Are prospective startup employees really motivated by stock options? There's no shortage of HN posts that actually work out the math and conclude that you won't get rich from employee stock unless the startup succeeds on the scale of Google, Amazon, or Microsoft.
Based on the number of times I've been offered stock options as a benefit of joining a startup, I'd say it's very prominent in startup culture as a motivator and recruitment tool.
If it doesn't hold value (as it seems you're positing), then early employees are getting played in the worst way. They're the ones who are getting screwed.
The context of what most people are saying is that founders are now getting their pound of flesh from VCs/investors (summary of other comments, not this thread.) The tone of those comments is that founders are simply putting steps in place to ensure they don't get screwed.
If this is the case (I don't know how true it is) then the marker for who gets hosed lands squarely on those early employees, and THAT will be a gigantic problem for startups. If early employees begin to distrust founders and investors, it's not just a headwind -- it's pretty much game over. Early employees are quite often the difference between success & failure. Those top-flight team members you need to execute on that idea will use the only leverage they have in that relationship -- they simply won't join the startup.
I hope AirBnB is an anomaly, but I expect this type of scenario to happen more and more. As for founders wanting to put themselves in position to do this -- who could blame them? But, it's not without consequence and their reputation as startup founders will be summarily tested with any future ventures.
The smartest startups will very quickly learn that success will only come when all parts are working together, doing their jobs -- founders, investors, early employees.
There is a rational case for joining a startup as an early employee, especially if the startup is funded. It's likely to be less soul-crushing than working for a big company, you're going to earn a salary (perhaps even a market salary) and you're going to gain experience towards founding your own startup in the future.
Stock options are a less significant part of the equation--they aren't worth anything unless there's an exit, and if there's an exit they still probably aren't worth especially much unless it's an extremely outsized exit, the once-in-a-decade type like Google, Amazon, or Microsoft. They're probably still worthwhile, but it's not prudent for an early employee to expect too much from them.
That's a lovely sentiment, but it's not close to reality when it comes to the presentation made when pitching those early-stage employees to join a startup.
Imagine a founder talking to an engineer about their fantastic idea, explaining how huge the opportunity is, etc. etc. and that the engineer will earn experience and a close-to-market salary. And you'll have options, but they likely won't be worth much unless we become Google, Amazon or Microsoft.
Yeah, I can't imagine that conversation either.
The demand for talent makes this situation appealing only to those who really need the experience. The highest quality talent -- the ones you need for your early-stage startup to succeed -- can do better than this nowadays.
Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google?
> Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google?
If someone was making this statement to me, as a prospective employee at Startup X, a giant red flag would go up. This is a signal that (a) this company isn't aware of what's being offered elsewhere, and (b) this company is projecting what's valuable to me as an employee (no financial gain, but "better working conditions".)
I wish it was that trivial, but this is a quaint notion that simply doesn't work if your goal is to pull in premium talent. It may work once in a while, but long-term -- no way. Maybe that simplicity has worked for you in hiring situations, but in my geography -- you'll end up with mediocre talent.
The bigco environment you mention -- the Amazons, the Googles, the Microsofts -- top flight candidates are using the pool of bigco and startups against each other to gain greater financial rewards. It's leverage, and the top candidates have it and are using it to their advantage.
Play the reindeer games or not, the market is what it is.
If a company sells for $150mm, and you have 1%, and there has been $20-40mm in financing (i.e. certainly not a great outcome for later investors, but ok for early), it's possible your equity will be worth $0 (due to preference), or maybe $200-300k. The odds of the company going from early to this are maybe 20%. Getting 1% isn't all that common either; 0.1% is a lot more likely unless you're pre-A.
$200-300k is nice, but if you figure there's a 20% or less chance of it happening, and you have to wait 4 plus maybe 1-4 more years for it. So, the net present value is about $10k/yr in extra salary.
Now, if you're Google, Facebook, or Microsoft, it's totally different; or if you are early at a company which takes very little financing and has a good ($50-150mm+) early exit.
As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.
As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
I'm afraid we're getting off on a tangent on this thread, but your math is correct, and I agree with your probabilities.
> As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.
I think that's the crux of it. Most startups are not this transparent and upfront with potential candidates.
> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either.
Very true.
> But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
For the company, absolutely. For the employee? Yes, if certain circumstances hold true. But expecting this to be of equivalent benefit to everyone is uninformed.
> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.
Again, great sentiment, but when you fold in everything that's been discussed and you target premium talent, more often than not I'm finding that talent is often going elsewhere.
As a summary, I think the tension around financials between founders and VCs is slowly being pushed off to early-stage employees, and premium talent recognizes it and is expecting more than invaluable startup experience as compensation for making someone else wealthy.
I generally agree with you, but I think most engineers, even really good ones, would rather have extra cash at the current investor valuation, vs. more stock. Assuming your startup can raise 5mm on a 20mm pre, raise 7mm on a 20mm pre with a smaller options pool, and pay people slightly above market vs. slightly below market.
If your startup is a rocket with no problems, either approach works, but if it gets bumpy, having cash extends your runway, and helps you retain key people better than increasing amounts of declining stock.
Plus, having investors put more cash in keeps them motivated to help you longer, sort of like an author's book advance.
There is definitely under appreciated value to being "rich" in your 20s; driving a nice car, living in a nice place that you like, being able to go out to eat... and it really only takes making a marginal extra 10-20k to make a big difference.
Yes, which is making the market rate go up. I'm not talking about accepting below-market rates, I'm just asking what's so much better about accepting a given rate at Google as opposed to a startup.
Options aren't it. They're somewhere between a bonus and a lottery ticket, and if you're smart enough to be "top talent" you're smart enough to figure that out anyway.
> I'm just asking what's so much better about accepting a given rate at Google as opposed to a startup.
Below-market rates? Not sure if that was implied, but that's certainly not the case I'm talking about.
I'm not suggesting that's the case, but you need to ask the candidates who we've identified that are doing so. We've been losing people to AMZN/GOOG (MS less so) who will often have salary offers matched + bonus structures that exceed ours, plus benefits that jump way over anything we can provide. What's so much better about that? You'd have to ask the candidates.
Not sure where the discussion went off, but I'm not suggesting that options are the end-all-be-all for early stage employees. I agree that the chances of them holding any value are low. But this I would say: if they really are this gigantic crap-shoot, why on earth do startups continue to offer them to candidates?
