
Startup Equity For Employees - daveambrose
http://www.payne.org/index.php/Startup_Equity_For_Employees
======
gyardley
This is a good article, but a lot can happen between your option grant and an
exit. I'd keep in mind that startups are generally for making founders rich,
not employees, and that no matter how hard you push on equity, the chances of
you getting meaningful money from your options is pretty minute. You may want
to optimize your base salary instead.

That said, the most important concept in the entire article is "[i]f they
won't tell you, go work somewhere else." Founders who are open with their
employees up front are less likely to take advantage of them later.

~~~
mattlong
I can vouch for this from personal experience. If you aren't getting a
percentage comparable to one of the founders, then you shouldn't settle for
anything less than near-market salaries.

Startups bring on employees for their expertise. You should be compensated
appropriately for it...especially if you're facing as much uncertainty and
risk as the founders without the potential for a big payout.

Also, when negotiating and judging a compensation package, remember that few
startups have successful exits. Most of the time - statistically speaking -
those options will end up being worthless. Salary (i.e. cash) has little risk
associated with it.

~~~
Ixiaus
This is good advice and a good indicator of why starting your own startup is
the only sure fire way of making off like a founder.

I was offered to join the team for an early stage startup a few months ago and
they offered 1% with salary upon funding. According to this article, all that
risk and working for nothing for a few months until they got funding would
have been a waste - I now have a few contract gigs that are paying me above
market value (adjusted for sole proprietorship expenses like health &c...) for
my work.

I basically work for a few months, then take a few off and do what I want -
much more ideal than 9-to-5 and/or a high risk venture in which I'm not a
founder...

~~~
davidw
> This is good advice and a good indicator of why starting your own startup is
> the only sure fire way of making off like a founder.

'Sure fire' and 'startups' do not go together.

As a counter example, there are plenty of early Microsoft and Google people
who were probably much better off with their options at those companies than
doing their own thing. Sure, they're outliers, but lots of things about
startups in general are kind of outliers...

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grellas
This piece gives very helpful advice about the right questions to ask
concerning equity when you are about to sign up with a startup as an employee.
It also gives credible explanations of most of the equity-related issues at
that stage.

In my experience, very few employees who get option grants will ask the right
questions to understand what their equity piece really means. That is, they
won't even ask about something as basic as how many shares a company has
outstanding (much less about size of equity pool, liquidation preference held
by the preferred classes, etc.). When they fail to get this information, they
really are going into the employment with poor knowledge about what likely
will wind up being the most piece of their overall compensation.

Why don't they ask? Sometimes they just don't know how it all works and
proceed out of ignorance. More often, however, I think they feel intimidated
about pushing a company to disclose what they think is company confidential
information, especially when the company is a big-name company that is already
VC-funded and the offer otherwise seems tempting.

Because of this, startups will sometimes play games in this area, arbitrarily
inflating the size of the company's capitalization structure (e.g., splitting
a 10M capitalization structure 3 or 4 for 1 to turn it into a 30M or 40M-share
structure). This splitting lets the company make a 100K share offer to a key
employee sound like a 200K share offer and hence make it appear better than
competing offers from companies working from smaller capitalization
structures.

It amazes me how many times employees will simply accept such offers thinking
they got better deals than they would have from other companies, when in fact
they may have passed up equal or better alternative offers. This is truly a
case of flying blind but it happens a lot.

~~~
ghshephard
And, as much as it pains me to say this, some companies have a very, very
strict policy about _not_ informing their employees or candidates as to what
the number of outstanding shares are in the company.

Yes. I feel your rage.

In fact, I've expressed it to the executives of those companies.

But, as long as things look good, the company is getting funding, and an IPO
looks like a possible event in the future, most (all?) employees are usually
afraid to make waves.

It's like PG often says - there really IS a difference between a
founder/early-stage-startup employee, and employees of more established firms.
I'm guessing 50% of the HN core would probably call BS and walk away from any
company who refused to tell them how many outstanding shares they had,
particularly after they were employees of that company.

~~~
iron_ball
Uh, honestly, getting diluted _at all_ sounds like utter bullshit. Imagine
being told "you will get 100,000 dollars at the end of the year," and then
halfway through the year you're told "okay, now it will be 50,000 dollars
instead." What's your recourse there? How is it not a ripoff?

Am I misunderstanding a crucial aspect of the system?

~~~
portman
Here's a simple case.

Company is worth $1MM. You own 10% of the company.

Company gets a $1MM cash investment. You get diluted to 5%. But the company is
now _instantly_ worth $2MM.

10% of $1MM = 5% of $2MM

This is not bullshit, it's math.

------
mrshoe
Since he never answers the most burning question ("how much equity should I
expect?"), I'll throw out some numbers based on my experience:

If you're being hired as a C-level executive, you might expect up to 2% - 3%.
If you're being hired as an engineer, expect more like 0.25% - 0.5%. I'm sure
it varies quite a bit, but that's what I've seen personally and heard from
friends.

~~~
ghshephard
An IT Manager/First IT Employee can expect to see 0.1% of a startup with $3mm
in funding and a $10mm pre-money valuation.

And, just a note - unless the strike price has increased significantly, or a
lot of employees have been hired, I disagree with the premise of the author of
the article that "Re-Up" aren't to maintain the same percentage of equity. In
my experience, they are used to do precisely that.

The people who are diluted are those who've left the company. Sometimes very,
very significantly - particularly if there is a reverse-split in the mix as
well. Existing employees simply get grants to keep their stake the same.

------
newhouseb
Man, this article is priceless. This would have really helped to have when I
was last recruiting - although I did end up finally negotiating myself to a
comfortable position... took three months though.

------
milestinsley
Valuable information, concisely explained. Thank you.

I have now learnt that I have 100 shares of preferred founder's stock in my
own company which has 100 shares outstanding!

This is equally as useful for potential employees at a startup as those
looking to recruit. I will certainly be referring back to this one when the
time comes to talent hunt!

~~~
dualogy
Lucky you, I only have 1 share of preferred founder's stock in my own company
which has 1 share outstanding.

OK, technically I guess it's not a "share" if it's just 1.

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chrischen
Great article!

But what if I offer 1 share for 1% and then sell myself a billion new shares,
diluting that 1% down to practically nothing? I'm sure this would be
regulated, but it seems if something like this needs to be regulated then it
indicates a flaw with the system. Why can't we just give out percentages, and
have that percentage stay constant?

~~~
ghshephard
It happens. And then lawsuits are filed if the party being diluted put real
money into the deal: [http://paidcontent.org/article/419-ebay-finally-loses-
cool-s...](http://paidcontent.org/article/419-ebay-finally-loses-cool-sues-
craigslist-over-stake-dilution/)

In the case of common shareholders, the opportunities for redress are
substantially less.

~~~
chrischen
So is there any law that says everything must be dealt like this. Is there a
way to buy an actual fixed share in a company?

~~~
vl
Yes, if you can buy enough shares that your vote will block any attempt to
issue additional shares, your share will be fixed.

