

A Newbie’s Guide to Startup Compensation (or “Stock Options will Make Me Rich”) - dshah
http://www.tonywright.com/2008/a-newbies-guide-to-startup-compensation-or-stock-options-will-make-me-rich/

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MicahWedemeyer
Excellent write up!

One point I would add: Options do expire, and at least where I work, the
expiration is tied to when you leave the company. So, if I quit, I have 60
days to exercise my (vested) options. In plain terms, that means I have 60
days to buy the stock at strike price set in the options agreement. Until I
read the agreement, I didn't realize that to make use of the stock options, I
would have to spend my own money to buy the stock.

I suppose this is obvious to anyone in the know, but for a first-timer like
me, it took a little time to wrap my mind around. I just thought stock options
were like coupons I could turn in for gold coins or something :)

~~~
aston
Yeah, you technically need money to buy options, but in most cases you're
buying the stock only to immediately sell it again at its current (higher)
value. If there's no buyer for your stock you can probably safely let them go,
since the market (private as it may be) has determined they're worth nothing.

~~~
tptacek
Not so fast. You also buy stock options when you quit the company, but want to
keep the equity you worked 4 years to vest into. Many options plans will
require you to buy them within 30-60 days of leaving the company.

For obvious reasons, the majority of options purchase scenarios could fall
into this bucket, and not the "sure thing" of selling your in-the-money liquid
options after an acquisition.

Another caveat about this is that there are plenty of horror stories about
what happened to people with startup common shares that left their company
before acquisition. You are, as you probably know if you're been reading here
for awhile, last in line in a liquidity event.

------
staunch
This is why I would never be an employee with a measly .5% unless: a. I wasn't
ready to do my own startup or 2. I _really_ thought the company could be the
next Google.

I do think this part is a bit wrong: _"If you’re getting paid market value,
then… Well, there’s no risk– and you shouldn’t be expecting much reward."_

I don't think that's the right way to look at it. Working for a startup at
your market rate is not the equivalent risk to working at an established
company at your market rate. The floor can fall out at any point for almost
any reason.

Also, a really great hacker doesn't have to settle for market rate salary
alone. He could be at some other startup that's very early stage or simply
values him highly enough to pay a market salary and give him a generous equity
allotment.

~~~
dshah
I disagree on one point: I don't think startups are that much more risky than
more "established" companies these days.

Established companies seem to fail or downsize reasonably frequently these
days. The real question is if/when this happens, is it easier/harder to find
the next opportunity if you've been a career "big enterprise" kind of person
or have been working for startups?

~~~
prakash
You are right on the perception of risk, it doesn't matter if it's a startup
or a bigco. The difference is you are working 60+ hours at a starup whereas
you are working 20 hours of actual work if you are lucky at a bigco.

------
gleb
Well, of course, standard venture model option grant percentages do not make
sense in case of a small exit ($50M) which takes 4 years. They are designed
for an exit of 5 to 10 times the size. So, if you are setting up an options
pool, you should account for target exit size and time. Incidentally, the
interests of full salary employees with stock options are much more closely
aligned with those of VCs than founders.

In Silicon Valley as an experienced engineer working for a startup you should
be getting about $150k/year + stock options. Some startups will have good
exits. Expected total return per year is about $300k/year long term. But you
are forced to save 1/2 of your compensation, and get tax advantages -- both
good. And you get to play the become-really-rich-on-stock-options lottery. If
you are hiring engineers here the packages should somehow be competitive with
that.

~~~
tptacek
At 150k/yr, to make 600k in a liquidity event, you would need to be holding
.5% of a company that sold for $115MM --- or about 5.5 times as much as
Flickr. In what valley job do you get a full half point of the company for a
150k dev job? How many companies have sold over the past 5 years for more than
$100MM?

~~~
webwright
[http://startup.partnerup.com/2008/01/02/2007-acquisitions-
we...](http://startup.partnerup.com/2008/01/02/2007-acquisitions-web-internet-
technology/)

More in 2007 than I woulda guessed, but still... I think your points are dead
on.

150k seems awful rich for a startup job. Job boards seem to agree:
<http://www.indeed.com/q-python-l-ca-jobs.html> (check the pay box out on the
left)

~~~
gleb
I really meant _good_ experienced engineer. Such a person is worth much more
than $150k/year, but you can't get much more cash as an employee in a startup
(for good reasons). Also, at that level you are getting at least 10% target
bonus, and that's included in the number.

~~~
menloparkbum
Engineers do not make $150K a year at a startup. If you happen to run across
this rare event, take the job, live on $40K and bank the rest (i.e. don't buy
a BMW). Then, 6-18 months later when the company goes down in flames, you will
have more than enough money to start your own company.

If you aren't a founder, the best job to get at a startup is some sort of "VP"
role after the series A round. These guys DO get paid $150-$175K a year, get
the same number of options as the early stage engineers, and don't have to do
as much work. As far as I can tell, their only role is to go to meetings with
each other. That said, the mere existence of these employees signals almost
certain doom for the startup.

My apologies to the YC founders looking for employees, but being an early
stage engineer (not a founder) at a startup is for suckers. You get paid paid
$10-$50K less than you could at a big company, and your options are going to
be worthless or worth far less than you could ever imagine. If you have an
entrepreneurial bent, your best bet is to take the higher salary somewhere
else and save money until you start your own thing.

~~~
webwright
"My apologies to the YC founders looking for employees, but being an early
stage engineer (not a founder) at a startup is for suckers."

This is a pretty broad statement that I'd disagree with.

First of all, plenty of startups pay market rate (or close enough to it).

Second (and way more important) most BigCo jobs are woefully bad at preparing
you to spin up your own thing. Don't believe me? Come to Seattle sometime and
watch how fast all of the Ex-Microsoft entrepreneurs hire "program managers"
and VPs. Working in a small startup can teach you a lot about what works (and
what doesn't) on a small team with limited resources.

Third, it gets you into the game. You meet other folks who like startups who
can be useful later (from co-founders to future hires to investors).

~~~
menloparkbum
I'm talking about really early stage people... the guys brought on for peanuts
and options, pre series A.

\- Pre series-A, startups can't really pay market rate, unless they have huge
angel investment or the founder is rich and financing the thing himself.

\- BigCo jobs probably do encourage the entrepreneurs to do things the same
way they did at the BigCo. However, in your example the Ex-Microsoft
entrepreneurs are _hiring program managers and VPs_. Thus, they have enough
money to pay these sorts of employees. Which means they got rich at Microsoft
or their MS resume point convinced investors to give them money.

\- Working in a small startup CAN teach you a lot about what works, but the
same thing rarely works twice. Note I'm talking about engineers. All the stuff
I learned about server scaling in 1998 wasn't as important in 2008.

\- It does get you into the game, but so does being employee number 30 with a
comfortable post series-A salary and free backrubs.

------
waynep
I see his last point here:

    
    
      He’s buying a work environment that is comparatively bullshit-free. Little bureaucracy, few meetings, flexible work schedule/environment, etc. If you’ve ever had an environment like this, you know how addictive it is and how elusive it is in larger companies.
    

... as the most important.

~~~
gamble
...plus 10-12 hour workdays.

~~~
JeremyChase
...plenty of 'established' companies have developers working 10-12 hour
workdays.

~~~
hello_moto
...with bonuses, promotion, more holidays, better health benefit (you and your
family need this).

~~~
JeremyChase
I'll agree with everything but promotion.

------
kolya3
Interesting to note that most people I've met will barter over the number of
options or compare competing offers by number of options... but rarely does
anyone ask how many shares are outstanding.

~~~
gleb
There are good and bad reasons for this. You really should ask. But there is a
common standard for how many shares you should have, so the # shares is
normally comparable between different companies. Sometimes you do get this
crazy company with 100M shares post round A. That's a bad sign in itself.

~~~
anamax
Really? What is this "common standard"? I'll agree that there's a range, but
the high end is 2-5x the low end, so if you don't know the exact number for
different, you can't reasonably compare companies.

VCs always ask and they're constantly evaluating investments. Why do you think
that the less-practiced should wing it?

