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No Exit (thinkpiece.club)
242 points by Futurebot on Sept 17, 2016 | hide | past | web | favorite | 81 comments

I like the comparison to Puritanism and delayed gratification. There is something there.

Even long after active religious beliefs are gone, there is a long trail of attitudes and habits which linger on. They just become part of culture.

Also those institutions or individuals (owners) who can tap into those attitude and play them against others can reap great benefits. There are a bit like settings and switches already there, just have to turn them on.

"Work hard and you'll be rewarded in the afterlife". In this case the "afterlife" like the article mentions is the exit event, or what used to be the IPO.

This belief is useful both to the owners (the ones who control the believers), but it is also useful to the believers as well. It provides comfort and a sense of mission. That last bit is readily discarded, but I think it is a very important part in the equation.

People will work 80 hour weeks at below market salary if they get to fantasize of being a multi-millionaires. Even people who think themselves beyond irrationality and silly biases (programmers in our case) will go for it.

Maybe the ability to fantasize, is actually worth something. Perhaps imagining oneself a little Zuckerberg or Mark Cuban, should be worth something. You are closer to that dream by working in a startup than say working for a big corp or sandwich shop. Is that dream worth the salary cut and uncertainty? That's the question.

Comparing with other countries, I wonder if there are cultures where this wouldn't work as well. And it might explain why startups just can't take off there. Let's suppose there is capital and talent but people there might ask "Yeah what's in it for me today?" and if the answer is "You can dream about being wealthy in the future". They'll say "No, thank you" more readily. It could be because of a religious background or they simply have less faith in official institutions.

I think the startup scene is mostly populated by naive young coders more than people who've rationally chosen to discard tens of thousands of dollars for the privilege of fantasy.

When people grow up, they are more than willing to accept a job at a mature company with slightly less exciting prospects for much more overall compensation, respect and accommodation.

Investors are so keen to pump a flattering narrative about youth being critical to new ideas to try to keep the flow of naive underpaid labor coming in, but none of that stuff is really true.

Experienced people are more valuable in everything, including software and entrepreneurship. There's nothing wrong with that and it only makes sense. The solution is to become experienced.

Thank you. Ordered it from Amazon.

I've heard of it before and meant to read it, so this time will actually do it.

I was about to suggest Weber, good call.

On the other hand, look at the many immigrant entrepreneurs, most of whom have far from Puritanical backgrounds. I hail from ex-Soviet Union (and I think you might as well?), which had none of the "work hard and you'll be rewarded" attitude and more of "to each according to their needs". Yet I'm quite happy to dream on occasion.

Well yes and no. A part of the Marxist ideology was that the Workers Paradise lay just around the corner if only everyone worked hand and sacrificed for it now, and if you died before it happened, you knew that your grandkids would see it. It was exactly the same delayed-gratification mechanism - and also why Marx was adamant that all other (competing) religions needed to be killed off.

An attitude which turned to be unrealistic and unachievable and was quickly recognized as propaganda bs.

People from the "socialist" countries saw through the bs relatively quickly and adopted the attitude "you pretend to pay me and I pretend to work"

When such a person moves to an environment where a real chance exists to reap the rewards of their labor, they get the proverbial wings.

The puritan/religious seem to be unconscious of the oppressive programming and see it as their own "values"

I wish there were easily accessible statistics for startups "making it" vs failures. People should be able to know what the odds are for the lottery ticket they buy with ~5 years of their lives.

Maybe someone can create an app for calculating your startup's chances.

Great points. I don't know about the 90s, but in this era, you either want founder-level equity or market salaries. There's too much uncertainty about the outcome, too many circumstances that can affect it, and too long a time window in which these circumstances can play out, for anything else.

Time is an important factor here, more for employees than, say, investors because you don't have a portfolio of multiple lives. Several years of your life count for a lot; be clear-eyed about where they're going.

The ability for non founding employees to file 83b letters would be a big step forward here.

For those like me: http://acceleratedvesting.com/what-is-an-83b-election-and-wh...

> Codified at 26 U.S.C. § 83(b), this election lets you decide at the start of your vesting agreement to be taxed for the entire amount that will eventually vest at the present value. Rather than paying tax each year then, you pay all the tax up front based on the value of the stock when it was granted to you. In order to make this election, you have to send a letter to the IRS within 30 days of the grant being made.

What do you mean? You can file 83(b) elections when you exercise your options. Usually that's done when you leave the company, but sometimes it happens earlier.

I guess I could have been more general: the ability for employees to be granted equity and put off paying taxes until they decide to sell said equity would be a good start.

the ability for employees to be granted equity and put off paying taxes until they decide to sell said equity would be a good start.

They can - that's what early exercise is. If you exercise on the day you are granted the options (not they day they vest - the day you join the company) your spread is zero, so your tax liability on that is zero.

Of course, you still have to pay the strike price out of pocket, but the IRS doesn't take anything (yet).

> in this era, you either want founder-level equity or market salaries.

Why does this have to be either-or? Never understood that

So you want say 20% equity in a company and the same pay as you would make at Google?

Not sure a lot of VCs would back that.. as they can find another founder to work for 95k and 20% equity. Your pay cut would fund 3 more engineers.

If you really want lots of equity and lots of pay, you need to bootstrap and be patient and be a rockstar. I don't see other ways to get there.

20% equity in a company and the same pay as you would make at Google?

One or the other. But not 0.02% and half the pay...

Yea don't take that deal. I honestly feel bad for people taking that deal that think it's a good shot at getting rich. Not fetting rich in .2% of non Facebook

The difference between 95K and say, 180K to live decently in SF is not that big, especially if equity has a good chance of being worthless.

Which is why startups shouldn't be in SF then. A startup in the Midwest can give you a good living for 95k which is approx market rate for a senior developer, and then equity is just icing.

The question is, where do we figure out market salaries? Glassdoor is hardly the final authority.

Discovering the market-clearing price is easy! Just keep tweaking the offer until your acceptance rate crosses some threshold. This is how markets have operated for thousands of years!

The choice to underpay and offer lottery tickets in lieu is a conscious, deliberate one by the founder/investor class, and hey, if you can't get enough suckers from amongst the Workers you can always lobby Congress to increase the H1B cap and let you import some from overseas...

When a recruiter contacts you, be friendly, and tell them a high number for your desired salary (I suggest starting at $200k). Soon you will get a feel for what they are willing to go for, and sometimes they will even tell you directly what their maximum is. FWIW Right now in Silicon Valley, $170k seems to be the max for senior devs, and $200k is actually reachable for managing tech leads.

I've seen $350k-400k for a lead frontend position around the Valley, and $250k + bonuses for a director of engineering position in the Valley - these are firsthand numbers. The numbers possible are higher than you might expect, and I am even relatively young in terms of experience (a little under 4 years).

I can only assume you are including stock options in these figures.

If you're getting those, you're probably managing hundreds of people.

The frontend lead position is for a pretty small team, and the director of engineering position is for a Series B startup.

I assume you are excluding the top companies or not considering stock and bonus compensation? Because $170k is closer to a new grad compensation package at places like Google or Facebook.

or not considering stock and bonus compensation?


Maybe talk about this among your peer group? That's probably the most up to date and accurate way to find out what you're worth.

American employers have tricked employees, via eg: unenforceable legal threats, that sharing salary information is illegal, self-harming, and in bad taste.

That is what the poster is doing.

Not long ago, someone from a code camp negotiated 250k total annual compensation from an SF short-term rental company.

The bit about Gowalla's Facebook "acquisition" is an important point for investors, and one I think the Crowdfunding excitement overlooks.

I've sold a couple companies and been an insider in a couple other acquisitions, and many of the knobs that get turned during the negotiations are about retention/compensation plans. It's hard --- like, it actually can be a problem when trying to close the deal --- to balance employee retention and the interests of investors. Even in the best case, every dollar you're giving to current team members is an incentive for the management of the company to accept a lower sales price.

In some egregious cases, one of them pretty infamous in the security world and the reason I've promised myself I won't spend real money to execute employee options, management and current team members got basically the normal proceeds of an acquisition and investors got zero.

Don't investors usually have a veto over acquisitions? I'm which case, why would they agree to a deal which was lucrative for management but valued their equity at zero?

probably because the acquisition would not happen at all without the employee retention, and the investors had a mandate to exit for whatever reason.

or management simply hijacked the company.

I've been an insider in a similar deal. A lot of times it's this, or let the company go through a messy, potentially headline grabbing, bankruptcy. A lot of times in this situation the acquiring company is doing the deal for the talent, and they need to be sure the talent stays around for a while, otherwise the deal would be worthless.

In some egregious cases.., management and current team members got basically the normal proceeds of an acquisition and investors got zero.

That sounds like an excellent case to me :)

You think it's excellent that departed employees who paid their own money to execute options got shafted? I don't understand that mentality.

You didn't say anything about departed employees.

There is another way for equity to have some value.

It's an old approach, but still works surprisingly well, and it doesn't even require anyone to buy the company or have an IPO.

You can earn a profit and then pay that profit to the shareholders in the form of dividends.

Dividends make sense for established, profitable businesses. They don't make sense for startups. No one wants the startup to issue dividends.

The employees won't receive any dividends unless they have already paid to exercise their options and are holding restricted stock.

The investors don't want to have their capital returned to them while the company is getting off the ground. They want the profit to be reinvested in growing the business.

The founders are already taking a salary. It is easier for them to fine tune that than it is for them to take compensation in the form of dividends.

Okay, but at some point you need to turn from a startup into a profitable business. This whole problem stems from the fact that these startups are either unwilling or unable to actually become real businesses at some point.

And that should be the actual endgame that is being targeted, and that the employees should be striving for.

People seem to have lost sight of that goal.

The Indie.vc program explicitly provides a cash distribution alternative for returning capital to the investors, fwiw.

Couldn't one issue two classes of shares?

Issue one class of share that is restricted from sale but earns dividends (for the employees) and one that is unrestricted but pays no dividends (for investors)?

Then you better bootstrap an S corp or an LLC. VC funded S corporations are not even structured for this.

To push back on part of the post:

"Many have blamed the decline of the IPO market on regulatory changes, such as the Sarbanes-Oxley Act.. There’s another important reason fewer and fewer startups go public these days, though: acquisition by an established company is a far easier, and, often, more lucrative, exit strategy.. A few extreme outlier exceptions such as Google and Facebook notwithstanding, acquisitions have been by far the most viable exit for small tech companies since the end of the dotcom bust."

Acquisitions have been more viable than IPOs for _precisely_ the same period we've had Sarbanes-Oxley. How the heck is this 'another' reason, then?

Let me quibble with "_precisely_ the same period we've had Sarbanes-Oxley."

Sarbanes Oxley passed in 2002. IPOs increased from 2002- 2004. Source: https://www.quandl.com/data/RITTER/US_IPO_STATS-Historical-U...

I suspect that Sarbanes-Oxley did suppress IPOs but if you can't think of some other reasons for fewer IPOs. I will offer some:

- Much more capital available in private markets from hedge funds, sovereign funds, etc. Think of how much money Uber can raise today as a private company. That didn't used to be possible.

- Tech companies have really resisted offering dividends because they are believed to be tax inefficient and a sign that those companies can't grow and invest. So instead they have huge amounts of cash on their balance sheet that they need to invest.

Ok, it seems you know more than me about this so let me try to poke holes in an attempt to learn further.

Was there really more capital available in private markets before 2008? I thought that was just because of post-2008 QE. That timing doesn't seem to work either.

Didn't Microsoft have billions in cash on its balance sheet in the 90's? I thought tech companies always hoarded cash when they were cash cows, and that it was at least partly a consequence of tax regulation, with cash sitting in one jurisdiction (say Ireland in recent years) costing too much to move around.

The fact that the delta in IPOs went up doesn't necessarily seem so indicative. There's a holding capacity for IPOs in an economy. I think your graph shows just how far the holding capacity dropped after SOX.

QE really doesnt make that much difference, it only affects the bond market directly a bit. VC is getting more money as the returns have been good (finally, historically they werent), while say hedge funds have had bad returns. The amount of money in private markets depends highly on risk preferences.

This is not quite accurate. Sure, directly it only affects the bond market. But the bond market is not isolated from the rest of the markets. After you push loads of money into it, it lowers the returns on relatively low-risk bonds. We now are seeing government bonds with near-zero interest rates (ZIRP). The low returns on bonds pushes capital that otherwise would have gone into those bonds into risker and risker assets, a direct consequence of QE. This has people chasing higher returns in stocks, and yes, VC as well.

SOX is trivial if you are a large public company, you just spin up a dedicated group to deal with it, for some rounding error of your cost of doing business anyway. It is much harder for a small public company. But I believe it kicks in anyway if you are a large private company with >50 shareholders, so there is that to consider too...

I don't think guidance from SEC was even issued for parts of SOX until 2005 and even into 2007 for the SOX 404 stuff, but I'm not a compliance person, so hopefully somebody in the know can chime in.

As an employee the rational reaction to illiquid equity with uncertain value, would be to simply discount it and demand a higher cash compensation. This is a problem for founders and VC, but I can't see why it's a problem for employees. If comp is bad they just walk. It's not like a good engineer can't easily land a job.

you’re never more attractive a target for firing than right before your one year anniversary [Disclosure: Tumblr fired me approximately one month before my vesting cliff.]


I think the author is giving people too much credit for optimism, and too little credit for the kind of thinking that has kept gambling such a profitable venture...

...for casinos. I suspect anecdotally, with no hard evidence whatsoever to back it, that the people who get into startups a lot, are the types of people who are very aware that other people have made insane fortunes that way, and they want that.

I should really stop being surprised at how much productivity and work is funded through fake money. "This has value, trust me," would tip off anyone. When the "trust me" is simply replaced with a large cultural delusion it works like a charm.

> “Equity is critically important because it is the thing that everybody has in common. Since everyone benefits from an increased share price, everyone tries to increase the share price.

I don't understand this. I have equity. I don't care about it, since I value it at ~$0.

Did you take a pay cut to get it?

If you didn't, good job.

If you did, you valued the equity at market rate - actual pay, conscious or not.

I have a pet compensation idea: founder shares should be soft capped at some threshold (5m a head plus a quarter of anything above that?) with the part above the cap redistributed to employee stock holders such that mid sized exits (~100m), which are significantly more common are financially rewarding for more people in the company.

I don't know if this is practical, but as an early employee at a startup it's hard to not feel bitter about the massive disparity. Usually I try to avoid thinking about it.

I think the difference in risk between founders and early hires justifies an order magnitude difference.

So, why does risk justify a higher reward? The usual answer is that without a greater reward there is no reason to take a risk.

My conjecture is that reward above a certain threshold is not actually that meaningful of an incentive when starting a company. I would be interested in hearing founders' perspectives though.

Start a company yourself and see how you find that rule.

I have limited experience with this, being in the Sacramento area, rather than the Bay Area.

However, my experience back in the late 90s / early 2000s went reasonably well. I was working for a newer department in a firm owned by private equity (which had been turning modest profits in one division or other for 20 years). We were purchased by a fortune 1000 company. As a team lead and key contributor to some of the infrastructure around the place, I received a nice little bundle of options, which were actually worth a little something in a year or two. Anyway, I stuck around for a little while during the transition, eventually got fed up with the parent company's stupidity, cashed out, and moved on. The options pretty much paid for a 6 month sabbatical while I retrained.

The numbers in my region sound tiny compared to SV numbers, but we bought a 3 bedroom house on an acre (in the foothills) for $140 K back in the late 90s, so you didn't need a 200K / year salary to get by.

Since then, I have worked at places that either offered some kind of pension, or had significant yearly bonuses. Show me da money! :-)

I'm an engineer at startup http://www.equityzen.com, which is a private secondary market that provides the alternative option of selling startup shares before an IPO or exit, rather than waiting or letting the shares go unexercised.

I believe that the secondary market is becoming a much more popular option to startup employees as companies start to take notice of the current issues with liquidity.

RSUs are taxed as soon as they vest. This means that employees with RSU grants are continuously accumulating illiquid but taxable income based on the company’s current fair market value. This can prove disastrous for employees who have already paid taxes on RSUs whose values have declined precipitously.

I wonder if you could introduce a kind of "Franked RSU" where the company pays the tax obligation at vesting (for certain agreed taxation jurisdictions)?

I'm no tax expert, but couldn't these losses be offset by Tax Loss Harvesting? It doesn't wipe them out, but does reduce the loss by approximately your top tax bracket.

There's nothing stopping companies from handing out bonuses hat match the tax obligation.

As I'm entering the fourth decade of my life, I have actively started avoiding any company that 1) self identifies as a startup, 2) employs less than 50 people, 3) is VC funded in any capacity. It's not because I have anything against them in particular, it's just that my risk profile has been changing together with my age, and I'm not really willing to put in the same crazy hours as 5-10 years ago in return for the right to participate in a de facto lottery.

Many experienced engineers I know feel the same.

A company working in an unknown space, that doesn't even know how to be the kind of company it wants to be; a startup can be very exciting for an experienced engineer because (if you're like me) you do like to solve problems, and I (at least) view software as only part of the problem space (make the business money).

To that, I'm willing to bring wits, flexibility, and broad experience. I bring value and justify my existence, and I do expect to be appreciated (compensated) for that; I expect to have a much higher salary than at a non-startup, not a lower salary and a lottery ticket.

The sheer number of "startups" that want me to work for peanuts just tends to make me avoid the term startup. Instead I look for their investors looking for someone to help them manage their risk, and treat it as a consultancy.

On the other hand, I think the pleasure is to have 1) startups as a customers, because 2) It has few employees and you can quickly negotiate with them, and 3) They are funded and can quickly spend money to speed up or improve their product. Just from a risk perspective, in economic crises (e.g. 2007/2008) we had a flat line near 0 of revenue coming from startups.

I've recently entered the fifth decade of my life, and I actively avoid any company that does not identify as a startup, or which employs more than maybe a hundred people, because I've already wasted too much of my life struggling to do work I don't care about or even believe in, just because some unknown committee of managers in some other part of the megacorporation employing me decided it needed to happen.

I look for small teams, instead, who are hot to try something new, where I can personally accomplish something significant and where I'll have enough breathing room to exercise my own initiative and apply my by-now-considerable experience to the choice of tasks we undertake and the design of the solutions we implement. I won't suffer through any more small-cog-in-a-big-machine experiences, no matter how much money they're offering. Life is too short for that.

Still, I agree with you about the lottery: equity has lost all incentive power, and salary is the only form of compensation I care about. I just see money as a tool for living an enjoyable life, not as an end in itself, and it would take more money than anyone will ever be willing to pay me to make up for the suckage another boring corporate grind would inflict on my quality of life.

I'm in a similar situation as the op. I personally enjoy that phase of a company's lifecycle. So long as there is runway (1-2 yrs). I love that edge of the seat do whatever it takes to try and make it work feeling.

I think in my case I've just become more aware of the fact that an exit is the exception rather than the norm. I've also had to educate myself a hell of a lot more regarding the intricacies of equity, i.e. investors preference, etc.

Would you still avoid startups if the hours were not crazy and the salary was the same (or better) as at a non-startup?

Possibly, due to a lack of long term stability and job security. When every round of financing results in a different VC installing its own people in the company and shaking things up, I don't feel comfortable betting the life and wellbeing of my family on the fact that some 24 year old "product manager" is going to act rational.

In other words, they'd really need to pay me a lot more than an established company in order to offset my risk.

Only if they have a long enough runway and I think the idea is sound.

"These industries are a rich source of e - KYC(know your customer) data. Airlines alone served 2.8 billion passengers in 2011. Every person who checks into a hotel has to supply"

I don't think this needs to be said but if my airline stats selling where I go to advertisers I'm not going to be using that airline anymore. It's bad enough they are selling it to governments.

I think your comment was meant to go to this thread instead: https://news.ycombinator.com/item?id=12524217

The thing about these is they are written by older folks who don't realize that the risk/reward calculation changes depending on how old you are. It makes sense to take on risk when you're young, and not when you're old. Pretty simple..

If anything, it's the young who don't know that. The old have been young, the young have never been old.

But you are only young once.

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