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Employee Equity (samaltman.com)
510 points by dko on Apr 18, 2014 | hide | past | web | favorite | 333 comments

I've worked at two startups, including one YC. Both were acquired by larger tech companies. I was employee #3 at one and rebuilt most of a broken codebase in the other. I got nothing out of either WRT options. I agree with the author on point 4 but I don't think more options are the answer, I should have just asked for a higher salary I would have been better off. Startup-bucks are even worse than a lottery ticket, because of tax complications and money required to cover strike price.

Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder.

Has anyone stopped to think what a massive failing of the startup part of the industry this is? Practically everything I read online indicates that if you consider your stock options to have any value at all even in a moderately successful company, you are a major sucker and about to get exploited.

Surely this must reduce the quality of the talent pool available to new startups, as the experienced developers conclude that other options are a better use of their time.

First of all, if you go looking for market inefficiencies in tech hiring (across the board, not just at startups), you will find lots of them. Software development hiring is folkloric; traditions handed down from Sr. Mgr Software Developer to Associate Developer tracing back to the beginning of time (1982 or so).

Second, regarding the talent pool available to employers, two factors confound the analysis: the first and by far the strongest is stated preference vs. revealed preference --- to wit, good developers will make large concessions on comp in exchange for working at companies that seem more fun; the second is that software developers are as a demographic cohort terrible at negotiating.

> software developers are as a demographic cohort terrible at negotiating.

Yep. It's no real surprise that coders are mostly men with poor social skills, while HR is mostly women with good ones, most of whom those men find attractive. Classic Valley symbiosis.

HR people do not as a rule do salary negotiation. You have to be a particularly "special" degree of bad at negotiating to end up out-negotiated by an HR person.

I am sure there are companies that, by outward appearance, do have candidates negotiating with HR people after the interview is over. Step 1 in handling negotiation with those companies: realize that you are not negotiating with HR.

This is a weird bit of advice. From my experience I have to assume you're saying "HR isn't the decision maker when hiring in elite tech companies" but the fact of the matter is HR/Recruiting is going to present the offer to most people, and it takes a career worth of preparation to move the conversation beyond that offer.

Well, I'm happy to have moved you a "career's worth" of wisdom forward in a single comment. You aren't negotiating with HR. HR does not know what you do, and HR's best idea of what you're worth comes from those ridiculous salary survey sites.

This is a cogent point. HR may be your point of contact for your salary negotiation, but they are not the decision maker or barrier. Ask for more money and they will ask someone else for more money on your behalf. HR is almost never the enemy in less-than-huge companies (and even then only moderately at worst).

If your Human Resources people don't play a significant role in purchasing your human resources, something has gone wrong.

Give me a break. In most companies, "human resources" exists primarily to cut people's health insurance benefits.

I've worked for 2 large technology companies. The first was a big one down in Southern California and HR there was as you describe.

The other was a big one in San Francisco, and their HR was insanely powerful... for some reason. It was quite a shock to me but to a lot of others used to Bay Area startups they made it seem like the norm.

So I guess my point is that not all HR is alike and there is probably some truth to this HR negotiating business.

Hmm. 'Cut', as in 'reduce', or as in 'distribute' (eg. 'cut a check')?

1000 times, no.

HR is there to make sure you know where the toilets are. They can't pick a Javascript programmer, nor can they decide what to pay for one.

But they are the ones having the actual conversation and working the rhetoric to close a deal. They aren't Deciders, but they are Negotiators ("salespeople").

I think that is just poor stereotyping.

Most of the software developers I've worked with in my career have had very good social skills, those that didn't, were poor developers as well... So are they bad negotiators because of they lack negotiating ability, or actual ability?

Is there data on the social skills of IT, HR, Gender breakdown etc... Perhaps what you are refering to is a U.S (?) phenomenon?

>> those that didn't, were poor developers as well...

The fact that people with good social skills convinced you that they were good developers proves the comment made by the parent poster.

I didn't say that, at all. I suggest you re-read.

To clarify for those that are a bit slow(er):

Their development skills convinced me they were good developers, their social skills just correlated.

The correct answer is that developers do not have, and are resistant to, unionization. As individuals they'll always have very little bargaining power, and most developers are pretty easily replaceable (especially before they're hired).

I doubt that many startups have dedicated HR people. If they do it's probably a mistake.

I've met quite a few HR folks with rather poor social skills. It's often the place where the worst business majors get "parked"

> market inefficiencies

In other words, you're telling me both people and organisations are imperfect?! Shocking.

Sarcasm aside: really, it is shocking how SW engineers could come to think that any of the inexact, data-free, human-judgement-driven sides of business are optimal--simply from the theoretical argument that a market is involved. A little economics is a dangerous thing.

I suggest starting from the assumption that everything can be improved, unless proven otherwise.

> Has anyone stopped to think what a massive failing of the startup part of the industry this is?

The failing is not that the employee equity math rarely works out, it's that the "industry" is so focused on equity. It often falls short as a recruiting tool (a significant number of prospective employees are clued in to the fact that it's likely to be worthless) and it's usually a poor retention tool as well (just look at startup turnover and the number of employees who don't stay with one company long enough to fully vest).

The startup value proposition today is actually quite compelling in some cases. Employees, many of them young and without significant real-world experience, can earn six-figure salaries working at companies that, without outside investment, could not sustain themselves.

Too much capital chasing too few opportunities has given many startup founders the ability to raise capital on terms that are insane. I mean, you have entrepreneurs raising million-plus convertible note seed rounds with caps that make absolutely no sense. Where does all that cheap money go? For many if not most startups, one word: salaries.

If you're being paid $120,000/year plus benefits to work on a CRUD Rails app at a startup that probably won't be around in five years, you should forget about equity. You have already won the lottery.

How is $120k/year to live in a top 5 most expensive city in the world to work harder than 95% of the people on the planet on a boring CRUD app winning the lottery in any stretch of the imagination? That sounds terrible.

Try earning $25,000/year working two jobs in a top 5 most expensive city in the world.

Working in tech may be unjustifiably glamorized, but you have to be incredibly out of touch with reality not to realize that earning six-figures plus benefits working 8-10 hours a day in air-conditioned buildings for employers, many of whom will feed and transport you, is something that millions of Americans would give everything for the opportunity to do.

"Employees, many of them young and without significant real-world experience...."

Getting that first job on your resume can be quite a trick.

Just before he emphasizes, with italics, that this is only "compelling in some cases".

Because of the circumstances in which I got dumped into the job market, I started out with a sysadmin job with some programming, which I turned into more programming, but it was not a great start, and it was only through unique coincidence (about the only person in the community with serious Lisp Machine and UNIX(TM) experience) and connections that I got my first really good job.

I'm curious what was your job that required (or at list benefited from) an experience with Lisp Machine.

Working for Lisp Machines Inc. (LMI), the other MIT Lisp Machine spinoff, in the early '80s.

They were working with Western Digital, which like everyone else at the time was designing a 68000 based workstation, and conveniently enough, it was based on MIT's Nubus NuMachine: https://en.wikipedia.org/wiki/NuMachine

So they were doing all the normal infrastructure for a high end workstation, and LMI was designing a 4 board Lisp Machine CPU with a Nubus interface that would work in one of their machines, with or without the 68000 processor board running UNIX(TM).

People with a serious UNIX(TM) background were actually harder to find in the community at that time....

In the early '80s... Oh, I didn't realize it was so long ago. I was hoping that your experience with Lisp Machines would enable you to enter in some lucrative but secretive niche sector, that would still be using something similar to Lisp machines now. I know a company has built one internally, but I don't have its name in mind.

Oh well, lucky you for having been exposed to Lisp machines.

"to work harder than 95% of the people on the planet"


I was wondering the same thing. It makes me think he hasn't seen much of the planet.

Precisely. Work in a boiler room, or hike sacks of grain 20 miles on your back, or work in low end food service, or go scrub toilets 60 hours per week, then come back and say software developers are working harder then 95% of other workers.

assuming startup 80+ hours/week.

80+ hours per week? Are you joking? Most startups aren't 9 to 5, but please name a single startup where you believe employees regularly put in 80 hour-plus weeks.

Even in professions like law and investment banking, where employees do have to work grueling hours on a regular basis, the "80 hour work week" is largely a myth. I think medical residents are one of the few groups that really puts in these types of hours consistently.

Yes. And from what I've seen, the companies where developers regularly do put in stupid hours aren't doing it because it's effective. It's a sign of dysfunction. E.g., a competition to be seen as the toughest, or a manager who can't really evaluate productivity other than by counting butts in seats.

hah, don't get me wrong, I highly doubt anyone really "works" a 80 hour week. I personally work 35 given that I take an hour and half for the gym + lunch everyday. And out of that 35, I probably spend 10 reading HN, learning new tech, doing personal emails, and other not exactly job-related activities, so 25 I'd say total of real 'work'.

so I was probably exaggerating a bit, but I stand by my original comment that many of these overworked, underpaid startup employees lead absolutely miserable lives and work harder than 95% of people on the planet.

For reference, the US in general works more hours per week than any other industrial nation. Hunter gatherers worked only 15 hours/week. Most impoverished nations work very few hours per week. The only people who beat them out are sweat shops in Southeast asia

We came to this conclusion as well; we decided to do bonuses based on Y/Y revenue growth rather than equity. The bonuses are not capped.

This allows us to:

1) Justly reward our employees to the upside (with cash, delivered semi-anually) if things go according to plan

2) Automatically controls costs if we don't perform as a team

3) Achieve upside fairness across early vs late employees since we can adjust the bonus % as we hire each new person

4) Eliminates oddities due to variations in company valuations where swaths of employees end up underwater due to bad luck of timing


1) the tax treatment of bonuses as income rather than capital gains is nominally worse; but given the complications with options, it probably works out better for all but HUGE equity gains

2) this plan might not work well for a company that will be pre-revenue for many years, but that should be a pretty far outlier case.

All-in-all this allows us to offer the opportunity for employees to earn above-market comp without having hope they get lucky with company growth, market timing, and their timing of joining the company.

It's been 3 years now and so far, so good!

Cool :-).

I worked at a very successful company that used a similar model: flat 50% of profits paid to employees as bonus. This worked fantastically well in the short term. Now, 10 years later, the company is still very successful but the upside has all shifted to the owners due to departures, renegotiations, and new hires not getting the same terms. So at 3 years it looked very pro-employee but at 10 years it looks very pro-owner.

Would have been really "interesting" if there had been a liquidity event...

The owners stuck around. Why didn't the employees? Serious question... were people fired for having too remunerative packages? Or did people just move on mostly?

Many people just moved on over time for non-monetary reasons.

I do agree it can be hard to make it fair once a company is big enough or growth slows dramatically, but that's a problem to deal with 3-5 years from now :)

As an investor and/or equity holder, wouldn't you rather see a startup reinvest their profits into their business? Retained earnings are not meant to be paid out as dividends if they can significantly increase shareholder value. This is even more true for startups where you are seeking a "hockey stick growth" model. Especially when you consider what is more important at a given time: profit, revenue, users, market share, uniques, etc. I would argue that it's important for a startup to be transparent around all these issues and help investors understand where you are at. It's unfortunate that startups can only rely on financing rounds to get updated valuations of their business. Coming up with internal valuations based on arbitrary multiples that are not validated by investors could be a slippery slope and thus are not worth considering.

Our bonus plan is based on revenue growth, not profits. Most of your counter-arguments are based on critiques of redirecting profits, which in our case is not what's going on. That said, you are right that generally companies shouldn't pay dividends if they have something better to do with the cash.

However, I'd make the argument that paying above market for top talent is about the best thing a startup can do to increase its likelihood for continued success.

So why did we choose revenue growth instead of profits as the basis for the bonus plan? Profits are easily gamed and frankly rare in startups and would not make for an appropriate metric to base bonuses on for an early-stage company.

I am not sure I follow your points about metrics, transparency, valuations, etc. Those seem like concerns unrelated to the structure for giving employees exposure to our financial upside.

Our #1 metric is revenue growth. That's what we want our team focused on. Not vanity metrics, not profits even. That's a management concern. Our bonus plans cover multi-year terms, and they motivate one to do the right thing in the long-term vs short term. There are no issues with gaming the bonus program; moving $1 of revenue forward/backwards by a few months has no effect. Making an extra $1 now at the expense of $2 next year is not rewarded. "Top management" still has to approve overall direction and operational processes, so it's not like anyone even has the opportunity to game revenue numbers at the expense of operating margin. Besides that, we hire good people and if you can't trust

I will say that for some types of models (eg Twitter) this wouldn't work as it's a free-as-in-beer product until they can start doing advertising. But models like that are quite rare. Though even in those cases there is probably a single vanity metric that is theoretically the main driver of future revenue growth which could be used.

this is awesome, I commend you sir

Clearly Sam Altman and a few other people in thread have stopped to think about this. :) Part of what he's telling people here is "look, your competition for the engineers who can help you deliver includes Google and Facebook, your expected value has to be comparable to what they can offer."

Of course, that's still talking about equity, which gets back to the fact that it really is best to treat your equity as little better than a lottery ticket -- something with the possibility of turning into a modest bonus and the remote chance of making you wealthy.

> experienced developers conclude that other options are a better use of their time.

Which I suppose is part of the reason the startup labor pool skews young. Occasionally, though, experienced developers get bored and need new opportunities too.

The labor pool skews young in SV and NYC, possibly because the only way to keep the cost of living down is to have multiple roommates, which does not work for someone with a family. In more suburban places, the age distribution seems in line with an industry that is as new as software is.

It's also a failure of the country's political and economic system, at least if you believe that a series of actions and laws culminating in Sar-Box ended the IPO exit shortly after the turn of the century. Other exits tend to be lots harder (my father had a specialty arranging them, and, hmmm, in the '60s also arranged an IPO...) and tend to leave much less money on the table.

"Startup-bucks are even worse than a lottery ticket...."

Also because if they are worth something, it's a motivation for the company to fire you before you can cash out. E.g. while the discrimination case against Google was settled out of court for undisclosed terms, whatever the motivation, the timing of the firing of Brian Reid 9 days before the company's IPO was clearly not an accident. (119,000 options, $10 million on the day of the IPO, lots more later: https://en.wikipedia.org/wiki/Brian_Reid_(computer_scientist... )

Given that we're living in a mostly post-IPO world, you could well be better off never getting options....

I don't think we're in a post-IPO world. We were just in a temporary dip: http://www.nasdaq.com/article/ipo-count-reaches-218-a-postte...

I'd rather be paid in barley than to have to deal with BS politics like this!

You've identified one of the reasons I hesitate to put myself in the "startup labor market" for any startup that isn't well-funded.

Even well-funded startups give me pause. I'm not interested in putting in founder-like work for entry-level employee-like compensation plus a lottery ticket. Unless the equity is meaningful and imbues the recipient with an actual, real voice in the direction of the company it's just a way to sidestep offering real compensation.

I'd be loathe to join a company where 10 people have a "real voice in the direction of the company". When you join an early team the only way is to trust the founder(s) as knowing what they're doing and listening to the team when there's a good point being made. The alternative is a recipe for politics from day 1.

I work at a small-ish company, and while, no, I don't have a "real voice in the direction of the company", I do have a voice in my corner of things: technical decisions. That makes me significantly happier than showing up and just being told what to use and do.

I wouldn't want to join a 10-founder startup, either. A follow-on to my comment would be that an engineer looking to work at a startup should almost never take options as a part of compensation, and should rarely take actual equity if it isn't sufficient to be on near-equal footing with the other founders' equity. Startups also shouldn't offer such crappy deals. They should pay the market rate, or slightly more because of the inherent risk in being an employee of a startup entails, and forgo the charade of stock grants (in any form).

I'm curious: what is "founder-like work" to you? Is it 50–80 hour work weeks? Or does it mean 40 hours but making the initial, architectural decisions of a new piece of software? Serious question.


In the first case, it's unreasonable to put in more than a couple of hours of overtime here and there for even market rate wages at any company, whether it's a startup or not. "Uncompensated (comp time doesn't count) overtime" is a euphemism for "exploitation."

In the second, the employee is effectively creating at least one of the revenue generating engines of the business. He deserves to reap the rewards of his labor. That means more than below-market wages plus "startup bucks"/lottery tickets.

The entire issue, as I see it, can be distilled to this: founders want employees who are taking significant risk, who will work for and treat the business like the founders themselves would, but who considers below-market wages plus "startup bucks" as great compensation, even when it is historically not.

My wife owns a Pharmacy* and works 50-60 hours a week, so I guess that "founder-like" work involves a similar time investment.

* The medical sort, and here in Holland the Pharmacists require the same education as a medical doctor but specializing in pharmaceuticals not diagnosis.

Agreed. I don't work for equity ever... don't feel like gambling with my livelihood.

I worked at a few also and managed to get a little money out of options, but nothing to write home about. I think after one company sold I got my payout and bought a new computer and a nice dinner and that was it.

I'm actually sitting on a huge pile of vested options at a company I left a few years ago, but I'm unlikely to ever exercise them during a sale because the strike price is almost guaranteed to be higher than they're worth.

I also know quite a few folks working a big startup sitting on lots of options, except the startup is on something like a G round of financing so they're likely diluted to worthless. Most of them started working there right out of college and don't understand how it works, and the company salary caps employees...it's a cool place to work but they're likely to get screwed if they're ever acquired/IPO.

One thing I've learned after working at quite a few startups as a non-founder is this, ignore the options and try and get the best possible salary you can. If you get some options, that's cool, but don't count on them for anything.

Maybe I'm mistaken, but I believe you only have 90 days after leaving a company to purchase vested options. I may be wrong, however.

To my knowledge, stock options are usually granted as ISO which have the 90 day cap. If they get converted to NSO, the cap can be longer but tax treatment is different.

Mine have a 2016 expiration date. It just depends on the grant agreement.

Be careful, there are laws which govern this, not just the grant agreement. Caveat emptor.

The other issue with startup-bucks is their value is tied to situations that may affect your continued employment - They're not just a lottery ticket, they're a lottery ticket where "losing the lottery" and "losing your job" are correlated events, whereas if you're liquid, you can buy lottery tickets without this correlation.

There's not much job security elsewhere either

This is one of the things which we like to say about startups, but it doesn't stand up under scrutiny.

The competing job offer is Google or another megacorp. What's their turnover for engineers in a year? 10%? 15%? The definitionally average startup has a higher turnover even if we restrict it to turnover caused by business failure, to say nothing of voluntarily or involuntarily losing one's job.

If you exit a position with Google/etc, you have a network full of people who also spent the last couple of years at Google. You can easily lateral into jobs of comparable quality. If you exit a position with a failed startup, your lateral transfer is likely into another job which pays below market. Your immediate professional peers are also people trying to avoid the failure stigma. They may also be slightly busy looking for a job to help you with your own job search.

If you work for Google for 2 years and then separate from them, your 401k increased by $30k in the interim and you probably have six figures sitting in the bank account. If your startup is shot out from under you, you may end up counting the number of ramen boxes in the pantry while hoping that the startup can make good on its final payroll check.

If you work for a megacorp and are let go, it is highly likely that you were let go for firm- or individual-specific reasons rather than industry-wide calamity. This is very much not guaranteed in startups, where e.g. ebbs and flows of the capital market can cause a daisy cutter to hit the hiring pipelines at dozens of firms at once. You could lose your job at the same time that everyone else stops hiring. Ask the wizened veterans of the dot com bust who are, what, in their late 30s?

Startups are meaningfully less secure than working at bigco. Anyone who says differently either doesn't understand them or is trying to sell you something.

For engineers above a certain skill level it's difficult to imagine job security becoming a real concern in the foreseeable future.

You're certainly correct about the opportunity cost of forgoing higher guaranteed comp at a BigCorp in return for a potentially higher reward, but I don't think that directly relates to the question of job security.

Do you remember 2001? One moment everything was brilliant. a year later and I had people who were working alongside me... people who were better than me in the late '90s... working for me, because their other option was retail. "I can't pay you what you are worth," I said to an ex-coworker I found working in a sandwich shop in the mid-aughts, "But I can pay you more than this place does." The guy really was pretty good, and he ended up working for me for many years.

Now, maybe we are in a bubble and maybe we are not, but the tech sector has a history of very sharp ups and downs, and in the downs? my experience is that a lot of pretty good people end up un[der]employed.

The other interesting thing is that from what I've seen? Layoffs at big companies (and if the sector takes a dump, there will be layoffs) are generally more "fair" than interviews at the same places. By that, I mean that those people who are shy but good are often the last to get laid off, but beyond a certain level, when interviewing, the "shy" part hurts you more than the "good" part helps you.

When Sonicity failed in 2001, I had a track record as a lead developer on a successful, well-reviewed enterprise product, the lead engineering role at an ISP that might still have been among Chicago's most popular, and research publications at least one of which has a cite record that a lot of ACM journal submissions would envy. Not to mention, I had cofounded a company that had raised a significant amount of money. I was living in San Francisco at the time.

I had to move to Ann Arbor to find my next job.

The thing about the daisy cutter that Patrick said is not a myth. If you're one of the people here that believes we're in a bubble, you should take it seriously. They didn't call 2002 "Nuclear Winter" for nothing.

When my employer failed in 2002, I had no trouble getting another job offer. Unfortunately that company failed before my start date. As did the one after that.

I moved to NYC to get a semi-functional job market.

These days the possibility of highly correlated failure is a major component in my career decisions.

No but at least if I lose my regular job I don't lose the pay I've already received.

If I'm paid $100k pa at Regular Corp and I get laid off after 1 year, then I keep the 100k I've already been paid.

If I'm paid $50k pa and 5,000 options at Startup Inc and I get laid off then I'll probably end up forfeiting the options which leaves me 50% worse off than if I'd worked for Regular corp.

Sure, but you're less likely to be fired at short notice from a big company. Unless you do something stupid or illegal you will be put on a performance plan and have some time to get your act together. Lets say you're working at a startup on a h1b visa, if they decide to let you go with little notice you have a limited amount of time to line up another job or leave the country.

I had similar experience with startups. With current conventions in startup labor market, only being a founder or or being at Facebook as number <10 employee pays off.

Both are off my list because I'm not lucky enough to join the next Facebook and I'm not capable of founding a company myself at the moment.

Getting sweet $170k salary with some bonus, massage, free food and shuttle is good enough for me.

You don't have to be one of the 10 first employees at Facebook to get paid: http://www.dailymail.co.uk/news/article-2072204/Facebook-IPO...

As a general rule of thumb, if a company is willing to do the extremely expensive action of acquihiring, they are willing to part a pretty high amount of equity of employees. Not acquihire-high of course, but a pretty good amount.

Of course, it could be argued that they aren't "startups" by that point, but "growth companies."

You linked to the Daily Mail, which is a British tabloid and not really known for its factual accuracy.

> Startup-bucks are even worse than a lottery ticket, because of tax complications and money required to cover strike price.

There is also a major information asymmetry. They know the ins-and-outs of the stock types and likely acquisition scenarios. It is not likely you are going to go over the company financials and corporate documents during the interview process. You just have to hope they treat you fairly.

As a potential future founder what strategy will you employ in regards to compensation?

Pick a market where you can get to significant traction in less than a year with a founding team of 3-5. Split equity evenly between all founders, but do pick one CEO. Then work like hell to get to significant traction. Don't hire until series A.

(If my current company doesn't work out, this is how I'll do it next time around)

I feel like I remember PG telling me that large founding teams (more than 3) were highly correlated with failure.

If I were to guess why: The more relationships you have on the founding team, the more likely you are to have ONE of them blow up or have someone lose their nerve/interest. Early startups are fragile things.

Seems like you could go with a hybrid approach (start with 2-3 founders, raise a small amount or self fund to hire 1-3 stars for small salary/high equity comp who couldn't go without a paycheck).

> I feel like I remember PG telling me that large founding teams (more than 3) were highly correlated with failure.

They usually are, but the median is not the message. If it's a group of college friends coming together to start a company for the first time, 2-3 people is way better than 4-5. But if you've worked with a few people before, know them well, and know how to set up expectations on day one, you can successfully have a larger group of cofounders without worrying about conflict. (This is something I've discovered for myself, it doesn't mean it would work for everyone)

At 4 or 5 founders, it hinges on group dynamics, not just the individual personalities of the founders. You need excellent communication, clear commitment, and you absolutely need two characters in the mix:

- A "negotiator". The kind of personality that is always mending the cracks that inevitably appear in the group.

- A visionary. The kind of personality that is incredibly optimist and always has the destination and the path in view.

Smaller groups can forfeit these needs and function, and are thus easier to assemble.

I've never seen groups larger than five succeed, and I've seen quite a few fail.

I wish there was a site that had a time line for every startup out there. When they were founded, when they launched, when they hired. ect.. It would be interesting to study. Some good info:


This is speculation but wont be hiring engineers until I can pay for it. I'd take a bonus instead of equity but I would rather the employee decide.

Different person from GP.

He could try this: http://michaelochurch.wordpress.com/2013/03/26/gervais-macle...

Agree with this from my experience.

I'll just take the higher salary and use it to fund my own ideas which I control 100%. Equity without say into decision making is practically worthless.

Just out of curiosity and to better compare your experience with the one from the article, what were the numbers in percentage?

Can't like this one enough. Very similar experience over my career here

Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder.

You're making the right call. I'm probably older than you and I've done two startups. My career hasn't recovered from the lost time. Total waste.

Most startups (by startup, I mean "company focused on such rapid growth that VC investment is mandatory") are pure shit. They fuck up your finances, drain your emotional reserve, and (unless you're a founder) often spit you into junior roles that you won't be able to stand after a taste of real autonomy.

If you don't learn much, then you've wasted time. If you do learn a lot (which you can, with a good run as de facto CTO) then you still end up in a junior role, due to your lack of credibility on-paper, for which you're massively overqualified. That's the worst outcome, because you're better off actually being junior if you're in a junior role; overperformance is far more dangerous (in large companies) than underperformance.

I suspect we're roughly the same age; my experience (after 3 startups as an early or semi-early employee) has been mostly the exact opposite. My finances are in great shape, I'm emotionally and socially healthy (the first one ended up hurting in the end, but I got out of there before too much damage was done), and at all three I've held senior development roles and am/was given a lot of latitude and autonomy.

I have no delusions that my option grants will turn me into a millionaire, but my salary is good/great, and I'm able to live well below my means (in San Francisco, even).

I tend to think startups messing up your career is more of a function of your selection of company and attitude than anything else. It's just a job. It'll only break you if you let it.

As a junior developer there's at least a chance that future engagements will give you a decent work-sample test where you can prove that your experience is worth more than the sum of your "intern" resume.

It's even bleaker for non-technical roles IMO: get hired as an "office manager," try to do everything asked to a high standard, and end up as a janitor, concierge, personal assistant, accountant, and collections manager for accounts receivable, all while getting paid as a receptionist.

The last paragraph is gem. I mean I wish more people understood this. If you are not a founder and made big money. Any other position where you can learn more than your age level peers is taken as arrogance and not qualification.

I report to 'architects' who haven't done or know 1% of me. By the fact that they've hopped 10 mega corps and with some neat interview skills always ensures they take home big salaries and bonuses.

While technical skills are good. Soft skills, social skills, a strong network is ultimately what really matter in the real world. Focus on that with a occasional focus on tech trends. Once you do that you can relax in positions of authority to make junior devs slog for you.

Speaking of "real autonomy", did you put any further thought into your idea of Autonomy Funds[0]?

I thought it was very intriguing, if perhaps hard to get off the ground. Definitely would be a good antidote to the kind of SV craziness you describe, but of course not really in line with the status quo. I'd like to see some more discussion on this, and maybe get involved (though my business knowledge is near nil).

[0] https://news.ycombinator.com/item?id=5578195

I don't think it's the right structure. I like the idea of open allocation (which is more defined) in a decent company better (although that, too, is rare). Paying typical young people to "do whatever" is not going to lead to the kind of performance that would sustain the fund. Also, I love the idea, but I feel like a lot of the best people are going to still go to YC. There isn't really room for more than one YC, because (like academia, which is all about reputation) most incubators are a reputation drag.

Also, I think "startups" generally suck. By startups, I mean companies built to become billion-dollar concerns (and willing to throw culture and people under the bus to get there). I'm starting to think of that as raving narcissism. People should want to do great work without that instant gratification and entitlement of Big Exitzzzzlol!!!!111

A better idea is this: http://michaelochurch.wordpress.com/2013/05/07/fixing-employ... . The idea is that people sell call options on their time, as a consultant. Let's say my fair market value is $200/hour now. I might sell a call option, struck at $150/hour, exercisable within 5 years. That's probably worth $100-150 because I'll be more skilled in the future. It lets people finance their career needs early, but it also makes the consulting market astronomically more efficient because the option-holders (who would tend to buy underpriced options) have an economic incentive to find work for talented people.

"The idea is that people sell call options on their time, as a consultant."

I really like that idea - there's not currently a marketplace for this, is there?

overperformance is far more dangerous (in large companies) than underperformance.

Why? Can you explain.

The curse of competence.

In your next family gathering people will ask you to fix their computer. You say 'Sorry I'm not IT, I'm a programmer'. Suddenly they dislike you. Do they dislike your cousin who waits tables for not fixing their computer? No, just you.

Similar themes play out in a business setting. If you're competent everyone will want you to do everything important. Which will result in:

1. You get stretched too thin and start making mistakes -> fired.

2. You refuse to take more than your share of work. This is seen as a slight to whomever you refuse. Similar to the above anecdote.

No one gets upset with the person who can't help them. They get upset when the person who can help them doesn't. Additionally people tend to focus on what you haven't done yet, not what you've already accomplished. The more that you are able to do, the larger the unfulfilled expectations become. Suddenly a large portion of the projects are complaining that they would be further 'if only we could get Redmaverick to help'. Now you're seen as the bottleneck for not helping, rather than the asset because your skills apply in so many areas.

If you are a skilled person who can execute tasks, it is vital that you always frame yourself by your accomplishments. By default your capabilities will be used to create a long string of perceived obligations.

"You get stretched too thin and start making mistakes -> fired."

It can be worse than that. In a small startup, you can be the least-worst informed and capable about several critical areas, where you pitch in and do a better job than anyone else could have, and make mistakes.

(In one particularly galling example in my work history where I was employee #1, I recommended an ISP, which was good, but without talking to me the co-founder who set that up also bought their bundled email service, back in 1997 when this was seldom well done. This turned out to be a mistake visible at the top of the company....

Or take firewalls: while I now know a lot more about them, and can set one up with raw iptables or Shorewall, back then all I knew was what I'd read in Cheswick and Bellovin's seminal book https://en.wikipedia.org/wiki/Firewalls_and_Internet_Securit... and said, "Gauntlet has a good reputation". Yeah, but its company, Trusted Information Systems, had just been bought by Network Associates, which apparently following a common Computer Associates business model of firing almost all of the technical staff and milking the reputation....)

Precisely. If you're "not working up to potential" you may not get fired but you're not going to be promoted. If you drop from a 9 to 7, people notice the -2 delta because changes in performance are much easier to pick up than absolute performance.

I'm (mildly) bipolar. The highs hurt me more at work than the lows. The lows I can push through and compensate for. I have a strong enough work ethic that except in an absolute mind-breaking depression (which I haven't had since my early 20s) I can handle it. In the highs, I either overperform or raise expectations. I always do a very good job of something, but that something might piss someone off.

Reliable median performers, on the other hand, don't piss anyone off or surprise anyone.

Of course, as our host points out in Beating the Averages (http://paulgraham.com/avg.html), "If you do everything the way the average startup does it, you should expect average performance. The problem here is, average performance means that you'll go out of business."

Which, if you're one of these "overachievers", increases the chance the start up that hires you, at least early enough that stock options might even vaguely maybe be worth something someday, will fail. This has happened at several that I've worked for, they died hard after I was purged.

If it's not to personal; do you have any anecdotal indications as to why your bipolar improved after your early twenties?(or rather; why you haven't had a bout of extreme depression since then)

Based on a variety of things including family history, my doctors and I believe I have "depression of a bipolar nature" ; not true bipolar but something akin that only expresses itself as depression. Based on his posting just now, it's very different from what he has, except for the "depression attacks", which perhaps got better with time, and definitely got better with anti-depressants, which generally cannot be prescribed to those who are frankly bipolar (and in my case one actually made me hypomanic, that's mania without hallucinations).

The #1 thing you can do to at least not help drive yourself deeper into depression is to learn cognitive therapy, which nowadays has a "behavioral" aspect added to it that I'm not familiar with (this is the CBT Michael refers to in his message composed at the same time as mine). Buy this book; I keep extra copies to give to people: http://www.amazon.com/Feeling-Good-The-Mood-Therapy/dp/03808...

If you're truly bipolar, there's no substitute for a doctor's care as well, you'll probably need a mood stabilizer, of which there are many varieties from the "gold standard" of lithium to modern atypical anti-psychotics.

Some mood disorders come on gradually and get worse with time. Others hit hard in the teens and 20s and become less severe in adulthood, sometimes remitting around 50. Treatment helps, exercise is important, and the most important thing to remember is that there's no silver bullet but that a multi-pronged approach (medication, CBT, exercise, yoga/meditation, cutting toxic friends and making good ones, good sleep habits, avoiding drugs including alcohol) can make your life a lot better.

My genetic pattern seems to show more debilitation in the 20s. Unfortunately, some people don't recover from the damage (to health and career) done in that phase. I seem to have made it through the worst, though.

It was in my late 20s that I learned to live with an unstable mood. Sometimes I'll have a panic attack (10 minutes of extreme adrenal excitement for no reason) or a depression attack (an intense 2-4 hour bout of depression that, while leaving me exhausted, seems to leave no lasting mark) but I take a zen approach. Yes, this is actually happening, and it's just emotion. Easier said than done, for sure, but it's an ongoing practice.

Panic attacks I think of as a stern, somewhat obnoxious teacher whose motivations I haven't figured out yet. What makes panic scary is that it can imitate pretty much any physical disease. Phantom smells, visual flashing, chest pain, balance problems, paresthesia, vertigo, vomiting, blurry vision. I've had pretty much all of that shit. Over time, you learn that it's not dangerous. Then it becomes an annoyance (like a traffic jam) rather than a source of terror.

I don't think of myself as disabled by it. Most creative people are on the bipolar spectrum (although two thirds are probably sub-clinical). I don't lose work time to it, and my "never flake" rule keeps it from being too disruptive. I think of myself as traveling the same road as everyone else, but in winter rather than summer. And there are things you can see more clearly when the trees are bare and the air is crisp.

You alienate yourself with respect to your peers and your boss will think you are trying to take their job. Nearly everyone around you will consider you a threat.

That is my take and my experience from that statement.

The best thing to do after having been tainted by startup education is to go into consulting.

You alienate yourself with respect to your peers and your boss will think you are trying to take their job. Nearly everyone around you will consider you a threat.

Bingo. You fucking nailed it.

The best thing to do after having been tainted by startup education is to go into consulting.

How easy is that? I'm considering that avenue for myself, largely because I'm sick of office politics, re-orgs, and other time-wasting bullshit. With a consulting arrangement, there's no expectation (on either side) of a long-term deal and I think that's better, because most companies renege on their side of the social contract (e.g. investing in their people's careers.)

How do consultants find good ($100+ per hour) work? If I could get the same take-home pay as a consultant, I'd do it in a heartbeat. I'm honest enough to know that I'm not a team player (unless I assemble the team) but I do great work and I'd rather be in a place where that's respected.

I'll try and follow up on this tomorrow, but I dont have a lot of insight. It is difficult. Lots of hustling.

indeed, having any deal flow in consulting requires A LOT of work building up a reputation of trust and quality with clients (and choosing clients well!)


The Gervais Principle is a fascinating series of articles that explain why this is the case and also give a lot of insight into corporate America. It's a great read.

A very relevant line from this article:

"Unless you very quickly demonstrate that you know your own value by successfully negotiating more money and/or power, you are marked out as an exploitable clueless Loser."

If you are working long hours and aren't rapidly negotiating your way up and into serious equity then you are marking yourself as a sucker. Don't be surprised if they continue to exploit you.

I'd just call that bad management. Team building requires some skill, including adjusting equity and compensation to build loyalty and keep valued employees. Do it wrong, and you get guys like that who are frustrated and angry.

Most underperformers don't really cause any problems. They work slowly and can't be assigned anything important, but over time the organization can adapt to them. Consequently, nothing really happens to them until there's a general belt-tightening. Usually, because people don't like being dicks and most underperformers aren't disliked, they're rolled into a general layoff and get a severance.

Overperformers, on the other hand, draw attention and animosity. People may say they like change, innovation and creativity. Abstractly, they do. At work, when they're trying to hold position within an organization that would throw them under the bus without hesitation, they hate change (except change that they control) and anything that smells remotely like it might be a challenge to their authority, reputation, or power, no matter how remote that challenge may be.

I'm seriously considering going into consulting, specifically because it's the one employment structure where overperformance isn't catastrophic. The worst result of overperformance is that you automate yourself out of a job, but that usually leads to another, better, one.

If you're an underperformer, you might get laid off in a year or two. You'll typically have a severance or warning because people will still generally like you as long as you're not an asshole.

If you're an overperformer, then unless you have someone powerful who goes out of his way to protect you, you're going to be fired (on a bogus "performance" case where you're set up to fail) in 3 months. You're also probably the type of person who, when served with a PIP despite being one the biggest assets to the company, will go nuclear, create morale-killing spectacles, and be talked about for years afterward. (Not that I know anyone like that...)

Underperformers can move along. With 2-3 years on their resumes, no one asks any questions. Overperformers often blow up spectacularly and develop reputation problems because, even if they're abstractly admirable, they didn't know the rules.

"You're also probably the type of person who, when served with a PIP despite being one the biggest assets to the company, will go nuclear, create morale-killing spectacles, and be talked about for years afterward"

I think Googler's and Xooglers on HN have by now learned to restrain themselves but I've had enough of this troll. I don't know what the actual psychiatric terminology would be but I know what the symptoms are: Toxic levels of cynicism combined with massive delusions of grandeur ("... despite being one the biggest assets to the company..." Hah.). Please note that the company he's talking about is Google where he spent a few months (or perhaps a year or so) in 2010/2011 timeframe. His equally delusional rants on internal mailing lists were stuff of (hilarious) legend. It was clear to any engineer with half a brain who read one of his rants that you don't want this guy anywhere near your team.

I do sympathize if he's suffering from genuine psychiatric issues and needs medical help. Someone close to him needs to help him get the care he needs.

But please, please young hackers, don't pay any heed to his alleged words of wisdom. The world, and especially silicon valley, may not be all cookies and cream... but it's also not the satanic hellscape that you're reading about in these sickening threads. Lots of young people enter this world every year, do their work, get compensated handsomely and treated royally (way better than almost any other profession that a young graduate could find work in today) and live happy, fulfilled lives. I wish a few more voices here would spread a bit of positive news (and down-vote the ever cynical trolls on a regular basis).

I'm usually a big fan of online anonymity, but it seems disingenious to hide behind a throwaway when you are making a personal attack directly at a named person - especially when you are referencing internal events at the company in question.

I don't believe in everything michaelochurch says, but I do believe there are real problems at Google pointed out by often not just michaelchurch (eg. rachelbythebay, Piaw Na). I believe Vic Gundotra should probably be fired for example.

I wasn't talking about myself, or Google.

I wasn't even on a PIP at Google.

You launched a personal attack on me for no reason. The conclusion I'm left with is that you're probably an asshole.

  If you're an overperformer, then unless you have someone 
  powerful who goes out of his way to protect you, you're 
  going to be fired in 3 months.
Let's say I am a junior manager at a big corporation, and I notice some of my subordinates are doing a great job.

I was thinking I would put them to work writing good software, delivering business value and generally making my team look good. In the fullness of time, and if they're interested, I would support them for promotion. While I would lose them as programmers, blocking their promotion would not be productive (assuming they're smart enough to notice, which you'd hope high performers would be), and as managers they would add to my political allies in other teams.

How would I benefit from firing them instead?

'(on a bogus "performance" case where you're set up to fail) ' Can you elaborate?

I worked as one of the very early founders of Digg. I bought my options. Obviously they're worth nothing, yet I owe the IRS about $120k. This threatens to destroy all my savings, retirement, and credit for 10 years.

ISOs are not only worthless 95% of the time, they're also actively EXTREMELY DANGEROUS 50% of the time if they're not simply worthless.

My suggestion: get a salary, and buy just-IPO'd stocks from companies you believe in.

If you find yourself ready to buy some ISOs, I further recommend you IMMEDIATELY sell them, as in have the buyer sitting there with you as you purchase the ISOs, and do the trade instantly thereafter. Take the short term capital gains hit. Do not hold onto them no matter what any CPA or tax attorney tells you unless they can talk at length about ISO+AMT Tax Trap and assure you you cannot possibly have that happen to you.

Don't you get to credit AMT charged against worthless ISOs in later tax years?

Why did you exercise them?

   The best solution I have heard is from Adam D’Angelo at Quora.  The idea is 
   to grant options that are exercisable for 10 years from the grant date, 
   which should cover nearly all cases 
That is an awesome idea, and really classy on Adam's part.

It's a great idea, and Adam is classy for a number of reasons, but having just left Quora, I only have 90 days to exercise my options, so it's not something Quora is doing right now, which is what the article seems to imply.

I think you should hit up Adam and see if he can provide you with a 9-year 9-month extension. If not, you should let Sam know so he can provide an update clarification on the article.

There is also a precedent for such type of clarification updates in YC family. YC founding partner, Jessica Livingston, provided a clarification with respects to Sabeer Bhatia of Hotmail vs. DFJ ventures based on the statements Bhatia made in an interview with her for the book "Founders at Work".

From a company's point of view, wouldn't that really suck, having all of these outstanding shares in limbo? I'd imagine at least part of the 90-day thing is just so that the company knows the status of those shares. For an employee, the company is holding those out as a carrot for you: someday those shares might pay off, if you work hard. For a former employee, he/she gets 90 days to decide whether to pony up the cash for the company (who gets money in exchange for the shares), or they get the stock back to give to other employees.

Having to keep track of "large" (unsure of how to quantify that) percentages of the company that might be purchased at a later date seems like a liability that the company wouldn't want to have to track, especially as a startup with other things to focus on. They're useless to the company, the only upside is for the employee.

Is it really more difficult to keep track of than regular shares? It's easy to decide if the stock might be purchased: if the IPO/acquisition is priced above strike price, then they obviously will be bought, and otherwise will not.

It is indeed not useful to the company, and a great upside for the employee. Out of all suggestions in the article, this is probably the most employee-friendly. But that's not a bad thing if it helps recruit good employees, or otherwise seems like a fair thing to do.

The usual 90-day limit makes employee vesting almost meaningless. They either wait for an acquisition (and get all their options accelerated), or leave before that (and lose all of them). Few employees have enough spare cash to buy out their shares.


that's not the only option. The company could remain privately owned - in which case you want to have below 100 shareholders so that you can remain a C corp

They're useless to the company, the only upside is for the employee.

Don't agree: the company already got the benefit.

I think 180 - 365 days seems far more reasonable. It's ridiculous to have the company shares tied up with the inability to give them back to other employees.

And that's why options are (mostly) a scam. If you leave before a liquidity event for any reason (they may not come, they take a long time, life circumstances, poor career growth, employers like to give shitty raises), you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now, or giving up your options. Sweet deal for employers either way. So when they hand out those option grants they probably get to apply a 50% discount or more to exercise.

Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.

@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:

1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)

2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)

3 - on sale of the stock, on the spread between the sale price and your basis

[1] https://news.ycombinator.com/item?id=7611512

If someone won't tell you the number of shares outstanding then you should value it during hiring negotiations at zero. I've had two potential employers (over 16 years) try to pull that on me and I was sure to tell them how much I thought their equity offer was worth during salary conversations. They both eventually produced information on company structure and valuation. It always helps to ask :)

> avoid even telling employees what fraction of the total company their options represent

Actually that's pretty telling. If they don't give a number it means it's ~0%.

> you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now

I am not really familiar about this area. It is a one time price to pay to purchase the stock options, is that correct? Furthermore, where does tax come into play? Don't you only get taxed if you decide to sell the stocks to generate income?

From how I understand it, when you decide to exercise your options (pay the strike price), you owe taxes on the different between your strike price and current fair market value even if you don't sell the stock. Most of the time, this counts as AMT (Alternative Minimum Tax) if you don't sell the stocks within the same tax year.

You have to report the "paper capital gains" for AMT purposes but that doesn't necessarily subject you to paying the AMT. And if it does, you will at least get AMT credits you can apply towards future tax years.

I don't really see it that way at all.

As part of your compensation package when you sign up, you're granted a set of unvested options. The idea is, as you work for the company and provide the value you've promised, the options become vested and are actually yours.

So why do you need to stay there to keep them? If I work at a company for a year and 25% of my options vest, why are the terms surrounding their exercise different depending on whether I choose to stay or not? I earned those options by working there for a year. Why is it fair to take them back if I decide to leave instead of stay?

Yes, I get that you're agreeing to that up front, so it's not like you should be surprised when the 90-day limit kicks in. I just wish option grant agreements weren't structured like that, but the employee has pretty much zero power to change that; these grants are pretty much take-it-or-leave-it, and the only point of negotiation seems to be in the quantity of the options. At best.

180 / 365 will pose the issues as 90 days. I had to let go of my stocks since the price to exercise was too high when I left. I wasn't sure when the company would ever IPO or get bought. Though had it been 365 days, it would have worked out for me. My company got acquired 8 months after I had left.

Presumably if the company is successful, the options will be exercised at some point. The company would make that assumption and expand their option pool accordingly.

The problem with the 10%/20%/30%/40% thing is that if the company shoots way up in value, an employee could theoretically be fired after two years and not capture much of the value they helped to create. It also doesn't necessarily need to be malicious [1], sometimes companies change and a person's skills aren't as valuable anymore.

If I were a prospective employee I would never take a deal like this, because it is really difficult to have that much trust in a company and founders that you likely don't know that much about. I can't say the standard 4-year vest with a 1-year cliff is the most optimal situation, but from an employee perspective it is way better than 10/20/30/40.

1: Though it could be, I know there was a story about something happened at Zygna like this

The scenario is little different from any other where someone lacks a controlling interest. Controlling interests can sell the company to another company they control at a price that suits their interests. They can issue shares to dilute equity and use the shares to acquire a company which they also control. Any legal action agaist such practices can be defended on the company's dime.

In other words, if scumbags control the company, scumbags control the company. Fortunately, most people aren't scumbags.

>>Fortunately, most people aren't scumbags.

No one is.

But money changes things. Let's there are two best friends, you offer the first person some money to back stab the other. The guy may not agree. However keep raising the offer and at some point of time when the figure hits a $X0/$X00 million I bet the guy's intentions will change.

Every one sells, its just the number that differs.

No, some people are "scumbags". I once worked for a company that suddenly ran out of it's startup money source and was forced to do a deal with a couple of "angel" investors ... who turned out to be devils.

They wrote into the agreement certain metrics that the company would have to meet after launch, and did everything they could to prevent it reaching those, e.g. firing the guy would would have made the sales, our multi-talented lawyer stepped up and made them. When Kleiner Perkins, who's connections could have been a make or break for the company, cold called us, these devils blew them off.

Their attitude was they'd rather have 100% of nothing (well, they probably thought it would have been something), and the company essentially died when 13 of us resigned en masse from the CEO down to all but one most junior engineer. (And then we had to go to the state to get our back pay for that partial pay period.)

I was in some of the last minute, try to save things face to face negotiations; these guys were malevolent. Not sure how they achieved net worths of 100 million and 500 million, but if they retained any control, they sure didn't use that money for good.

In other words, if scumbags control the company, scumbags control the company. Fortunately, most people aren't scumbags.

Most people aren't, perhaps. Most people who have the connections to be VC-funded startup founders are scumbags.

Read: I am not one of them or have the social skills/drive to be one of them therefore they are scumbags.

This kind of personal attack is not allowed on HN, regardless of how wrong you think someone is. Please don't post any more comments like this.

michaelochurch said "most", not all.

You don't know what the fuck you are talking about.

If you have actually lived in the society that actually exists, rather than the one entirely in your own head that you wish to believe in, you'll recognize that there is a positive correlation between social position and being unethical. (1) Power corrupts, (2) power attracts bad people, (3) bad people are more willing to make moral compromises to get power, (4) good people in power (it does happen) are usually not cynical enough to tell when they're being lied to by their lieutenants.

It's completely understandable that you'd rather live in your Pollyanna fantasy world, and that's fine. If you want to believe that the world is 6,000 years old, that is likewise OK with me (even if you're wrong). What I won't let you do is spread delusion to the young and gullible. If you don't know what the fuck you're talking about, then kindly quiet down and let the adults talk.

Hey. Personal attacks are not allowed on Hacker News, even when someone else flames you first.

(This originally read "regardless of how wrong you think someone is", but as someone pointed out to me, that was the wrong way to put it, and the original offender was upthread.)

Damn dude, I think you forgot to take your Midol today.

Personal attacks are not allowed on Hacker News, regardless of how wrong you think someone is.

Mixing in a gender slur makes it worse.

This is the kind of thing we ban people for, especially when they don't have a history as a positive contributor on the site.

Understood. Will not be commenting like this again. Thanks for the warning dang.

It's important to note that Sam also suggested an increased equity grant on top of the 10/20/30/40 schedule. The expected value of 10/20/30/40 only matches 25/25/25/25 if the overall equity grant under 10/20/30/40 is higher to begin with. Depending on the time value of money, and upon one's personal opportunity costs year over year, that equity award might need to be significantly higher. Alternatively, as Sam suggests, there are compensating mechanisms (new grants, vesting acceleration based on performance, etc.).

All things being equal, I wouldn't take a 10/20/30/40 over a 25/25/25/25, because it would be economically irrational to do so. But all things aren't supposed to be equal under the two structures.

Thinking about this another way, if the company shoots up in value immediately even 10% of your equity grant could mean a significant payout if the company is following the rest of Sam's advice by offering above market percentages and being exercisable up to 10 years after the grant date.

Great point. In dollar terms within the respective vesting years, 10%/20%/30%/40% might look something like 5k/100k/200k/500k, which is extremely back loaded (and could help explain the Zynga 'scandal').

If you were committed to more equity though, this might make sense. Right now it's 25/25/25/25. An employer might want to offer above-market equity but backload the extra, so it's more like 25/50/75/100 compared to market (this example gives 2.5x the market equity rate). At year 2, pre-grant another 25/25/25/25 refresher to start after year 4.

Thought exercise: If you get 4x the equity/options, you only need to work 1/4 as longer as you would under the old regime. This means that if you get fired after the first year, you're in the same boat as if you had stayed for all four years under the old equity split. What's important to solve to make this work is some clause like the 10 year exercise window.

I've been thinking of putting together something simple to analyze employee option paperwork and add some plain English annotations to help employees understand exactly what they're signing. Based on my experience, there's something like 5 or so templates that cover 90% of the startups in the valley, so shouldn't be too hard. Is there any interest in something like this?

We at Casetext are interested in this space as well. Our annotations technology will undergo some major improvements in the near future, but even the way they are today may be sufficient to meet your needs. Hit me up (jake at casetext.com) if you want to work together to make this a reality. Here's an example of what docs look like on Casetext now: https://casetext.com/contract/simple-agreement-for-future-eq...

This would be fantastically useful. Please, do this. I looked, hard, for this in the last month. If you need it, I'll talk to my employer about creating a template with dummy information based on my package.

I agree that a resource like this would be incredibly valuable for startups and employees outside of the valley too. Even though they may not have the same details, the annotations may help explain general concepts and terms which are important.

I had a comment on another thread recently proposing something in a similar vein to help employees understand what their stock options mean/are worth: https://news.ycombinator.com/item?id=7584320

Please do this! It's not just valley startups that are confused by this -- other cities are too. And as you say, there are usually 5 templates that cover the vast majority of cases.

I agree, this would be awesome.

Yes!! This will be very helpful

As a founder I looked into paying vendors/employees with options, but have found they are too brittle. Because option deals are created at the start of employment they require a lot of faith on the part of the founder, who does not know the employee's abilities or temperament. Options do not track well with performance and cannot be adjusted easily. I also do not want to be in the position of considering terminating an employee because they have more options than what I think they are worth, and employees should not have that fear either.

Instead I am working on giving vendors and employees a convertible note that is based on their performance month-by-month. Let's say an employee or vendor is taking $5000/month less than they should be because it's a startup. The company credits them $5000 to their note each month (this can be more if there's a risk premium), and adds any performance bonuses as well as they come up. This lets management clearly track performance against the shares they are giving, and lets the employee know that if they work more they can get more. As time goes on the value of the note increases and the employee can converts their note to shares at the current valuation (or a discounted valuation).

This seems a lot more flexible to me than options, and is less stressful for the founder and the employee. Am I missing something?

Completely off topic, but I'm this post made me realise that Sam Altman went from programmer to enterpreneur to financial guy. This post has very little ado with what he once started doing. He's a partner (and president) of an investment fund now, a pretty odd career move once you take the pink Silicon Valley glasses off.

This entire post is about finance. Not about business, not about products, not about customers, just finance. Personally, I understand just about half of the entire post.

To be clear, I don't think this is a bad thing. I envy Altman for understanding this (and for running YC at an age younger than mine, but that's another thing). But that's not my point. What I wonder about, is whether this is inevitable for successful enterpreneurs.

Is the path programmer->enterpreneur->finance the obvious one? Sam's path might've been odd, given that his startup wasn't the next Facebook, but you see the same in startups that are the next Facebook, such as Facebook. Zuckerberg used to be a PHP hacker and now he's this NASDAQ CEO. I'm not sure about Drew Houston but all I read about Dropbox recently were acquisitions.

Does growing business make you a finance guy, or do you need to be somewhat of a finance guy to grow a business? I'm really curious which is the chicken and which is the egg here.

Finance allows diversification in ways that operating (programming, marketing, etc.) doesn't. One usually needs to either (a) make money operating or (b) gain experience marking to either (a) invest your own money or (b) invest the money of others.

(at least in private markets)

Being a founder means looking after your employees and that's what this post is about. Entrepreneurship is not solely about building and creating things. You have to lead, manage, and look after the company and its most valuable asset, the employees. Employees need to be compensated properly, and the devil is always in the details, so he is diving into financial details on how to achieve that. Financials are not the point of this post, it is the consequence of proper employee compensation.

As soon as you go from solo programmer to building a team, you need to be aware of these financial issues. How to structure equity and compensation are fundamental issues faced by all founders. Focusing on the details may not be necessary, but if you don't at least understand the basics of the financial side - which are not hard - it will be hard to build a company.

PS. I don't think it's fair to call him a "financial guy" based on one post.

I don't think the skillset is the factor. Smart ambitious person happens to learn programming first, his ambition keeps him pushing to entrepreneurship and other fields.

Another smart ambitious person might start on a different side of the mountain and keep climbing.

I was half-expecting him to advocate a "less equity for employees" stance since, superficially, don't investors already compete with founders for percentages?

Of course it makes sense on a higher level, e.g. when wanting startups to be desirable workplaces, or wishing for their own ecosystem to be a fair place etc.

So, maybe not your average "financial guy"...

There's several factors that make this irrelevant.

1) YC's incentives look very different from VC's: they get common shares, not preferred. This means their incentives are more aligned with the founders than with future investors (for example, if a VC has a controlling stake in the company & wants to fire the founder and dilute the common shares to basically nothing, then YC gets similarly diluted).

2) The dilution effect of the option pool on YC's shares is trumped by the dilution effect of future investments on YC's shares. If expanding the option pool has a marginal dilution affect but dramatically increases the likelihood of success, then that's a no-brainer for YC to push for.

3) YC's business model is dominated by the extreme outlier successes (e.g. Dropbox, AirBnb). Thus, YC does better by doing these three things better:

A. Increasing the likelihood that future successes are funded by YC (i.e. the founding team chooses YC early on)

B. Increasing the probability that a startup will become an outlier success.

C. Given that a startup is becoming an outlier success, multiply that success to the extent possible.

This piece hits nicely at each of those points. For A, YC takes a leadership role in how to structure a cap table, making founders look more to YC. Also, YC startup employees (ie future YC founders) think better of YC. For B and C, once a company grows beyond the founders, each employee makes very meaningful decisions on a daily basis that impact both the company's likelihood of success and magnitude of success. Aligning these employee's motivations with the company's further helps make these decisions better for the company.

It's about as meta-strategy as you get. It doesn't just make YC look good for advocating better incentives to attract better employees, it makes YC look like a leader. And makes them look extremely smart for seeing the way to look like a leader.

I wouldn't say that sam has now become a finance guy, finance has now simply become one of the things he does now as well.

It's quite difficult to compete with Google and their revenue/cash hordes when it comes to salary / total comp. Especially if you price the options at the last round's price and discount them some more.

Imagine a well to do company of 2 founders (in SF/Bay Area) and a team of 3-4 others that raised a seed at 10m cap. They want to grow their team headcount to 15 and are busy hiring, running servers, etc. They can offer a 100k salary (more than enough to live on) to a sort of senior engineer or PM and want to compete with Google on total comp. Let's say they need to make up the other 100k difference in comp & salary with options. Over 4 years, you're looking at a 4% equity chunk to one employee, the 6th person joining the company.

Not that I think numbers in line with this aren't realistic (I do agree with Sam that more generous equity grants are better), but for most companies that make a 15% option chunk for employees it's difficult to rationalize a number like that.

Edit: Also, that puts the equity comp of that 6th employee (or 10th, because in most cases you will have a similar equity bracket for those people) at about 1/8th of the founders, not the 1/200th that Sam mentioned. I wonder how many people have made offers to employees with a similar comp plan.

100K is not more than enough to live on, if you live in the Valley and have a family (say 3 kids) then 100K barely buys you a comfortable lifestyle. I know that is not the point of this thread but so much focus of these discussions seems to pivot around a 22 year old college dropout who lives with roommates in a shared apartment.

When you reach a certain point, say your mid-30s and you have kids your financial obligations can extend far beyond what people think is necessary to 'live on'. You have retirement contributions, savings for college, long term care for family (most people believe it or not, have to help their parents out at some point).

And that's why in the latter case, an early stage startup may not be for you. You join later, with a higher salary, when it has stabilized and looks to be going somewhere. And without the risk, you don't expect the equity to offset it. Pretty simple, really.

An equity offering of 1-5% doesn't offset the reduced salary. That equity typically doesn't imbue the recipient with the same authority as the founders' equity imbues them. Yet, for example, Hire #1 in a two-founder startup is pretty darn close to sharing 1/3 rd of the risk as the founders. It's just that his risk is assumed to be amortized over the term of his tenure and slightly reduced by a salary, so it has the appearance of being significantly less than it really is, even though neither component of that assumption is valid.

Being able to raise a seed round is a non-trivial hurdle and is not something most engineers can do. Compensation isn't really about risk (which is low for everyone involved given the current employment market), it's about value and opportunity cost.

I agree with the logic that gives very early employees 3-5% equity stakes. Any more than that I think is unfair to founders and angels -- there is real value in getting even a reduced salary. Most founders have worked for a year or two without any cash comp, at something that may look absolutely ridiculous on a resume. That is a humongous risk. Those coming in after that risk, plus the risk of failing to raise the seed money, are IMSHO taking about an order of magnitude less risk, therefore the 3-5-ish percent number makes sense.

Don't even get me started on this idiotic "we put 15% aside for employees" crap. Fogedaboudit. $80 to DE and you've got 10 million more shares to play with. Not my fault you failed to get the arithmetic right the first time around.

A 22 old college dropout who lives with roommates in a shared apartment can live in $50,000 a year or less, even in the Valley.

As a sibling comment mentioned, working at startups, especially early stage startups, isn't for everyone. If a person has major financial obligations a more steady job with less uncertainty (and less potential for upside) is probably the best fit.

200k is nowhere close to total comp for a lot of engineers at google. 300-400k for anyone with 7+ years experience who is worth a damn, and some are topping million+. Startups simply cannot compete with google compensation, period. No matter how much equity you give.

There may be valid reasons to work for a startup, but thinking you will be paid to the best of your ability or god-forbid, thinking you will get rich is not a valid reason.

I was underestimating the comp for google engineers just to prove the point. I strongly agree that working at google is better in terms of pure comp (though the longer term capital gain taxes do work out better than salary..)

It's easy for a startup to compete with google on compensation: just be a huge success. If you sell for $10 billion, a typical engineer with 0.1% equity will do well. A first employee with 2% equity will do very well indeed.

But yeah, on average, it's not going to be as good as Google. Pick your startup carefully.

It would be more realistic if it accounted for the expected growth of the company valuation. It's unrealistic that the company should be valued at 10m for the next 4 years - it's going to grow or zero. Also their salary is likely to bump. Just doing some quick numbers it might be realistic to give the same "EV" as google by granting 2.3% with no raise or 1.5% with a salary that approaches market over 4 years. I think that's very reasonable for the kind of person who is turning down a 200k/yr job to work for you.

The valuation is the expected value. And since we're talking about investors who get preferred shares, the actual valuation for determining the value of the common shares (which employees get) is lower than that, still.

You're not wrong and that view represents the normal thinking I suppose. But don't you think it feels weird to say, "We're going to pay you next year in equity at this years valuation"? if you choose to stay in the company for year 2, it's strange to think that your risk goes down while value per share goes up. Your effective cash+stock compensation for year 2/3/4 goes way way up if you think in those terms. Then drops sharply at year 5!

I don't know, I suppose in a fair world you would be given more equity on yr1, less y2, etc. But that doesn't motivate people to stick around like the existing structure.

> Your effective cash+stock compensation for year 2/3/4 goes way way up

Not if the company flails or fails. If it does well, your increased comp makes up for the even more probable counterfactual, where your equity was worth bupkiss but you plugged away like a true belieber until the lights went out and the last pizza box was empty.

Value per share goes up, but presumably the employee had a significant role in making it go up, so that part seems fair. The 5th year discontinuity is an unresolved problem, though. It seems that, for the most part, people don't expect their employees to stick around that long. In the blog post, it mentions that some people are moving to 5 or 6 year vesting.

> The 5th year discontinuity is an unresolved problem, though.

By the end of year 3, you should be having "that talk" with whomever is running the show at that point. If you are a valued, productive member of the team, you'll negotiate another package that is at market. If not, it's probably time to move on to the next town 'cuz you're a rolling stone, always looking for the next adventure....

15 employees on a ~$2M seed round would be very aggressive. Realistically you'd only want to hire around 5, so your runway lasts at least 18 months.

Low-single-digit percent equity stakes vesting over 4 years for those employees is pretty in-line with what I've seen on https://angel.co/salaries.

It is not really aggressive if you are planning on growing your company. Typically, a high growth oriented venture funded startup is looking to get about 12-18 months of runway from their funding, hit some metrics and get funded for series A, repeat. 2M seed round at 5 employees means avg per employee spending of 260k / year. This is assuming you're not bringing any revenue in yourself.

By hiring 5 employees I meant a total headcount of 7 or 8 including founders, which will burn through nearly $2M in 18 months.

Fair enough.

I suppose it depends on whether you're running a startup with revenues or not. I am operating from the assumption that by series A you're about at the 1m arr revenue level and your revenue + funding are funneling your growth. YMMV with companies with low/no revenue.

The 100k number isn't engraved in stone, to stay the same for 10 years. If there is a talent shortage and big houses raise salaries to pull it in, VC will have to follow up.

I'm curious about this bit:

"It causes considerable problems for companies when employees sell their stock or options, or pledge them against a loan, or design any other transaction where they agree to potentially let someone else have their shares or proceeds from their shares in the future in exchange for money today."

What are the problems with these schemes? I'm presently employee #1 at a startup, and 99.9% of my present net worth is tied up in illiquid paper there—the rest is a 10 year old station wagon and some Ikea furniture.

I'd really like to be able to pledge my options for a loan to buy a house, so I'm curious to know the issues which may arise from such an arrangement.

Great post by Sam. For employees, I'd also refer to Alex MacCaw's An Engineer’s guide to Stock Options[1]. Alex used to work at Stripe, and at the end of his article he shares some intersting bits of stock tax alternative not covered by Sam:

If you can’t afford to exercise your right to buy your vested shares (or don’t want to take the risk) then there’s no need to despair – there are still alternatives. There are a few funds and a number of angel investors who will front you all the cash to purchase the shares and cover all of your tax liabilities

And he goes further:

If you’re interested in learning more about financing your stock options then send me an email[2] and I’ll make some introductions. I’ve set up an informal mailing list, and have a group of angel investors subscribed who do these kinds of deals all the time.

[1] http://blog.alexmaccaw.com/an-engineers-guide-to-stock-optio...

[2] the link is to alex at alexmaccaw.com

Very interesting. I like this train of thought. I have a lot of developer friends that would rather (and are) pursuing their own entrepreneurial ideas than join an existing company. While I wholeheartedly support that, the flip side is fewer startup-savvy developers available to join other startups.

There are a lot of reasons why they are pursuing their own ventures. A common one is: "It's not worth it to be an employee of a startup. You need to be a founder. (Or maybe employee #1-5.)" You may disagree with that belief, but it's certainly a belief many hold. Sam's suggestions may take this reason off the table.

> "It's not worth it to be an employee of a startup. You need to be a founder."

Yup. If you can get a job at a tech company that offers high compensation, you will likely make more there (and gain lots of great experience) than you will at a startup.

Look at the value over 4 years: - Startup salary (~$100k-ish) vs. Tech co (~$140k-ish+) - Startup equity could be worth $1,000,000 if you get 1% and the company sells for 100 million (obviously there can be other factors here, but lets just use that number) - Large co. Stock grant could be 150k-200k+(or more!) over 4 years, and you'll likely get refresher grants on top of that each year. And the stock price will likely go up over those 4 years. So after year 4 you are making quite a bit off of your vesting stocks.

There's also a pretty good chance the startup will fail, which would net you nothing but a sub-market salary for the last few years, so it will be harder for you to negotiate a higher salary at your next gig. Or if you are acqui-hired, you'll get some small hiring bonus and then have to wait 4 more years for your new stock to vest.

To me, the only time joining a startup and taking below-market compensation is if you are just starting out and want to gain some experience you might not get at a more established company, or perhaps your skills aren't up to par so you can't get past the interviews[1].

Or maybe you just like the "startup culture", and that's cool, but why not start your own thing instead?

[1] Note that if your startup gets acqui-hired, you'll probably have to interview anyway, which could result in not getting an offer!

You know, it's funny, I read things like this from time to time: "so if I have 0.5% of company and it gets acquired tomorrow for $100 million dollars, will I get $500,000?" and I remember that I am in this exact scenario, and have no idea what the answer is. I've been an employee at a startup for 2 years now. I joined when I was young, naive, and broke — I don't even remember if I read the paperwork before signing it.

Does anyone have any advice for how to go about learning more about employee options? I realize I sound dumb, but better late than never.

Some questions I've always had but have been too afraid to ask:

- How does one exercise their options?

- What taxes are there and when do you have to pay those?

- In the above scenario, what factors are involved in me actually getting that $500k?

- What questions aren't I thinking of because I don't know enough about any of this? For example, I've never asked about my options since signing the paperwork: was there something I would have had to do already that I haven't, and will likely screw me in the future?

P.S. Throwaway for anonymity (because I am embarrassed to have to ask!).

I've exercised before. Typically, you email hr and say, "I want to exercise"; they send you some paperwork which you fill out; you write the company a check. DO NOT DO THIS BEFORE UNDERSTANDING TAX CONSEQUENCES. You will typically pay tax on the spread between strike (your price per option) and the fair market value (fmv) which is set by the board and often updated quarterly. This can also be a backdoor way of a board tightening those golden handcuffs; if you where early enough the taxes may well exceed the strike price. You should also be able to get the fmv by asking. Keep in mind these shares you're buying may well be completely illiquid and the irs wants their taxes right now anyway.

A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).

A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.

A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.

Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.

And be sure the accountant knows what he's talking to. I did that and it was still fail, because they didn't understand ISO+AMT Tax Trap.

As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.

Going for long term capital gains will only destroy you if the stock falls, which can happen in any investment.

If there is enough confidence in the stock, a happy medium can be to sell enough ISO's at the time of exercise to cover the tax cost for that year. However, if the stocks you have are a massive % of your overall (potential) wealth, short term tax on a big # is still better than long term gains on a volatile #.

> Typically, you email hr and say, "I want to exercise";

What happens when they ignore all emails related to exercising? I had this problem and I even followed up by CCing the controller and CFO. It turns out they didn't want anything on "paper" so they just ignored me. My offer had the options in it, but they never gave me the option paperwork. I hear they finally granted the options a year ago to people still there. I think they were playing games trying to lower the FMV or something. I'm not sure it was all legit.

1) Go talk to HR for the documents relating to your specific situation. This is not something that will be threatening to HR.

2) Take the documents to an attorney for advice on how to proceed.

> I am embarrassed to have to ask

No reason to be embarrassed. You don't know something. There is always something you aren't going to know. Also, the smartest people are the ones that always ask questions. They are not satisfied accepting things, they seek to understand. And that means saying "I'm ignorant of this. Teach me."

Anyways, I'd ask whoever handles this for your company. Whether it's your founder, CEO, HR, or whatever department depending on the size. Someone is handling this for them, and I guarantee if you don't understand it, someone else doesn't either.

And, if the company hasn't made clear the value of what you have, then they aren't benefiting from it. After all, if you knew that if the company succeeded, you'd get $500k for it, you might want to work harder. What's the point of an incentive if it doesn't incentivize.

assume you'll end up with nothing, because you probably will. Or maybe you'll be able to eat a few nice dinners if you are lucky. If you are being paid under-market, leave ASAP

This is a great post, and I agree with almost everything Sam wrote. I think problems #1 and #4 are unfair (you might get less than you deserve, or less than you thought you were getting), but problems #2 and #3 are extremely unfair (you can't take what you've earned with you if you leave the company, or you have to pay taxes on something that has no liquid value and might not have any value in the long run).

I'd love to get Sam's (or anyone else's) thoughts on the 10%/20%/30%/40% 4-year vesting schedule that was mentioned. I don't like this schedule for two reasons:

1) It creates larger discrepancies in what employees earn over time relative to each other. If employee #1 joins today and gets a 2% grant, and employee #20 joins in 2 years and gets a 0.2% grant, then in year 3 of the company, employee #1 will vest 30x as much as employee #20, instead of 10x with the current 25%/25%/25%/25% scheme.

2) This scheme seems to replace and/or ruin refresher grants. Currently, if you do a good job, you get refresher grants every year or two. With the 10/20/30/40 system, you're already getting higher and higher compensation over time, regardless of performance, and the bump from refresher grants while you are vesting your original grant becomes minor. Furthermore, the drop from what you vest in year 4 to what you'd vest from just refresher grants in year 5 becomes much more dramatic and much more likely to push someone to look for other work.

What do others think?

The back-weighted scheme is also problematic because sets up a perverse incentive to consider letting people go at the end of their second year unless they are all-stars, since the company ends up keeping 70% of that equity and gets 2 years of hard work out of the person. With an even weighted scheme there is no time-dependent tradeoff like this to be made, the employee continually earns shares at a fixed rate and as long as they are contributing managers never have a hard "decision point" to make with regards to their shares.

The problem with back weighted grants (and amazon is famous for this) is that the companies that do it are the ones who ride developers raw and are doing it to attempt to stanch horrific employee turnover. Well, I guess I'm generalizing from the example of amazon, but really, is that the company you want to keep?

My take on it as a startup employee is (1) no, (2) hell no, and (3) your company sucks and you are doing this to attempt to lock me in. Also, hell no.

There's another option that people never seem to talk about. Treat people well, give them a good working environment, and give them a fair salary based on the fact that they don't have any equity.

Most engineers I know with stock options and a discounted salary would have been much better with a higher annual salary and no stock options at all.

This is attractive for someone out of college, but if you're trying to attract someone senior with a YouTube/Google/LinkedIn/Facebook/Twitter exit in their resume (and sometimes multiple of those, not that uncommon in the Valley), your fair salary is likely to be less than the total package they can get elsewhere.

In that case odds are the startup doesn't have sufficient funds to pay for the talent it (thinks it) needs. I'd argue that this means the startup is: a) mistaken about its needs; b) poorly run; or c) a bad idea (e.g. the price the target market is willing to pay is insufficient to support even the optimally efficient startup's costs to provide service).

This misses the point. Prostoalex's point is that a senior engineer can pull $300k+ at a place like Google/Facebook/etc., all while working less than 9 hours a day with lavish perks.

When a senior engineer goes off and tries to work at a startup, it is precisely because they want to try playing the lottery (with a very fat equity slice), not because they're going out to try and get a ultra-competitive cash salary.

Well, one way to attract quality people without sufficient funds is to be generous with equity. The more senior you get, the less sensitive potential early hires are to the salary levels - their investment income alone is likely to be multiples of whatever you plan to offer salary-wise. Getting them sold on owning a larger stake in an interesting company will probably get them excited.

Sometimes there is not money to do that.

If the idea can't get angel funding or a bank loan, then perhaps the idea isn't good enough to build.

Or the founder prefers to bootstrap it?

Regarding the question of knowing what percentage of total equity your stock grant represents, most companies that are not incredibly early stage will simply not tell you.

Pushing the subject further will make you look like you're nosing around where you shouldn't, often leading to the offer being dropped (this has happened to me).

Not to say it wasn't a not-so-great company to start with, but a dropped offer is a dropped offer.

That really makes no sense.

"Here are options to buy 10,000 shares"

"Umm. Thanks. Is that a lot ? Is it peanuts ?"

Without knowing the second number you might as well not be having that discussion.

Yeah, it's crazy. But it's super-common. I always ask how many shares are outstanding, and nobody ever has the information at hand. It's like they said, "We're going to give you 10,000 units of some currency. But we won't tell you whether it's a Zimbabwe dollar (current value: $0.002) or a Euro (current value: $1.38)."

A reputable employer will tell you what percent of the company the stock represents.

Simply knowing how many shares you were granted without knowing how many total were issued tells you nothing about what your shares are worth.

If a company wants to issue you shares as compensation but won't tell you how many total are outstanding, run.

I was lucky that my first job was upfront about what I was getting (%, # options, and outstanding shares). I like to think that I have enough confidence at this point that I would refuse a company that wouldn't tell me what me equity is worth.

I kept pushing, and wasn't told. I ended up leaving not long after. I should have left on the spot.

Tax laws make this more complex than it needs to be. It would be ideal to eliminate options altogether and compensate employees with stock.

Take the market value of a job minus the amount the employee is actually paid (the startup discount) and pay the discount in stock -- common shares (VC's will be in preferred). All employees should get 2% of salary as a starting point in shares. Allow employee's to buy additional shares by forgoing comp or simply investing. Peg share price and timing of share grants to Rounds or any investment (Notes).

Perhaps have repurchase rights only if terminated for cause. Doesn't matter if someone comes in for 8 months but adds value during that period, so vesting concept is eliminated.

Would need IRS to change grant from ordinary income to capital gain type of treatment where taxes are paid when some actual liquidity/transaction occurs.

Vesting options at a startup are really like second-order options. If they were granted to you immediately they would just be ordinary options: you have the option to buy the stock at the strike price. However, since they must vest over a period of time in which you are sacrificing a higher salary, you are also given the option of whether to continue vesting those options (by staying at the company) or not (leaving the company).

The second-order option is what makes them valuable. Most startups either grow aggressively during those 4 years or they die. If they fail early, you don't have to sacrifice much salary for the now worthless options. If they are doing well, the options are now worth much more yet you are still only sacrificing the same amount of salary for them.

The problem is that the value of this presents a direct conflict between the company and employee. When the value of the unvested options grow, the company can reduce the unvested amount (or fire them if they don't agree)[1] because it will be disproportionate to the value the employee is providing. Note that they don't actually have to go after the unvested shares to recapture this value. They can go after any other form of compensation they are providing since it will still be more than the employee can get elsewhere. Essentially, this means the employee's upside potential is severely limited. Since the value of a share in a startup is based almost entirely on a massively higher future value, this tremendously reduces the value of typical startup vesting options.

If I worked for a startup I'd want straight equity. Find the value of the common stock and pay 10-30% of my salary in common stock. The amount of shares will float as the value of the company does, but this is required in order to keep incentives aligned. I'll pay the tax out of my salary (at ordinary income rates). If the company succeeds, almost the entire value derived from the equity will still be taxed at capital gains rates.

[1] See Zynga, Skype, and probably many others we never hear about.

I'm going to be in a position soon to start hiring people and I've been thinking long and hard about this. I do think that engineers tend to get the short end of the stick when it comes to options, even when the nominal percentages sound good. I can think of friends who were early engineers at "successful" companies that took an awful long time to see any real money, let alone the vast majority who get nothing.

I'm seriously considering a profit sharing / options system where options are only vested in quarters that are unprofitable and profit sharing occurs otherwise. I know that this wouldn't be different at all for many start-ups that have little chance of profitability early on, but for those that do it could be a very interesting way to align interest and not screw the employees.

Has anyone had experience with "early exercise" of (non-ISO) options? As I understand it, this strategy lets you treat them for tax purposes as if you bought the underlying stock, meaning no tax liability at vesting or exercise, and capital gains are all you pay at final sale.

The downside is you have to pony up for the full strike price of all the shares at hiring. Works great if the company valuation is still nominal (ie before a 'valuation event' such as series A, though there may be cap note seed investment already)

One could imagine a company offering a hiring bonus that covers the cost of early exercise (padded for expected tax loss).

Maybe the real problem is this shit is complicated. Then again, we're programmers, right? Don't we do complicated by nature?

I have experience with early grant of non-ISO shares, which may be different from what you're asking about.

I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I have a significant # of shares and a significant % of equity in the company, the tax I paid was quite affordable. See 83(b) election.

If it pans out and I sell my equity, I will pay long-term capital gains on the difference between the valuation at the time of my 83(b) election and the sale price. If it doesn't pan out, I'm not exposed to AMT or other tax weirdnesses that other posters have noted. I found this mechanism useful.

You were granted shares, similar to founder's stock. I'm talking about options, which have a strike price. In my scenario, you in effect exercise (buy) the shares before they vest, which is on its face kind of impossible. One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave -- in effect, you buy the shares, simultaneously giving the company an option to purchase them back, and that option vests backwards over time -- the longer you stay, the less shares they can buy back. Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation. For the company, I assume it's like any investment round, they sold stock for working capital.

Damn complex but worth it to avoid IRS woes.

"One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave"

That is the only way I have heard of early exercise working.

"Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation."

To be clear, the way this works is that the time of exercise you have income (AMT only for ISOs, regular income for other options) equal to the difference between the fair market value and your exercise price. So you owe no taxes if your exercise price is the fair market value, which is usually the case if you exercise soon enough after the options were granted. It's not about which way cash is flowing, it's about whether what you get back in exchange for the cash is worth more than the cash you are paying.

"I assume it's like any investment round, they sold stock for working capital."

I'm more hazy on this, but I don't think it would normally be similar to an investment round, because in an investment round typically new shares are issued; in this case you are buying shares that were previously issued for the employee stock pool.

I don't think there's any real difference between issuing new shares and selling shares from a pool. Shares can be issued but if they're not actually sold to anyone, I believe they have no effect on the capital structure of the company. Perhaps the issued shares have some effect on valuation metrics, but that's subjective voodoo anyways...

You can early exercise non-ISO options if your stock agreement allows it (also ISO but it's a little more complicated). If you also file an 83(b) election then you are indeed treated for tax purposes as if all the shares vested immediately, so if you exercise before the value of the shares exceeds your strike price then you pay no taxes until you sell the shares (or there's an acquisition or something).


As you say, the big issue with this is paying the exercise price. There's not really any way around that. If you're going to pay your employees extra money to cover the exercise price then you might as well just give them shares instead of options. Another option is to loan the money to employees. I don't know how common that is with startups.

Adding to Sam's post I'd like to see employees made aware about tools like 83(b) elections to decrease their tax liability.

I actually had to explain 83(b) elections to HR at my current job. I don't think it's just employees that need to be made aware of them...

I have tried to figure this out: is there any point to doing forward exercise and 83(b) election with ISO options, which is what most employees get?

do you (or anyone else) know what happens if you do an 83b election then leave the company before 4 years?

Also, this doesn't really help post A, particularly if you're getting pretty senior and have a bunch of experience. At my last place, I would have had a $50k bill to do an 83b. I could write that check but goddamn is that a lot of cash to part with.

edit: thank you @rosser

Typically, the company will buy back unvested shares at the strike price if you've forward exercised them.

Ask to forward exercise when joining. From what I understand, there isn't a negative impact on the employer, you are just being granted RSU's that they have an option to buy back for $0 before your cliff, and then convert to ISO's at your cliff. You can file that 83b election immediately, which will substantially drop your tax burden.

Yep, we offered this to all of our employees at Hired after our seed round, but before our $15m Series-A. The majority took the early exercise option once they understood it.

It's a massive lift for our team (based on tax savings) when an eventual liquidity event occurs, with no downside for the company other than additional paperwork and some legal costs.

right right, but I have to (1) come up with $50k in cash (in my example), and (2) if the job isn't working out, I want the fraction of my initial payment back upon leaving and it isn't clear this happens...

Early exercise makes the most sense for seed stage companies where the exercise price is still low... at companies where you have to spend $50K or more to exercise, I've seen loans being handed out by the company to its executives to make it possible for them to take advantage of it.

Any insight into why a company wouldn't allow forward exercising? The legal/finance team at my company refused to do it, though I wasn't given an explanation why.

* It's extra hassle/paperwork.

* Employees have less incentive to stay because they won't run into the AMT "handcuff" situation (where if they leave they have to exercise their options or lose them, and they can't afford to pay the taxes to exercise the options).

* More employees will actually exercise their options before liquidity, which means more minority shareholders.

Mary Russell & Chris Zaharias are trying to do that here http://stockoptioncounsel.com/ with a bill of rights endorsement by educating folks on stock options and their rights. There are all sort of clauses and tax implications around given options that confuse people. Most end up believing the % they got will make them a millionaire.

This is a great opportunity for Freakonomics to dig into the state of stock options in startups.

When I was in my 20s I was more gullible by all the talk of stock options and becoming a millionaire from them. However I never stopped investing in property and after 10 years I am happy I continued investing into tangible assets that I was in control of. Stock options is a lottery at best. And as you get older, and learn the value of money and your time, you see the opportunity costs clearer.

As a side note, I've been through an IPO and fed all the brain wash leading up to it. Reality is always far from the dream. Many people don't like to talk about their failures only successes hence you hardly ever hear about this.

Now saying all that, there are the minority that strike it rich either by being an early employee of a startup that goes big (small % of something large) or are a founder of a successful startup when the stars align.

Employee compensation in startups will need to change as more folks start to realize the opportunity costs.

My word of advise, invest in yourself and stuff "you are in control of".

I am a fan of giving options every year with a performance multiplier. That way the high performers are rewarded with more options and your available options are more accurately divided amongst the employees who have made the most impact.

When you are not yet cash flow positive as a startup you can give 'bonuses' in options rather than in cash.

I don't know if we could figure out a portion that employees could contribute to additional investment rounds if they wanted to take some money off the table.

How do you define performance? It's a fantastically difficult thing to define. In my experience every attempt at this (at least for engineers) ends up in a situation where people are putting their effort into maximizing metrics as opposed to furthering business goals.

We completely decouple performance reviews from compensation. Full stop.

What? Why? Don't the overachievers then become bitter knowing that the guy next desk to them is making more by working less, just because he was better at negotiating at some point?

You'd think that, but in fact, it fosters such a collaborative and unselfish environment that people who might otherwise be "along for the ride" can't help but be caught up in the team.

Build a culture of productivity, not productive individuals.

We solve that through careful hiring, and not being afraid to part ways with folks who can't get the job done satisfactorily.

Interestingly we decouple the two precisely because of what you're describing. When you start singling out specific people, other folks who are also doing very good work pretty quickly become disinterested in their job. That's bad.

Even worse, measuring ACTUAL value to the company is really really difficult (I'd suggest that it is impossible). So now you are in real danger of driving your most valuable people, the ones your system failed to recognize, out the door. That's bad news.

Do you then have a flat compensation that's known to everybody in the company?

We do not currently, but we've considered it.

In a startup / smallish company it is pretty easy to evaluate relative impact for a given quarter. I would agree its really really hard to do that algorithmically.

There's another effect of the ten-year exercise window.

Remember how Facebook was "forced" to go public because so many people owned stock? (http://www.businessinsider.com/why-the-sec-will-force-facebo...). Well, if there's a ten-year exercise window, some of the people will hold their options and not exercise them. My -- albeit limited -- understanding of the situation is that those people are not counted as stockholders. They have options, not stock.

So the ten-year exercise window is also good for the startup, because it delays the time until the startup has to publicly disclose its financials.

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