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What I Wish I'd Known About Equity Before Joining a Unicorn (github.com)
1382 points by yossorion 248 days ago | hide | past | web | 558 comments | favorite

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it - "we're all in this together" - mmm. As long as the salary is market rate I ignore equity altogether.

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.

Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.

Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?

It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.

"Let's say you're granted about a year's salary in shares..."

Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee.

Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day.

"Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.

Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate.

However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.

The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now.


The problem is that RSUs are still a joke and can be taken from you easily. ISOs have way, way more power.


That article is terrible, please do not use this to make decisions. Just about every "downside" he lists could also apply to an option grant. All equity grants will come with an agreement and restrictions on whom you can sell them to and under what circumstances, whether options or RSUs. Worse, he goes on for quite some time about how little upside you have with RSU. That has NOTHING to do with the RSU itself- it comes because companies that issue them typically do not have much growth left in them, not because it is a RSU vs an option. The differences between them are...

1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year) 2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar)

In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...

I know nothing about RSUs at pre-IPO companies, but RSUs at public companies are worth real money, a fact this article fails to mention.

So are options. Options at a public company can typically be exercised and sold as an atomic operation from the owner's perspective, with the exercise price (and taxes) being extracted from the sale's proceeds.

I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.

Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).

Not quite -- they must WITHHOLD the tax. You have the option for them to sell the shares. If you'd rather, you can send them a check for the tax bill and hold all the shares.

That only works if the company's shares are publicly traded.

Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.

It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves.

Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.

Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary.

The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO.

I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.

Companies do this so that their employees don't get into tax trouble. There were cases when the employees failed to sell the shares needed for taxes and later on the share price crashed and the employees were stuck with big tax bill. Like what I said in my other comment on options, the granted shares are regular income at market value; and if you don't sell enough and later have losses the losses would be capital loss. Unless you have other big gains to offset you can use only $3000 a year to offset your regular income.

Indeed, the tax man doesn't accept payment in illiquid stock (or any other kind of stock).

You're normally given the option. If you want to pay taxes out of pocket, you can do that.

tldr: 83b isn't just for RSUs.

You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.

> You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.

Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs.

This is an IRS rule, independent of your company's terms.

I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?

Yep. And there is the problem. I don't want options to buy anything. I want shares. Actually, I want cash.

You can exercise your options the day they're granted, even if they're not vested.

That said, they're not really worth anything to you until they're vested, of course.

I've never worked anywhere that would let you purchase before vesting. You accept a new position that came with 20,000 options vesting over 4 years with a one year cliff. At the end of one year, 25% of your shares (5,000) are now vested and you may purchase them. The company might have a valuation for them that's higher than your purchase price, but they are still typically worth "nothing" in that you can't sell them (assuming you're at a startup that's not yet publicly traded.)

Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate.

Point: no, you cannot exercise options at grant time, you can only exercise once vested.

Sorry, I meant ISOs. Good clarification.

Don't take the risk.

Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.

You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out."

That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had.

By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.

You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."

I didn't miss the second part.

The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all.

Hence the "it worked for him then, but probably wouldn't work for anyone else, now"

It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.

This lockup normally affects everyone who had shares pre-IPO -- investors, founders, and employees -- when did it not exist? It played a large role in making people sad when the Internet Bubble burst, for example.

That's pretty crappy. Another way to prevent anyone but the founders and investors from capturing any value from the IPO.

Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?

It's definitely crappy. I'm not sure what rules the founders operate under, but it's definitely something investors and underwriters push. Nominally it's to control liquidity, and it does do that, but it does so specifically by handing all early returns to a few of the shareholders. It's not hard to imagine other systems that would, with a bit more work, manage liquidity while letting everyone access the market.

On the options - I'm honestly not sure. I don't think it's barred by contract (since that's about managing actually control and share movement), but I don't know what options trading looks like for newly-IPO'd stocks.

Bummer. Startup equity indeed looks like a sucker's bet.

Many agreements explicitly ban just-post-IPO sales these days. His point is that the $10 million in profit would have evaporated if not for a rapid cash-out which is often illegal to perform today.

You're right, but there's a better way to think about the $10 million, called the "safe withdrawal rate".

If you're 65, a good rate is 4%. This means that if you invest your $10 million in a diversified mix of stocks and bonds, and you withdraw 4% per year, then there's a very good chance that you won't run out of money before you die. See: Trinity Study [1]

If you're younger, you should probably use a more conservative rate of 3.5%. That's still an annual return of $350,000, for the rest of your life.

According to your rate of $110 USD per night, you only need to spend $40,000 per year to live in a four star hotel.

First class flights seem to cost around $3,000. You could fly twice a month for $72,000 per year.

Then you have $238,000 left over for food and entertainment. (And hopefully some charity.)

[1] https://en.wikipedia.org/wiki/Trinity_study

You should also be sure to save enough for healthcare related expenses FWIW

What about taxes?

I think we're talking about after-tax money; unless you live somewhere that has a wealth tax, once you've paid all your taxes on income (wages or capital) then you're free and clear.

Common retirement strategies, like a 401K, differ taxes until withdrawal. So taking out 4% of your portfolio every year upon retirement would in fact incur taxes. Since a 401K is massively tax advantaged in your highest earning years it only makes sense to maximize this portfolio while you can thus delaying, but not avoiding taxes, until a later date when you'll likely pay much less on the income.

The issue is not that investors prefer to keep the rise in equity to themselves.

The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.

I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success?

Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.

There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares.

You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.

Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)

I walked away from a unicorn, a few years ago. If I had stayed - and somehow survived the effects it was having on my mental health - I might actually be a millionaire now.

Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house.

But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.

How was it affecting your mental heath--stress, sleep deprivation?

well, I developed a kind of generalized anxiety - I think it came from the long hours in a fairly large and crowded open-floorplan office - it was just way more constant social contact than I'm comfortable with. I guess if it was stress, it was stress from trying to perform while conforming to an environment that I found profoundly uncomfortable. Also there were nebulous culture mismatches that made me feel like I had to put on a fake persona to fit in.

Now I work from home and I'm much happier.

i call open floor plans "sweatshop chic"

Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144).

An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.

Australia is even worse in that you owe tax on the options, before any event of any kind has occured. I think that they're pushing through legislation now in order to make it more US-like and allow founders to offer these worthless lottery tickets to potential employees :)

I Canada I can defer paying the (income) taxes on the options exercise until 'deemed disposition', which unfortunately also includes going bankrupt. And the possibility to count the capital loss against the income is severely restricted.

Canada has a much better treatment of capital gains than the US. Instead of a separate tax, 50% of the gain is taxed as ordinary income.

This reads like a Faustian bargain. I've seen this sort of stuff happen over and over to my colleagues, it was worst in the late '90s and early '00s. As much as I wanted to work for a startup once in my life, I learned that the only way to do "startup" is if you are the founder. Practically everyone else is along for the ride.

The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see.

"The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see."

The biggest problem is SOX: going from a private company to public (something I've done twice, now) is a pain, and can take a year to implement all the regulations (you may even need to change source code, and also commit processes). It's even worse on the accounting/business side. More importantly perhaps, it's expensive: you don't want to take your company public unless you can afford the hit to productivity and cash flow.

According to the WSJ, that's why there aren't more IPOs these days.

Yep, it's way easier and way less friction to store everything including payment information in one huge database accessible to all employees.

A security nightmare, but time and time again we've seen you don't need good security to make a lot of money.

The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits.

And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.

> The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.

> You are never told what the outstanding # of shares are and typically the stock are valued in pennies.

If the CEO is unwilling to tell you when you ask, walk away.

I have literally, personally, gotten an offer that that included options denominated in the current share price in dollars, and it was a little over $100k.

Standard procedure in the valley is about ~$100k in options at present valuation. Granted this is typically calculated without adjusting for the lower valuation of common stock, but the presumption is that in an IPO-like liquidity event the common and preferred stock valuations would be basically the same.

> And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario

You don't care about relative growth with options, just the difference between strike price and sell price. A '10x' growth of 0.01 to 0.10 only gains you 0.9 per option; a 2x growth of 5 to 10 gives you 5 per option.

Which is also why looking at your grant as '$100k worth' is silly. Look at how many units you have, and how the price might change, not what the strike price is right now.

You are absolutely wrong about the $100k option grants. There are a lot of startup that offer that to senior engineers.

I always ask what the valuation is, and they'll usually tell you after some back and forth of "why are you giving me a job offer with a value that I don't understand? You wouldn't keep the salary a secret, so why are you keeping the value of my options secret?"

The good news is that there are a couple new firms that aim to address this exact issue. The firm I work for is called the Employee Stock Option Fund (ESOFund) and we aim to help employees exercise and cover the taxes associated with the exercise (on a non-recourse basis - meaning you don't have to pay us back if the company fails). In exchange, we split the future profits. If you use us, it is a risk-free way to exercise with a chance of significant profit in the future!


What percent of the "profits" do you take? Can you explain how ESOFund would work in the situation I outlined above?

Each of our deal is custom tailored to the specific situation. In the situation above, we would help provide the 300k upfront and then we would negotiate terms. We aim to take less than half of the ultimate proceeds, but that ultimately depends on how the company exits. We don't require any transfer or pledge of stock and as a result, we take on a lot of counter party risk. We aim to price it in such a way where it is a good deal for the both of us. As you can imagine though, the deals that cost more money upfront requires a high payoff in the future. The other advantage we offer is that we can move extremely quickly. While other firms might take a few months to decide, we've closed deals in less than 24 hours before.

If you ignored the options at the start and got the market rate salary as the OP suggested, then you can just wait it out. That's the point of getting market rate up front.

I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.

So I never understood - it seems like it would cost you 200k to buy something worth a million. Arent there people/institutions out there that would cover the 200k cost in exchange for maybe 300k worth of stock?

Yes, it's my understanding the company will sometimes offer ways to finance the options purchase such as cashless exercise, or promissory note. Alternatively you can taking out a loan (anything from a general loan, to a specialize 'options exercise loan'). Cribbed this answer from the longer form one here: https://www.quora.com/How-am-I-supposed-to-afford-my-stock-o...

Most banks will give you that loan if the stock is liquid and actually evaluatable.

But if something happens on your way from the bank to the stock sale, guess who still has to pay back all that money.

It's common to perform a sell-to-purchase, covering the stock purchase with the sale of itself.

Unless there's buyers for that stock lined up, what you're buying is only worth a million on paper.

Or, like one of the companies I worked for, you could exercise your options, wait for a large Fortune 500 to buy them up, but then get told that your bylaws have a special provision that if the sale doesn't clear a certain amount, everyone's common shares are liquidated.

As in we got zero. Nothing. And this software is still in use in a major product.

So no, please don't trust options or exercised shares at any private company to be worth anything.

You want to get paid? Negotiate salary and laugh in their faces when they offer you options.

Everyone wants to believe it won't happen to them and that their company must be special since they work there. But sadly this happens to brilliant people all the time.

Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company.

Say it 3 times: "Cash. Is. King.".

Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid.

Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.

There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this.

You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.

Most unicorns disallow this nowadays to prevent the headache Facebook had when IPOing (very explicit you cannot transfer shares without the companies consent clauses in contracts). Some do controlled tender offers which allow employees to sell some shares, but these happen at the behest of the company, not the employee.

Don't most options include right of first refusal and more, to prevent you from selling them on the private market?

Yes, but ROFR doesn't necessarily hurt you - it just slows down the deal. Also, the VCs who do this also structure the deal in certain ways to make the ROFR price unclear and therefore negotiable.

But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value of non-publicly-tradeable shares, and it would be nice if the IRS agreed =)

I was at a start-up -- that I co-founded, so I take some of the blame here in not realizing what another co-founder was baking into the cake, but at least I can warn others now -- where the company interpreted "right of first refusal" as "the person trying to sell shares must hire an outside auditor to determine FMV," and refusing to answer any further questions about whether the auditor would actually be given access to the company's books.

Many private companies, e.g. Uber, doesn't allow unapproved secondary selling of their shares.

can't you sell a future security on your shares though? This is a "promise" to sell at some point in the future, can't see how can this be prohibited.

On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

If you aren't at the company, it will be extremely ordinary for some funding event to dilute you to nothing. And you will have absolutely no say in the matter, because you're an outsider who, and this will be a direct quote, "isn't moving the company forward."

For me personally, if I was in that position I would stick it out for however long it takes. I cannot imagine having enough liquid assets to be happy to risk $100k like that. I am also of the opinion that even if I did amass such value in equity that there's a high chance I'm going to get screwed on whatever the book value of it today is tomorrow when I actually cash out. If it's so bad that I need to run not walk out of the building then I'd have to just make peace with binning it off.

For most of us where startup equity comes with a real valuation of zero (i.e. anything but the Uber or AirBnBs of this world) - I think you're a lot better off ignoring it entirely.

> to walk away from this situation with nothing

This is where I think you are healthier having at least a market rate salary. Then you've not walked away with nothing - you've been a regular employee and happy with your lot and ready to move on.

>> I cannot imagine having enough liquid assets to be happy to risk $100k like that

$100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).

>> anything but the Uber or AirBnBs of this world Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy.

After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.

> $100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).

I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :)

The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.

Nope, I think I mis-understood what you were saying :) I thought you had said "risk $100k" meaning $100k worth of on-paper gains, not $100k of cash to gamble on stock. My mistake!

You divide 100k by 3 to account for the risk, and by 4 again to account for the vesting schedule (usually 4 years).

The shares are worth at most 8k in salary, that is if they're somewhat liquid. (which they are definitely not for startup and far away IPO).

If you took a $20k drop in salary for that, you've been not only screwing yourself at this job but also for ALL your future jobs, because future companies will try to downplay you based on your current salary.

If a company asks for your current salary, say "I'm sorry but I'm restricted as to who I can share that information with".

If they ask who made that restriction, link to this post.

You are not going to get a year's salary in ISOs. You're not. At typical ISO strike prices (i.e. prices on the range ones of dollars), that would be an a lot of options. A company is simply not going to do that. It's much more likely you'll get something like half your salary or even less in ISOs (of course vesting over 4 years). This doesn't matter if the company IPOs with a 10x multiple of the strike price, but then again, the company has to have a major liquidity event.

The uncertainty around the current valuation (which everyone has due to the infrequency of material events), the uncertainty around the likelihood of a major liquidity event, its size, and its type make ISOs incredibly hard to accurately price. If anyone says they can do it accurately, they're lying.

What makes you so sure? Say the company is valued at $300M when you join. $100,000 worth of ISOs is 0.03% which is not unreasonable if you're an engineer from say employee 5 to employee 50 or so. Now, the company becomes a unicorn valued at $3B which is 10x.

I'm not saying that the basis points are unreasonable. I'm saying that my salary is more than $100,000.

I believe It's only a $3K per year income deduction if you have no other capital gains to offset it with. If you have future capital gains of $200K, it can make that go to 0 and you wouldn't have to pay tax on it.

Ah, yes, you're right. It would offset future capital gains.

> "Or do you end up locked in for a few more years of handcuffs while waiting it out?"

The golden cuffs _will_ click if you stick around any time at all and have even slightly bad luck: Maybe you burn out before vesting, or the company blows an acquisition that would've fit your schedule and your payout/life goals.

Waiting around after you hear the click becomes a losing game. Find another one to play, it's a big world.

I think it is a lot more than 20% to pay the tax man since the gain on the exercise is considered regular income. This could be a big problem if the stock is still illiquid on the day of exercise. And if you later couldn't get the private valuation price the loss is capital loss and only $3000 per year can be used to offset regular income.

It's much worse in late stage startups where expiration means use em or lose em.

It comes down to a gamble. With your numbers, a big one.

But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.

> Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man

But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?

Because there are no profits because you can't sell the shares because the company is private.

It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casual reading to nail it down. But to save you some time let me give you a template for the type of stock option deal you want and you don't want.

Don’t want 1) 409A valuation price is already in the multiple dollar range. a. Why : You can’t afford to exercise do to tax burden 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. 3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event a. Why: This is a prison sentence and a total gamble as you really own nothing until an event. 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.

WANT 1) 409A valuation price is in cents and the stock option plan has an early exercise option. a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested. 2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want. 3) The company is in seed or series A and you own at least 0.5%+ of the company. a. The company’s founders do not want to take series C unless they absolutely have to. Ask them!

In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!

> 1) 409A valuation price is already in the multiple dollar range. a. Why: You can’t afford to exercise do to tax burden.

The value of one share isn't meaningful. You should calculate the exercise cost of the whole grant (based on the last 409A) to see whether early exercise + 83(b) would be a good option.

> 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee.

Acceleration is nice, but why would you insist on it? I'd happily trade it for (substantially) more options. If there's a liquidity event and your options have a substantially positive spread, that's already a positive outcome, so in the interest of minimizing risk, I'd rather improve the scenario where you want to leave before a liquidity event.

> 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.

You should simply calculate your percent ownership (while accounting for liquidation preferences), rather than using the number of funding rounds as a proxy.

2) That is an acceptable nego tactic if you can get it. And by all means you should go back and forth to get as many as possible. But after that you still want acceleration as the terms of your un-vested options are subject to change when ownership changes. Even if you stay with the new company.

4) True, this is just generic advice and usually by the 3rd round your % is going to be VERY low. But of course always consider actual % taking TSO into account.

This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded).

Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.

This is excellent advice. For what it's worth you really need to know the total number of outstanding shares to appropriately assess the 409A valuation. The stock could split later.

The article is not about early stage companies though: If a company has 20 employees, yes, chances are that the value is zero. But imagine you are joining one of those companies that aren't public, and have a large paper valuation: hundreds, if not thousands of employees, plenty of brand recognition and all that. Chances are that you are still paid in a way that resembles what Google or Facebook do, except instead of RSUs for a company that is publicly traded, you will probably get options, instead of a 100K+ salary premium over working at Google.

So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero?

If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.

"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.

Given how few startup companies actually make it, treating it as zero is the only sane and rational thing to do.

Right, because it's better to be paid $X/year and have 0 stock options than it is to be paid $X/year and have Y stock options, and no sane person would prefer the latter or negotiate for a Y large enough to be worth something even if the startup doesn't "make it" but is sold for 5x less than they tell you the IPO is going to be. And a company that has already got $200M invested into it is just as likely to fail to grow in value as a 1-person startup operating from a dorm room - it's always a 1 in a million lottery ticket. Only after IPO do RSUs suddenly gain value from 0 to something.

Given loss aversion and human talent for rationalising their sunk cost, do you really think you'll be able to accurately value those options? Treating them as worth 0/ε is a good heuristic, it'll give you the right decision basically every time.

The frame reality however is that the mythology of the windfall is part of the sell and a motivator for many. People _want_ to believe. And secretly in their heart of hearts they do believe.

Not in the reality, which they are likely smart enough to determine by reading their paperwork, and running the scenarios–even if they are treated properly, which seems increasingly rare...

...in the fantasy.

The fantasy is part of the sell. It is part of the glamor (sic) of being able to present yourself to others as _working in a startup in the Bay Area_.

IMO companies with integrity would _actively_ tell people up front what to expect (zero) and to explain why they offer equity anyway.

Were I interviewing, the company that led with that kind of honesty would stand out, regardless of its size or prospects.

Assuming equity is worthless the base salary has to be north of 200K to match the market rate (for low level software engineers) for public tech companies. In most Unicorns that's definitely not the case. In fact when I interviewed for Uber they explicitly said that their base salary is low compared to Google/FB but they make it up in equity.

Is the market rate really >$200k for "low level software engineers"? I know a lot of them, even some that are working at Google, and my impression is that $200k is quite high for someone in that category.

It is very high, of course, but this is HN, where everyone knows some friend's roommate's brother who makes $200K at Google--therefore $200K must be the going rate for software engineers everywhere in the valley. I highly doubt that there is a significant number of engineers outside these few outlier companies making those figures.

At Google, assuming what I saw was representative, 220+ k$/yr in total comp (salary + bonus + RSUs) was the standard last year for one promotion up from new grad (SDE IIIs).

(Note that Google RSUs, unlike Uber's, are convertible to cash immediately upon vesting.)

The point is that an entry-level engineer can make $200K at e.g. Uber (think $120K base + $80K equity), so for a newish company (with near-worthless equity, per the advice in this thread) to match that, they would have to pay $200K base.

Market rate seems to have gone up again in the last little bit. Yes, that salary is within reason for (good) non-senior candidates at big companies.

I guess he means total comp, which makes it a little less out there, but I still wonder.

Yes I mean total comp including base+bonus+equity.

> In most Unicorns that's definitely not the case.

It's only true because the market allows them to do that. The reason those unicorns lowball on salary is because they can.

If workers keep saying "yes, I'll take tulips in lieu of salary," the market will adjust and pay lower salary.

If workers say "nope, it's a good market out there, I either want salary or very good protections against dilution," then they'll have to pay market wages.

By "low level software engineers" do you mean low level in the sense of relatively low experience or low level in the sense of working on embedded systems etc?

They mentioned Uber/FB/Google, none of whom are really in the embedded systems game (Google maybe to a lesser extent).

As in entry level.

Where are you living where entry level software engineer salaries are north of 200k? I'm in the bay area and base salaries for software engineering with a bachelor's degree range from 90-115k from what I've seen (generally with some stock options and bonus potential added on top but I've never met anyone who's come even close to 200k starting out)

He's talking about total comp, not just base salary. If you're looking at total comp, there's many many late stage unicorns and large public companies that have comp packages north of $200k for entry level engineers straight out of college. I've seen comp packages for many of these companies.

He's talking about Google and Uber. Those definitely pay around that much.

In total compensation, sure. But base salary that high is unlikely. Consider also that Uber isn't public, so the non-salary comp isn't worth anything yet.

What're the odds that equity actually ends up making up for the difference in salary, though?

Uber also said this to me and I can confirm that their base salary was significantly below market.

Exactly what everyone should do. If someone is obsessed with these kind of topics I think he should start his own startup and be a founder/co-founder.

So if you want to make big money at a startup, you have to found your own or gtfo?

I think the point is that if you believe you have a decent chance to make a lot of money out of your 1% shares you are naive and a bit stupid.

And if you consider every day of a romantic relationship as just a one-night stand with them (by coincidence the same person as the night before but no matter, that's just a coincidence), then you'll never be hurt if they cheat on you or even outright leave you. You can never be hurt!

To me, saying "always value the equity at zero" is exactly the same as that. Like, "always value the relationship at zero."

It's not sane advice in my personal experience, especially at the tiniest company sizes.

I'm always amused how employees are encouraged to think of their stock as zero-value, which founders and investors keep 85% of this "zero value" for themselves.

Founders and investors have favorable terms -- they can take money off the table in the former case, and have liquidation preferences in the latter. So their stock has non-zero value, though it may not be as much as the paper valuation suggests.

Great perspective. It's not that equity itself is zero value. Otherwise, how would founders be able to afford MacLarens? It's employee equity that should be thought of as very low (or zero) value.

In fairness, employees are encouraged to think of it as zero value specifically when considering it in lieu of alternative compensation.

Right. It's quite the opposite of GP's sarcastic remark: founders want their employees to value their equity highly so they don't have to pay them as much. The advice in this thread is contrary to this. But yes, I've seen founders be stingy with equity during negotiation using this type of "logic," so the GP's point still stands.

Those are three totally different things. The kinds of stock/options and decision making power for an employee, a founder, and an investor are completely different.

Because founders usually don't get fucked out of their stock. Employees regularly do.

Same goes for standard bonuses, even yearly ones. Pretend you're not getting one until after the money is in your bank account. Expecting them will lead to unhappiness, I've seen it happen to too many people. It's crazy how sad & upset some people can get over huge checks of "free" money, when they expected more than what they got. And of course it's dangerous to spend it before you get it. Bonus plans can and do change after the profits are made, bonus pools can and do dilute and/or shrink unexpectedly, people who didn't help can and do figure out ways to jump into the pot after it gets big, management can and does change their minds and decide to invest or allocate profits. I've watched all of these things happen, and the only way to enjoy it all is to negotiate your compensation as if bonuses don't exist, wait to think about bonus money until it's in hand, and then consider yourself lucky when extra money arrives.

This would be true ... but only because people don't understand how to leverage and negotiate using their power. Engineers have historically been unable to organize large movements and work together. The size of most of these unicorns is still under 2000 people, with less than 4-500 engineers. This means that if you really want to you can "lead a revolt"

Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise.

BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.

"The company can choose not to buy back your unexercised options at par-value for as long as it wants."

That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything.

What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.

It is a legal rule that the company decided to impose in it's corporate charter, they can amend it to be whatever they want. It's arbitrary and not a fundamental part of US/State corporate law (like say race discrimination or workers comp). If they wanted to put a law in that you need to spin in circles and tap dance or else your stock automatically gets reclaimed they could create a clause in their charter for that too. This is what people need to understand: Rules change because people wake up and push for them to be changed.

Lawyers have created all sorts of bullshit to protect the employer and that has become engrained as "best practice"

No, this is a provision in the agreement that's driven by the tax code and IRS regulations. It is required if you want the option to be an incentive stock option. It's not arbitrary.

You're right that you are free to to negotiate a different exercise window prior to accepting your stock grant (and a lot of more progressive companies are offering this). You just can't, under current tax law, get the sometimes beneficial ISO treatment with a longer window.

There's a nice summary of the situation here: https://news.ycombinator.com/item?id=9254299

You are right -- it's not as black and white as I described.

That being said -- It seems like with some "legal engineering" it can certainly be ameliorated (as was demonstrated by Pinterest). My main point is that if people push for their rights then it will incentivize companies to do the legal engineering that is necessary.

Pretty much every "policy" you are told about by a company is bullshit.

At the risk of sounding like I'm self-promoting, we developed a Compensation Model at Qbix that is arguably much better than equity for both the worker and the company.

The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute.

The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea.

You can find the details here:


That would work for most employees. Founders know much more about their company and don't offer equity if things go well.

Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.

In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get.

Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway.

In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.

>> Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.

I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".

Exactly. I have participated in two of these, one of them were options, the company got purchased but in the 2008 aftermath they sold it for cheap. The next company issued "growth shares", was worthless. Both sites are gone. They paid a good salary though.

I get a yearly cash bonus and I treat that with the value of zero. I don't budget and/or plan it before I get it because there's a chance it's lower/higher than last year or non-existant.

Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.

Or the company could do the very hard and legally annoying work of convincing candidates that the equity won't be destroyed at a moment's notice.

This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a dollar a share strike price. What was painful to me, was that when I left after 8 years (I grew weary of it all, especially management) I had 90 days to pay $34k to get my options or lose them. That was painful cause I didn't have the extra $34k I could just throw away (had no idea when they'd sell), but hated the fact that none of the thousands of extra hours I worked (I kept track) counted for anything. One could argue I was paid a decent salary. Only on paper though, since my effective hourly rate was 3/4 what I'd have made at a non-startup working a regular 40-50 hour work week (i.e., I had to work more hours to make the same pay I could have gotten for fewer hours at a non-startup).

After I left, 18 months later, the company sold and my options would have earned 10x the $34k of the strike price. I.e., I would have made $300k if I could see the future. I just find it painful that at that moment, all your time is effectively worthless, and only the $34k would have counted for anything, even though I gave far more than that in extra hours.

Needless to say, I am somewhat hesitant to put in too many extra hours anymore and almost never work weekends or holidays.

8 years of weekends, late nights, holidays and vacation for a net of $200K after taxes?

That's ~25K/year so if you would've worked a regular 40 hour week, 20 hours of contract work at anything more than $35/hour would have put you ahead. And you would've still had weekends, nights and vacation.

Yeah, that's the calculation that bums me out too. It's one of the reasons I am somewhat loathe to ever put in too much "extra" time anymore. I enjoy being a part of a startup for more than just the lottery ticket aspect, I enjoy creating things from scratch, etc. But the days of burning the candle at midnight are gone.

In startups, man exploits man. At other employers, it's the other way around.

Isn't the other way around still man exploits man?

That's the point. :)

To expand, it's a play on:

"Under capitalism, man exploits man. Under communism, it's just the opposite." which seems to be attributed (without any sources) to John Kenneth Galbraith:


I've also seen it as "Under capitalism, man exploits man - under communism it's the other way around." I always assumed it was a translated Russian proverb, along the lines of: "No truth in the news and no news in the truth" (Major Soviet papers were "Pravda" (the truth) and "Izvestia" (the news).

Enjoyed the sovietology fact :)

True words.

Can you explain the calculation to me? I am interested to understand the calculation so that I can perform similar calculations when I have two opportunities to choose from.

superqd mentioned he would have made $300K more (i.e. in addition to the fixed salary he was earning) if he had bought the options. I assume that after paying for taxes, he would have still made $200K. Since he worked for 8 years, this is indeed $25K of additional income for every year. If he worked for $35/hour for 40 hours/week for say 50 weeks in a year, his total income would have been 35 * 40 * 50 = 70K. How is this better than his original job which was probably paying him say $80K or greater than $80K as fixed salary every month? It sounds like it would have put him behind by at least $10K. What am I missing?

The >$35/hour number is incremental pretax income on top of his base salary, not a replacement for it.

A very similar calculation is why I left a startup recently and went into contracting. In many cases the realistic best case scenario from working at a startup isn't as good (financially speaking) as the non-startup alternatives. This leads many people to extremely optimistic assessments of what the future worth of the startup may be (worth > $1billion)

There are many good reasons to join a startup but if the financial motivation is the main one then it's probably not the best route.

I've worked for three startups, each fairly well-known at least at some weird level. Two early stage and one immediately pre-IPO. One of the early ones netted me nothing(1), while the other gained me ~$10K when they went public(2). The third was quite lucrative, and was the least demanding - by far - of life tradeoffs.

(1)Other than a feeling that I'd joined the Witness Protection Program when I fled after an engineering walkout.

(2)Offset by literally years of damaged self-esteem. Pedigree is heavily overrated - with one exception, all the famous people were pretty awful.

He just said that. Way to rub it in, bud.

I'm sorry this has happened to you. I hope it can serve as a warning to other HNers that companies are not your friends, and that it's never worth investing yourself like crazy in it as an employee. Any employer will throw you under the bus as soon as possible, and possibly has already planned that in the contract you signed. That applies to three person startups all the way to gigantic multinationals.

Enjoy your personal time, leave at 6PM, turn off work email/slack/anything and do things that make you feel better as a person.

Very much this. There is a bit of a lie we all participate in at many companies of nearly every size, though sometimes much more so at small startups. The lie is that we are all on the same team and all in this together. In reality, the team are those who actually own the company by virtue of the money they've put in (i.e., investors). Time is regarded as a non-asset, regardless of how much you invest into the company. So everyone else is there to help the real team succeed, and in so doing, hopefully get a little money yourself. Now, sure, I hope to find rewarding work and such, but I also choose riskier startups because of the potential upside (though likely small).

Sure there is always the possibility of landing work at a unicorn that is worth billions, but I think the problem is that many of us are too willing to give up parts of our lives in the hope of some very unlikely return. Either the industry needs to figure out how to value time as an asset in a meaningful way, or crazy startup-hours need to stop.

So you're saying that Silicon Valley is full of temporarily embarrassed Zuckerbergs?

Seeing it from afar, it's worse than that. Seems to me it's full of temporarily embarrassed Zuckerbergs that also happen to be blind to the reality of the world.

Or you just charge a good salary, since after all if one is to be an employee, let's keep things good for everybody. To the owners, this is your company, and for us, hell if you want to build a rocket to the moon I'll help but this is my fee.

> None of the thousands of extra hours I worked (I kept track) counted for anything

Yep, that's exactly what your management was counting on.

Yeah, it's the fact that time isn't regarded as an asset being contributed is what burns my mind. For the salary I received, I think there is a reasonable expectation from the company's point of view that they get 40-50 hours of work. Anything beyond that, in my humblest of opinions, is me investing in the company. There is a logistical problem in accounting for this, obviously, and I'm far from naive on this and other points, but the underlying point remains.

> I think there is a reasonable expectation from the company's point of view that they get 40-50 hours of work

The only reasonable expectation should be 40 hours a week.

I worked my ass off at a startup, sleeping under the desk, weekends. The usual. At one point I needed a break and informed them that I was taking a break. Two months cycling through Europe.

When I came back, they'd moved and I had the best cubicle reserved for my return. They missed me but only because I forced the issue.

Sorry I don't follow. So you came back, and the company had moved but they reserved a cubicle for you at the new office? What does you forcing the issue have to do with them missing you?

> the best cubicle

No small thing on a place parent presumably spent a lot of time.

It sounds like you realized you needed a break before it was too late (i.e. "burnout"), which is obviously good. But why did you return to this grind?

Interesting work and stock. I was partially vested and I could/should have looked around.

Don Knuth said something (about TeX): never spend more than 2 years of your life on something. I've broken that rule several times but I'd counsel following it on startups, especially someone else's startup.

Sounds like a good rule. One that I happen to have followed when it comes to work and broken when it comes to studying (which I know consider mostly a waste of time).


Sorry it sounds like the Stockholm syndrome.

I don't recall the Stockholm captives being well paid, free to leave at any point, with medical benefits and stock options doing interesting work with some decently cool people. Gotta Wikipedia cite on that, skipper?

What is the learning here ?

I have a similar experience -- albeit only 2 years -- when I left I was faced with $30k (pre-tax) and didn't have the money and was actually in debt. Not to mention the battle scars: anemic, overweight, depressed, and cynical. Luckily I've recovered now and started my own company. In addition to a 10 year exercise window I try to educate our employees and potential employees on this matter and to be as transparent as possible.

I now also regained my stamina to work hard and long hours but I know where my red line lies and take it easy when necessary. I also make "enjoyable work" for myself and our employees a priority. Call it naive or stupid but life is too short to slave away without enjoying the day-to-day of it.

I think an important point would be to ensure a meaningful work-life balance is maintained. Many folks may contribute "too much" time believing that extra time is going to somehow count in someway other than in simply getting product out sooner (though not necessarily of high quality). I was in an environment that was somewhat pressurized, to say the least.

I'm in a somewhat similar situation to you, but on the upward slope. If you don't mind, what was the breaking point for you? How did you approach your recovery? How much time and effort did you put into getting your business off the ground? How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)? How do you handle employee's failures and your own?

I have started to think about these points a lot.

Given I basically have a coworking workshop (it's a 3 friend little webdev company), there is a lot to consider.

Solving and handing over of my current obligations, dedicating to my shop, or starting a new one my way, or finding a new place to soak in more experience (I'm 32, but somehow my brain still works well enough to quickly absorb new stuff).

>what was the breaking point for you?

It got exponentially harder to get out of bed and get to work. I just had to quit because I couldn't show up. I didn't give anytime to interview or find an offer. I was also in a weird situation with regards to immigration. So it was reckless but goes to show how much I had to leave.

>How did you approach your recovery?

Joined a big company, got myself on a path to be comfortable financially, took every weekend off. Picked up hobbies, coded for fun. Worked out, visited doctors, changed my eating habits -- got healthy.

>How much time and effort did you put into getting your business off the ground?

Part of 2015 and 2016 I started working and growing on an old side project of mine until got to a point where I knew I could raise money for. I quit in April 2016 and worked like crazy for a month to raise enough money to hire a couple of engineers, get to feature complete, and start selling (which is what we're still working on now). I wrote about it here: https://amasad.me/2016

>How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)?

If you're building a startup it's one of the hardest thing you'll ever do so in my opinion you need to align the mission, the product, and the market you're going after with what you care about. Whether that social good, tech, or business. Given that, it's builtin the company that you should enjoy what you're doing. Then hire people that enjoy that too and it all (seems) to fall into place naturally. To sum up, you're in a position to design your ideal work environment -- do it! (You may fail, but that's better than being stuck with something you don't care about).

>How do you handle employee's failures and your own?

I'd be lying if I said I don't push myself and others around me to be the best they can be. You just need to give feedback regularly so that there are never no big surprises (this is something that you can learn by being at one of the good big companies) and always be kind.

Good luck with your workshop.

Oh you are the guy/one of the guys who made repl.it! I saw it on HN couple of years ago, it's an awesome product, congrats! I hope you succeed with it.

Thanks! :)

Thank you very much for taking the time to answer the swarm of questions. It's a ton to think about and make it my own.

Don't sweat getting older. My theory is that the capacity to learn doesn't really degrade much if it's used regularly, and that the real issue is that incentives change for older demographics.

Did you consider using something like ESO Fund to finance the exercise of your options? If so, why did you decide not to use them?

Assuming they're willing to do the deal, if your alternative is letting the options expire worthless, it seems like a no-brainer to take a loan with no recourse unless there's a liquidity event. You wouldn't have made the full $300k, but at least a solid portion of it.

The story I related was at my previous company from about 4 years ago. I had never heard of ESO Fund until this moment. Thanks for the info, I will definitely look into that (I currently have a lot of options at my current startup).

ESO Fund's website doesn't mention about their cut in case of liquidity event. Do you happen to know how much is it?

I think they price depending on the company and its situation and risk. I've heard of them taking half the proceeds, though.

You are correct! Our pricing depends on a bunch of factors including how much money it takes to exercise the shares and what we think the company can exit at. We aim to take less than half the proceeds. Sometimes if the exercise cost is higher and the exit isn't as high as we anticipate, we may end up taking more than half. For the most part, our business is a referral business and happy clients means they will refer their friends/co-workers.

If you think about it it is quite odd to give free labour to a company because you have shares (or some derivative of shares) in that company AND you are working for them.

Because you may also have lots of shares in companies in an aggregate fund (e.g. in a a pension) but you aren't working for free for those companies.

However people do get caught up in the emotional 'but I own a bit of it', and I think companies exploit this.

Yeah, the golden handcuffs really did shackle me emotionally. I couldn't part with the extra money to pay for the shares, even though I really wanted to leave the company much sooner. So I stayed since that was the only way I'd be able to keep the shares.

While employees may irrationally put in too much effort because of their perceived ownership value, the comparison to slivers of ownership of publicly-traded companies.

One person can make a difference in the value of a 20-person company, and if that person has a 1% stake in the company it can be rational to work longer hours to make that happen.

On the other hand, there is very little that a shareholder of a public company can do to materially affect the bottom line of that company. And as the owner of perhaps .000001% of that company, that person would see very little financial benefit from such effots.

Yes it all depends on the details. 1% stake !== option to buy 1%, based on the info presented in the link though.

A 1% option seems more like the poker game ante, but you need to keep putting more in (time, effort or even cold hard cash) to stay in the game :-)

If you are working for a small company, be a founder, not as an employee. Many folks mistake small companies as startups. Startup is a place where exponential growth happens. From what I see, this is a just a small company which had regular growth. Run if you don't see exponential growth.

Why didn't you exercise any of the options during the 8 years you worked there? I'm not trying to blame you, but it seems to me like you took the low-risk (short-term cap gains, exercising near an exit event) approach. You lost the compensation by not exercising, but you didn't have to give up any of your own money (free time though, which does suck). You said your salary was decent so you could have exercised at least some of the options to get different tax treatment fora riskier play.

This is a sad story: 90-day exercise windows are employee hostile, they should be much longer, especially when the company isn't public.

However, and I don't know how to put this more kindly, but I can't help but wonder if you understood how options work while employed at the company?

A simple technique to avoid having to quickly come up with a lump sum is to set aside enough money to excercise your options as you accumulate them.

In this case putting aside $4,250/year earmarked for exercising your stock options would have allowed you to save the $34k required.

But there's the opportunity cost and extreme risk in investing in something you have very little information on. Hopefully you're maxing your 401K and personal savings/investments before this.

In the end though it might be wise to hedge a bit and at least buy some of your options as you go if you believe the company is worth something eventually.

Yeah, it wasn't the case that I couldn't have come up with the $34k at all, it's that it was asked of me in the first place given that I'd already put in far more than $34k of extra hours and had no shares to show for it.

I worked for a "startup" that was going on 10 years old, $190 million in funding and was still not profitable.

I was stunned by just how many of the long-time employees had no understanding of stock options. One was actually flabbergasted to learn that each funding round was creating new shares and diluting the value of existing ones; he thought the founders were selling their own shares to raise the money!

The ignorance was due in part to the company being in a region where startups and stock options are not common. Another big factor was willful deception by the founders, who had been promising to start the IPO process for three years, and frequently estimated that their IPO valuation would be equivalent to Facebook's.

Fair enough, but you could not have known that your options would not go underwater either. At the end of the day, options let you become an investor on the cheap. Hindsight is 20-20. I think the only nice way to do it is a long window for exercising options. Lets you benefit from your hours and also protects you from the risk if it goes south.

Yeah, I get that and realized I could have easily lost money too. It's not that it was painful to me when the company sold, though it did bug me then too, but at the moment of my exit interview and I was given the reminder that I could purchase within 90 days. It was in that moment that I really didn't like that my invested time had no value. Granted, it wasn't the first time in my life I realized this, it's just that I had never invested so much before.

I get your point but I think a clarification is useful here: the risk for gp was not "options might get underwater" but rather "stock is too illiquid".

Options are underwater if the strike price is less than the current market price; shares in private companies might not have an actual market price but you can estimate them. Underwater options still have >0 value since there's a non-zero chance the stock price will decrease before the expiration date -- of course, if the expiration date is close by and the strike price is much higher than the current price, the option value might be very close to 0. Still, you practically never exercise underwater options (there are some rare exceptions not very relevant here).

In grandparent's case, the issue is not underwater options; they are about to exercise the options and get stock. At the time they left the company, the stock price was presumably way above the ~$1 strike price. They could have bought (say) $60k worth of stock for only $30k, making a profit on paper. The problem is, as the article says, you have to pay taxes on capital gains AND that stock is illiquid (you can't easily sell it if at all).

Thank you for sharing! Very helpful!

No problem!

Did you talk to a bank or someone who could lend you the $34k?

You do realize that this is the exact premise of risk and reward? That company could have been the next Google, Facebook, Amazon, etc, and in those 800-ish days you would have given up for weekends over 8 years you could have earned more than all of your ancestors probably have ever earned in their entire lives. All in a fraction of your single life.

And yet, we still get posts like this one, and comments like yours, that make it seem like somehow the employees are the ones who are getting shafted.

Could equity deals be a little more clear and fair? Sure, absolutely. Maybe make the window for options something more like 6-12 months. It's entirely subjective. But when the "make or break" lifecycle of a startup is 5 years, waiting 6 months to make a critical hire because you have options tied up in people who don't even contribute to the organization anymore is detrimental AND unfair to the current employees.

It shouldn't make you sad that you couldn't exercise your shares. It should make you sad that you didn't work more effectively the capitalize on your options sooner.

I realize I could have attempted to exercise sooner, but that isn't quite the point. The part that really bugs me is the fact that time is undervalued (or non-valued). If I have a high value asset, my time, that I contribute towards the success of a company, it's value goes severely underappreciated by management and the board. That's the problem. If person X puts in money, and person Y puts in time, the time is regarded as a non-asset. Now, you might be tempted to say, "but you got paid", and I did. But I put in far more time than would be required somewhere else. That is, I put in extra time, a non-fungible unrecoverable asset, into the company and had nothing to show for it. Asking for more payment (for the options) is the equivalent of asking me for more time, which I had given plenty of already.

I think this is a good point. If you're going to take options in lieu of part of your salary, they should for fairness be options on preferred shares, because you're effectively contributing cash.

Of course, nobody gives employees options on preferred shares.

So were you the only one working longer hours? And if you felt so undervalued, why didn't you ask for a raise at any point over those 8 years? Perhaps your work ethic is why you were given the options in the first place?

It seems like you're whining about something that you had complete control over, and chose not to exercise.

people make companies and the rules. you are a person and agreed to this and acted as if you agreed. you took a bet and it didnt come out financially the way you want. you probably learned alot about startups and what works and doesnt tho.

Well, yeah, the only person I was angry with was myself. The rest of my emotions at the time were mostly of frustration and sadness with a system that undervalues an asset I had invested (my time above and beyond).

A lot of times a company will have a decent idea of what their exit is, based on how much money is in their market, or how much similar companies have sold for. When that's the case, you need to ask.

1/3% (and that's generous) of a potentially $1B dollar company might seem like a lot, but after 10 years of dilution how much will you really have left? If your options dilute by 1/4 (also generous), you've made about an extra $80k a year, and that's not even with taxes subtracted. And don't forget the likely higher salary, raises, bonuses, stock grants, and medical care you get at a big 4 company.

It's possible that you can be be assured to make no extra money working for a startup, even with all the extra risk, depending on how those factors play out.

I think the point is employees under estimate the risk involved. I could make a start up that pays people in literal lottery tickets but I'd be unable to hire anyone because prospective employees can easily see it's a bad deal. Not the case for start ups.

I was thinking yes, but then no?! I bet you could hire a bunch of people with lottery tickets!

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get it without money we can't build anything, but without good employees everything else is multiplied by 0. The math in the article is unique to the U.S but I think the "essence" behind it is quite universal.

What stops founders from offering a company wide "vested Share vs. Cash" with an equal cap for everyone on each new round ? For e.g founders planning to sell 10% of their own share while raising round in the so called "Take money off table", all employees get the 'right' to exercise the same option, hence instead of dilution to the new value its straight selling the value they created ? what are the arguments against this ? For the investors its the same, and if the cap of how much of the vested % you get to sell is kept realistically low it should not risk decreasing the value of the private stock.

while i agree with Jaymzcampbell as an employee you're better off with dropping the "hope" the paper value of what you own means anything, however its contradicting to the popular piece of employee incentive tool that is quite essential in acquiring& keeping good talent.

I think we need to coin a new term like: "early employee valley of death" [1]

Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.

This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.

1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death - http://businessofsoftware.org/2013/02/gail-goodman-constant-...

It's pretty common advice that you want to be the last founder and not the first employee for this exact reason.

So many times this. The startup I was working for was exactly as you described.

In the end they ran out of money and all the employees got laid off, getting nothing.

Here I am though, working for another startup. This one actually makes money, though.

Yes totally agree with this. I've been there, but with my eyes open. It's still a good experience being employee #1 or #2, as long as one doesn't expect any financial upside for it. Therefore, the key is to put a time limit on your involvement.

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money.

One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No".

Thanks, but no thanks. If you admit that you're not going to share the benefits, I have no reason to get involved.

>> I worked for one startup which got bought. The founders made money. All of the employees lost money.

I think this is far more common than you'd think. Take YC for example. I'd be really curious to compare SamA's outcome vs. employee #5's outcome (for example). Even when companies "fail", founders do just fine for themselves via acquihire, and it's generally not tied to their stock (acquirer values stock at $0, pays off investors, employees get retention bonuses of ~$50-100k over 4 years, founders get quite a bit more than that).

Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big.

The systems are always going to be biased to the people who have the most money. You may realize you're getting a terrible deal, and their deal is much better. That's not an accident, and asking them to fix it is just going to cause suspicion and anger, especially if you blow past their facially spurious justifications for this ("I'm taking a lot of risk here!!!"). The real answer is "I have more money than you, so I can set the terms to favor myself".

I'm not necessarily saying there's anything wrong with that per se. Consider the flip side. You've promised an employee that he will make 10% of what you make that year, even if it means you're tithing that to him directly. You make $10M. Your employee makes $1M. Is your employee going to stay employed, or is he going to leave immediately and use that $1M to start something that will make him $10M next year, or even just to buy a fancy house on the beach and invest from home without having to pull a 9-5 every day? Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.

Honestly, in my experience company loyalty in employees has less to do with outside financial incentives and much more to do with internal transparency and mutual respect at all levels of the company than compensation.

One of the main problems with the current startup culture is that everything is overly commoditized. For something to be considered a unicorn it has to fit a model, have a certain amount of growth, a certain amount of revenue, a certain number of employees. This hurts a lot of companies's success because it forces them to adhere to a model that's designed around a totally different organization, ironically the same thing that created "Startup Culture" in the first place.

I would and have much preferred working at companies where I liked my coworkers managers and reports rather than ones where I was simply paid more.

> Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.

This is not a problem for law firms, medical practices, consultancies, investment firms, or management in any public company. Your argument is just that employees who are in shitty, exploitative jobs will take the money and run, so try to exploit them harder by paying them less. Are you really "not necessarily saying there's anything wrong with that per se"?

Not every job that requires financial incentive to motivate work is automatically "shitty" and "exploitative". There are a lot of things that we really need to get done, that people wouldn't do if their paycheck didn't depend on it. I would say that probably 85% of the white-collar workforce feels that way about their job, and darn near 100% of the blue collar.

We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.

There's a reason that law firms, medical practices, hedge funds, etc. tend to be small. Each professional is essentially a free agent, hopping aboard on someone else's infrastructure for a limited time and more-or-less free to call their own shots, including going to another practice or starting their own if they're unhappy. There's a lot of lenience in scheduling, work hours, etc., and it's a very ad-hoc thing, because everyone knows that it's a free association based on goodwill and not based on mandate.

These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.

Just think about the types of companies you listed and ask yourself if things would work out if every company afforded such luxuries to all of their workers. Normal people don't, and indeed can't, have access to those luxuries or nothing would work anymore (at least not until we get more stuff automated).

It's hard enough to get normal workers to collaborate when their paycheck depends on it. Take away that incentive, and suddenly everything looks like open-source; without the financial incentive and the threat of lost stability if a product has poor reception, people do the fun stuff, and leave the hard stuff for someone else to worry about somewhere down the road.

Like law firms and medical practices, teams of developers break apart and most projects can't sustain more than 3-5 like-minded major contributors (because there's little incentive to keep people around and get them to deal with necessary compromise; if people don't like what's happening, they just leave).

Also like law firms and medical practices, it suddenly becomes very difficult to get the help you need in either a cost or time efficient way.

The 9-5 is a different lifestyle. And we need people who work 9-5 more than we need people who close their practice down to go out to Tahoe for 1.5 weeks every time there's a bank holiday.

I'm saying there's not necessarily anything wrong with people who have more money being able to set the rules of the transactions they're involved in, necessarily. I do think they sometimes set rules that are bad, but my point was that the fact that such a group exists is not bad in and of itself.

Removing the general need to trade labor for financial stability is a disaster at a massive scale, and on many different layers. There is a path out of wage slavery, and anyone is free to choose that path and attempt to earn their way out. But a lot more people are content with the work-a-day grind than one might think (not content enough to do it willingly, but not discontent enough to put in the work necessary to escalate outside of it).

In a utopia, everyone would help everyone out and contribute their skills, knowledge, and resources free of charge, just because they saw a need for them. If literally everyone agreed to do this literally all of the time, we'd be in fine shape. But we don't live in such a place, so the need for financially-motivated human labor will continue to exist until we can teach robots how to replace 100% of it.

> We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.

The context is early-stage startup employees, not white-collar accountants and blue-collar janitors who you are presumably outsourcing to other companies because they perform functions that are not essential to your business. The profits shared by people working for these outsourcing firms are not great because the profits of these outsourcing firms are not great. Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great. How is that fair and why should anyone agree to work with you on those terms?

> These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.

You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.

I don't want to address the rest of your rant except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.

>Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great.

Firms that resell blue-collar labor are often very profitable. I'm not sure why you think they're not.

>How is that fair and why should anyone agree to work with you on those terms?

It's a marketplace, supply and demand is going to dictate these types of arrangements. There are many more adequate employees who want to work at an early-stage startup than there are early-stage startups hiring employees.

I'm not saying anyone should agree to work under these conditions, but as long as they do, others have to remain competitive.

I don't personally think it's fair. I think early-stage employees should get a much larger slice of the pie than they typically do. But I'm also not going to indulge the fantasy that being a non-founder and/or non-investor can lead to riches; it may have happened once or twice, but it's very unlikely to happen to you. In almost all successful startups, already an infinitesimally small quantity, the founders and investors get the proceeds from the exit and the employees are lucky to see a bonus check for $5k.

>You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.

They certainly want you to think that's the case. I'm not going to say that everyone in these professions works a certain way or another, but there are many who have a lax working schedule (admittedly, I don't know any who close their practice for 1.5 wks every time there's a bank holiday, that's called "hyperbole"). I know this because I have friends who are doctors, lawyers, and in finance.

>I don't want to address the rest of your [essay] except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.

I went out of my way to discuss because you seemed like you wanted to do that. This is a discussion forum, after all.

I couldn't agree more. After I first realized this asymmetry back in the dot-com 1.0 days, I stopped wanting to be an employee and started founding companies. I did take a couple senior VP jobs where I fully understood the equity I was getting and was OK with it.

If you want the large exit, you're either a founder or an investor. It's been that way for as long as I can remember.

For a startup I think market-rate salary for early employees is more than fair, assuming it's coupled with an appropriate options package.

But if we're talking about "Well you make market rate if you value your options like XYZ..." then yeah, that's BS.

Exactly. Equity should balance out the risk and opportunity cost of joining a start-up vs. an established company, NOT compensate for a below-market salary.

Just to play devil's advocate - as a founder, I've both made money and lost money. Some of my ventures were self-funded to failure and I had to write off hundreds of thousands of dollars. I repeatedly remind my family that my worst case is not a year of unemployment with zero income but rather a year of business failure with a painful amount of red ink. One or two experiences like that and you become very aware of the line between people willing to risk their time and money vs. people only willing to risk their time. If you really want to make the leap from employee to co-founder, you can probably do it - but need to bring money to the table or at least offer to work for much less than market (or even zero) in salary, which good founders will typically respect and overvalue since it reflects extreme personal commitment to them and/or the business.

> line between people willing to risk their time and money vs. people only willing to risk their time

But when people take equity instead of compensation at BigCo, they are quite literally risking money + time.

If I'm not being paid market rate, I am being given equity, and I'm expected to work the typical startup bullshit hours, then there is absolutely no way you can say I'm not risking both money and time.

Exactly that. Your additional time is money invested in the company.

Interestingly, one person's time can be worth more than another person's money. For founders, this is sometimes factored in, but usually not for employees, even when they take a reduced salary. At best, if you are taking a 100k job for 50k, you are, in the eyes of most founders, only investing 50k in the company. But if you are putting in beyond 2k hours that year, anything beyond that is an investment and can be worth far more than the extra time put in by founders themselves. Such invested time is usually completely unrewarded, it's assumed to be "factored in".

> But if you are putting in beyond 2k hours that year, anything beyond that is an investment and can be worth far more than the extra time put in by founders themselves

It's not just the time, but the experience and skill of one person can be immensely more valuable than someone else's experience and skill.

> Such invested time is usually completely unrewarded, it's assumed to be "factored in".

i.e. "completely ignored".

I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted.

When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of outstanding shares, and by 2 years later, I was down to 0.015%.

>I was promised that more options would be issued and we wouldn't get diluted from future rounds,

I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted.

The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is supposed to be a Wonderful Event because it means the smaller ownership percentage is worth more.

E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO.[1] If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.

In other words, you can't look at dilution in isolation; it has be combined with the (hopefully increasing) value of the shares.

[1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...

I've seen this scenario multiple times:

1. Company needs to raise money

2. Company issues new shares

3. Board realizes "oh shit, this is a lot of dilution"

4. Board decides "okay, who is important enough to keep around" and issues stock grants to those special people to undo their dilution.

Founders and VCs have seats at the board table, and so are always important enough to get grants. Employees do not, especially after exit.

So the two choices left are

a) employees have no protection against dilution, therefore no protection, therefore shares are worth zero, or

b) employees are given protection against dilution.

You can say "b" is never going to happen. That's okay. It means that "a" and it's obvious conclusion happen.

It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.

>I specifically asked if our options would be diluted in the next fundraising round

I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.

If a founder promised me "no dilution", I'd have to conclude either...

1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)

2) he does understand math, but he's a dishonest crook and therefore will tell you anything

3) he's mentally ill

4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.

Because it was my first startup and despite days of research into how options work, I clearly still didn't understand it all. So I trusted his answer. I had no previous experience or knowledge that would have led me to believe that they wouldn't follow through with the promise to grant additional options over time.

Your company does not 'promise' you compensation - they have a contract for that.

If you were to have some kind of special 'non dilution' clause in your equity position (which by the way, no founder would reasonably agree to), then you should have it in writing.

But it's moot. One or both of you was obviously struggling with how all of that worked, because giving employees anti-ratcheting clauses is not something that should really be done. In fact, it should be avoided if at all possible even with investors.

> ... and then believing a promise of no dilution ...

He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.

>offset that dilution

The typical mathematical mechanism that offsets dilution is the increasing price of the shares.

E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)

Basically, you own less percentage of a more valuable company.

>Which would be a perfectly sensible thing for the company to do for a valued employee.

But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.

Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.

Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.

"I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted."

It's only unrealistic because of greed. There's absolutely no valid reason this has to happen.

When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution.

You just have to hope for the best and if it doesn't work out you get lectured by some smartasses that it's your own fault.

Yeah. There are a lot of naive people out there, and in particular, "young" is virtually synonymous with "naive" (through no fault of the young people directly, they simply haven't had the experiences yet).

Like the other lies the moneyed interests tell, the belief that it takes a fresh young generation to build good products and that's why the oldest guy in a random SV startup is 26 is pure propaganda that they're hoping you won't see through. People take this bait and go out and work for a free room in an apartment shared by 6 other "founders" and a laughably small basic living stipend that doesn't even equate to minimum wage.

Maybe a few hundred of these people have actually ended up getting rich? And they're "founders". How many early startup employees are doing well right now anyway? How much have Dropbox's first 50 gotten, for example, and how does that contract with dhouston's take-home? The early employee race is really baseless.

It's a fool's game, and people realize that after a couple of years, and then go work at a real company, where they can at least collect a market salary and where prudence and experience aren't plainly mocked and discarded [because these attributes threaten the people at the top].

There's this mug's game where you are treated as belligerent for wanting access to the essential data to value your shares, and stupid if you value your shares at zero.

Or it's just a larger, systemic issue. Saw this post yesterday on Reddit, which I think is quite relevant here as well: https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy...

I don't find it baffling.

You flatly cannot build a company without capital.

On the other hand, you might be able to build a company by treating good employees badly, because the employees are either a little naive or they really do value working at your cool startup over money.

You might also be able to simply build a reasonably successful company with not very good employees (in fact this is most companies)

Lots of companies start with minimal capital infusions. The VC roulette is not the way that sustainable companies have been built, historically speaking. Atlassian is a recent example of a bootstrapped tech company that IPO'd.

I personally believe that in a fair world, the people actually producing the value would be allowed to collect most of it, and the people who grease the wheels would collect an appropriate gratuity. However, I acknowledge that we instead live in a world where the people with cash set the rules, and their interest is in preserving and growing their power (which means keeping themselves much richer than everyone else).

Considering VC only really started in 1970s, it is easy to say that it's not the way companies have been built historically. That said, Atlassian is more an exception than the norm. Most really big, successful tech companies took VC or PE money during their history to help them grow (Google, Facebook, LinkedIn, Cisco, Apple, Microsoft, etc.).

>You flatly cannot build a company without capital.

Many successful companies are bootstrapped.

> Many successful companies are bootstrapped.

I'm bootstrapping now and I'd generally agree with the statement you quoted.

It's expensive and near impossible to find cofounders/enough-"bootstrapped"-help to make building a tech company from scratch feasible, never mind go to open market and get enough customers for the business to be worth running. A "small" 250k check would solve almost all of my issues right now.

So the conclusion is that the people who actually build the thing don't matter, so the company should feel free to fuck them at will. So why should anyone ever work at a startup that isn't guaranteeing them market rate compensation? And don't say the "experience", because that can be gotten anywhere else.

Because an angry investor can fuck you over more than an angry employee.

Any truly angry employee can fuck over a business far worse than an investor. Sure, the rare investor with industry swaying clout is dangerious, but low level employees can cripple any technology dependant company immediately with a few minutes effort.

Not without incurring significant damage to himself in the process.

The relationship is always and rightly asymmetrical between founders and employees. What's dishonest is offering shares that can be diluted, can't be transferred, and have no voting rights with the understanding that they are any more than shares in the current company bonus scheme. Employers should just pay a competitive salary and bonus. And employees should wise up - if they want a piece of the action they need to take founding level risks and put a lot of skin in the game.


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