We hope this will take a small step towards correcting this problem.
A couple of years ago, I asked AngelList's CTO if I could utilize their data to build something like this; he never got back to me, so I moved on. Really glad to see this project live!
EDIT: Just realized this came from the fine folks at LTSE. Awesome stuff, Tiho!
Looks like there are some hidden assumptions about liquidation presence etc. Might be good to add a slider for that. (My employees would do pretty well at a $25M exit!)
And it looks like this is the slider you were asking about. ;) https://captable.io/
Suppose you regard tldroptions.io's probability distributions and outcomes as correct, and the only thing you care about is maximizing the long-term rate of goal of your capital. Then the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion , a.k.a. Fortune's Formula) says that you should try to maximize the geometric mean of your capital, which amounts to maximizing the expected logarithm of your capital.
To make this concrete, suppose you are choosing between two options:
- (Startup): Working at series C+ start-up for three years, where you receive 1% equity and $100k/yr salary, and have a 20% chance of getting ~$60 million in 3 years (according to tldroptions.io)
- (AmaGooFaceSoft): Working at AmaGooFaceSoft for three years, where you receive $300k/yr total comp (according to patio11)
For simplicity, I will ignore taxes and the time value of money. All monetary amounts below are in millions of dollars. If you have no money in the bank to start with, the geometric means of your alternatives after 3 years are:
- (Startup): exp(.2 log[60+0.3 ] + .8 log[0.3]) = $0.86 million
- (AmaGooFaceSoft) = $0.9 million
In this case, AmaGooFaceSoft is slightly better.
On the other hand, suppose you already have $1 million. After 3 years you will still have the $1 million, plus your salary and whatever money you get from your equity. Here the geometric means are:
- (Startup) exp(0.2 log[6+1+0.3] + .8 log[1 + 0.3]) = $2.8 million
- (AmaGooFaceSoft): 1+0.9 = $1.9 million
In this case, it's better to join the start-up.
The base salary matters a lot. If you have no money in the bank, but you get $150k year at the startup instead of $100k, then the geometric mean of the Startup option after 3 years is better than that of AmaGooFaceSoft:
- (Startup): exp(.2 log[60+0.45 ] + .8 log[0.45]) = $1.2 million
I joined Zenefits when everyone had dollar signs in their eyes. It felt like the roaring 20s (or at least the accounts I've heard of them).
How are they doing nowadays?
I always say don't compromise on salary for equity. Compromise for the experience, for an entrance into the field, because the chick at the counter was digging you, but not because of some payout you think you'll get in the future.
Two things a lot of startup employees are unaware of that are worth highlighting: they actually have to buy their options, which eats into returns, and that if they leave the company they have a limited window (30 days, typically) in which to do so. In would behoove them to save/plan for this fact.
This means you can find yourself valuing stock options very little, even in cases where you have full faith in the company making it and being very profitable. A growing company is very different year to year. What are the chances that you'll love the same company in 6 years?
My personal calculation is that I have a 50% chance of leaving a job every year, so if I am guessing that it'll take 6 years to IPO, and I don't think I can just keep large amounts of money frozen in options, I have to discount the value of said options over 95% on top of the traditional calculations. RSUs from he big four don't have that problem.
That's a very weird statement. Companies are under no obligation at all to ever offer stock to the public.
An IPO comes with all kinds of downsides and many companies simply do not feel the benefits weigh heavier than the downsides. Such as: transparency, SOX, all kinds of restrictions and demands regarding communications, dealing with the SEC (or the local equivalent) and so on.
I certainly didn't intent any offense.
None was taken :)
The price of the options eating into returns is reflected in the number we present (we assume a consistent valuation growth by stage and at exit), but taxes aren't and those can 40%+ in the US, which people don't necessarily expect. Limited exercise windows are one of the things we have in the list of ways this can go horribly wrong, but you are right that it is something that you can plan for if you know it's coming.
Thinking about it, that and early exercise might both be candidates for some sort of "list of questions to ask" tool...
See here for more: https://blog.wealthfront.com/qualified-small-business-stock-...
Yup. It honestly astounds me how many people don't factor this into their decision-making. Your only equity compensation on joining is the delta between your strike price and the current market value of your stock. This is often very little, far less than you give up in salary at many companies.
This tool doesn't explain the dynamics going into the estimated profits (though it links to things that do), but it helps people avoid over-estimating the value by missing dynamics like strike price.
Caveat: this doesn't work in a "down exit" less than the previous round's value.
As @bethcodes says, this is not a calculator, because while these two numbers will get you within a factor of 2, knowing the details will help you get even closer.
(Disclosure: I built a calculator to help you do that: http://www.optionvalue.io/calculator/)
"As a Delaware corporation, all of the company’s stockholders (including minority stockholders) have the right to inspect and make copies of the company’s stock ledger and its books and records upon a written demand to the company. The stockholder’s inspection rights also apply to the company’s subsidiaries. Although Delaware corporate law does not specify the types of books and records that the stockholders may inspect, these rights extend, at a minimum, to the company’s financial records and corporate minute book."
Note that there are complicated ways that that more options might appear, depending on the company (e.g. sometimes debt can convert to equity) that they might be a bit more hesitant to talk about, but they should be pretty open about the total number of shares currently outstanding.
This could keep slider at $0.00 for a longer (further on the right side).
Preferred shares are reflected in the current payoffs; that's what's responsible for the "low exit" portion of the slider not paying off at all. Are you talking about participation preferences that let VCs double-dip? Those are a whole different kettle of fish, but also not as standard as preferred shares.
By disclosing terms of the shares, great companies could attract better people. You are not going to trick good people with shares, only fools.
A. You assume young people are "really good individual contributors" and older people aren't, which is very often exactly backwards.
B. It has been my experience that startups often hire people with management experience as they scale.
C. Your assertion that young people don't want to manage old people is unsupported and pretty much just sounds bitter.
The original hypothesis that younger developers are more likely to be overconfident about their chances of success and so are willing to accept lower effective pay makes way more sense than that older developers are less good at being individual contributors.
> A. You assume young people are "really good individual contributors" and older people aren't, which is very often exactly backwards.
Not my assumption. But, as someone ages, if they are an excellent individual contributor, they often find themselves in management roles. There are exceptions, but the real problem is that as people age, they want to be called "people managers". And, startups don't need people managers, they need contributors so there is a mismatch.
If an older person only wants to be an individual contributor, there are of course places for them, but my contention is that the cross section is extremely small. I can see why it seemed insulting, that isn't want I meant.
> B. It has been my experience that startups often hire people with management experience as they scale.
Sure, they do, but more often than not, they are hiring their strongest individual contributors from within. Only a small percentage of people hired are hired from very senior roles.
> C. Your assertion that young people don't want to manage old people is unsupported and pretty much just sounds bitter.
I have worked in 3 large organizations and 2 small organizations, it is extremely rare for a younger person to hire someone older than them. I cannot imagine that there is evidence counter to this claim. I have seen it repeatedly.
> Instead of trying to get the right answer, we set out to build a tool that could get an answer.
I'm curious though, from where did you get the numbers about the likelihood of an exit? I thought it was pretty interesting that a Series C is statistically less likely to make you money than a Series A, according to this.
Interestingly, data I found from 2010 was very different. It seems like more recently the popularity of early acquisitions (especially in biotech) and more robust seed funding have shifted the distribution of outcomes. It could definitely change again: success rates are by no means consistent.
Think of it as investment diversification.
Suppose you have $100k in the bank, and tldroptions.io says you have a 20% chance of receiving a $60 million payout. The geometric mean of your capital is then $360k: https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1...
It would take 62 million CA powerball tickets (each with different numbers, in the same drawing) to give the same result: https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+l...
Lottery tickets, unlike options, cost money up front. You still can't lose more than you pay, so the payoff curve is similarly non-linear, but unless you can trade options for cash options will always beat lottery tickets.
Lottery tickets are easy to diversify in that you can buy a variety of numbers. (The times when lotteries have become a net-positive buy the buyers takes advantage of this fact.) Employee startup options are more like buying one set of numbers over and over again. On the other hand, the odds of getting any payoff from options are somewhere around 15-30%, whereas the odds of getting any payoff from a California SuperLotto Plus ticket are ~4.3%. Because you can diversify ticket numbers, you could get the same odds of getting any payoff by buying 14 tickets with different Mega numbers, which would earn you $1 to the $14 you spent. If you could buy stock in many different startups, you would be called a "venture capitalist" and those folks on average do much better than people who play the lottery.
Finally, the maximum payout of a lottery ticket is capped and known ahead of time. The largest lottery win in the US was $656 million. On the other hand you don't know going into a startup what the payoff for that particular startup is going to be, and the largest exit of all time was Facebook at $104 billion. Just like with the lottery you don't know how many ways you are splitting the payoff, but unlike the lottery it's going to be based on the decisions of the board/founders, rather than random.
Basically, the lottery is a lot simpler than a startup, with few sources of actual uncertainty, and so there's no real risk involved. It is just gambling: you can do the math to figure out what edge the house has and figure out for sure that you shouldn't do it. Startup options, on the other hand, reflect actually-unknown unknowns, and so are more valuable to those who hold more-optimist-than-average beliefs about the probability of that particular startup succeeding.
That's only true as long as you're still working at the company. If you leave, you have to exercise, and then the worst case becomes negative.
tl;dr in one word: "Beware"
Then clicks the down arrow again. Negative numbers ensue.
True story, except I'm not usually a QA engineer.
The company I work for is about to get major investment and they are transitioning from an LLC. Only the 3 founders have equity currently. As engineers we have no idea how much to ask for. Because we have already been working without equity. How do we account for the years we've worked? Or that our salaries aren't that great right now.
But it was mysteriously deleted without reason.
So I would take it we should ask north of this number. Being that we're small, don't have great salaries, and have been working for the company "because we believe in it" before getting any real promise of compensation.
Series A 65%
Series B 68%
Series C+ 71%
If so I'm a little surprised that seed and series C+ companies have approximately the same chances never exiting.
Typical grants for post-series A employees (the 10 to 50 first employees) are at least 10X more than that. With that calculator, you get something (~ $20K) for a $40M exit. Not 0. Not amazing either.
This was one of the places where the model could be a lot more accurate, but at the cost of much more complicated math.
(Exit Price < Money Raised) ? $0
The expected value of working at an early startup gets overestimated, by a lot. If you're optimizing your career, either make the most you can at an established company, or start a startup.
Or... work at an enlightened startup, that understands the state of affairs, and offers really generous lifestyle advantages - i.e. go work remotely for a couple months if you want, otherwise they are just exploiting misinformed young people and their founders likely have some ego issues.
I joined a startup long after product market fit, it was pretty obviously going to be moderately successful, and I was employee ~100. I never worked too terribly hard, and my equity was worth about 50% of my (not too low) salary each year.
If you're not joining at or before series A, a lot of the risk has been mitigated, and there are markets opening up to sell your equity into.
I just wrote about this last week - https://medium.com/@CaseySoftware/tech-ipos-an-inside-out-vi... - after personally experiencing IPOs of both Twilio (joined post-B) and Okta (joined post-F).
Edit: Replaced the link to my site with the Medium post.
The equity of many AmaGooFaceSoft employees is also worth at least 50% of their yearly salary.
I have never heard of a Canadian company looking to raise capital structuring itself under Canadian law. Commonly, you'd have a Canadian law subsidiary wholly owned by a Delaware corporation.
Disclaimer: I am not a lawyer. Hire a lawyer before selling private stock. Do not take investment or legal advice from my Internet comments; they are neither.
GGP covered that option quite nicely. Those are companies that are clearly at the top companies of the decade, maybe even longer.
Imagine what kind of stock investments you'd make if you were only allowed to invest in one stock at a time.
Let's say 10% of start-ups succeed to the point where employee 100 makes "a bunch of money", which I think is very generous. You would need to join 10 of these start-ups throughout your career (and of course remain at each for the 3-5 years it takes to learn if the lottery ticket pays off) to have an expectation of one case where you end up that bunch of money.
So yea. Risk adjusted. While the EV might look good, the variance makes it a losing game.
I can't comment on the rest of your model, but its worth keeping in mind how the binomials shake out.
It is a true statement that the expected number of successes after 10 tries would be 1. It is also a true statement that your chance of zero successes after 10 tries is 34.8%. (The balance comes from the outcomes that include multiple successes.) It may be that the latter is the more relevant and interesting statement to make, but your math was totally right.
Or, the fact that a series B is needed is indicative that there was more risk than anticipated. Series B is not always good news (in general it is though, but there is still plenty of risk at that stage). So always verify what the reason for a funding round was and make sure that it was an 'up' round rather than a 'down' round.
Still so many phony companies out there even at Series B.
> I actually think, risk adjusted, that's the easiest way to make a bunch of money.
It's really not. Risk-adjusted go work at Google for 10 years and you'll probably make more.
If what is easy? Making a few million in a few years is never easy, but I don't know of a better way to do that on a risk-adjusted than joining startups after product/market fit.
And for what it's worth I don't build very much anymore, unfortunately
Product-market fit does not imply appreciation. Growth is priced in. Unless you think you know more than the market (the VCs), you shouldn't expect a return.
If you're a SWE at Oracle, are you really going to make much more than you'd make at a 50 person startup? According to Glassdoor, not really.
Just look at the Oracle SWE salaries: https://www.glassdoor.com/Salary/Oracle-Senior-Software-Engi...
Even including total comp, that's barely more than I made the the first <20 person startup I joined.
Look at another mid size company as a developer.
Not worth it financially, considering opportunity cost of not working somewhere that pays more.
Just pointing out that there could be other non-financial benefits from working at a startup, that might make it worth it. Everything from you enjoying your time more, to the work helping you gain skills faster and make you able to get a higher salary down the line.
While I'm a little disappointed in my pay, I get a ridiculously flexible schedule, work from home whenever I feel like it, I put in some extra work last weekend so my boss just told me to take tomorrow off (which is a common occurrence), the work I'm doing is 5x as interesting and I get to try my hand at a breadth of tasks. I also ended up getting a fantastic title after 6ish months as I was hired in under a pseudo title and they had the mentality of "show us what you can do." There's always new/more difficult tasks I can jump in on when I'm ready.
My other two offers did not have flexible schedules, one had no work from home and the other allowed it sometimes. They were both clearly defined roles, despite my interviewers telling me about all the cool projects I "might" get to do l've learned to never consider any "mights."
I think I'm another year or two my pay will be higher and I will have a more interesting career than if I had chosen one of the ther offers.
I don't expect to get anything from this startup other than experience and a paycheck. And the experience definitely makes up for the lower pay.
For example, someone who is a VP at a startup might equate to a typical Manager at a larger company. Someone who is a CTO or Chief Architect at a startup might be a Senior Engineer at a larger company.
Large companies have an approximate scale in mind for their titles, where a Manager, Director, VP, etc. are responsible for (on average) a certain number of people reporting to them, and a certain amount of budget. "Director" level at a large company may entail responsibility for hundreds of employees and significant budget. That director has far more actual responsibility and scope than a startup "VP of Engineering" with a 10-person team.
To put it in different terms:
Anyone can pay $50 to incorporate online and they'll be a CEO. The actual prestige of the person and their CEO title significantly depends on the prestige and scope of the company. From a career perspective, what others will care about and evaluate are a person's actual scope, responsibilities, and accomplishments.
So be careful about viewing a title as a reward; a better reward is an actual increase in scope, responsibilities, and compensation.
Because of my lackadaisical response it never got changed. Couple months later my boss's boss brought it up because they needed it for some form and she asked if I wanted an even higher title than what I was offered initially. I said "sure."
I don't expect much from it, but every stupid signal helps next time I'm job searching.
You can always go retire at a big company later. The younger you are, the easier it is to take these sorts of risks.
But also think like an investor. Don't put your $x00,000 investment in a startup just because it's cool. Do it because you believe you'll make a positive ROI.
I feel I'm optimising my career, working as a sysadmin at a small startup. It's not optimising for money, but I get to touch a lot of tech and design a lot of infrastructure. Make a few mistakes and learn from them. I'm not implementing someone else's design here.
Oh and you had zero chance of losing any money and you can take share save money tax free
Al those competitors want to do is cherry pick profitable customers and the USO can go hang.
Unfortunately doesn't parse the "$1 million" mark. But that's ok, because let's be honest. It's not going to exit that high.
Edit: Thought about this a little deeper and it is possible with a lot of companies exiting prior to the Series C, but suspect the data set of Series C+ companies may just be too small?
This is exactly it.
(For the curious, I added a click mask to the modal contents and forgot to update the links to fire anyway.)
Well, then it's misleading.
Between AMT, capital gains / income tax, there's potential for a huge chunk of what you might earn to be removed.
This is a fantastic start. Yes, angel.co/clear was complicated. I hope you have better luck driving adoption.
What you are charting at the top is the company exit value. But the UI controls enter info tied to the employee. You should chart the employee's exit value.
You should also put the "or not*" controls as totally optional toggles as an exploratory UI. I.e. the user can toggle "preference" and see what it does to their value.
Reality is probably a little fuzzier than that, though.
Edit: the assumption of 0.01% is also absurd.
A simplified calculator should include reasonable defaults. This is like a mortgage calculator called tldrCanYouAffordAHouse.com that assumes 25% interest rates and doesn't disclose that.
If you have 100 employees by the time you exit, and 1% of the stock was divided among them (exactly the situation where I am), each would get.. 0.01%. That is 0.0001 of the issued shares..... as options.
This is no longer uncommon.
Secondly "by the time you exit" isn't relevant. Your stock is setup by when you join. If you join a company with 100 people, sure you get less. But 0.01% for Seed/A isn't even close. If that's what you get offered, don't take it.
As an example - say you traded around 60k a year in cash in return for higher equity. In six years you're looking at around half a mil which means with, say .2 in a Series A, you're looking at a pretty big exit (i.e 700M) before you even have a chance of breaking even. This is obviously a terrible choice (i.e care for 20 dollars or a chance at 20 dollars)
To make it 'worth it', from an 'expected value' POV you'd need to make 2-3 million on around a 3.5B exit which are, of course, exceedingly rare.
You also have to be careful about things like options windows on exit, tricky term sheets with liquidation preferences for preferred shares, etc.
I'm going through this process now and it's shocking how most people really have no idea how this stuff works. Even with recruiters/HR/CTOs/etc who deal with this stuff day to day.
That would make my blood boil. I'd probably say something like "if money isn't a big deal I'm sure you'd be fine to just give me some of your salary, right?"
That's not an unreasonable offer. You should try to negotiate it up to around $150k.
> However, I wish to be compensated for the rights to the prototype upon joining as it is about 50k lines of code.
I'd suggest you mostly give up on that idea. It's naive thinking. The market value of this code is close to 0—it's very unlikely anyone else would want to buy it from you. At best, it's just an additional reason to hire you (instead of someone else).
On the other hand, if I walk, I might have wasted a few months time but at least I will have comparable salary in a stable job. 3% in early seed rounds just seemed pathetic to me when my role would be vital to the companies ability to grow.
You could owe taxes on money you never saw. Under the AMT rules, if you exercise options at a discounted price, you have to consider the discount as "income". If several years later, when you're ready to sell and the stock is below what you paid for it, you'll still owe the taxes on your discounted price.
Ask your tax person for the details before engaging in any stock option purchase.
Answer is $0