However, for 1%, 2%, 3%, or even an unheard of 10% equity, it's just simply not worth it when it's so cheap and easy to start something myself or find a co-founder.
It's odd that I follow Hacker News and lap up everything startup and YC related, but I wouldn't even click on one of the YC job postings as the prospect of this kind of deal does not appeal in the slightest.
Joining say 3 co-founders with 33% each against my 1% as the first senior engineering hire would really stick in the throat unless they had monster traction or funding [in which case they'd already probably be bigger then 3].
I just do not understand who takes these roles with very early stage startups as the entrepreneurial 'rockstars' that they are asking for can easily have a go themselves with not much less chance of success, pretty limited downside if it fails, and high opportunity costs either way.
For that reason, if I went to work for a very early stage startup, I'd want a much, much, much higher salary than I could get in the market at a big company. This would be to compensate me for the additional risk, the additional workloads, plus the fact that I would be helping them add outsized value in terms of building the company for them.
But if they've raised money and you're drawing a salary? The startup is massively de-risked. You should accept far less equity. You take on virtually none of the downside risk and still participate in the upside risk.
As an employee, the situation you want to avoid is the quick flip. Do the case analysis:
Failure: better to be a first employee than a founder. You should be better paid, and your 3% of $0 is the same as 50% of 0.
Quick flip (aka HR acquisition): Founders make out much better than first employees, since they'll typically be granted large retention bonuses. Best case you get a free option on a job at the acquirer which probably comes with a reasonably good bonus structure for the first few years.
Acquisition for value: Everyone gets rich. Founders get very rich, first employee gets much richer than he possibly could have working any normal job.
Don't work for people who want to flip their company to Google in 6 months. Work for people who want to change the world.
 Unless you've co-founded it with like, Steve Jobs. In which case you should probably take 1% if that's the offer. Also, you are probably a necromancer.
That's a great point. I really think any entrepreneur looking for a quick out is another sign of an (un)intentional scam artist.
Is someone who is doing a startup in hopes of hitting the startup lottery (when you get bought out) a scam artist?
I'm not saying it especially takes a lot more skill but the level of stress and responsibility of the first non-founder is considerably less than the founders and always will be.
So there's that.
You also shouldn't expect more pay than a big company, a startup can be a lot more fulfilling and that's what you go there for.
You seem to know that from your first sentence but have put some strange mental barriers around taking the plunge. It's like the difference between doing extreme sports or going golfing. Both are past-times, just very different experiences that elicit different desires in different people.
EDIT: No idea at all why this was d/ved, if you don't want other people's experiences on HN... d/v away
To an extent, but I would be almost as exposed to the risks as the initial founding team in terms of it crashing and burning.
And you know what? In a way, thats fine. Part of the appeal of joining the startup is that you get to live on the edge a little. You celebrate the wins and mourn the losses, you fake it till you make it, you buy into the mission and give everything you've got to try and make it a success.
But despite my best efforts, I just don't think I could do that to my fullest for 1% and a market salary. I'd of course give it my best shot, but part of the appeal of doing the startup is that I would want to give more and go all in on the project.
This might just be the fact that I believe I have it in me to do it myself, and I'm at a time in life where I will have a real go in the not too distant future.
But the problem nowadays is that most good entrepreneurial developers will be thinking along similar lines :)
To be clear, I think early stage startups such as the ones straight out of YC should really open the purse strings with regards to giving away vesting equity to early engineering hires. 1% just isn't going to cut it for the top few % of talented, entrepreneurial developers with requisite level of experience - who will likely have very high opportunity to costs at the moment.
With the exception of the startup porn you read on TC, the only companies that raise multi-million dollar Series A rounds already have traction. The difficulty in gaining traction in today's saturated marketplaces should not be underestimated.
In most standard Series A rounds the company creates a 15-20% option pool and the investor gets around 30% of the equity.
Assuming two co-founders and a small seed round, the founders each likely own 18-20% of the company. They also went without pay and healthcare for a while, built a product, got traction, raised a real round (which is more difficult than it seems you believe), and are giving you upwards of 10% of their own stake. In addition, it is likely that the founders are taking below-market salaries while paying everyone else near -market salaries. That said, 1-2% for an early, senior hire is right on the money.
This also explains the "its so hard to hire" sentiment.
@benjaminwootton: reasonable argument that typical early stage employee equity is dwarfed by what engineers can get by founding their own company and that engineers might rationally require larger salaries at startups to compensate for failure risk (sucks to job hunt, even if its not hard to get a job).
on the other side, the founders who are trying to give away 120k and 1% to get a great hire have the responsibility of maximizing their own total EV as well, so if they were to give away 10%, it would have to be clear that the hire would be expected to grow the total founder EV by more than 10%, and in fact, more than that to compensate for the risk of the failure of the engineering hire to do so.
So if the founders are sitting on a validated, funded, post-revenue startup, its not necessarily enough for the engineering hire to help accelerate product. they have to make the total pie bigger, and by enough to compensate for the variance in outcomes for how much bigger they can make that pie.
So if you want 10%, and you're trying to join a startup with 100k/yr in revenue, you can't just help them get to 1mm/yr in revenue 1 year faster. you have to demonstrate that if you forked the universe into two paths, one where the founders gave you 10% and salary, and one where they walked away from you, the present value of the cash flows (or some metric) of they company in the "hired you" scenario is:
1. > 10% better with 100% certainty
2. more than > 10% + x% better with something less than 100% certainty to compensate the founders for the variance...
So generally these decisions are probably made with non-economic reasons, like "We like each other" or "I get off on working on bleeding edge technologies" or "The engineer is willing to give up substantial economic EV in return for te ability to feel like part of a team or affect decision making".
TLDR: engineers work for companies when the needs of the engineer and the company converge. the bid and ask between "what an engineer needs/delivers" and "what the startup offers/needs" separate as early stage startups move past "MVP" into being somewhat validated.
However, early engineering hires have a great opportunity to learn things that they can't learn at a bigger company. An engineer knows how to code, but they may not know how to design products, do user testing, make partnership deals, run surveys, raise angel, tune virality, create ad campaigns, find good advisors, recruit, market, sell, do user research, or raise VC money.
If you are at a large, low-risk company, most of that stuff will be handled by somebody far away and uninterested in talking to you. At a small startup, it will be done by one of a small number of people you'll know well and have unlimited access to.
If you intend to found your own company someday, I think there's no better way to learn how than to work closely with people who have done it before and are doing it again with you right there.
Once you have that out of the way, you can think about 'extra'.
Getting the 'extra' as equity has the highest potential return and the lowest probable return. Which is to say that if the startup has an exit that involves the common stock you could potentially get millions of dollars. However startups are startups because they are as yet unproven businesses. Their chance of failure is high early on and it goes down in proportion to revenue.
What that means is that when a startup is later stage, has a product and some revenue, its less likely to fail than when it first starts and before it has a product or revenue.
So generally you can split startups into fairly large risk baskets.
Basket 1: pre-product / post-product
Startups that are pre-product are the highest risk, and the getting 'extra' as equity here is something of a sucker's bet. The company has yet to prove they can even build what it is they want to build, much less sell it or get users.
Basket 2 (post-product): pre-revenue / post-revenue
Startups that have a product can be spit into those that have convinced a customer to pay them money for their product and those that haven't. The sad truth is that some products cannot be sold profitably or at all. So the next big 'milestone' is that there is revenue coming in from customers who are using/buying the product. Pre-revenue is higher risk, post revenue lower risk.
Basket 3 (post-product, post-revenue): Traction / No Traction
The third split is the traction/no-traction split. If a startup has customers and revenue, they have crossed the 'big' hurdles, but to grow they need more customers. That is where traction comes into play. Is the startup getting new customers? What is it costing to get them? Do those costs outweigh the revenue they generate?
If your startup is post-product, post-revenue, and has traction always take equity. It is going to pay back better than salary.
But assuming you can afford the risk: Make a guesstimate about the expected value of an exit, add some risk premium, and compare. e.g.
If you assume $1B exit with prob. 3% (and no other outcomes), the expected value of the company is $30M. If you are offered 2% of the company over 4 years, that amounts to $600K or $150K/year at most (probably less, given tax considerations, exercise price, etc -- but let's assume the maximum).
Now the risk premium: you can be fired at any point, you are 97% likely to only be left with salary, and there's the opportunity cost (if something good comes your way, you'll have to choose and essentially forgo the equity). Altogether in my book, that's a 75% risk premium. It's down to ~$40K/year for the equity value.
So, in this case, I'd value e.g. $120K "no equity" with $80K "with equity".
Now, if you think the company is going to top out at $100M at 3%, I'd value $120K "no equity" as $116K "with equity".
When you look at it this way, it is clear that in the vast majority of cases, you should treat options/RSUs as lottery tickets or potential bonuses, but not much more.
Unless you happened to be an early Microsoft, Google or Facebook employee (what's the probability of that?), you're almost surely better off with high salary.
I will say that "3% of $100M (and no other outcomes)" would be an extremely pessimistic assessment of a startup, a so-called "risky double."
It's a way to get people to think of expected value. I Could have instead said "$3M expected value". Would you say it's pessimistic to assume that's what a startup will eventually bring in (as cash) to shareholders?
I think it might even be optimistic. There are thousands of 3-people startups that fold giving out $0.
I tend to favor sharing of equity, because I want commitment from my core team members. It's not that I don't value equity in my company. I do. I value it in the higest regard, which is why I don't offer it to any stragler who comes along. You can rest assured that if I do offer you equity in my venture, I hold you in high regard.
It's very hard to tell if you want to be in business with someone. I'm fortunate to have had an opportunity to work with some of my co-founders in a normal business relationship prior to becoming co-founders. Had I not had that experience, I'm not sure how I'd evaluate that decision, but I can tell you it wouldn't be based on whether I was offered a high-salary or stock options.
Even if the startup is positioned well with deep pocketed investors you won't be able to cash out the equity for at least 8 years (a typical time span from launch to IPO or buyout for a successful startup) assuming you still work there (or you quit and purchase your vested options with your own money) ... and the odds of any given startup reaching a miletone where the equity is worth selling is small.
A few years back the median was more like 7.
Looking back on it, it's easy to say that I made a "bad" decision (e.g I should have seen the writing on the wall and realized these startups were going to tank), but I'd probably do the same thing over again, for a few reasons. Although the startups ultimately failed, I was still paid enough to have my own apartment, cover my expenses, etc. On top of that, the "jack of all trades" role I took on in these startups allowed me to pick up a lot of other skills (sysadmin, design, etc) that I wouldn't have been exposed to had I been paid market and chose to go the corporate path. I also made some invaluable connections that I still rely on and am in contact with to this day.
Now that I have a few years more of experience working at both startups and nonstartups, it's a much tougher decision overall. As tferris pointed out, the opportunity cost of giving up a portion of salary for a tiny slice of equity is much higher as an experienced developer with a broad skill set. Interestingly enough, working at a startup in my earlier years out of school played a vital role in acquiring that skillset. So, you really need to other factors like the founding team, traction, market, etc when considering a startup as well as both where you're at and where you're trying to go in your career.
The big thing, though, to remember when negotiating with professionals? they are professionals. Their only job is to profit from information asymmetry. It's probably a mistake to think that you are better at the information asymmetry game than they are.
just as a real-world data point: I have been very, very stingy when it comes to giving out ownership in prgmr.com. While this /does/ signal a long-term commitment from me, it really has more to do with the fact that I don't have a clear 'exit strategy' than anything else- prgmr.com is not a 'get big fast or die' kind of company. I very well might be running this business until I retire, and, well, you probably will have moved on by then.
I'm talking about partnering with some other people on other ventures with a shorter timeframe, and for that? sure, I'm happy to share.
If there's no track record, the equity isn't worth the paper it's printed on.
You'll come out ahead with the high salary until you are really on an all star team with a track record.
This is an important point. I took a job at a startup where the founders have all been part of two 200M exits (1 IPO in the first internet boom and 1 acquisition in 2005). They all made out very well with their options (big house, small yacht, small plane kind of money). They definitely have the connections and the vision to repeat their success. They offered me 3 choices for compensation: high salary, low equity; low salary, high equity; medium salary, medium equity. I ran the numbers and figured based on previous exits that it would be more likely that the higher salary over 5 years would be a better payoff if the company doesn't have at least a 100M exit, and if we do have a much bigger exit, 2% vs 3% will just mean a smaller yacht and no plane.
Generally speaking, the equity you receive (in whatever form) will effectively only reflect increases to the company valuation.
In the case of options, if you get 1% of a $100M-valued company, it is worth $0 if the company value stays <=$100M, and will only be worth $1M if the company value increases to $200M.
In the case of RSUs, if you get 1% of a $100M-valued company, you are taxed as if you were just gifted $1M (pay 35% to Uncle sam today, and a few more % to uncle state as well), although you can't do anything with it, and if you forfeit it (because you're fired or quit or the company folds) you can't get the tax back. However, if the company does get to $200M valuation, and you manage to sell your equity, you'll get $2M in proceeds and only be taxed on the $1M increase this time.
People think "wow, options for 1% of the company. If the whole company is worth $1B, that's $10M!" but that's wrong - the options have an exercise price, which must be realistic at the time of grant. So if the company is already worth $100M, and at the time you can exercise is worth $110M, your 1% options are worth exactly $100K.
And about 83b: it doesn't protect you from tax. It just locks in a specific value for tax purposes (but you have to pay the tax at that second). It's an artificial tax event, which may be in your favor if things work out well, but has immediate costs regardless.
Enough equity to give you a sense of urgency and personal investment in the success of the company.
Your personal 5 year plan should treat those options as worthless. If the salary doesn't mesh with that 5 year plan, then it's too low.
If someone asks you to invest in their company, approach it the same way as if they were asking you for cash - do your due diligence and ask lots of questions. I can't stress this enough - do your homework. Don't make assumptions that just because the founders are successful people that the company will be successful either.
Evaluate the same things a VC would look at - how does the founding team fit, what is the revenue model, burn rate, marketing strategy, who do they plan on staffing, what kind of investment do they have already, plans for raising another round etc. Don't be shy with these questions - the founders want you to trust them and be a part of the team and you have a right to know the answers.
Basically don't base your decision on a gut feeling and some ad hoc criteria, think like an investor before you invest.
- Probability that startup fails > 95%
- You will get usually about 0,5-2% vested over 3 to 4 years with a cliff, you'd get more if you joined before a funding and took the entire risk and had no salary for some time
=> So working at least 3yrs for max 2% (rather 1%) with an exit probability of less than 5% yields too high opportunity costs; as a talented developer you could miss many other opportunities
Likewise, the salary offer is about the combination of your negotiation skills, expected marginal utility of your work, and the current state of the company
I'm in the process of negotiating to join a biotech startup in the Bay Area. I am a graduating undergraduate student, and interned with the startup team previously when they were working in research at BigCo. They left, licensed their own hardware patents from BigCo, and are starting up. They are asked me to join them in return for housing reimbursement, a meager living allowance, and an uncertain amount of equity.
I know it depends on how much risk I am willing to shoulder, but what would be reasonable terms for salary and equity, considering I'm a fresh grad?
They would bring me on as an early engineering hire, and they are currently bootstrapping from savings while working on the product and courting angels. Series A would certainly be far off. The founders have solid connections, and have brought in an experienced woman to act as CEO/advisor until they have funding. She was previously the CEO of a well-regarded company in the same space.
The equity would be in the form of RSU, and salary would increase after angel funding, and to market rate later on or with Series A. The personalities of the founders are great, and I believe in the product.
I don't have an employment history, but I interned at well-known research institutions each summer, later at BigCo, and attended (private) school on a full merit scholarship. My skill set extends beyond software to several other areas (that would, if mentioned, make it possible to identify me). I'm wet behind the ears, but capable.
I also have a regular "corporate" offer elsewhere, at a salary comparable to a low-end Bay Area market salary.
Also, your risk tolerance as a fresh grad is much higher than it will be in the future. You (probably) don't have an expensive lifestyle or a family, and you can live pretty cheaply yourself. So you have much less reason to be leery of equity than somebody older and more established.
I personally think that the best time to work for a small startup is just after graduating, and that it's definitely worth doing at some point in your life. So I would go for it in your position.
Sure, they might win big, but you'll enjoy life a lot more and be less stressed with a higher salary.
I look back on a "startup salary" with equity and wonder what the hell I was thinking. They recently had a very small exit and after raising money and screwing over early employees on options...high salary would have still been ahead.
After one year, no raise, but 20% (or perhaps more) of your salary as equity at the company's most recent valuation.
Would any startups consider taking this?
Would any other potential employees of startups consider it?
My solution? Salary only and I take the salary and fund my own startup.
Most startups fail (and I've taken enough of the crappy deals to find this on my own), so I've become a skeptic, usually doing a better job of analyzing their ideas and connections. I end up charging my full rate (which to me is more valuable than the gamble of equity) and then using it as capital for my own projects.
A friend of mine wouldn't leave because he had equity..even when management sucked and it was a terrible place to work. The company didn't get their next round of VC funding and went out of business withing 8 months.
My problem is that it's too easy for the management of these companies to drive the company into the ground with terrible ideas..and you, as a minor stake-holder have absolutely no power to stop it.
If you're actually a real partner (a concept that makes more sense in lifestyle businesses than in VC-funded startups, where only founders and VC implants end up being partners) then equity can make you rich. If you're the 35th person to hop onto the train, you're really just an employee and you're better off with a decent paycheck. The options might pay off, but they won't make you rich in most cases... so it's usually better to have a salary, which might not make you rich either but gives you stability.
The #1 concern should be what you'll learn and what kind of role you'll have, though. Unless we're talking about order-of-magnitude differences, or at least orders of binary magnitude, that's more important than either.