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Startup options are better than they look (2017) (benkuhn.net)
93 points by mercutio2 11 days ago | hide | past | web | favorite | 114 comments





Having worked at an early startup, I share the opposite view: startup options are much worse than they look. The expected cost of not working at a big company is much larger than mere 10% (go check levels.fyi if you're curious) that the author calculated. The upside of stock options is also bound by the slim chance of any startup's successful exit and dilution that comes after each round. Here's a good calculator (http://optionsworth.com/). If you have 1% equity (rarely given) of a company that exits for $100M, you gross ~$1M. That's before dilution and tax. Aside from the financial cost, you also sacrifice your career mobility because you are forced to exercise your options if you leave the company before a liquidation event (rarely happens before an exit). Do not work as an employee at a startup if your primary motivation is making a lot of money.

On the other hand, if you want to start your own startup, I think working at a startup is a great way to minimize your own risk while maximizing learning if you're like me ;)


Your last point is really relevant. You can actually get paid to learn all kinds of things at startups including which company destroying mistakes to avoid. Not to mention there aren’t very many roles at FAANG where you can work directly with the C Suite and see how the sausage is made.

FTA: "For instance, if the company is worth $1m, and you are granted options on 1% of the company, then this basic model says that the expected value of the options is 1m * 0.01 = 10k."

The options are options to buy, so if you are granted 1% options of a $10m company your options are worth just above zero -- you can pay $10k to get $10k of stock back. You only make money if the company value goes up relative to your strike price, and the amount of money you make is proportional to that.

E.g. if the company literally doubles in value, you now can pay $10k to get $20k worth of shares. Only then do you profit the $10k in the above model. So the model only makes sense if you get in and the company doubles in value, and even after that you still only make $10k.


This isn't actually true, because 409a valuations (where your options are struck) sit at what most would consider a meaningful discount to the actual value of the company (often 30-50% of the preferred, below where secondary is even happening in late stage companies).

That said, the strike does reduce the value of the options vs something like RSUs, but less than this comment infers.


Not only that, but it's kind of a nominal value. There's some shares you'd be lucky to find a buyer for.

This is a cool analysis with a bunch of giant caveats. The author lays them out at the end.

The most important seem to be that it assumes people are risk-neutral and optimizing their expected wealth, instead of trying to reach goals like maximizing the probability you'll be able to buy a house in SF. If that were the goal, I think early stage startups would fare incredibly worse in this analysis.

The next most important seems to be that there's no way for a company to fail in this model. The companies that become worth less can't become worthless. Since these early private companies' stock aren't liquid, you can't cash out before they fail. You get zero dollars from those, which is a huge difference from the model.

And the whole crazy tax thing. If you quit as this model suggests, you almost always have to exercise within 90 days (spending a bunch of your money for an uncertain future). Then the IRS sends you a huge bill if you left a successful company where you might get more than zero dollars. But you still haven't earned any cash from the stock.


FWIW, re: taxes - TrumpTax raised the AMT thresholds so aggressively that the % of folks to whom this applies is probably a lot smaller than it used to be.

And even if you are pushed over the AMT threshold, and if the only reason you went over was due to purchase of ISOs, and if you don't go over the threshold in the following year, you can get credit in future years for that extra tax you had to pay.

Correct. You can claw back a chunk every year until you have that AMT paid back so depending on your inflation and investment opportunity cost expectations you are not actually risking that much money, just the cost of the shares.

I think that really speaks volumes to how relevant it is to join early stage if you want to play the options game - later stage companies _seem_ safer but may not actually be that much safer if you consider everyone already in the investment aggressively driving the price of the shares up and forcing you to risk more on exercise.


So, huge mistake in the article right away... It assumes total comp at Google is 110k..... The reason startup pay is nonsensical for many people isn't because startups don't have big upside, but that the upside didn't keep up with the massive increases in pay the bigcos have driven. Eg starting sde I comp at Google is 180k... , Or 60% more than the article assumes.

There is also value that bigco provides in terms of stability, benefits, professional hr (hr isn't your friend, but bigco hr will probably at least follow the law)....

Dan Lu's articles on startup vs bigco pay are well worth looking in to.


Is this base comp or final comp?

Total compensation [0].

[0]: https://www.levels.fyi/salary/Google/


180 is mid senior according to levels.fyi.

For salary sure, but it is 345 total comp and the stock is pretty much as good as cash considering it'll vest monthly and you can set it up to immediately autosell converting it to cash.

For Google, that's entry level (L3). L4 (between fresh graduate and senior) makes $250k TC.

L4 is ~2 years out of school.


While this is great pay for many, it's not especially easy to get a job at Google or elsewhere in FAANGM, Many who aren't top engineers have the option of startups or a c list firm.

It is pretty near impossible to beat that at a startup...

That's why I'm at a big company now instead of startups, where I have most of my experience in my career (about 5 years). 2 years of working at a lower paying FAANG and I am getting ~$320k total compensation for a mid-level dev (granted, that is as a top performer) - that is double what my last job (startup) was paying me.

I think I'm now on a road of buying a house in the Bay Area sometime down the line, whereas my previous years of working brought me no closer.


Right. The big players have salary on lock down and small players can't compete on that front. You pretty much have to believe in your startup. It's a gamble.

The startup can get you hired at bigcorp at a higher level than if you joined and crawled up the ladder. This is never mentioned when discussing comp comparisons.

Yeah, but it's still a gamble. Unless you become a VP/Director it's tough to get to a sufficiently high level to make it worth it. It's rare, for instance, for someone from a start-up to come in as a Staff/Senior Staff engineer (L6/7).

L4 starts at 2-5 years out of school, and ends 5-30years out of school.

I’m glad someone said it. So tired of the advice I constantly hear on HN to assume your grant is worthless.

I forward exercised my stock options when I started a job for $7k in 2013. Last December I was able to sell some that valued my initial grant at $1.3m (still private but probably will raise at higher value or go public soon). Because I forward exercised I paid taxes at the 2013 value of the company, which was basically nothing. And I only pay long term capital gains when I sell, which is less than the earned income tax rate.

Of course there is a certain element of luck involved, but to say that the mathematical probability of building wealth from your share of equity in a startup is the same probability as winning the lottery is completely disingenuous.


I don't think you understand how rare your situation is.

All these things are unusual:

1. You joined early enough that you can early exercise for such a low price ($7k)

2. Your company allowed early exercise (still unusual these days).

3. The startup 20x-ed in value (my conservative estimate)

4. You stayed in the job for 6 years!

5. Your startup let you sell some of your shares before exit (This is extremely unusual still).

Still, even with those assumptions this turned out only ok. Assuming you sold everything in December, you made $1.3 million over 6 years, so $217k per year. Considering that for a typical senior software engineer, the equity portion needs to make up about at least $150k of compensation (conservative estimate of a Google L5 from levels.fyi), I would say you did roughly ok, making an extra $67k per year. That's pretty good, but not amazing. Getting promoted to L6 would be more than twice as good.

Sorry for being so negative about your good situation, but I really think current equity compensation is far too low and tricky, and that workers, and especially new workers, should not be optimistic about the benefits.


I didn’t stay for 6 years. I don’t work there anymore. And like I said, the company will likely raise soon, potentially at a much higher valuation. There is a comparable company that is already public that is trading at a much higher valuation.

I also didn’t say my experience is/was common, but it certainly was not the same as winning the lottery. That is my point.


> but it certainly was not the same as winning the lottery

I am happy that things worked out so well for you, but you're not sharing any data to back up this claim. I mean someone could literally win the lottery and say how great things worked out - it's anecdotal evidence.

https://xkcd.com/1827/

For many people, and I strongly suspect most, startup options are a losing bet. The worst part is you have to wait years before you know whether or not they're worth anything.


The odds of winning the CA lottery is 1 in 42 million. There are fewer than a million residents in SF. I don’t know the exact number of startup winners (both founders and employees who made more than $1m) living in SF at this moment but I would conservatively estimate something in the 5k range.

The odds of winning the minimum $38 MM payout in California are 1 in 42 million. The odds of a smaller payout are orders of magnitude higher. And you can play twice a week, instead of having to wait a minimum of 1 year between potential payouts. You're also allowed to buy other lottery tickets in that period of time.

To put things in perspective, of the dozens of people I know who joined startups, almost all of them felt the stock wasn't worth it.


Got it. Sounds like you did pretty well then! Congrats!

It is still rare to be given such good terms on equity, and also rare to be knowledgeable enough to take advantage of the opportunity.


Getting promoted to L6 at Google is a winning lottery ticket! Most people at Google never reach level 6.

I got options priced at 12c that were valued at 35c by the time they vested, $1.50 when I quit and exercised and paid AMT, and $5 at IPO.

This transpired over a span of about 5 years.

This company was successful but not clearly profitable when I joined.

Maybe I got lucky picking a winner, but I'm not a famous (or highly talented) engineer and I didn't cast a wide net when job hunting.

OTOH, I got another job offer years earlier where the employer tried to match a $15/yr gap in salary with an offer to buy $15k strike price options! The clear deception in how the VP presented the economic interpretation of the options was a factor in my decision to decline.


> current equity compensation is far too low and tricky

Of course, we can imagine various ways in which the situation can be improved, like getting equity directly instead of options, increasing the amount of equity, etc.

But that's beyond the main point of stocks. The point of them is to align employees with founders more, get them excited and motivated about the future.

> workers, and especially new workers, should not be optimistic about the benefits.

But the same argument can be made about founders and starting new companies. Of course most startups do not succeed, but should that discourage people from creating them?

I think there is a bit of confusion in that generally it's believed that these aspects of startup industry are much different - one is a 'unavoidable state of the world' and the other is 'unwillingness of certain people to make the situation better'. But perhaps both of them are in fact state of the world... There are many variables that go into selecting the values for employee stock grants and could be just as much hard to change.

Maybe they ultimately end with 'smarter people are able to control those less smart', but that's another discussion.


A founder's situation is very different from an employee's situation. The founder will immediately purchase their stock for peanuts, where employees usually face all the hazards of the 90-day exercise window. The founder starts out with 40%ish of the startup, which is tremendously more upside than the <1%ish of even early employees. Founders typically have a board seat and negotiating leverage over all future equity rounds, where employees are powerless and need to hope that their founders are ethical enough to protect their interests in future raises.

I'm not against founders getting these benefits. I think VC's are the ones getting too good of a deal here. Roughly, if they pay $10 million for 10% of a company, and an employee gets 1% to offset $1 million of their reduced compensation (over 4 years, vs working at Google), looks fair, right? But oh wait, we forget the many many downsides of the employee's position (not preferred shares, had to ALSO pay to exercise them, risk of AMT, 90-day exercise window, etc). Seems to me that the VC got somewhere between a 5x and 20x better deal here.


But the VCs pony up the cash up front and they are likely to lose it in most cases. The VCs and LPs have an opportunity cost too, they could be investing in other things, including a public market with a great track record for large caps.

There’s no easy answer but founder equity seems over weighted to me. If the founders want to align the interests of the company with the interests of the employees what’s wrong with having 15% instead of 30% and doling our dramatically more options to everyone else? No doubt founders take more risk and work harder but do they work 300x harder? (Usually by employee 10 or so grants are at 0.1% or less)


As an employee, giving a startup a discount on your compensation is pretty similar to a VC giving the startup cash.

Nobody's saying it's literally worthless nor are they saying it's literally the same odds as winning the lottery. They're saying that using those as mental models is good enough. "Treat the options as a lottery ticket" isn't supposed to be a mathematically precise statement. I'm happy for you that you did so well, but most people doing what you did in 2013 didn't get those same outcomes, and that's the point.

I see it on HN all the time. People are literally telling others to assume their equity grant is $0. People are even saying this of private late stage startups that issue RSUs.

If you want to make a gambling analogy, I’d say making money off your equity grant at an early stage company is more like playing Roulette (with a better payout) than buying a lottery ticket. Sure, it’s uncommon to win (in this case hit your number) but it happens with decent frequency.


I don't read it as saying it's literally worthless. Large payouts happen rarely enough that if you want what most people want, you should make the decision for reasons other than maximizing your worth. Assume it's $0 for decision making purposes, and be pleasantly surprised if it isn't. (read literally, this would be an oxymoron)

For some reason changing the analogy from a lottery ticket to a roulette game does not actually make me think it is reasonable to take equity instead of cold hard cash.

Perhaps it was my gambling addicted stepfather who died broke that keeps from seeing the appeal.


If you’re joining an early stage venture backed startup and demanding only a salary and no equity, you’ll feel much worse if your startup finds any reasonable level of success because you demanded 20k more a year in salary over something that could be much more than that.

You’re not risking your life savings by joining a venture backed startup as an employee. In the worst case you write off a few thousand dollars you spent exercising some options while making a market rate salary (because you negotiated).


> If you’re joining an early stage venture backed startup and demanding only a salary and no equity, you’ll feel much worse

... because no startup is willing to pay competitive total comp fully in salary. Bigcos mostly aren't either, FWIW, although RSUs of a public company have a lot more liquidity and lower volatility than startup options.


Can you forward-exercise like that, before they are vested? Or did you need to wait for them to vest?

The point is you forward exercise when you are granted when you start your job, so no you wouldn’t have vested anything at that point.

You can if you get “early exercise” privileges which should be something you look for when evaluating an offer.

How much were you able to sell?

Could you do it again at a different company or do you feel lucky?


"Startup options aren't so bad"..."adding risk aversion would decrease the offer value by a huge amount"

So the author shoots his main premise in the foot by not including one aspect of human behavior that we see in just about every worker. Sure, young people with no family are less risk averse than old people with families, but just about anyone seeking a salaried job is risk averse when considering jobs. Risk seeking individuals aren't very common in the standard job market.

Ben's articles are usually well informed, especially when it comes to probabilities and decision analysis, but not factoring in indifference curves in an analysis that is already this complicated is a pretty big miss. The bottom line is that working for a startup is a pretty big gamble, and expected values are misleading in terms of how people actually make decisions.


Eh, not really. I could be risk-taking but self aware enough to know I am a far better engineer than businessperson. I'd join a company and dive into an experimental projects that might fail or get me a huge bonus. Or I might....join a startup!

> Estimate the valuation of the company

Good luck with that.

Also, you need to factor in that the probabilities of the start up becoming significant (IPO / become profitable / survives) are probably way below 1%.

At the end of the day, you don't go to a start up for the money but for the experience. Any other intention is guaranteed to not work out.


There's a real danger for young tech employees to put too much faith into models like these. A nice probabilistic graph appeals to our logical and mathematical sensibilities by appearing to cover the range of possibilities and giving some well-reasoned projection of likelihood, but it doesn't account for the human element.

Picking a successful startup with growing valuation is just the prerequisite, if you are lucky enough to do that then the likelihood of getting a good payout from stock options becomes dominated by the behavior of the board of directors and the founders. So actually the number one question is: do you trust the founder(s) to look out for their employee's interests? Number two question is: are the founder(s) savvy enough to avoid investors triggering scenarios that totally screw early employees (dilution, liquidation prefs, etc)? These are super hard questions to answer even for savvy veterans, and probably totally outside the depth of the inexperienced young people flooding into tech right now.

I don't think its responsible to advise young people to give significant value to options based on spurious models. Instead I'd recommend they go read Steve Blank: https://medium.com/@sgblank/startup-stock-options-why-a-good...


This whole thing fails to account for the fact that on every subsequent round of funding, your percent ownership goes down. Even if the company is doing well, at the next round of funding, you'll pretty much be reset to the original value if you're lucky. If you're very lucky your options might be worth more.

VCs have gotten too good at extracting value from a company. In this day and age, I consider startup options to be worth $0.

If I'm looking at a startup, it's because I am either super excited about their idea, or super excited about having a lot more responsibility/learning opportunities than at an established company.

Those are the factors I'm valuing in my head vs. the actual dollar opportunity cost.


Can you explain "on every subsequent round of funding, your percent ownership goes down" ? Maybe a naive question. But if you are given say 50% of a company, how can your percentage of ownership decrease if someone funds it ? What's the mechanism for this ?

Dilution:

https://startupxplore.com/en/blog/dilution-shares/

The fundamental mechanism is that new investment is met by issuing new shares. If you hold options on a constant number of shares, and the number of shares into which ownership is divided goes up, then your fractional share of ownership goes down.


Say you have 50% of the company and your cofounder has the other 50%. That's all the stock, right?

If you want to raise money you need to sell some stock. So the company creates new stock and sells that -- increasing the total number of shares. You don't get any of that new stock yourself, so your total ownership percentage goes down.


What you are saying is true, but at least in theory you don't lose any 'value', because the money raised makes the company worth more. It's like going from 50% of a $1m company to 25% of a $2m company.

Of course in real life things are much more complicated. And, if I was a cynic, I'd say they are purposely complicated in an effort to screw people over.


Two ways this happens are liquidation preference and "participation". In both cases (they work differently but mean similar downsides for employee stock), your stake's value becomes conditional on a best case scenario exit and investors in practice gain more ownership than the numbers immediately reveal.

If the company fails, all that means nothing. If the company goes big, it won't matter. But in the most likely exit case where the company sells for less than everyone was hoping, now you get into the interesting territory where the investors might make their 1.5x return before you see a cent.

It's not that founders don't understand this. It's that founders end up taking these conditions when they're low on negotiation leverage and choose between that and running out of funding, so it's an understandable decision. However, they also avoid talking about it unless forced to because it changes how you will value your stock, which changes how attractive your offer or current compensation is. As a rule I ask about it when I talk to startups about job offers.


through dilution "you'll pretty much be set to the original value" after each funding round is what the OP said.

they're purposely complicated, and recruiters and VCs will take advantage of people who don't know how to do the math or reason about the amount of value extraction they're capable of, telling folks "oh this stock could be worth 100x of what is now"


Further, options come from a pool of stock that has last priority for cashing out. Preferred stock holders will get all value first, meaning an exit for less than the issued stock value will leave options holders empty handed. Sorry if I mixed up any important words, I’ve been out of the game for a couple of years.

In real life.

The founders and angel shares do not delute and your percentage goes down each round.

If your lucky they are worth the same.


Founder and angel shares absolutely dilute with additional rounds of funding unless you have provisions that are very rare in term sheets and founder agreements.

Pro rata [1] is pretty standard [edit: at least in early stage startups], so investors typically have the option to maintain their level of ownership by putting money into the round. Everyone else gets diluted. I think in practice investors only get diluted if they actually want to. I'm not sure how often pro rata is extended to founders, but I would guess it's pretty common.

[1] https://techcrunch.com/2017/09/13/how-pro-rata-works-in-vent...


It is not common that founders get pro-rata rights.

There are a number of additional factors not modeled here that affect real world decision making. First, most option grants revert ownership to the company if not exercised within 90 days of leaving the company. If the company is doing well, it only makes sense to leave if you can exercise. But the problem with exercising is that there can be enormous AMT tax liability if the company is doing well and the valuation has gone up substantially. For early employees, the taxes can easily be 10-20x the exercise cost or more. But since the stock is illiquid, there is no market for selling some of the stock to cover this liability. If you front the taxes with your own money (or worse, a loan) you are now in a position of enormous risk. If the company falters or collapses, your downside is huge and you can be hundreds of thousands of dollars in debt.

Basically they create new stock to issue out, which increases the total number of stock in the company in turn diluting the percentage of stock you own

The other responses in this thread are correct, but I suspect may have still left you confused.

You are correct that 50% is always 50%, but employee stock options are typically given as a number of shares, not as a percentage of the total, which is what allows for dilution. At least, that's how I understand it.


Any number of shares at any given point is a percentage of the company, and any percentage is always a certain number of shares.

You won't stay at that percentage though, unless the founders agree to protect you from dilution. In that case, they'd compensate you with some of their own shares whenever you dilute to keep your percentage the same. It's not common for employees though.


The point is that dilution works by creating new shares out of thin air -- the total number of shares increases. Meanwhile, the total percent remains 100%, for obvious reasons.

Sure, but that doesn't change whether you're giving out a number of shares or a percentage, because both are the same, just expressed differently. There's no common theme where somebody says "here are 0.1% of the company" and implies anti-dilution. It's just easier to talk about percentages than shares, because it's easier to calculate if you know the total valuation. You'll dilute in both cases.

Stock dilution I assume

> Even if the company is doing well, at the next round of funding, you'll pretty much be reset to the original value if you're lucky.

Obviously depends on the situation and what valuation you got, but unless it's a down round, your percentage will be reduced, but that reduced amount will be worth more (on paper). Sure, you might no longer have 1% of a company valued $1m, you'll now have 0.5% of a company valued $5m.


Except that it almost never actually goes that way. Instead what you get is .5% of a $5M company which has a $3M preference for the latest investor, leaving you with .5% of $2M, or exactly the same thing. Except more complicated than that.

That would be uncommon in my experience. Investors won't get the difference between the current and the last valuation as a liquidation preference, they'll typically demand one as high as their investment. Understandably, they don't want to throw in a million, get 20% of the company only to have the company disband and receive 20% of the $1m back.

The $5m won't come from a $3m investment, though. They'll take 20% for $1m, leading to a $5m valuation. And I don't know anyone that would give them a $3m liquidation preference in that deal. If your cash-on-paper (that is: shares vs total valuation) share doesn't grow in a round, that's a good time to think about getting out. If they were valued at $5m and are seeking investments valuing the company at $2m, run.

Yes, investors aren't throwing money around like they maybe used to, but I don't believe there's reason to be overly pessimistic. If the company becomes successful, you'll make money if you've been on board early enough (that is: if you took on risk).


Why would investors go for that? In case of no investment, the company goes under, so you get 1% of $0. Therefore, you should be happy with pretty much any kind of dilution, new investors can easily force existing shareholders to get e.g. 0.1% of $5m.

That's why you don't speak to one investor only. Investors want to invest to make money and they compete against each other (if the company is interesting). Yes, if the situation is "please give us money or we're dead tomorrow", the negotiation position is going to be bad, but that would be because of mistakes made earlier (i.e. not talking to multiple investors, not talking to them early enough, not understanding when the money is going to run out etc).

Generally you're going to raise at a higher valuation, so the fact that your percent ownership goes down at a higher share price isn't a bad thing. It's when you raise at the same valuation or lower valuation where it can be painful.

A model that assumes every engineering hire is given 1% of the company but also ignores the risk of dilution would seem to only apply to a very small part of parameter space...

This is the biggest point. There are so many ways to devalue the options specifically issued to employees, and you sometimes see more overt behavior like with Zynga back in 2011 https://www.wsj.com/articles/SB10001424052970204621904577018...

It is a fool's errand, given everything that has happened in the space, to treat options as having any serious value. Unless there's a secondary market you can immediately sell your options on, treat them like lottery tickets


It also seems to ignore strike price and the scenario of an acquisition where only the VC and founders get paid.

Footnote 1: "You may be asking yourself, 'what about the strike price'? The answer is that, because almost all of the expected value of the options comes from a very small fraction of scenarios in which you exercise them, the strike price doesn’t contribute very much to the expected value."

Another (very) important consideration is the tax you will be liable for at the time of exercise but possibly before liquidity in the event of success and the information asymmetry between most engineering hires and the founding team.

It's for this reason that I believe 10 year exercise windows are the right thing to do, and young engineers should be encouraged to avoid startups with ~90 day post-employment exercise windows.

P.S. Hi Ben!


TBH the exercise windows should disappear. The 10y lifetime of VC funds is plenty enough incentive to push for a liquidity event eventually.

The 90 day post-employment exercise window is a requirement for them to be treated as incentive stock options, which have significant tax advantages over non-incentive stock options.

It's not a clever thing that startups do to try to increase retention.


Are the tax advantages meaningfully different for ISOs vs. NQSOs if you 83b your NQSOs?

It seems to me anyone who really is banking on their startup having huge valuation growth (and can afford to do it) should 83b their options, either way.


This model focuses on numerous secondary factors while ignoring two of the most important variables, dilution and probability of success.

Dilution will continually decrease your stake... Likely at the same rate you vest (year).

Most important of all... The entire upside needs to be multiplied by the likelihood of success. No matter how much the company is 'valued' today, more often than not it will be worth 0 in 5 years.

Pouring one out for the WeWork employees this weekend...


You are correct- probability of success is (in my opinion) the single most important factor when evaluating options. Even if on average employees did well with stock options, the fact of the matter is that the distribution of payouts is very lopsided, not unlike professional athletes or actors. So most start-up employees will get nothing at all for their hard-earned options.

From personal experience, I have worked as an employee at 3 start-ups, and in only one of them did I get any payout at all from my options. And the amount of value I got from that one "success" was trivially small after multiple rounds of dilutive funding (financially, I would have been far better off flipping burgers in lieu of all that overtime). Most of my peers have had similar success rates with start-ups, with a few notable exceptions.


The implicit assumption here is that you can always change jobs. That’s not true if the economy is bad. We now have a generation of people in the workforce that have not seen a downturn. Back in 2001-2003, I was locked into a startup that cut our already below market pay by 20% due to the poor job market at the time. There are simply times when it is difficult to move companies due to macroeconomic trends.

Some folks commenting seem to be missing some of the point.

Ben isn’t trying to say “startups pay $100k, Google pays $110k”. Those are round numbers deliberately picked out of the air (which obviously don’t match expected comp at either startups, or Google).

It’s an analysis of how to value stock options in high growth startups.

As someone who routinely tells people to value stock options at zero, this analysis has convinced me to value them at something closer to 5% expected return lottery ticket. So, still basically a garbage deal, but I’m convinced by his argument.

I’ll note one other downside I haven’t seen anyone else mention: BigTechCo managers (including me) won’t hire people who appear to job hop every 1-2 years. Why would I invest in you, when your contribution to the team is barely positive for the first 6 months, if you’re going to change teams in such a short time.

I understand it’s different in startup land, but job hopping more than once is a red flag for most hiring managers I know at big tech companies.


Stock options in the UK are a near fraud. Your a ability to excercise them is contingent on an exercise window opening at the next funding round (a long time) and you lose said options on your last day of employment. Unscrupulous management trying to claw back options can force employees out.

I do not take stock options in UK companies seriously and neither should you.


It's no different in the US.

I was in a situation where the company was trying to sell itself. I was 1.5 years into 4 year vesting schedule. I decided to leave for 10k more and not buy my options and a few months later it sold with all employees getting vested. If I would have stay that would have worked out to 100,000.

But I ended up much better off. The extra 10k allowed me to qualify to buy a house. The house was 1/2 a million and rose to a million in 4 years. During those 4 years I would be stuck at the new company (those were the terms because they fully vest everyone). I avoided the endless flying trips to hq to train them. I kept my freedom to move to other opportunities.

Options do payoff but salary is worth more because your purchasing power increases. Real estate (single detacted houses) in a world class growing city always goes up.


What this leaves out is salary spikes by job hopping. If I get 100k at the startup and 10k more at another company and the startup gives me options of 20k, (regarding both give me similar raises for simplicity) it seems the startups offer is easier.

However if after 2 years I quit my job and take another offer for 150k and the startup won't counter, its a loss of 20k I get by being the 2 years at a startup instead of at another company. Even worse when regarding that the early stages (unless you love that lifestyle) of startups is stressful I'd always go to another non-startup company unless I do actually like the product at a startup and see myself in it.

If money isn't a purpose then the way should be. People as purpose is an argument but honestly I'd just not work somewhere with ass people


You also get to quit publicly traded companies based on how much your unvested RSUs have increased or decreased in value since you signed on to the job. So this isn't really an advantage for startups, except to the extent that startup volatility is higher.

This all sounds nice but it ignores the issue of liquidity... You can't afford to exercise your options because you can't sell them. The secondary market sounds nice in principle but I never had success with it. And if you can afford to buy them you have to budget for the tax bill that will hit you with the AMT truck. The move to the 10 year option exercise period helps though so you should only consider companies that offer that. 30 days, 1 year.. not long enough.. 10 years might be enough.. For example, Palantir has been in business for 16 years with no IPO in the near future. So the "deal" here, or the implicit bargain isn't great.

The number of startups that reach a liquidity event is about 1%. a liquidity event is the company gets sold to a bigger company or an IPO. 99% of companies fail to be sold and fail to IPO. about another 9% of companies become zombies which means they don't die but they don't thrive. Options or RSUs are stranded and not saleable due to SEC rules. The other 90% fail.

the numbers reaching liquidity events are higher in Silicon Valley maybe 5% of companies reach liquidity events but the Outlook is still poor for most start-up companies.


Startup stock options are good when: - there is no liquidation preference overhang - you feel confident your contributions will significantly move the needle for this startup - you're not giving up much in terms of salary - you're ready to take on a bigger role/build up experience

A friend of mine managed to get this right 4 times in a row. (joined 4 companies, made solid return on all of his stock options). so it's definitely not impossible. obviously a large ammount of risk involved though.


The opportunity cost is not just the lost wages, it needs to also factor in the _years_ of having less-known or no-name/failed startups on your resume. This absolutely will impact your career opportunities. Having 3 early-career years at Google on your resume has a compounding effect for the rest of your life (sorry, but it’s true). That opportunity cost is way, way higher than the n 5-digit dollar value this article rather blithely assumes.

There is a lot of content like this on HNews. There are many factors that go into startup options. Definitely worth more than 0 on average though.

On the other hand, many startups nowadays pay market level comp + stock options. So in terms of opportunity cost it's just plain upside. (unless you are getting FAANG level offers, thats a whole different game. those are above the majority of startups)


Established tech companies that have IPOed are offering market level comp + stock as well. They also, in my experience, give out better bonuses, have better benefits, and offer better work/life balance.

Indeed. It would be...suboptimal to work for anyone not offering what you described. Anything else is undervaluing/short changing yourself, while enriching someone else.

> Definitely worth more than 0 on average though

Average, sure. Median is possibly 0.


Median net is negative.

Only if you get FAANG offers, most other traditional companies pay less than startups

> You receive a job offer from a startup currently valued at $10m, with a strike price of $2.5m.

Isn't backdating employee stock options like this kind of sketchy/illegal? If the company is worth $10m and you accept a job offer and get an option grant, you don't get options priced as if you accepted the job offer back when the company was worth $2.5m.


Backdating to skirt FMV is not allowed, but the valuation is ordinarily based on the last funding round--for preferred stock, with some terms favorable to the investors--and what you're getting options for is common stock, with no terms.

This is a compelling mental model, but not practical — one person can't live expected values. If you want to actually realize expected values on options, the best option might be to become an accredited investor as fast as possible and invest in high-volatility companies :P

No they are not, speaking from experience.

One debt financing round and your golden stocks lose 90% of its value. It's worse when you have exercised your options.

Plus you won't get class A stocks, class B or worse, which means you won't make much unless company goes public and goes big like FB or Google.


This makes 0 sense except in a failing startup where the stock isn't worth much to anyone, including the founders and investors.

Well it does makes sense because this is the ground reality, not all startups make it. Engineers never get preferred shares no matter how hard we try to think so.

Class shares are a thing to protect investor money not engineer interest.


But they are irrelevant in a successful startup and no one really wins in an unsuccessful startup. At most preferred shares get invested funds back unless the startup took some really bad deal with multiple liquidation preferences. What I would say is that in an unsuccessful startup engineers are likely to make out better in an acquihire than the investors do.

Most startups fail.

Curious. I hadn't thought too much about startup hopping, since there is a large opportunity cost to staying in a startup that doesn't take off.

I think is interesting to apply this reasoning to entrepreneurship. When you are receiving no salary and possibly even investing your money on a company.

TL DR: The author argues that startup options are "better than they look" because you can quit (and keep your options) at any time.

The model is extremely naive: it doesn't account for (a) dilution due to continued investment, (b) investor preferences, and (c) (perhaps the most important), most options need to be exercised (or forfeited) shortly after departing.

A departure situation can trigger a significant out of pocket payment: from the actual exercise price PLUS a possible tax trigger (AMT in the US) that gets larger as the company value increases.

Many employees that leave with vested options often can't afford to exercise them (or all of them).


Plenty, plenty of startups will have options that are worth 0.

Numbers in the example don’t line up with what I’ve seen of Bay Area trends. $110K TC at Google is low for a new grad, and good luck getting 1% of a company valued at $10MM straight out of college.

More realistic numbers for me would be:

early career: $125K TC bigco job vs $100K + 0.1% at $10MM startup

Experienced: $350K TC bigco job vs $150K + 1% at $10MM startup

When you run these numbers it’s real hard to make the case that startups are the best move financially. Plenty of other reasons to work at startups, but increased comp at big companies + founders giving less equity to employees has changed the equation.


Though I agree with the general analysis, one important point anyone joining a startup should consider is exercise windows. Obviously if the company is worthless this doesn't matter, and if it's a rocketship you'd probably want to stay around anyway, but if it's somewhere in the middle and you're stuck with a three month exercise window it's a really hard decision to leave.



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