
Ask HN: Is startup equity just snake oil? - Spiritus
Is equity just an excuse for start-ups to motivate lower salaries and bad work hours, which in the end don&#x27;t yield much anyway?
======
AureliaDalek
Think of them like lottery tickets. Yes, they could be worth millions of
dollars, but the chance of that happening is very, very slim.

The tradeoff for the bad hours/pay is that you'll get more autonomy in your
work and the ability to really influence the product. To me, this is why you
should work for a startup. Certainly not for the stock options.

~~~
ajbonkoski
"The tradeoff for the bad hours/pay is that you'll get more autonomy in your
work and the ability to really influence the product. To me, this is why you
should work for a startup."

I'm beginning to really hate hearing this over and over. So many people accept
this at face value when in reality it's dubious at best.

Case in point: 6 months ago I left a start-up for a medium-size company
(~300-400 people) that has been around for ~15 yrs with no ambitions of going
public nor taking outside investment. I get both amazing pay and an insane
amount of autonomy. I doubt this could be matched by a Big or Small company.

Here's the rub: Silicon Valley markets itself VERY WELL and if you're willing
to internalize everything that comes out of this marketing machine, then
yes... it's snake oil.

I'm not diminishing the the importance or impact of entrepreneurial ventures,
but I think we can do better than Cookie-cutter Generalisms repeated ad
nauseam without independent thought.

~~~
fratlas
Would you say your company is a rare breed?

------
cballard
Yes.

First of all, they'll probably just tell you how many shares you get. So, you
don't even know what percentage of the total you have! But even if they did
tell you, they won't show you the cap table, so there's no way to even
evaluate the worth, since you can't see how much the investors are going to be
paid out first. And even if you did know that, the board can just print more
shares and make yours irrelevant anyways, so you _still_ can't tell what
they're worth.

So, assume they're worthless.

~~~
tptacek
This used to be a pretty common story, but I haven't heard it in awhile.

Don't accept offers that don't give you enough information to value your
shares, unless equity isn't a significant part of your compensation.

~~~
x0x0
It happened to me early this year, and they were super-upset when I turned
them down. An A-round startup (with investment from a16z!) that wouldn't share
the denominator in the options package... I guess it takes all types. Funny
enough, they're still hiring for the role.

------
brianwawok
If you make your own company and get 40% of the equity or whatever.. not snake
oil at all!

If you join a late stage startup and get a good salary and a few shares... not
snake oil, but not going to be life changing. Base your decision on the salary
and what you will be working on.

All the people in the middle offering you 50% of market pay plus 1% of a small
company? Ya that is pretty much a scam to get cheap labor, don't fall for it.

~~~
bpchaps
BJ&JG was a bit different, though. ;)

It's hard to say that two guys who were new to management at the time are
entirely representative of the entire small company market. Inexperienced
small company market, sure, but not the market as a whole.

Also, because real life slipping into HN - why the heck did your sound script
pipe a python regex matcher's stdout to perl to have it immediately go
directly to stdout for another pipe pick it up?! The context switches... the
p&l impacting context switches.... ;)

------
ThrustVectoring
I only ever value equity in terms of "percentage of the founder's share". That
is, if it isn't the same kind of thing as what the founders have, then there
isn't anyone negotiating on your side to keep it valuable, so it's probably
not worth anything.

The golden question is "if you get an exit that makes you $10m, how much money
does that mean for me?"

------
bobby_9x
There are many issues with getting equity when you are not investing money:

1) rounds of investments will dilute your shares 2) you have no control over
the company and are now in the precarious position where the situation could
get really bad, but you don't want to leave because you don't want to lose
your shares (I've been there) 3) If the company is overvalued at some point,
takes an investment, and then sells for less than that value, the investors
will get paid back first (further reducing your chances at getting a payout).

Is it snake oil? Not necessarily, but it's a huge risk and you shouldn't think
of it as your path to riches.

------
poof131
Yes, more than changing the world, fake equity is what start ups are all
about. The goal is to take the fake equity and try to make it real. As an
example, a friend built a prototype in a couple months and with the help of
someone else, he was able to raise a $1M note at a $10M cap. With 50% of the
company he now has $4.5M in equity. But it’s all imaginary. Without an exit it
means nothing.

Employees are the ones who need to watch out for this, because the founders
turn around and try to pretend the equity is real. An offer of $200k of this
fake equity isn’t really $200k. And for you to ‘get rich’ and 10x your $200k,
you will need to 10x the founders $4.5M of fake equity. All the founders need
to do is see an exit and they are rich since the initial seed round gives them
millions.

So don’t worry about $ numbers, just the percent of the company. If it is
early, understand the cap table and fight for your fair share. And don’t stop
fighting, especially if you are adding value. Remember the founders got
millions of ‘fake equity’, they can and should share. Don’t forget that the
ebullient founders see a payday on most any exit whereas you won’t. I like the
advice that you are either learning or earning, and if you aren’t founding you
most likely are learning.

Also, don’t let people talk you far below market salary since you aren’t just
giving up big company salary, but also bonus and stock. Most of all though,
you need to trust the founders since it’s easy for them to screw you and easy
for them to screw everyone if they don’t make the right moves. Even if you
build a good product and get customers, if there are bad ratchet clauses
everyone but the investors will get screwed.

This is geared more toward early stage. For later stage you aren’t going to
see the cap table or anything else. The main thing for mid to late stages is
growth: users, customers, and revenue. You are stepping on to a rocket ship
priced for perfection, if it goes off trajectory your equity is going to be
worthless, so don’t feel obliged to stay and help out of charity. At this
point the founders have likely already made millions, the senior employees are
probably going to be okay, but the noobs are going to get burned.

YC and others have done a lot to help founders. Unfortunately, no one has done
much to help employees. So pay attention and do your best to find people you
trust. Remember, founders have every incentive to sell you the golden dream,
since it’s likely to be golden for them.

------
rudimk
No, not always. It's something a lot of startups misuse. But I wouldn't say
that's how everybody does it. I know some startups that offer equity with a
slight pay cut, just to gauge your motivation, and bump up your pay soon
after.

------
mesozoic
Pretty much. Would you work as hard or take as much of a paycut if you got
virtual lottery tickets instead (lottery tickets that even if you win may not
pay out since VCs have a higher priority stake in them)

------
forgottenpass
_Is equity just an excuse for start-ups to motivate lower salaries and bad
work hours, which in the end don 't yield much anyway?_

Pretty much. Unless you have your lawyer (not _a_ lawyer, _your_ lawyer) tell
you otherwise assume equity as compensation is worthless.

There are times and places where equity isn't meaningless, but that's not at
Valley tech startups. There it's mostly used to mislead impressionable youths
that haven't been burned yet.

------
relaunched
It's less snake oil as it is an inheritance from a long, lost relation. Stock
isn't something you can bank on, unless the company is knocking on the door of
an IPO and then you are probably looking at RSUs anyway.

 _I 'm gonna do some math that probably doesn't apply to a new grad, but
certainly could apply to an experienced SE/SWE/etc._

Look at it this way, if you are making $175k, with a 15% bonus and $55k of
vesting stock at Google ("Alphabet"). Let's just assume the stock doesn't
fluctuate over the course of the year. We'll call your total comp $255k real
money (forgoing 401k and other benefits for simplicity).

Now, you join a well-funded seed startup. They pay you $150 (even in these
crazy times this is a high startup figure). Congratulations! You just became
an investor. I'll save you the spiel about paying for a better environment,
accelerated learning, purpose, etc...You have invested 105k a year, in
exchange for .1-.25 percent of the company, if it's still a pretty small
startup. Oh yeah, and year one's money gets paid mostly towards your stock
cliff; you paid to accrue the first years stock until the end of the year (if
you make it to the end of the year). If you leave in month 11 you get nothing.
However, at month 12 you get the stock from year one, then each month you earn
1/48 of your total equity stake.

 _A few more simplifying assumptions. Let 's say your annual adjustments at
BigCo and your annual adjustments at startup are equal, which they won't be.
Also, there's no opportunity cost._

Next year you pay that $105k again. Then, the company raises a few rounds of
capital, over the next 5 years. All in all you've been at the company for 7
years and paid $735k for (let's call it) .1% of a company that was worth $5
million post at the time. But, you've been diluted 30%, 20%, 15% and 7% in
subsequent rounds, and then maybe re-upped a little along the way. You have 3
times your initial grant worth of stock, because you were really good at your
job, so now you own .000189 % of the company.

If the company has a $500 million dollar exit, with no preferences, you get
$94,500. But, with all the rounds you raised, $500 million is probably gonna
trigger a liquidation preferences. Let's say it took $150 million VC money to
get your exit. Well, you get $66,150. Damnit...

Well, that doesn't seem worth it. How big does the company have to get to make
it worth it? Well, I haven't heard of any $10,000,000,000 acquisitions. So,
let's say you IPO and after your lockup period, you leave the company and sell
all your stock. You'll have a tax advantageous $1.89 million. Off all the
startups you hear about, and many you don't, how many $10,000,000,000 exits
have you heard about? And what is that risk factor worth?

Now, why do people do startups? Well, let's say your startup is Facebook.
After your lockup period, you had a market cap of ~$100,000,000,000. Your .1%
is now worth $18.9 million. Or if you had an original .25%, $47.25.

I hope you get the point.

~~~
alain94040
I think your math is a bit off. The dilution computation gives me 0.044%
(before assuming you get any extra stock). With no extra stock, that gives you
an exit at $150K. With the extra stock, you probably are in the $200K-$400K
range. Which you do want to compare to your "investment" of $750K...

So your post is very good advice to everyone. I encourage you to apply similar
math. Of course, the hard part to evaluate is the variation: maybe the exit is
10X better. Or maybe it's 10X worse. How valuable is a high-risk/high-reward
payoff? At least, by doing this math, you put hard numbers on just how high
the payoff can be. If it turns out to be no so high, that's a great help to
your decision.

~~~
p4wnc6
I think this advice is OK as long we make a heavy emphasis on the need for
some probability distribution over possible exit values. Such a distribution
has to account for growth of the company, ability to succeed against
competitors, potential acceptance of outside funding along with restrictions
like liquidity preference, and so on.

No one is good at articulating these distributions, and many people who
influence you during the hiring process with either be overtly nefarious in
their attempts to get you to believe what their rosy-colored prior looks like,
or they will be suffering from different biases (especially the earliest-stage
employees).

For a young engineer who may or may not have a great command over this sort of
probabilistic reasoning, and may or may not know any techniques to mitigate
the biases that might creep in, it can be extremely risky to advise them to
determine their own personal assessment of whether the exit will be 10X better
and so on. Almost always they would be better off simply saying that they
can't put a useful probability distribution on it, and therefore they cannot
come up with a useful model of what the equity portion would be worth.

It sounds nice to teach these types of candidates about how to value the
equity in terms of knowing about liquidity preference, asking about the
composition of the board of directors, asking detailed questions about
comparable companies and their exit numbers, and so forth. But in truth it's a
bit like handing someone a loaded gun, pointing it at their foot, and saying,
"you're welcome for the advice."

~~~
relaunched
I don't think it's that tricky to put a general distribution on it, Chi-
Squared.

------
gesman
It's an effort to sell you expensive lottery ticket.

You may or may not choose to play this game but odds are not in your favor.

My suggestion is to postpone options/equity discussion up until after the
salary discussion is settled. Let it be icing on the cake rather than
replacement for the part of the cake.

------
juhq
The thing is, it's all upside down. If a startup wants to get a experienced
person to the team, they should offer more salary and then some options/shares
instead of lower salary and possibility of options.

I really don't understand why an experienced person would take a pay cut.

------
lacker
No, that is too simplistic.

When you get a job offer with an equity component, you should be able to
estimate its value. Figure out what you think the company is worth, figure out
what % of the company you own, and multiply those two numbers together.

I have had friends get job offers where the equity component was worth less
than $1000, and I have had friends get job offers where the equity component
exceeded the salary component. It really just depends on the startup. So don't
just dismiss the equity component as worthless without digging into it a bit
more.

------
staunch
I'd compare it to being part of a team in a poker tournament. You walk away
with a share of the winnings or you walk away with nothing.

