I think what was missed was that a lot of people feel inequality is inherently bad, independent of the cause. I think both sides are mostly talking past each other on this one. It's possible for the fact that an entrepreneur getting rich by founding a startup to be a good thing because of the wealth they create while the fact that it increases inequality to be bad. I think most people agree that entrepreneurs getting rich is on the whole net good. That doesn't make inequality inherently good though.
Not sure that giving liquidation preferences to common stockholders would be fair- the idea with a 1x liquidation preference is that money into the company at least first goes to repaying the principal on the investment first before rewarding any upside.
Dilution is unpredictable and what's worse is you have the principal agent problem where employees who are affected don't have a seat at the negotiating table. You're definitely counting on upper management/the board not to do things like that. Not sure on the solution but agreed that it needs to be solved.
"Dead equity" is a tricky problem. On one hand, you've granted ownership and ownership is supposed to have significant upside for exactly the case where the company goes gangbusters like this. On the the other it still somehow feels unfair.
Equity has no intrinsic value and I'm glad you recognize you can't pay rent with it. Founders who try to claim otherwise are being deceptive and I wouldn't work for them either. Much worse if you get insulted and called an idiot for trying to negotiate.
However, equity is a significant form of compensation, not just at startups, but at large companies as well. You're missing out if you don't take some time to understand it in early stage startups.
I understand it. Obviously, I want more equity. But it doesn't act as a replacement for salary, like some people seem to think. It's a bonus, like free snacks and ping pong tables. It might pay out, but it probably won't, and you shouldn't base your life around it.
This seems a clearer statement of your position. Absolutely, don't base 100% of your life on a 5% shot at an exit. That is indeed a common failure mode. But your reaction to this observation seems too extreme. It is possible to work these things out probabilistically. Treat your career as a portfolio, spend 80% say of it in relatively safe places, spend the remaining 20% in multiple places, don't stay too long if you stop believing in a place. Do all that, and the 5% probabilities add up. 5% here, 5% there can add up to real money.
It seems sub-optimal to assume that probabilistic money isn't money, it'll close you off to lots of opportunities for wealth.
I'm not disagreeing, but you can't just look at the odds of a successful exit when it comes to figuring out the probability that your equity will someday become valuable. There are several other factors that can effectively leave common employees' equity worthless, some of which the article describes. Rarely do companies seem to be willing to provide the information needed to weigh the risks.
Yes, absolutely. My % examples were sort of assuming that preliminary analysis. You have to do it for yourself and be comfortable with the conclusion. And avoid like the plague companies that won't give you enough information. Usually if I have to ask more than once that starts to seem like a red flag. I might lose interest really quickly at that point.
In your experience, how often do startups try to play these sorts of equity games? My feeling is that it's overwhelmingly common, but this is based only on interview experiences with 2 startups and on previous HN discussions.
Yeah that's hard to say since nobody has a global view and new companies hang a shingle everyday. The best places tend to know what they're doing, so this makes a good signal for startup quality. Even if it causes you to miss out on a good company it's unlikely you would have had much upside with them anyway. Life's too short, lots of fish in the sea.
Much equity does have intrinsic value. I think the lifelong work of both Benjamin Graham and Warren Buffet have been focused on acquiring equity (and other assets) with intrinsic value.
A lot of equity, especially with startups, lacks intrinsic value or it's hard to do accurate fundamental analysis on the total intrinsic value. (Berkshire does not buy high tech for this reason.) Moreover the utility value of the equity to you or the limitations on your ability to sell or transfer may make any existent intrinsic value negligible to you as an employee.
The crazy thing to me is: 1) the fact that employees are granted options instead of shares is an artifact of tax law, and 2) the fact that there's a 90 day exercise window is also an artifact of tax law. Yet, companies constantly come up with post-hoc justifications of why only giving a 90 day window is fair. There is big resistance to change on this point. Even Ben Horowitz and Sam Altman don't think it's a clear decision! http://genius.com/B-horowitz-lecture-15-how-to-manage-annota...
If you were to derive how to think about employee ownership of a company as a form of compensation from first principles, you'd never come up with options and you'd never come up with a 90-day exercise window on top of that. Those are both artifacts from tax law yet it's become the standard form of compensation!
Do you how a company would you give employees shares directly without them being taxed on the grant?
One way I've seen this is with RSU double triggers: you are granted RSUs but you don't own them until the stock is actually liquid. However, at that time, you will have to pay taxes and you don't get long term capital gains.
Update: Just read your link, it's crazy how on this topic, Ben goes on a rant about random things, and whether it's fair to give 10y exercise period, because the person working there doesn't somehow get that benefit. Even if you have a money, employees are not investors, they can't just throw $10-100k on one startup, without knowing liquidation preferences or anything else, and which may or may not have some kind of liquidity in the next 10 years. It's useless to give equity if most people get screwed.
Agreed that it's mainly a function of employee number and secondarily a function of contribution. I'd much rather it be based on contribution. The trouble is that contribution is hard to tell up front but you have to be agreed on baseline compensation. Perhaps there's a way to fix that as well.
Also time is easy to quantify and measure. Contribution across departments though? What % of building a major feature of your product for a key customer goes to marketing/sales/design/engineering/etc.?
From the perspective of an employee, I completely agree this is the correct method of getting an idea of what equity is worth. I've had exactly 0 new hires ask me all those questions. Maybe 10% have asked me how many shares outstanding we have. The number of people with the experience to ask the right questions is really low, even for senior hires we've made with 10+ years of experience in startups. I think the onus is on startups to start proactively sharing this information with new hires- not just employees.
You make it sound so easy. Professionals at picking the right company (aka venture capitalists) get it wrong the vast majority of the time. Nobody has any guarantees about how things will end up.
You really think the 90 day exercise window is fair? It means an employee who just left a company has a huge burden with their vested options- either come up with a lot of cash and take a massive risk or have your equity compensation be worth nothing.
If you joined Uber a year ago, it was pretty obvious they were a rocket ship, and you'd easily be set up to make 200-300k a year with bonuses and equity. Hardly chump change, and definitely more than joining the latest YC winter __ "we're 2 stanford MBAs hiring our first engineer to change the way the world does analytics", here's $130k and .0something percent equity to come join us.