As our 30 person startup has grown, I made a conscious decision to stop pitching stock options as a primary component of compensation.
Which means the job offer still includes stock options, but during the job offer call we don’t talk up the future value of the stock options. We don’t create any expectation that the options will be worth anything.
Upside from a founder perspective is we end up giving away less equity than we otherwise might. Downside from a founder perspective is you need up increase cash compensation to close the gap in some cases, where you might otherwise talk up the value of options.
Main upside for the employee is they don’t need to worry too much about stock options intricacies because they don’t view them as a primary aspect of their compensation.
In my experience, almost everyone prefers cash over startup stock options. And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
Even if the company has a successful exit lots of times the founders have different stock class than employees which allows them to cook the books in creative ways where employee stocks are devalued without affecting founder stocks.
I personally went through a successful exit of a company where I was one of the early engineers and was privy to orchestrating the sale (working with potential buyers and consultants) and saw this happen.
I now am granted stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud.
Somewhere along the line "privately-owned company" morphed into "do what in any regulated industry would be considered fraud."
Multiple classes of stock for non-investors in a pre-IPO/private company should be illegal because there's no visibility or transparency. The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Maybe have an out if you have verified third-party audits and cooking the books like you mention (which happens all the time) carries the same fraud penalties as if you did it for a public company.
Not every company is a unicorn. For bootstrapped companies that might never sell, multiple classes of stock can be extremely useful for a variety of legitimate accounting and dividend purposes. One of the local law firm's company setup packages uses a de facto _six_ share classes.
I agree with your concerns re. transparency but I don't think eliminating share classes would fix that.
* Class A - voting shares, founders / controlling parties, etc. Typically small fixed share count (e.g. 100), not issued dividends directly but used to represent percent of controlling interest.
* Class B - non-voting shares, early stage employees, advisors, supporters, etc. Used to issue dividends.
* Class C - Same as class B but reserved for future issuance through more formal programs like ESOP when you're ready for that
Then you might have some preferred shares for investors, say class D and E for two investor groups and then a Class F for convertible debt (even bootstrapped companies can have owner / friends / family / seed / etc money, plus may want to not rule out raising at some point).
This is obviously a lot of classes, but by doing something like this you can separate control from economic upside, create different terms / stock agreements for different classes, keep room for future planning (things like ESOP), facilitate investor needs (they almost always want preferred shares), have more flexibility with fundraising or convertible debt, etc.
I'm not actually trying to argue that exactly six classes are necessary or optimal, but moreso that its common to want not just one single share class. Practically speaking I imagine that firm does six because they're trying to give a template that'll work for many of their companies and reduce the amount of per-customer customization. My company has less although more than one.
Ah, I'm thoroughly familiar with the idea of multiple share classes (although I must commend your excellent explanation and examples here) - I was actually particularly interested what their six choices were to cover the bases as a lowest common denominator etc. No worries at all if you can't say though, I get that.
This is highly country dependent, but in America for example, if this is not presented in your employment contract then it is not something your employer needs to do.
However, if your employer is a public organization then all of this information needs to be made available to shareholders. While you may not have access to this information, it is not secret and can be shared by any of the shareholders. Due to this, there is an implicit requirement to reduce risk and “cooking the books” while allowed is generally seen as risky since shareholders may run for the hills. In a smaller, privately run company there are no shareholders to run for the hills. Just a bunch of employees who hold paper IOUs. In order to get that audit protection, the employee would need to negotiate that into their employment agreement!
One other trick I learned about and should warn others about - getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team. I got such an offer, and not only was this information not given to me until I asked about any events aside from funding rounds that would be dilutive, but it was presented as standard operating procedure.
>getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team
How's this different than if an option pool exists? The more people have options, the further the pie will be split up. Having an option pool or not doesn't change this.
First, dilution should only be happening at funding events, not every time a new senior staff person is hired, and second the dilution should affect everyone equally— founders, execs, angels, VCs.
It's super unfair to give an employee "x shares" that turn out on exit to be shares of a fixed pie that is different from the one the investors have their shares in.
When the option pool is created that is the dilutive event, so new employees getting their grants doesn't result in current employees being diluted, because the entire pool was already taken into account.
But that’s not true. An options pool containing shares owned by the company is the same from a “how much of the company do I own” perspective as unissued or even uncontemplated shares.
The only real advantage to the options pool is ease of management of the shares. There’s a lot of paperwork around issuing new shares you don’t want to do it every time you hire a programmer. And I guess you could argue that telling people the pool exists lets them not be surprised by the future dilution when they’re issued. But the pool itself hasn’t diluted anyone.
Dilution is created by increasing the number of shares held by the company’s owners. Actions like issuing shares from a pool (or the inverse, buyback or cancellation of grants) affect every shareholders relative dilution.
there is a proxy to check this - investor quality.
Every high quality investor - including YC - forces an options pool. The post-money SAFE created by YC accounts for an options pool ("The Post-Money Valuation Cap is post the Options and option pool existing prior to the Equity
Financing").
high quality investors will in most cases, decline a fundraise if there is no options pool - since it signals that the founders are not serious about the most valuable asset of any startup.
I've found getting info around stock options at startups is often really hard. It's not very transparent. For example, the total diluted shares isn't shared or sometimes even the current valuation isn't shared. LoL good luck with ever seeing a cap table. Often times that makes it impossible to even determine their value.
There can be value here for sure, but everyone dreams big, never asks questions, and never tells. My other favorite in this industry is "stealth mode" lol.
"Cooking the books" could mean many things but most people would interpret this as fraud. There are many exit scenarios that aren't fraud but rather stacks of preferential stock that get paid before common, who usually get paid last.
That’s correct, I don’t believe anything illegal was done but certain things were done to dilute the employee share class which didn’t dilute founder shares. Just start reading about preferred stocks and you will realize they can basically be blank cheques to have any value and have voting rights to issue as much other common stock as they want.
Additionally there was some liberty on what “sale price” actually was in the contract. This may be common operation, but the sale price according to my contract was much lower than the amount of dollars which was exchanged for the company.
No. Fuck that shit. When the spirit of the law and the letter of the law conflict, I want us as humans to be able to step back and say that, hey, it doesn't make sense when you put it that way, and ignore the rules and do what's actually right.
As someone living in a country with common law and having taking business law 101 (so certainly NAL) this sometimes ends up being a bit of a guessing game as to how a judge will interpret jurisprudence.
There's a lot of room for improvement in legal systems and they move extremely slow due to the political nature of things.
wouldn't you rather the 50/50 chance for some _seemingly_ impartial person to intepret a deal, than have to pay a lawyer more than somethings worth to enforce some complex 500 page word salad to keep a business run by a person whose dones this hundreds of times before?
What does this phrase mean? There is no way that any sound contract law will grant any weight to the term "implied". Either it is written (and agreed) or not. So, I would say anything that is not explicit is meaningless in term of contract law. (Again: I am only talking about jurisdictions with serious, mature contract law, not some banana republic.)
Then it is a poorly written contract, and the party that agreed to it was tricked or poorly advised. Plain and simple. We see this often with "fast and loose" term sheets for some corporate and sovereign bonds on less reliable names. There is a whole podcast (I forget the name at this very moment) that does nothing but discuss dubious bond contracts. Frequently, the co-hosts will ask: "Who in their right mind would agree to such a contract? This clause is totally unenforceable / provides no protection against event X/Y/Z." And, yet, these contracts still exist in the wild.
Dumb question: Do you think the average dev in Silicon Valley pays a third-party employment contract lawyer to review the terms and conditions before agreeing? Sadly, I feel the answer is "no". Speaking personally, I would never agree to such complex employment compensation terms without third-party advice. Yes, I know it is not cheap (maybe 500 USD per hour), but the alternative looks much worse, and most people here facing these contracts can afford it.
> Then it is a poorly written contract, and the party that agreed to it was tricked or poorly advised.
Well, yes? I mean, we're talking about a situation where one of the parties involved in the contract isn't acting in good faith. And people frequently can't understand contracts. Is there anything surprising about the fact that someone was misled or "tricked" in such a situation?
If I say I'll give you 50% of the revenue we generate, and then the details of the contract allow me to bring on other people with the same deal of 50% of the revenue, and then you all share 50% it would likely feel unfair.
I'd say that phrase means 'consideration' in some cases, and in any case something like 'reasonable expectation', which would enter into the 'meeting of minds' prerequisite of contract law.
Banana republics like almost all countries with Civil Law rather than Common Law? And also, you know, some US states and the UCC?
The doctrine that anything not explicit is meaningless in contract law is also referred to as 'the four corners' referring to where you look to interpret the contract; this is considerably relaxed in many jurisdictions (and some situations in the US) where there is considerable information asymmetry and/or power imbalance between parties. With employment contracts in particular; to be a good coder for instance, why would you need to know how dilution of options works? Only to avoid being mislead by your prospective employer?
Conversely, in Civil Law jurisdictions, you see that corporations (rather than employees/consumers and sometimes small businesses) are mostly held to the four corners of the contract as they are professional parties that have legal departments and should be presumed to do their due diligence.
"Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most early stage startups is an intentional attempt to deceive employees. There's a lot of founders out there telling early engineers they're getting "0.5%" when they know full well that a $1B acquisition down the line is not going to put 5 million dollars in the engineer's pocket.
Can you explain? In most cases, preferences won’t come into play, assuming you raise at a standard 1x preference and sell for more than you have raised. In that case, owning 0.5% should roughly translate into $5M (modulo dilution).
There are plenty of valid scenarios where the company sells for a lot, but less than it raised. And 1x preferences are no longer standard post-ZIRP, afaik.
People are often not aware that the value of common is nonlinear, so the value of 0.5% in this case is zero. (For the ML fans out there, the common price per share has one or more ReLU activation layers. :) )
Even with 1x preferences, the company might have raised $2 billion but sells for $1 billion because the investors don't want to get any further losses.
The general rule of thumb is that acquisitions are bad for employees, and IPOs are good, especially if the share price is stable for 6 months.
Also for acquisitions, often you'll have to work at the acquiring company for some time to get money from your options. Or might get options in the acquiring company instead (which again are worth nothing until some future possible equity event which hopefully translates into cash).
That would be the naive mathematical interpretation and how the system would work if engineers designed it. Lawyers designed it, though, and they probably know some tricks to make that not happen.
Business people hired lawyers to design means and methods to commit _implicit_ fraud and deceptive practices to improve the value of their capital assets.
Those lawyers then go on to sell this product to others.
I'm sure there's some lawyers out there that are going out there shopping this stuff around, but it's Capitalism and Business thats the active agent, not Lawyers.
I don't intend to be on the founders' side at all, I'm just not quite sure I'd throw them in jail over it. I'd definitely call it "cooking the books" comfortably.
Intentional misrepresentation is fraud, but I understand pragmatically how the line could become blurred. What I object to is the idea that blurring that line is intentional, even if that is not acknowledged.
Founders will almost always have common stock too, so they're in the same boat - it's only investors who will have preferred stock. If you don't spend 10 minutes to understand liquidation preferences before accepting a startup offer, that's kind of your problem.
I’ve yet to work at a startup where liquidation preferences and investor participation is freely given or ever even mentioned. I only know about because I participated in TechStars. So, I guess we can blame employees for not hiring a lawyer to review their sign-on agreement (which, again, doesn’t have that info) or we can hold founders accountable for not sharing all relevant data needed to evaluate an offer. As a prospective candidate It’s one of those things you need to know about to even know to ask about.
I think founders are doing themselves a serious disservice. I loved working at startups but it’s just not worth it in most cases. The trade-off was always take lower salary for a chance at making big money and repeatedly investors and founders perform a rug pull.
Blaming employees for a change in the gentleman’s agreement is certainly one way to look at it. But, it sure feels exploitive, especially for younger folks that haven’t yet been burned by it. If founders keep doing it… well good luck finding anyone willing to work at their startup.
Seriously - the whole point of giving your early employees equity is so that you can attract talent without blowing your budget.
It seems like most founders love pretending that there are armies of top-tier engineers rushing to work at their startup in exchange for pay that's well below market and stock that still won't be worth very much even if the company has a wildly successful IPO.
I really wonder why this happens - is it just greed from the founders? The VCs? Do early employees value stock like shit regardless of how transparent the company is?
Yeah but I'm a programmer and don't innately understand that social power dynamics stuff. They're friendly and nice people and offer me drinks and snacks when I meet up with them. What do you mean they don't have my best interests at heart?
There's also just the case that a buyer is happy buying say 88% of the company and having 12% (usually non-voting) shares lie with employees/former employees. Stock options are only really, truly worth anything if they IPO.
True that stock _options_ are only worth something after an IPO, but vested and exercised stock options that get turned into equity is a different story.
Equity can be worth something via acquisition from private equity doing roll-ups, corporate buyers looking to fill strategic product niches, etc
Also, for the more heavily vc-funded late stage still pre-ipo plays, secondary market, which can be at a discount to the most recent vc round, or in some rare instances in a hot sector, premium.
One other thing - waiting for the IPO might be the worst thing to wait to do. The public markets are much more fickle than private markets. Once a company IPOs, there's usually a trading moratorium on insider shares, usually 180 days, so by then, the equity value may have completely imploded.
My point still stands even if it's equity. PE/corp buyers may not care about buying out the very small minority stock holders, that is the point I 'm making.
Lets say you've got
Founder A 25% - Voting,
Founder B 25% - Voting,
Investor A 10% - Voting,
Investor B 15% - Voting,
Investor C 8% - Voting.
Former Employee A 0.5% - Non Voting,
Former Employee B 0.4% - Non Voting,
Employee C+ 0.2-0.3% each all Non Voting.
If say Big Co want's to buy the company why do they care about buying out former Employee B? If they can pickup the two founders and the three investors, thats enough for complete practical control.
That hasn't been my experience. I've never had the experience of BigCo only acquiring just enough for 50.1% ownership. There's also clauses in the equity plans for participation on change of control (assuming that BigCo taking 50.1% constitutes change of control)
Not since... I'm not sure the regulatory change, but if employees are able to sell back to the company or to private investors, resulting in cold hard cash in employee bank accounts, without the company going public, I'd say they are worth something. We can argue about how, without an IPO, the price isn't fairly decided upon, but having cold hard cash in the bank is nonetheless real.
I've never heard of being able to sell back stock options. You don't own anything with an option. You just have the right to buy at a price in the future.
I didn't say stock options. There is a mechanism through which SpaceX employees have been able to cash out some sort of financial object that they received, despite the company not being public.
Right so for options, when the employee leaves the company, they can convert them to shares, and then there are ways for them to sell those shares somehow, and it results in cash money somewhere down the road that isn't just the salary.
I'm generally pretty against paternalism in markets, but when you get to the more "finance-y" stuff like this the opportunity for large scale fraud is just so prevalent and there are so many people just looking for their next mark.
If $10k or $25k is an amount of money you have to pause to think about at all you have zero business investing in early stage startups. Simply by the way the math works out you are better off buying lottery tickets because at least then you'll get to scratch something off before going bankrupt.
Sorry, but I DO have business investing in early stage startups. I called huggingface being this big back in 2019. And given your first sentence, I'm going to 100% call this out as projection on your part.
Folks who work in AI/ML know how to invest in the space! You're welcome to ignore the fact that Unsloth is objectively going to pop off (likely be acquired by huggingface) and anyone who invests in it will come out ahead.
The Venn diagram of people who are sophisticated enough to make these kinds of investments with better odds than gambling and people for whom $10k is hard to scrape together is indistinguishable from two circles. I'm sure there are some in the intersection but it's such a small piece of the pie we can effectively call it zero.
If you want to gamble that's your right I'm sure there is a roulette table somewhere near you. But the social harm caused by allowing dentists and grandmothers to invest in seed stage startups greatly outweighs any social good caused by letting that near-zero overlap get rich a little easier.
People here get u on their high horse about investment minimums and the like. Sure, they get real excited about some startup and they may turn out to even be right. I also know people who do angel and seed investing who are beating the bushes for capital or are just holding tight. Startup investing isn’t some magic money tree reserved for the well off. Heck, I’m pretty selective about even purchases of even individual public companies.
In 2019 they didn’t need your $10k of funding. If you contacted them within the 6 months they were starting they would have said yes. In 2019 it was more time consuming than it was worth. So they encourage you to go through a pool of investors which you are scoffing at.
In reality, my project needs funding now. If i bootstrap and get customers, I don’t need to worry about your lunch money. I need someone (or customers) who can fund that same amount for a year.
An outside individual purchasing shares is not the same as employees accessing liquidity.
As one example, SpaceX is privately held but routinely does funding rounds with large investors so employees can sell shares and access liquidity[1][2]. A $10,000 minimum purchase amount is trivial for those investors.
Across the universe of accredited investors, I don’t think that a $10K minimum is a significant barrier.
We can argue whether the accredited investor process is good or bad (I think it’s more good than bad), but I don’t blame companies for not wanting a bunch of $872 high roller outsiders on the cap table.
I don't usually see minimums below 25K, which is fine and sensible.
You really need some kind of a proxy to aggregate anything less than that in practice - thinks like crowdcube or similar. Can you imagine having to draw up paperwork just to transact $1200 or something? Doesn't make much sense.
It is fraud to take advantage of the fact that your employees don't realise their stocks are not the same kind of stock that the VC and the founders have.
When the founders still control the board, in practice the buying company understands that what makes the acquisition work is that said founders end up happy, and that the outcomes for your typical employee can be sacrificed to the edge of what the law allows.
Maybe there's management carve-outs. Maybe the total value of the acquisition is lower, but as part of the negotiation, there are great transaction bonuses, or retention bonuses. The investors with preferred shares still get their liquidation preferences, but the common stock is worth a pittance. Maybe instead of an acquisition, some of this is turned into an asset sale, or there's some considerations for founders that involve very friendly rollover equity. Maybe the founders add a new kind of stock, or create a new legal entity as part of the acquisition that does... "interesting" things. An inventive legal team cannot do miracles, can make sure that the employees feel robbed either way.
The acquirer, the founders and the VCs with the biggest share will get what they want, and come up with something neither will challenge. So it can be down to just the workers to pool together and decide to sue for violation of fiduciary duty, which might not be fast or easy to prove. You aren't in the room where it happens, but everyone else is.
Dilution is sort of a necessary evil that comes with raising new rounds of capital. I understand how >1x liquidation preference is legal, but it seems incredibly unethical, especially since it's never communicated to common stockholders.
IMO, if you feel the need to hide your cap table from your employees, it's probably unethical. Yes, indeed, most cap tables are unethical.
I got forced into working for some garbage startup at a job early in my career. The CEO was absolutely psychotic and never put much effort into hiding his motives.
The guy gave me a "Pre selection" letter (bokded at the top that it was "NOT A LEGAL DOCUMENT") that I was selected to receive 1,000,000 shares, vested at 250k a year (no one year cliff into monthly).
1,000,000 of how many? Didn't say. Percentage? Nope.
Was it 25% 3% .00003% Who knows!
I eventually was forced out after him verbally abusing me, making unsubstantiated accusations about how I spoke to other employees, and doing things like asking me to clock out and continue to talk about work.
I received two death threats after I quit. And, seven years later, I get a threatening letter falsely accusing me of defaming the company under random online accounts. After rejecting the allegations, I got a "settlement letter" that demands I forfeit all obligations, and can never talk about the employer again. It also explicitly stated I'd get $0 and that they "wouldn't appear at my place of residence" as my benefits.
Last I saw the SEC audited them and said they had no revenue and no products to commercialize.
They raised $6m on fundraising sites selling SAFEs, but had $800k in assets and $6m in debt. Oh, the most interesting part is the owner had the company paying his other computer repair business $5k a month for IT services.
It really reenforced for me how meaningless the whole process. Working for that company was a lifetime mistake.
Damn, that really sucks. It really is the luck of the draw. I started at a company that just paid me an hourly rate with no promises of stock options but I could just as easily have been dragged into some kind of mess like you experienced.
That's what I started as well with this employer. I never wanted to get involved with their other project but they forced me on it. I was trying to find another employer the entire time but it was just around the time Trump got elected the first time and nobody seemingly wanted to hire
Not a separate class of shares. Almost always, founder shares refer to the magnitude of the grant and the voting-rights agreement attached to it. ("Stock class" is a very specific term.)
This serves my point not yours, the process is often very misunderstood by those being promised the equity, and it's often "converted" in ways that dilutes or outright takes away most of the value by the time the employees ever see financial gains from the equity.
Ignorance is a big problem too. One time I had someone offended when I asked if their insurance plan qualified as a high deductible - they didn’t know it was a legal classification and thought I was accusing it of being expensive.
I’m not anti-startup but the VC backed startup culture of the last 10 years or so has been pretty souring.
> The vast majority of cases stock options end up worthless
My fav manager had a great way of phrasing this: "There are more ways for your options to be worthless than to make you rich"
But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.
Ultimately I think you should never take an uncomfortable pay-cut to join a company and you should maximize your stock compensation on top of that. Don't forget other types of equity – brand, exposure to good problems, network.
I think the main thing to remember is that you should assume they are worthless.
There's probably something like a 99% chance they are worthless, a 0.9% chance they are worth a decent holiday, a 0.09% chance it'll let you retire early, and a 0.01% it'll make you somewhat rich. Worst of all, unless you're the CxO you have very little control over the outcome.
Equity is a nice bonus, but you might just as well treat it like the company giving you a lottery ticket for Christmas. Nobody is going to take a significant pay cut or work 80 hours a week for a lottery ticket, so don't do it solely for the stock options either.
I’m 0 for 3 on startup equity being worth anything and have since left the industry.
One of the startups I did some time at was as close to a sure thing as one can hope for (unicorn valuation at one point) but it still went to zero in a very public flame out. It’s still impossible not to get imaginative about what could have been as I was a very early employee… such is life.
The most lucrative stretch of my career was working for a big company that paid good base salaries.
Same. 1 startup is dead-dead. 1 startup is now a husk of itself used by the CEO for fractional CxO consulting, and 1 is down from unicorn status to limping along with 1/5th the staff.
The primary benefit of startups is getting to do more work to learn more faster and not deal with Process.
I've worked at 8 companies, 3 have resulted in value from equity (all granted pre-IPO), all of them in certainly much larger than "a decent holiday" level.
I think people have updated to be much too negative on the prospect of equity paying out. It's obviously much better than 1%, at least if you work at anything other than extremely early-stage companies.
I've worked at 10 startups since 2006, with equity or options each time. Only one time did it turn out to be worth anything at all (~6 months salary), and that one time wasn't even a successful "exit". It was more of an aquihire, and they paid out the options for everyone they didn't want, ie everyone not living in the Bay. The other nine times my options have been worth precisely zero, either I get let go or quit because the company is circling the drain, or fizzles out, or gets rid of a bunch of people to goose the numbers before a fire sale.
Stock options are a lottery ticket, and I value them roughly the same.
Well statistics shows that it is best to value equity at 0. I will take equity in a non public company. But not in exchange for cash compensation at my market rate.
I'm honestly stunned that people here are performatively math-illiterate.
Some companies experience liquidity events. Therefor the value of equity in those companies is positive. Some companies go out of business. Therefor the value of equity in those companies is zero.
If N is the ante hoc chance that a company will experience a liquidity event, then:
People aren’t saying the chance is literally zero. They are saying it is low enough that they can’t consider it reliable comp for income purposes in their own personal situations. I can’t say my experience has been any different so I don’t blame them. People commenting aren’t math illiterate. I’m kinda amazed you are taking things so literally when it’s so obvious to anybody reading how to interpret the discussion.
"Statistics" on its own doesn't tell you anything; you have to consider your own risk aversion. Only VCs can afford to be risk-neutral and only consider expected value.
ok, so you're a mini elon musk pet that has good name recognition. The probability that anyone can replicate this ins the million+ employee mark is worthless, also.
The rate of having a liquidity event for startups, particularly startups past the A stage, is just obviously not ultra low. Like, is it better than 50%? Reader, it is not! But it's not sub 10%, either.
People can make intelligent decisions about equity without hyperbolically insisting that the chance that that equity will be worth money is one in a million.
It's not really possible to have nice uncontested stats about this because the definitions of the rounds aren't fully neat, there are potentially generational effects, and how you divide up industries isn't fully neat either.
Let's be really clear, though: there's "getting good value for options" and then there's "getting some value for options." It is straightforwardly true that in general big public companies have better comp than pre-IPO companies: the guaranteed value of equity in your Metas or Googles or even lower-tier public companies is generally higher than the expected value of pre-IPO equity, even if you are relatively risk-insensitive.
That is importantly different from "the value of pre-IPO equity is zero," or "it is a one-in-a-million event to get value from pre-IPO equity."
It’s not importantly different if the value you get from pre-IPO equity is less that the haircut you took to work at the startup, which is overwhelmingly the case.
You want to tell me you’d be feeling like your equity was worth something in colloquial terms if you got what amounted to a mediocre bonus one year through your liquidity event?
Yes. Something is more than nothing. This is not rocket science.
I really want to insist on the principle that we are nuanced enough people to say, "startup equity is worth less, in expected value, than public company equity, but 'less than public company equity' is still more than zero."
I truly empathize with your desire. But I can’t agree.
To get to the point of the community feeling like startup equity is worth something on average, I think we need to figure out how to generate more favorable outcomes for startup employees.
If startup equity is worth something 20% of the time, the average person would need to work at 4 startups before seeing value. And the statement that it has non-zero, but low, expected value, just isnt true. On average it wasn’t.
If we could make startup equity worth something-minus-x 100% of the time (instead of just something 20% of the time), I’d be more amenable to agreeing with you that you can place a reliable non-zero value on startup equity.
That means things like removing liquidation preferences. Unfucking the tax situation around options or making it standard politcy that the company buys your options for you. Universally allow secondary markets. Build in participation structures for existing employees through funding rounds.
Would you say the expected value of a lottery ticket is > 0? Because startup equity is just too unreliable for an average person to not treat it like a lottery ticket.
I will concede that if you are very very discerning in which startups you work for and a good negotiator and have access to questionably legal secondary markets, you may be able to beat the curve. But that’s certainly not the average case.
It really depends of the stage of the startup. I recall reading someone doing analysis on this (unfortunately I don't have a link) showing that joining a company that isnt public yet, but is already large-ish and showing some real product-market fit gets people better payouts. Yes, employees 1-40 of a future unicorn will to great (if they could afford to buy the shares, and AMT doesn't kill them which is another story), but it's relatively safe to get into a company that hasn't IPO'd yet.
Imagine say, that you joined Stripe in 2014. By then, probably 500-1000 employees and a a real name on the industry, yet private. It's perfectly reasonable to not consider the stock they might have offered at that time as straight out money, like you'd have treated Google RSUs. But discounting the shares to zero, or just "a nice bonus" is also silly. I bet anyone that got a year or two of stock in that era is well into the retire-early/somewhat rich cadre, and that wasn't all much of a risk.
> By then, probably 500-1000 employees and a a real name on the industry,
You're wildly exaggerating here (but unsurprisingly). I know someone who joined Stripe in 2015, and he said there were about 300 employees globally at the time.
But I do generally agree with the rest of your point, I'm just contextualising the information.
I had this mindset at a startup and decided not to risk any of my money exercising my stock options. They eventually expired. Years later the company IPO'd and I would have made a lot of money had I exercised.
Waiting for more certainty before exercising means the fair market value will likely be higher then and you'll have to pay AMT.
I now approach a job with the mindset that stock options are probably worthless, but I'll risk what I can afford to by exercising as soon as I can.
> But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.
I personally view Stock Options in the same way as lottery tickets - sure they might pay out big sometimes, and people do win lotteries, but, for the most part, they're going to be losers.
There might be argument about the difference in how often stock options lose compared to lottery tickets, but that's missing the point.
The main difference is that people often think they share a fate as a startup. They all have the same lottery tickets (in varying amounts) that pay out under the same conditions. After all, that's how managers often motivate the early employees.
But since there are different classes of lottery tickets, the payouts can change arbitrarily at the last minute depending on the specifics of the deals.
So even after accounting for the fact that most lottery tickets don't pay out, you need to account for the fact that some within the same startup might pay out while yours don't. And there's no perfect way of knowing ahead of time.
Sorta. You could definitely go in on something worthless that never gets any traction and end up with less than zero, as in, you owe money after the experience. But for every Stripe or Airbnb there's 100 more lesser known names that still pay out, not in the millions, but a couple hundred thousand dollars range, which is still enough to change most people's situation.
Definitely look at them as worthless untill they're worth something, but the untold secret is the secondary and private market. SpaceX employees have gone that route and some are quite rich despite there not being an IPO. Again, the failure mode to be aware of is you could end up in debt and owe money which is worse than if you'd never played.
> Definitely look at them as worthless untill they're worth something
One (of numerous) problems with stock options is almost all stock option contracts require you to exercise within 90 days of leaving the company.
Often times employees leave a company, and then need to decide within 90 days whether they will spend anywhere from $5-50k+ to exercise the options to keep the stock, otherwise you forfeit the options after 90 days.
The stars really have to align for you to make money with options without risking/gambling your own capital by exercising them.
Unfortunately secondary markets only exist for very large companies like Stripe. I’m not aware of secondary markets for small < 100 person companies, which is where you see the most blatant hyping up of stock option value.
> without risking/gambling your own capital by exercising them.
Many companies offer early exercise, so you can reduce the amount you gamble by a lot.
Also, you already "pay" in terms of opportunity costs by being at that startup vs something more established where you get RSUs of a public company. So using some of the money from the startup in order to exercise the shares is really useful. If the startup's cash compensation is just enough to pay your bills, then of course it's different.
There are companies that will finance your options exercise in exchange for a cut of the earnings in the event of an exit. I haven't personally used one, but they do exist.
> You could definitely go in on something worthless that never gets any traction and end up with less than zero
Absolutely agree
> Lesser known names that still pay out, not in the millions, but a couple hundred thousand dollars range
FTR This is the same for lottery tickets, they don't all win the top prize (or a share of it), most will win a few dollars, some tens of thousands, and so on.
So would you trade your founder equity for a fixed salary? My guess is probably not.
Equity is an extremely important factor for many candidates, especially more senior ones and executives.
I would not pitch it as future value, and instead pitch as % of company. If it's a minuscule amount that doesn't move the needle in offer conversations, than perhaps you are not offering enough, or you're identifying candidates who value more predictable income than investment in the company.
Exactly. If I'm joining a 30 person startup it's not because of the size of the paycheck. Any larger company will obvioulsy be able to easily beat the offer. I want a significant amount of equity. I want to see the cap table. I want to see details about funding rounds, finances, available runway. I want to see MRR/ARR, recently closed deals. If founders dance around these questions and say "equity is not imporant, see how much we are paying you" then I'm walking out the door.
Reading through the thread, the point is the startups arn't providing transparent accounts of what the equity is and how it can be diluted and reduced over the life time and sale of the company. That's all the debate.
Many people have seen those options become worthless because of legalistic maneuvers and violate what's said in the initial options.
So this tangent isn't really clarifying anything. Some people would simply want larger salaries and options be valued as 0$ for evaluating compensation because how easy Capitalists have made it to screw over classes of options/share holders.
Nothing wrong with wanting a guaranteed salary and job stability, but people in this situation should simply not be working at a VC funded tech startup. “Boring” software companies exist. Banks, government, aerospace, manufacturing, consulting Countless mid-large software companies of all conceivable types. Practically all of them will be able to beat a tiny startup on salary. Go work at them instead.
The question is more so to startups looking for proper staff. I'm not really certain you're getting the best quality staff if your best offer is to pimp up options. Seems like only morons would take that, and well, isn't that a problem itself?
If you think about it the vast majority of startup options are worth $0 so you have to treat them as worthless or you’re not being rational.
The idea that they’re a lottery ticket is the only way they keep hiring and I’ve heard plenty of engineers refer to actual lottery tickets as idiot tax
the founder has so much more control over the direction of the company and what an exit looks like that it makes sense for them to want equity.
As an IC, there’s little I can do to affect the company valuation because I’m just executing the CEOs vision. And there’s nothing I can do to affect their decisions about potential exits.
> In my experience, almost everyone prefers cash over startup stock options.
My experience has been a little different. We had a lot of people demanding both very high cash comp and then demanding very high equity packages on top.
Giving people a sliding scale option did put some of the control back in their hands, but it also produced an analysis paralysis for some where they couldn’t decide what to pick.
> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
Much of this is due to startups failing. Every random “startup” trying to pay people with options because the founders have no hope of success inflates this statistic.
However another driver of this statistic is the extremely short exercise window upon quitting. People may work somewhere for 1-3 years but the company could be 5-10 years away from acquisition. Employees have to give the company money at time of quitting to get any equity, which few want to do.
I know the common wisdom, but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.
> but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.
isn’t this illegal? private stock ownership needs approval from company/BoD to change hands, no?
While board approval can be a condition of transfer (consult the options agreement), forward contacts can be used (with counterparty, liquidity, and price risk) when transfer conditions cannot be met to effectuate a de jure transfer.
This is why I will never work somewhere with a short post termination exercise period (PTEP). If it’s not at least 5 years, ideally 10, they don’t seriously consider equity something that employees are owed.
I would have ignored anything you said about the value of stock options anyway, having many years ago learned that they are practically always worthless, so making me a straightforward, honest, non-speculative offer would make me more interested in working for your company, not less. Kudos. Keep it up!
A candidate wants a _competitive_ offer. While stock is almost impossible to compare across offers, candidates can at least stack-rank the company’s funding and check to see how the proffered percentage compares to the mean for the funding round. So if a company has high-percentile funding, and gives a high-percentile equity fraction, it’s a good sign to the candidate. But of course, the company could be WeWork, or even OpenAI could get risky if the tender offers stop (which will happen when/if the market crashes).
At the end of the day, it means a lot to the candidate if the company _wants to compete_ for a hire, especially in the current economy (layoff-friendly and SWE saturated, especially versus 10 years ago). A story like “your options could be worth $XXX in 4 years” I hope is not seen as competitive today.
Startups have this weird psychological purity testing I have never seen outside of religious groups.
Effective organizations understand you actually don’t need to look inside the box. If someone is continuing to do good work for you it’s working. You don’t need to second guess their reasons why, or give them a reason to question their commitment.
It’s a basic lack of empathy. Many founders do have the privilege of choosing opportunities and seemingly cant or are unwilling to relate to people just working with integrity and sometimes being fulfilled by their choice of trade, without needing to be married to someone else’s idea and cause.
Also most founders ideas aren't unique and there is often a tone deafness there. Employees with experience have already seen their idea even if it was in a prior cycle.
"Believing in the mission" requires a suspension of disbelief that can reduce the impact of various factors that would otherwise decrease morale (e.g. lower cash compensation, fewer benefits, unfair working conditions, longer hours, etc).
There's a reason many startups are built on hordes of college kids and it's not that they "have more energy" or "are more willing to think outside the box". They're less experienced and thus easier to manipulate. They're also less likely to have dependents they need to take into consideration, don't understand their limits or trade-offs between short-term performance and long-term endurance (e.g. burnout), and are more likely to be naive about their place in the company and the effect/function of the company. Plus, of course, they're "less risk-averse" which is another way of saying bad at judging the odds of certain outcomes.
I was a hired early to a startup (my hiring manager was the CEO) that's now public and worth $10B+ that you've heard of. It took them over 10 years to go public, and I would have done just as well putting my money in FAANG, but with lower risk and more liquidity.
I'm not saying this is right or wrong. But, if you're ventured backed, then this strategy is usually at odds with your investors. The reason stock options were used in the past was because you were signaling to everyone (you, your family, your grandma, your early employees, your current investors, your advisors, your future investors, etc.) that you were strapping on to a rocket ship. By paying them more and giving less stock, this means your capital raises don't stretch as far (from a perspective of time). This in turn will be a signal to your investors that you may take the $1M and not the $3B deal (see Google/Yahoo), which they may not like.
Isn't that the point of equity compensation? I don't care about owning a percentage of the company - that just sounds complicated. I care about converting it into cash later. To compensate for the small chance that will be able to happen, you better make it seem like a lot more cash than the alternative cash compensation you're offering. The upside to you is that you don't have to pay that bundle of cash for a while, and you only have to pay it if you have it. And not you personally, but all investors indirectly.
> The vast majority of cases stock options end up worthless
Also, even if the company ends up worth a lot of money, there's no guarantee that a way to liquidate, such as an IPO, exit or secondary market, will become available in any reasonable time frame. And as a regular employee you have exceedingly little to say in bringing about such events. There's not much fun in having a winning lottery ticket that can't be cashed in, in fact it's highly stressful.
This is the way. Options aren't really worth much for the rank and file startup employees after about 7-10 hires. That fraction of a percent is just not going to be life changing unless it's the next OpenAI or something. For very early employees it's different, but even for them some founders will assign far too little equity to really make a difference.
As your 30 person startup has grown, the (future) value of the stock has gone from $0.00 to not $0.
When the value was zero, of course you had to talk up future value - you were selling something worth $0 for $1,000's. Now that it is worth something, it represents actual value for the employees to swap for salary, which is why you no longer offer as much!
That’s not really how it works, though. The price of your options is set based on when you join the company. If the company is already valuable by the time you join, you’re essentially buying in at the current valuation with the hope that the valuation will continue to increase.
You make money on the amount the company value increases starting the day the options were granted.
(This comment isn’t 100% technically accurate, but gets the point across in fewer words)
Almost always stock options at a startup are the equivalent of an unsecured iou. Even if there is a conversion at some point due to a buyout, common employee stock rarely ever sees any of that money. If anything they’re often negative value because you pay taxes on their claimed value at assignment.
People offering stock comp in an unlisted private are the moral equivalent of Jeff foxworthy’s “oh you’ll take a cheque? Hell I’ll pay the whole damn thing off then. I didn’t know you’d take a check I thought you wanted real money.”
I find it refreshing that you prioritize cash compensation over stock options. Many employees may feel more secure with a higher salary rather than relying on uncertain equity.
The hiring managers / founders equating the stock options to real money is actually a red flag to me.
It’s super unlikely that a cash-out event ever happens for a startup, so until then, it’s just fake money to me.
And I say this having owned and exited my own 8-employee startup and continued to work for startups for the last 15 years. I work for cash, not imaginary future profits.
> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
This isn't actually true from a historical perspective. The primary reason why the gap between the wealthy and and everyone is increasing is that employees started preferring cash compensation over equity. Joseph Blasi documented this in his book The Citizen's Share, and that book is why Elizabeth Warren recently passed legislation making it easier for employers to give equity to their employees.
> The primary reason why the gap between the wealthy and and everyone is increasing is that employees started preferring cash compensation over equity.
You're making it sound like equity turns companies into co-ops when in reality most equity remains unexercised (because that literally involves paying your then likely former employer money) or ends up being worthless for all the reasons others have explained.
The gap between the wealthy and everyone else has been sharply increasing ever since Reagan[0].
CEO pay alone has massively skyrocketed, detached from all other economic growth factors (most of the growth occurred in the 1990s)[1]:
> From 1978 to 2020, CEO pay based on realized compensation grew by 1,322%, far outstripping S&P stock market growth (817%) and top 0.1% earnings growth (which was 341% between 1978 and 2019, the latest data available). In contrast, compensation of the typical worker grew by just 18.0% from 1978 to 2020.
The reason workers prefer cash compensation is that you can't use equity to pay your bills. Cost of living has increased since the 1970s[2], housing costs and college tuition have become a lot more expensive[3]. While electronics may have gotten cheaper, the day to day expenses have gone up and those in lower income brackets will necessarily spend more of their income on things like groceries and rent. Standards of living increasing with income may increase those expenses but there's a cut-off point where those increases no longer track linearly even if you throw in money sinks like private yachts. If you want to reduce cash preference, you'd need to first address the underlying socioeconomic insecurities that drive the real need for cash that this preference comes downstream from.
You can't have multi-billionaires (or even near-trillionaires) and a steady socio-economic progression to them from sub-minimum wage. Multi-billionaires can only exist in a system that allows for disproportionate amounts of wealth to be drained out of the system into a minute fraction of the top percentile. The gap is a necessary conclusion of a system that allows multi-billionaires to exist.
Thinking this can be fixed by "making it easier" for corporations to give workers equity not only ignores why workers prefer cash (and why they're more likely to do so now than decades ago) but also why corporations want to use equity for compensation (i.e. because it usually reduces cash compensation while coming with very low (and in any case: delayed) risk due to workers not exercising options or shares becoming worthless or near-worthless due to the way preferential shares are usually structured). If we were talking about actual worker ownership (or at least revenue sharing) things would look very different, but that's not something most corporations want and definitely something most investors/VCs would reject outright.
[0]: Reagan cut the top marginal income tax rate by 20% to a mere 50%, after it had already previously been cut sharply by Johnson from 91% to 70%[a]. He also slashed capital gains tax on dividends by 20%[b]. The 1980s also saw the rise of Financialization[c], i.e. the rise of the finance economy (rapidly eclipsing the real economy), and a sharp decline in the already scarce labor union participation[d]. It's also worth pointing out that the response to Republican neoconservatism from the Democratic Party was (like in much of the West - possibly due to the Cold War hard line against socialism) not a stronger leftist opposition but instead a shift towards Third Way[e] politics and neoliberalism, i.e. while Reagan may have been the starting point, the widening of the wealth gap was a bipartisan effort.
That mindset can definitely simplify negotiations, but I’ve noticed that removing equity from the perceived value stack can change how people show up. Some folks who might've gone the extra mile with even a slim shot at ownership now treat the role more like a job than a mission. I’m curious—have you seen any shifts in long-term engagement or retention since downplaying equity?
It is a job, no matter how you pitch it. Equity is not real ownership and doesn't come with any real decision making power. It is a slim chance at a big bonus. I've had equity in most of my jobs and the job sucks then I'll leave before my stock vests which I've done twice.
> I've had equity in most of my jobs and the job sucks then I'll leave before my stock vests which I've done twice.
Sometimes you can't tell how it will be from the outside. You only know whether you'll like the job, or whether it has prospects, after trying it.
Bouncing isn't a bad move. In fact it's smart from a diversification perspective. Once you realize a company has no future, just get out and try again. As an employee, choosing whom to work for is one of the few ways you can diversify against risk.
The Netflix approach to this [1], where Netflix allows employees to choose how much of their compensation is cash vs options seems like the best approach - you can tune based on your risk tolerance.
> Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside (down) you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.
However investors that put money in get preferred shares (not common stock) right?
The tradeoff is not equal: taking less salary and receiving stock of less value seems risky to me. I can't imagine the employees discount is very good (those preferred shareholders don't want to be diluted).
when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).
An understated benefit is that, if you have 4 year vesting, you can choose after year 1 or year 2 whether you want to stay.
Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.
So, considering this, the expected value of $100 in stock options is actually more than $100.
> Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.
If you get 25k shares worth <$1.00 and, you won't double your salary even if the share price doubles. Not to mention that only 1/4 would be able to be exercised, and you have no liquidity to realize the gain.
The assumption in my comment is that your entire salary is in stock — otherwise, obviously you need to adjust accordingly. But only 1/4th of the stock being exercisable makes sense if you think of vesting like a monthly salary — each month, another 1/48th becomes exercisable. Even if you technically own the rest as well, it's more appropriate to think that you don't.
If you think NFLX is going to increase x%, then your total comp goes up accordingly. If you took straight cash, you'd only recognize those same gains if you had purchased NFLX with it.
It's actually more than that, because the option costs less than the price of a full share. i.e. if your comp is $400k and you choose 100% stock options as your comp, that value allocation will almost certainly control more shares than if you took 400k in cash and used that to buy all NFLX shares.
If that wasn't the case then yes, there would be no reason to take options as comp because obviously (as you say) you can just buy NFLX on the stock market directly with some or all of your cash.
I realize this is still confusing, so here is a concrete example with made-up numbers.
---
Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.
Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.
If you'd taken the cash you'd have $300,000.
If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.
> If you'd taken the cash and immediately invested all of it in NFLX, you'd have $400,000.
But you can take the cash and immediately invest it all in NFLX options. That should be the baseline for comparison, when answering "why would one pick options vs cash"?
I'd imagine you _must_ have some benefits to pick options. Perhaps tax treatment is better; perhaps you pay less fees than buying them yourself. But still, there must be some incentive to pick NFLX options from the company, instead of picking whatever options you want from your broker.
(also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
You're going to get a better strike price from the company than from the market.
> (also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
Yes indeed, that is why options are a risky investment and no company pays people entirely in options.
At least when I was there the options cost 40% of the strike price (whatever the current market price was at time of issue). The other difference is that you shift the income tax to time of exercise.
Yeah my numbers were made up, 40% of strike price does sound more reasonable (and obviously provides less leverage, but still some). It being pre-tax also helps with leverage vs taking cash.
Another benefit of the company's options is that they have a 10 year term, vs most market options which expire in < 1 year. You can get LEAPS but those are still max 2-3 years.
this is a bad comment for this subject. NFLX options are on a publicly traded stock. the terms are also different than a startup stock option. you've really just introduced confusion into this subject, judging from all the child comments.
in my experience, most startups do offer you a sliding scale of cash vs equity, just not 90% as NFLX does. they may not advertise it or be upfront about it, but i've never personally experienced a startup that wouldn't trade one for the other.
I've posted this before but it's a great read. Even if you have millions of shares, the dilution and later investors could still leave you with nothing.
I worked for 2 startups, both failed, but I never got to see the cap table.
I worked at a startup where I joined as the second employee before they raised any money and I basically got 0.5% of the company. They went on to raise over $100 million in VC.
I got $0 for my equity. Start ups have SO many ways to screw employees out of their equity.
The most basic is that you have options that you are not allowed to sell during equity rounds. If you accept them then you need to pay the strike price and they count as taxable income even though you got shares instead of money so you just lose a lot of money.
Say what you will about Elon, but at Space X employees are allowed to sell their shares for actual money at regular intervals. Very few start ups that succeed allow their employees to do that.
90% of startups that succeed just want to grind down their employees rather than pay them the equity they earned.
At both startups we bought our shares early using Section 83(b) of the IRS tax code. That first year when we bought the shares I had to file extra paperwork but it shifts the tax rate to long term capital gains.
So I ended up writing checks of $60 and $100 to buy thousands of shares at $0.0001 a share. I left both startups before they went under but everyone lost that small amount. When people ask me how much money I made at the startup I joke that I lose $60.
This is excellent and illustrates that unless you have access to the cap table, you have no idea what your options are worth. Sometimes you can at least get a founder to tell you what the preference stack looks like, and what multiples were given to investors, and that might be enough to kind of sort of work out what an exit looks like.
I'm not a lawyer so I don't know if an LLC would have to comply in the same way.
I do know that there was an operating agreement and we had a very strange meeting at one point where the CEO and the financial guy told us that we had the right to see the operating agreement. Someone who left shortly after must have hired a lawyer and demanded that.
I did see it the operating agreement but not the cap table. When I left the company I did not even know what a cap table was so didn't even know that it was a thing that existed. I only found that reddit post a year later. I'm post that link so that people don't make the same mistakes I did. There were a lot of other questions I should have asked before joining both startups.
On this April 13 in these United States, I can't help but think of the incredible inconvenience of how RSUs and shares sold seem to be calculated for the sake of income taxes. Please just add it up and send me the bill. I don't want to pay more than what's due. And I don't want to cheat. For whatever reason, the typical tax interview software guesses wrong or has insufficient inputs when I feed it info from employer + brokerage. So what remains feels like guesswork with liability on both ends.
RSUs aren't really that bad, unless your employer does sell to cover in annoying ways. Net share withholding works out super simple, the shares that weren't withheld are at the brokerage with the correct basis, and the income and withholding are reported accurately on your w-2.
Options do get pretty nasty if you exercise and hold, when the fair market value is higher than the fair market value; because then you have to have an AMT return and a regular return and reconcile them.
ESPP with a discount was pretty bad the last time I had it; the brokerage said they were specifically required by IRS rules to report the wrong cost basis, and you had to adjust it when you sold, or you'd have the discount reported on your w-2 and again as a capital gain. Maybe that changed, capital gains reporting has changed over time.
I wonder if you worked for a certain california-named company based in another california city... Your experience sounds a lot like mine.
They sell-to-cover when my stocks vest quarterly, which pisses me off because the stock constantly goes up and I wish I could keep them until the time my tax bill is due.
And, I have to manually report to the taxman all the money paid via those sell-to-covers, because even though eTrade sends me the transaction details each year, and they clearly tell the IRS how many stocks I got, they don't tell the IRS how much tax I already paid on it.
When I worked for the company named after a rain forest, we had the choice of sell to cover, sell all or pay taxes without selling shares. I always chose to sell all. I would never have taken 25%-30% of my hypothetical cash compensation and bought one stock. Why would I keep my RSUs?
Now I work at a smaller company doing the same thing (cloud consulting) making the same amount all cash. I much prefer that over cash + RSUs.
I agree options are worse than RSUs. But RSUs are very bad. 3 reasons:
1. My RSUs vest monthly. I've been selling immediately. For the last ~2 years, I guess I've been unlucky, and the sales have generally been small losses. Each of those sales gets washed by a vest that occurred either a month before or a month after. I used to track these by hand in a spreadsheet. It become essentially impossible due to increasing complexity every year caused by the long chains of vest+sale. Now I wrote a 1000+ line Python program to calculate my wash sales. It probably took 20+ hours to write. It takes about 30s to run, that's how large the vest+sale graph is (and the program isn't optimized for runtime). A single sale is now being washed by chains of vest+sale that are extremely long. And due to each vest involving different amounts of fractional shares due to changing compensation and changing tax rates, the washes are constantly doing partial washes, that split lots into sublots. So a single sale might involve many many sublots. The holding period is also propagated to the new lot. The chains are starting to get so long, that if this were to continue a few more years, I would have some sales that are partially long term (>= 1 year) and partially short term, which I can't find any information online about how to file. It takes me hours to format my data from my 1099B and statements into a CSV to put into the program, and hours more to take the output CSV and put it into Turbotax. Quarterly vests would partially solve this problem (you would still get washes caused by multiple vests happening on the say day sold for a loss washing each other, but at least it wouldn't propagate to future or past vests).
I have now resolved to never sell for a loss (where loss is defined as for any sublot within the lot, the sale price is lower than the original basis + the basis added by all the previous sells washed by this sublot's vest), to avoid this problem. This may mean I have to hold on to stocks that I want to sell, potentially until I die.
2a. I live in CA, but worked from MI a few days a few years back. That means I now have to pay MI tax for 4 years. I receive ~48 vests per year (monthly vests of 4 different grants (from the 4 prior years)). For each of those ~48 vests, I need to calculate what percent of the days between grant and vest I worked in MI, and pay that amount of MI tax on that vest. Turbotax has some bugs related to MI taxes and 401ks and IRAs. Even though my 401ks and IRAs have nothing to do with MI, I now have to deal with these Turbotax bugs every year because I have to file MI taxes.
2b. If you need to file NY taxes as a non-resident (like I have to do for MI), it's even worse, because not only do you need to do that calculation for each vest (~48/year in my case), but you also need to file a new IT-203-F form for each vest. That's 48 IT-203-Fs to file each year. And each one is a complex form involving workdays, weekdays, holiday days, sick days, vacation days, etc.
3. If you move between states with different tax rates, your vests are taxed completely at the new state's tax rate. They're also taxed proportionally (based on time between grant and vest) at your old state's tax rate. So they're double taxed. You do end up with a tax credit that undoes the smaller of the taxes. But this means that when you move, for 4 years you're taxed at the maximum tax rate of the 2 states (on at least some portion of the vests). This makes WA->CA movers mad, because all they have to pay CA tax on 100% of their vests immediately. It also makes CA->WA movers mad, because they have to pay CA tax for 4 years on some portion of their vests.
If you've been selling everything at every vest event, then wash sale rules don't apply - essentially the IRS doesn't want you to claim a loss when you haven't effectively closed a position, and if you don't hold any shares, then you have closed the position. Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting. Basically you don't owe Michigan income tax for a given tax year if you didn't live or work in Michigan during that tax year.
I think it'd be good to visit with a CPA to cover some of these topics. I'm not saying definitely hire one but I think you may have misunderstandings of the tax codes.
>if you don't hold any shares, then you have closed the position.
Even if I acquire new shares < 30 days later?
My employer (Google) had a CPA give a recorded presentation about how to file RSU taxes. In it he said that the vests can was your sales, and this is especially prevalent if you have monthly vesting. This was a CPA who specializes in helping Google employees file taxes.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting.
Also, that same CPA gave a different recorded presentation specifically about state-to-state RSU taxes, and he said that if you work from another state, you need to track the number of days between grant and vest that you work from that other state in order to properly attribute the earnings to non-resident states.
If they're vesting every month, there's a reasonable question of if the newly vested shares are replacement shares for the shares sold.
The IRS defines a wash sale with
> A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
> Buy substantially identical stock or securities,
> Acquire substantially identical stock or securities in a fully taxable trade,
> Acquire a contract or option to buy substantially identical stock or securities, or
> Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Is vesting RSUs acquiring shares in a fully taxable trade or buying stock? I don't know and never considered it, but the statute of limitations has run on my RSU days. I also didn't have monthly vests.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting. Basically you don't owe Michigan income tax for a given tax year if you didn't live or work in Michigan during that tax year.
I don't know about Michigan, but California's Franchise Tax Board asserts that it is owed tax in tax years where RSUs vest if you lived or worked in California during the vesting period; even if you don't live or work in California during that particular tax year. After I moved to WA, I continued to pay CA income tax, as I had partially vested RSUs. I've heard some companies will cancel and reissue RSUs when you move states, but this wasn't offered for me. FTB is kind enough to say you can use any reasonable method to allocate RSUs and they never asked me to show my work, so I must have done fine?
Wall Street pays cash. Trading firms pay cash. Cash is the best form of compensation because it's the most fungible*. If you really believe your employer's stock will double in value, you can take your cash bonus and buy shares of it. Of course if you're that confident in your market prediction power you're in the wrong line of work. Wall Street pays cash because it gives employees the power to invest it however they wish (read: no one knows the future so they invest in a diversified basket of assets).
The only downside of all cash compensation is it attracts mercenaries. Personally I find believers and missionaries more pleasant to work with.
* All else being equal, such as the payout schedule.
> If you really believe your employer's stock will double in value, you can take your cash bonus and buy shares of it.
RSUs aren't quite that deal, because they're "invested" before they vest. Even assuming that the employer would be equally willing to give you either $X/yr in cash or $4X in RSUs over the next 4 years, you can definitely come out ahead if the stock keeps going up. It's effectively a form of leverage through time arbitrage; you get to buy $4X worth of stock at today's prices using money you don't have yet.
Consider a simplified scenario where the stock is flat forever, except that it doubles in a single day when you've been there for a year. If you take the $X in cash and immediately buy your employer's stock with all of it, you only double your money on that first year's paycheck. By the end of the 4 years, you would have $5X (the $4X you earned in salary/bonus, plus one extra X from the doubling). On the other hand, if you take the RSUs, that entire grant, including what hasn't vested yet, benefits from the increase. In this scenario, by the end of the 4 years, you have $8X.
Similar happens with any scenario where the price is monotonically-increasing, but with more arithmetic. If you assume that the stock will go up over time, and that you wouldn't want to be trying to time the market, this starts to look like a pretty good bet. Compound that with the fact that most employers will be willing to offer a much higher number in RSUs than in cash - that is, if they would offer $X in cash bonuses, they'll offer >>$4X over 4 years in RSUs, especially as a starting/signing-bonus offer - for reasons having to do with financial accounting, and it's suddenly a very attractive deal.
The main reason to prefer cash over RSUs is for diversification. But if we're talking about a public company, you can still sell the RSUs as soon as they vest in order to diversify (and the standard advice is to do so). You really only stand to lose if your employer's stock goes down between grant and vest - not just worse than market, but actually down - which, on average, is an easy bet to take. Getting RSUs at a private company is a much dicier prospect, of course, because now you're locked into that lack of diversification in a way that really matters; even after the point where you get the paycheck, you don't get to bail out if the ship starts to sink.
If you are front office head count (sales and trading), then, at a certain level and beyond (probably ED/MD), you will receive a portion of your comp in RSUs. And, if you are a "material risk taker" (trader), there is also a claw back mechanism for those RSUs. (I don't know is senior sales are subject to claw backs.)
Yes and when I did receive a large portion of my compensation in stock, I had it set to sell all as soon as it vested and diversified it. If I had gotten the same amount of compensation in cash, I wouldn’t have put 25% of my compensation in AMZN. So why would I keep my vested RSUs? In fact this year I will get the same amount in cash that I did in 2022 in cash + RSUs. I have no plans on putting 25% of my compensation in any one stock.
Selling my “equity” in a private company once it vested wouldn’t have been an option.
Note for those who don’t know: Amazon has a 5/15/40/40 vesting schedule with their first four year offer. The first two years you get a large pro rated cash signing bonus to make up for the back heavy vesting.
I'm not a tax professional but this hardly seems necessary. Have you consulted with a tax professional to confirm that this is all necessary? How much of a difference does it actually make, i.e. how much tax do you actually pay to MI?
In terms of the amount of tax to MI, it's not a whole lot. A couple hundred dollars. And it doesn't change my total taxes paid, because I get a tax credit for that against my CA taxes. MI's tax rate is lower than CA's.
Are you using autosale? It sounds like you’re manually selling, perhaps that is why it’s so complicated. I used autosale while I worked at Google and had no problems
I used to use autosale back when it existed. Now it no longer exists, and has been replaced by an ETP program.
It's been a while since I used autosale, but I think the problem still existed then, because I think even with autosale the sale price wasn't identical to the vest price, so there were still loss sales, which could be washed. But I think since the sale happened the same day as the vest, the problem wasn't as bad, because in 31-day months, the loss sale couldn't be washed by the next month vest. So there wasn't the case of constantly increasing complexity, because the complexity would reset in 31-day months.
I tried ETP back when it was introduced. I didn't like it. It's been a while, so my memory of why I didn't like it is a little foggy. For one thing, when you're enrolled, you're not allowed to buy or sell any Google shares manually. One of the biggest problems was that there's a cooling off period, and the shares that vest during that period don't get autosold right away, and you can't sell them manually. I think they get autosold a month or so after vesting. My memory might be wrong, but I think that's what happened. Another thing that annoyed me is that my sells got split across 2 1099-Bs: the 1099-B from my individual Schwab account and the 1099-B from my EAC Schwab account. I think shares that vested during the cooling off period went on one 1099-B and the shares that vested during other times went on the other 1099-B. And somehow in the confusion I ended up with some shares that never got sold at all.
This is not true at all. It only has to do with if you have "substantial risk of forfeiture". If they are your shares to own forever, the IRS considers receiving them taxable. This is why double trigger RSUs have expiration dates. It's possible they never become liquid. Therefore they're not your property yet. Therefore you don't owe tax until they are. Or they expire worthless someday, and you don't owe anything.
> Please just add it up and send me the bill. I don't want to pay more than what's due. And I don't want to cheat.
I have a hard time understanding this comment because this is exactly what employers do when paying out RSUs.
At the end of the year, you get a 1099 indicating the fair market value of shares you've received. There's no trickery here--this is literally the amount you owe income tax on.
I'm not sure what tax software you're using that requires you to guess inputs and numbers. TurboTax makes this trivially straightforward.
Those equity percentages in this document are EXTREMELY FOUNDER FRIENDLY and I believe this entire document was written to anchor new employees with lowered expectations on equity. I think this entire document is a disingenuous scam to make new startup employees think that those percentages are okay.
I’ve been in Silicon Valley a long time, since the dotcom boom. My first company, the executive assistant got so rich from the pre-dotcom IPO she quit and bought a vineyard. That’s how things used to be. And we aren’t talking about some crazy ipo, it was before those times.
Fast forward to these days, the startup I worked for got acquired. I was engineer < 15. The founders got low 9 figures, I got 5 figures. Almost everyone got fucked for years of loyalty.
But that’s what YC and other accelerators teach founders. Be cheap with equity. And this document just perpetuates that.
Founders can easily make life changing money but the people that do the actual work get fucked unless it becomes a >100B company like a Facebook. That’s not realistic and they know that. Employees need a bigger piece of the pie when things go great for the company and not just when it becomes a Facebook, Uber, etc.
If you want to know how to evaluate equity, pick a total valuation of the company at exit and then multiply by your stake. If the company needs to exit at > 10B for you to make a life changing amount of money, then ask for much much more equity or don’t take the offer.
It's crazy how "founder friendly" and "investor friendly" (read: "employee unfriendly") the norm has gotten. I would never work for someone else's startup these days. No way, no how. Four orders of magnitude difference between the founders' exit and the early employees' exit is totally unacceptable.
Which is part of why my founder co-matching profiles mention that I'm looking to spread the equity wealth around among early hires, more than is usual.
If a prospective co-founder is turned off by that, without a really compelling reason, then we'd probably clash on other values as well. And I'd also think there's a good chance they'll backstab me when they think they can.
The main issue anyway is if the founders and investors own a controlling stake of the business they can just do whatever they want.
Startups were definitely much better in the past but in the mid 2020s they exist on the stories of 15 years ago to try and hire talent for bargain prices
I don't think your complaint/experience actually lines up with the numbers here.
In the Post-Series A numbers, the lowest numbers are in the ~0.5% range. This is at most 2 figures off what the founders could get together. In a world where founders together got 9 figures, a senior engineer would get 7 figures, not 5 figures like in your situation.
The majority of comments here seem to argue the ideal equity share for employees is zero, since it probably won't be worth anything. That seems like an even more founder friendly viewpoint, no? Mass inequality of ownership is how we end up normalizing the corrupt billionaire class. I agree with you we need an industry desire for better ownership terms, but instead I see people arguing employees should just take a salary, look the other way, and let owners hoard all the spoils.
That is not what people are arguing. Labor sellers should assume equity in a non publicly traded company is worth far less than the labor buyer wants the labor seller to think it is, so labor sellers should demand more cash such that the compensation is competitive with other potential job offers that offer more cash.
Don't get sucked into blind rage over nothing. Why do most employees nowadays prefer cash over options in startups? because for every successful startup where the secretary got a vineyard there are 99 when the startup limps along for 12 years and then closes without a sale. Generational wisdom turned into "Dont get suckered for low wage and options, get a high wage and invest in the S&P".
Will there be lucky founders that become very rich? absolutely. Founders are generally very risk aggressive and are willing to go boom or bust. But for an average person that just want a good life why risk lower living standards for a low change of riches?
If you are very risk aggressive you can push for more equity, but expect your salary to be much lower than your peers. Most veteran SE will advise against it.
Earning a salary in cash doesn’t stop you from investing the cash. I have never earned equity from an employer but most of my net worth is sitting in publicly traded companies. So obviously I am not lacking company ownership just because the company I worked for didn’t loop me in.
The other reason this isn’t true is that equity becomes a lottery ticket that is written in a founder and investor-preferred manner and is used to fleece mostly young employees who don’t know better and are romanced by the thought of being a part of the next Uber or Airbnb.
The practical reality is that it becomes “this job is worth $150,000 but we’ll pay you $100,000 and you can have some equity that might be worth hundreds of thousands if the casino pays out.”
But then you have investor preference multiples, valuation fuckery, and other ways that even a successful exited company can pay out less than your fair share.
To me cash is king because I can invest it however I want. Equity is fine if it’s for a public company, as that’s effectively just deferred cash as an incentive to stay longer.
Came to write this same comment. The first 10 employees of a company are so critical to success and they tend to be drastically underpaid. A founding engineer (often employee 3 or 4) would be lucky to get 1.5% at most places while the CTO has 30-50% and they probably have very equal impact on the company in the early days. And engineers do well by comparison. The first customer-facing roles often get barely any equity at all while they hustle to actually make an idea into a business.
The VCs have convinced the founders that they are special people and they deserve 10-100x the rewards of their best employees. They do this to create room in the cap table for themselves of course. They also give the founders early liquidation opportunities to keep them on their team.
It’s disgusting, and the founders wonder why some people don’t want to grind as hard as they do.
> I believe this entire document was written to anchor new employees with lowered expectations on equity. I think this entire document is a disingenuous scam to make new startup employees think that those percentages are okay.
Have to love the HN crowd. A guy goes out of his way to write a very detailed, high-quality guide demystifying a very complex and consequential topic, open sources it so it's free, and immediately people suspect the entire document is build just to make startup employees think lower percentages are OK?
Disclaimer: I know the author personally, so can definitely attest to the motivation behind this guide. I'll also say I've used this guide both as a founder and as a startup employee and it's been immensely helpful.
The fact that you are a founder that agrees with these extremely low equity percentages for early employees confirms exactly my point. It's to anchor lowered expectations for new employees coming in.
Genuinely curious. What percentages do you think are fair and why? As both a founder and employee, I anchored to the market. But maybe the market isn't fair. So what is?
Conspicuously missing from this is any discussion of clawbacks or repurchase rights, which can be a big deal. Sadly most people do not seem to be too familiar with these, but they should as they are quite common and very dangerous to employees.
Also missing, any discussion of equity-like or profit-participatory structures from LPs (limited partnerships).
Technologists joining one of these should know the "business domain" "partners" are either buying into or awarded partnership interests, but structures can be available for non-business domain roles (in firms that think technology isn't in their business domain cough), such as "profits interests", "synthetic equity", "phantom equity", or etc.*
If the firm has a product and you're helping build it, look for equity-like that let you not only share in profits (if any, most starting things don't have profits) but have a stake in capital events (from asset sale to IPO).
Think of these two forms as something like dividends and something like a combination of options and RSUs. If the profit component is intended as part of annual comp, it should pay at 100% from the start even if you don't "own" it until you vest. Meanwhile if it's a future reward, then both it and the capital-like would have a "tail" that remains in effect if profits or a capital event happens after you leave.
These are very complicated and very bespoke per firm since they are 'made out of' the partnership interests of the LP where ownership is handled as "capital accounts" and may have no accounting method for "goodwill" value separate from partner capital accounts. In such cases, generally partners have shaved off some portion of their rights and allocated those rights to employees, and the mechanisms of this "waterfall" amount to where you stand in that line if at all.
Ideally (a) seek advice from someone experienced with these that (b) you don't have to spend $1200 an hour on.
* Partnerships that understand their business domain is in the technology business — since technology is just another word for tools, and business humans should be tool crafters too — will be using this and have told you about it during interview, and it will all go more smoothly.
There are several books also available, including a 2014 book aimed at financial planners and tax advisors that I have on my shelf and find myself consulting several times a year, as it is still pretty relevant under today's tax law.
Equity compensation is an essential part of modern corporate incentive structure. In particular, it incentivizes prospective employees to accept lower compensation, by making it appear larger on paper.
I've always evaluated it at 0, and that's all I got from the equity I got in my whole career. If I didn't think the salary was enough I wouldn't have accepted.
Basically none of it. RSUs at public companies are as good as cash that just happens to be pre-invested. The tax implications are very simple (they're just regular income like getting paid in cash), and so are your legal rights (you're not much different from anyone who bought a share on the stock exchange). You should risk-adjust their value like any investment, but there's are very few if any sneaky things that can happen to pull the rug entirely.
> - Equity compensation programs, such as [ESPPs](https://www.investopedia.com/terms/e/espp.asp) in public companies. (We’d like to [see this improve](#please-help) in the future.)
My personal preference has been for post series B companies that have some kind of name recognition and legitimate business model. You get less equity but the chances of the equity being worth something is higher. Plus its a smaller team: just a personal preference, I like smaller teams.
I got hit with a new equity compensation fugazi with RSUs at a small public company recently.
My offer letter pledged something like $100,000 of stock, vesting over four years. I was told that I would receive the grant within the first three months of my employment, once it was approved by the board.
Once I finally received the grant, it was 1/5 of what it should have been. “What gives?”, I inquired.
Apparently the stock incentive plan has a “price floor” for grants at $5 / share, and the stock had plunged to approximately $1 / share at my time of hire.
So my offer letter says my grant is for $100k, but in reality it’s $20k.
I learned this was because there was a limited pool of stock available for employee award grants, and a recent rout in the stock price meant there was an insufficient amount of stock available for grants.
Apparently going forward, offer letters specify the number of RSUs rather than a $ amount. So I guess a charitable interpretation is that it may not have been so much an intentional deception as a set of unfortunate circumstances coming together with some poor oversight on the details of my offer letter.
Still, I am incensed.
I referred to a previous employer’s offer letter and RSU grant for comparison. The offer letter also specified a $ amount, and did not specify how it would determine the price of the stock to calculate the awards by.
In that case, it seemed to be the average closing price of the stock in the month the award was granted. Which I’m content with, but these details also were not specified in the offer letter.
tldr if you get an offer letter for a $ amount of RSUs, make sure to clarify (in writing) how the valuation of the stock is determined for the calculation of the number of units awarded.
Oh that is bad! It is a 20k/y pay cut you weren't expecting.
If they were keen to make amends they should just bump your pay that much. Unless they are struggling.
By the way I have a similar RSU amount and schedule. So gar so good but cognizant that in the contract they can stop it at any time. I took the risk as I can also quit at any time!
This is strange and possibly illegal. If the stock falls, you should get more stock since they’re worth less. If they don’t have enough stock then they shouldn’t have offered you that as compensation.
In any case… $1- $5 is penny stock territory. I believe you get delisted from NYSE if ur stock stays at $1 for too long.
All of the RSU offers I ever got stipulated the grant was "subject to the approval of the board", i.e., not guaranteed. That said, I'd be absolutely livid if something like this happened, and would be expecting my manager to either make it right, or I'd look for a new job at the first available opportunity.
Were they people you'd like to work with on a project you'd like to help build? Maybe it's worth it. Life is for living, after all, and we do a lot of our living at our jobs; there's more to consider than just what you get paid.
I would not want to work so closely with someone trying their hardest to minimize the benefit to me. Since life is for living, we should work on teams where there is genuine respect for all members, not animosity and greed.
The sad fact is that being able to work just for personal satisfaction and not just for money is an extremely privileged position.
My personal preference only: I'm glad my current employer has no equity compensation altogether; just base salary and bonus. My former employer did have RSUs, but they have an auto-sell program that I utilized every year.
In college the computer science department had an extracurricular talk about finances for a software engineer; the invited speaker was very adamant that holding most of your net worth in a company that employs you was an unacceptable concentration risk. I remembered that to this day.
A lot of employers who only pay cash have salaries similar to companies that pay cash salary plus equity. Perhaps the equity won't be worth anything, but often times it's extra on top of what's being offered. Those accepting cash only are often leaving potential expected value on the table.
Is there a way to find out current average/going price of shares (I have ESOPs; I have not yet exercised and was laid of sometimes ago) of an unlisted US company? I would also not like the company to find out (if possible).
Can I even sell in secondary market? I do not live in USA. Can the company stop me from selling and also refuse to buy it back themselves?
A guide for non-US employees at US companies that offer equity would be super helpful. It's an absolute minefield, especially in Britain. I'd love to contribute that information to your guide if contributions would be considered?
I've earned stock options from three startups and none of them ever went public. The only company that ever actually paid me equity was Amazon and it was a pretty big payout. You will earn a lot more with RSUs than options.
This doesn't even mention ESOPs[1], which have very favorable tax benefits in the US. I don't think that ESOPs are very compatible with high-risk/high-reward startups, but for businesses that turn a profit and grow at a sustainable rate, they are excellent.
Just a few weeks ago, I met a CTO that got the company to a series A level of revenue by building the whole product over two years. Was fired by the CEO, who brought on new investors, recapped the equity table, and drove his option value to almost nothing.
The guy is now a senior engineer at a decent company, but effectively had 10+ million of value he created lifted from his hands.
One thing not pointed out in the article, but I would like to hear others perspective on, is what happens at the 4 year mark when all options are fully vested and exercisable. This is a scenario for employees that have been there long-term. Should requests be made for further option grants? Should employers think about further option grants to retain employees? What are people’s thoughts and experiences?
You should be getting refreshers every year. If you don't then you are either not negotiating hard enough or the company just doesn't want you around for the long term.
The sin in Silicon Valley’s equity model is the lack of voting rights attached to employee shares. Once an ESOP plan has more than 1,000 members (or an employer more than 1,000 employees), the ESOP should—as a class—get a Board seat.
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After seeing several option grant story arcs from start to finish (including one I’ve experienced personally), I find this type of compensation utterly worthless and frankly insulting to the workforce.
What happens in the average case scenario when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).
Let’s run the math here really quickly. You leave your high paying, hard, cold cash job at megacorp XYZ (let’s call it $300k), to join hot startup ABC that just raised a series A at a $50MM post. The startup offers you $150k in cash because … everyone is in it for “the mission”, and if they’re generous another $250k in options compensation to basically be on par with the XYZ salary that you’re leaving. Now, that $250k options grant is based on where the founders want the company to be by the time that your vesting schedule starts kicking in. So really, what you’re getting is more like 0.25 of the company if the company hits $100m valuation. We’re not going to even bother discussing pref, dilution and all the other factors that are constantly fighting to reduce that equity value. ANYWAY… once you vest you’re presented with the right to exercise, which costs money and is going to result in a tax bill which…costs money. Now you’re a wise financial planner and know that the sooner you exercise, the less tax you have to pay in the case of a liquidation event…so you fork up the cash. Now what’s it going to cost? Probably not 0, because strike prices are determined based on the valuation of the company when the options are issued…so you’re probably more in line to spend maybe $50k if you’re lucky but mostly closer to $100k. If there hasn’t been a 409A adjustment, you don’t have to pay tax on that. Now if you’re closer to a series B and let’s say the founders got where they wanted to be and valuation doubled, the 409a was filed and now you get to pay regular income tax, so you find yourself being taxed as if you just made that coveted $250k…but you didn’t. You are making an investment … just like any other investor, albeit with a lot less favorable terms. The best part is..guess what? If your circumstances change and you want to move on to a different job, you are now getting to choose between staying with the company until it has a liquidation event..or you have to effectively invest in it. Pretty shitty deal!
Now, this obviously assumes that you exercise your options and that you’re trying to optimize your tax bill. You could just as well be vesting and staying with the company for a long period of time, not having to really exercise your options and effectively you can make a ton of money without putting anything up for equity besides your sweat. Or you could have stayed at megacorp and taken that half of your salary that you gave up to invest in this ABC startup OR maybe a big bundle of the same kinds of startups with a much better risk profile because of diversification (and less reward).
Now let’s actually talk about a happy case. You joined early, you’re now an exec, you earned your stock, you vested, the company was gracious enough to give you a low interest loan to exercise your options…you’re golden. Company is getting acquired by a legacy big pocketed company or PE firm, you’re about to make bank and retire early. BUT…there is a caveat. During the sale proceedings it has been decided that half the purchase price is going to be stock and half is going to be cash. Moreover, all the execs should roll half of their equity into the new venture and you’re locked in for another 3 years, but now…you’re holding equity in a totally different beast of a company and you have 0 say or idea as to how that company works or trades.
In any case, as one of the comments here said…there are a lot more ways for your options to be worth nothing than there are for you to become rich from them. There are just too many variables to consider. It is not a good way to become rich. In order for it to be worth it, you have to be at a company that succeeds in making your equity worthwhile despite all of these caveats.
Your description seems directionally correct, but I don’t understand this part:
> You are making an investment … just like any other investor, albeit with a lot less favorable terms. The best part is..guess what? If your circumstances change and you want to move on to a different job, you are now getting to choose between staying with the company until it has a liquidation event..or you have to effectively invest in it. Pretty shitty deal!
Why would you have to stay with the company after you vest? Is there some kind of clause that strips you of your share ownership or forces you to sell if you leave the company?
> Why would you have to stay with the company after you vest?
I'm assuming they are referring to someone that _did not_ exercise their options and is leaving.
[you might already know the following based on the rest of your comment, but thought i'd add it]
With options, vesting is only half of the story; you need to exercise the options which converts them to shares. ISO options (what you get as an employee) have a PTEP (Post-Termination Exercise Period) that gives you 90 days from voluntary leave (maybe varies?) to decide whether or not you'll exercise. If you don't exercise, you forfeit them.
I believe the longer PTEPs that you hear about (5-10 years) do some ISO->NSO conversion which changes the tax situation, but at least gives you flexibility & wait for some liquidity event before committing the cash.
Another common one, is you hold a big equity position, but get pushed out/leave early long before there is an exit event. The investors and executives still at the company will fuck you over on your options, and like diluted your options after you left. This happens literally all the time, and if you arent the CEO, there is almost nothing you can do.
Just a few weeks ago, I met a CTO that got the company to a series A level of revenue, by building the whole product over two years. Was fired by the CEO, who brought on new investors, recapped the equity table, and drove his option value to almost nothing.
As our 30 person startup has grown, I made a conscious decision to stop pitching stock options as a primary component of compensation.
Which means the job offer still includes stock options, but during the job offer call we don’t talk up the future value of the stock options. We don’t create any expectation that the options will be worth anything.
Upside from a founder perspective is we end up giving away less equity than we otherwise might. Downside from a founder perspective is you need up increase cash compensation to close the gap in some cases, where you might otherwise talk up the value of options.
Main upside for the employee is they don’t need to worry too much about stock options intricacies because they don’t view them as a primary aspect of their compensation.
In my experience, almost everyone prefers cash over startup stock options. And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
Even if the company has a successful exit lots of times the founders have different stock class than employees which allows them to cook the books in creative ways where employee stocks are devalued without affecting founder stocks.
I personally went through a successful exit of a company where I was one of the early engineers and was privy to orchestrating the sale (working with potential buyers and consultants) and saw this happen.
I now am granted stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud.
Somewhere along the line "privately-owned company" morphed into "do what in any regulated industry would be considered fraud."
Multiple classes of stock for non-investors in a pre-IPO/private company should be illegal because there's no visibility or transparency. The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Maybe have an out if you have verified third-party audits and cooking the books like you mention (which happens all the time) carries the same fraud penalties as if you did it for a public company.
Not every company is a unicorn. For bootstrapped companies that might never sell, multiple classes of stock can be extremely useful for a variety of legitimate accounting and dividend purposes. One of the local law firm's company setup packages uses a de facto _six_ share classes.
I agree with your concerns re. transparency but I don't think eliminating share classes would fix that.
I'm super curious - what are the six classes and what's the reasoning behind them?
A common structure would be something like:
* Class A - voting shares, founders / controlling parties, etc. Typically small fixed share count (e.g. 100), not issued dividends directly but used to represent percent of controlling interest.
* Class B - non-voting shares, early stage employees, advisors, supporters, etc. Used to issue dividends.
* Class C - Same as class B but reserved for future issuance through more formal programs like ESOP when you're ready for that
Then you might have some preferred shares for investors, say class D and E for two investor groups and then a Class F for convertible debt (even bootstrapped companies can have owner / friends / family / seed / etc money, plus may want to not rule out raising at some point).
This is obviously a lot of classes, but by doing something like this you can separate control from economic upside, create different terms / stock agreements for different classes, keep room for future planning (things like ESOP), facilitate investor needs (they almost always want preferred shares), have more flexibility with fundraising or convertible debt, etc.
I'm not actually trying to argue that exactly six classes are necessary or optimal, but moreso that its common to want not just one single share class. Practically speaking I imagine that firm does six because they're trying to give a template that'll work for many of their companies and reduce the amount of per-customer customization. My company has less although more than one.
Ah, I'm thoroughly familiar with the idea of multiple share classes (although I must commend your excellent explanation and examples here) - I was actually particularly interested what their six choices were to cover the bases as a lowest common denominator etc. No worries at all if you can't say though, I get that.
This is highly country dependent, but in America for example, if this is not presented in your employment contract then it is not something your employer needs to do.
However, if your employer is a public organization then all of this information needs to be made available to shareholders. While you may not have access to this information, it is not secret and can be shared by any of the shareholders. Due to this, there is an implicit requirement to reduce risk and “cooking the books” while allowed is generally seen as risky since shareholders may run for the hills. In a smaller, privately run company there are no shareholders to run for the hills. Just a bunch of employees who hold paper IOUs. In order to get that audit protection, the employee would need to negotiate that into their employment agreement!
> The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge.
Are private companies allowed to share some information with a subset of their investors and not others?
Well, they don't always get away with it. Depends on who gets pissed off.
I think you can nix the qualifiers - multiple classes of stock have inherent problems and should probably never be legal
At least in public companies there are enough safeguards where I think a reasonable person could be fine with it.
One other trick I learned about and should warn others about - getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team. I got such an offer, and not only was this information not given to me until I asked about any events aside from funding rounds that would be dilutive, but it was presented as standard operating procedure.
>getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team
How's this different than if an option pool exists? The more people have options, the further the pie will be split up. Having an option pool or not doesn't change this.
First, dilution should only be happening at funding events, not every time a new senior staff person is hired, and second the dilution should affect everyone equally— founders, execs, angels, VCs.
It's super unfair to give an employee "x shares" that turn out on exit to be shares of a fixed pie that is different from the one the investors have their shares in.
When the option pool is created that is the dilutive event, so new employees getting their grants doesn't result in current employees being diluted, because the entire pool was already taken into account.
But that’s not true. An options pool containing shares owned by the company is the same from a “how much of the company do I own” perspective as unissued or even uncontemplated shares.
The only real advantage to the options pool is ease of management of the shares. There’s a lot of paperwork around issuing new shares you don’t want to do it every time you hire a programmer. And I guess you could argue that telling people the pool exists lets them not be surprised by the future dilution when they’re issued. But the pool itself hasn’t diluted anyone.
Dilution is created by increasing the number of shares held by the company’s owners. Actions like issuing shares from a pool (or the inverse, buyback or cancellation of grants) affect every shareholders relative dilution.
there is a proxy to check this - investor quality. Every high quality investor - including YC - forces an options pool. The post-money SAFE created by YC accounts for an options pool ("The Post-Money Valuation Cap is post the Options and option pool existing prior to the Equity Financing").
high quality investors will in most cases, decline a fundraise if there is no options pool - since it signals that the founders are not serious about the most valuable asset of any startup.
The people.
I've found getting info around stock options at startups is often really hard. It's not very transparent. For example, the total diluted shares isn't shared or sometimes even the current valuation isn't shared. LoL good luck with ever seeing a cap table. Often times that makes it impossible to even determine their value.
There can be value here for sure, but everyone dreams big, never asks questions, and never tells. My other favorite in this industry is "stealth mode" lol.
"Cooking the books" could mean many things but most people would interpret this as fraud. There are many exit scenarios that aren't fraud but rather stacks of preferential stock that get paid before common, who usually get paid last.
What happened in your exit scenario?
My read is that the poster felt that the accounting practices, which were likely legal and commonplace, violated implied contractual obligations.
That’s correct, I don’t believe anything illegal was done but certain things were done to dilute the employee share class which didn’t dilute founder shares. Just start reading about preferred stocks and you will realize they can basically be blank cheques to have any value and have voting rights to issue as much other common stock as they want.
Additionally there was some liberty on what “sale price” actually was in the contract. This may be common operation, but the sale price according to my contract was much lower than the amount of dollars which was exchanged for the company.
There’s also a lot of plain fraud in private tech companies.
It's technically legal -- the best kind of legal!
No. Fuck that shit. When the spirit of the law and the letter of the law conflict, I want us as humans to be able to step back and say that, hey, it doesn't make sense when you put it that way, and ignore the rules and do what's actually right.
As someone living in a country with common law and having taking business law 101 (so certainly NAL) this sometimes ends up being a bit of a guessing game as to how a judge will interpret jurisprudence.
There's a lot of room for improvement in legal systems and they move extremely slow due to the political nature of things.
wouldn't you rather the 50/50 chance for some _seemingly_ impartial person to intepret a deal, than have to pay a lawyer more than somethings worth to enforce some complex 500 page word salad to keep a business run by a person whose dones this hundreds of times before?
totally, which is why we go to a jury of peers for things
Ah yes the cornerstone of any stable judiciary - "ignore the rules and do [what I want]."
Sometimes what the contract says and what the contract _looks_ like it says to a layman can read very different.
- Granted $500k of stock on start, and then have it diluted as stock is added for new investors
- Hollywood accounting - net vs gross
There's lot of places where a contract can be represented as one thing, only to have it be far less than that.
Then it is a poorly written contract, and the party that agreed to it was tricked or poorly advised. Plain and simple. We see this often with "fast and loose" term sheets for some corporate and sovereign bonds on less reliable names. There is a whole podcast (I forget the name at this very moment) that does nothing but discuss dubious bond contracts. Frequently, the co-hosts will ask: "Who in their right mind would agree to such a contract? This clause is totally unenforceable / provides no protection against event X/Y/Z." And, yet, these contracts still exist in the wild.
Dumb question: Do you think the average dev in Silicon Valley pays a third-party employment contract lawyer to review the terms and conditions before agreeing? Sadly, I feel the answer is "no". Speaking personally, I would never agree to such complex employment compensation terms without third-party advice. Yes, I know it is not cheap (maybe 500 USD per hour), but the alternative looks much worse, and most people here facing these contracts can afford it.
> Then it is a poorly written contract, and the party that agreed to it was tricked or poorly advised.
Well, yes? I mean, we're talking about a situation where one of the parties involved in the contract isn't acting in good faith. And people frequently can't understand contracts. Is there anything surprising about the fact that someone was misled or "tricked" in such a situation?
> There is no way that any sound contract law will grant any weight to the term "implied".
Nobody is suggesting that any law would.
> Either it is written (and agreed) or not.
Yet you managed to infer things that weren't in the post.
> So, I would say anything that is not explicit is meaningless in term of contract law.
Again, where is anybody saying anything to the contrary?
If I say I'll give you 50% of the revenue we generate, and then the details of the contract allow me to bring on other people with the same deal of 50% of the revenue, and then you all share 50% it would likely feel unfair.
I'd say that phrase means 'consideration' in some cases, and in any case something like 'reasonable expectation', which would enter into the 'meeting of minds' prerequisite of contract law.
Banana republics like almost all countries with Civil Law rather than Common Law? And also, you know, some US states and the UCC?
The doctrine that anything not explicit is meaningless in contract law is also referred to as 'the four corners' referring to where you look to interpret the contract; this is considerably relaxed in many jurisdictions (and some situations in the US) where there is considerable information asymmetry and/or power imbalance between parties. With employment contracts in particular; to be a good coder for instance, why would you need to know how dilution of options works? Only to avoid being mislead by your prospective employer?
Conversely, in Civil Law jurisdictions, you see that corporations (rather than employees/consumers and sometimes small businesses) are mostly held to the four corners of the contract as they are professional parties that have legal departments and should be presumed to do their due diligence.
"Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most early stage startups is an intentional attempt to deceive employees. There's a lot of founders out there telling early engineers they're getting "0.5%" when they know full well that a $1B acquisition down the line is not going to put 5 million dollars in the engineer's pocket.
Can you explain? In most cases, preferences won’t come into play, assuming you raise at a standard 1x preference and sell for more than you have raised. In that case, owning 0.5% should roughly translate into $5M (modulo dilution).
There are plenty of valid scenarios where the company sells for a lot, but less than it raised. And 1x preferences are no longer standard post-ZIRP, afaik.
People are often not aware that the value of common is nonlinear, so the value of 0.5% in this case is zero. (For the ML fans out there, the common price per share has one or more ReLU activation layers. :) )
Even with 1x preferences, the company might have raised $2 billion but sells for $1 billion because the investors don't want to get any further losses.
The general rule of thumb is that acquisitions are bad for employees, and IPOs are good, especially if the share price is stable for 6 months.
Also for acquisitions, often you'll have to work at the acquiring company for some time to get money from your options. Or might get options in the acquiring company instead (which again are worth nothing until some future possible equity event which hopefully translates into cash).
Have 1x preferences become standard? When I worked in startups early investors often has 2x or 3x liquidation preferences, especially at seed.
That would be the naive mathematical interpretation and how the system would work if engineers designed it. Lawyers designed it, though, and they probably know some tricks to make that not happen.
You think engineers never scam?
Not like lawyers, dentists, car salesmen, etc do!
Like what? All the examples people have said are where either
1) the company has Nx preferences, for N >1, in which case the company has essentially failed to fundraise or
2) the company sells for less than they raised, which again, is a polite form of failure.
lets no degrade lawyers more than necessary.
Business people hired lawyers to design means and methods to commit _implicit_ fraud and deceptive practices to improve the value of their capital assets.
Those lawyers then go on to sell this product to others.
I'm sure there's some lawyers out there that are going out there shopping this stuff around, but it's Capitalism and Business thats the active agent, not Lawyers.
I am under the impression that an oversized cap table is pretty much standard. Am I wrong?
Playing both sides with this comment
I don't intend to be on the founders' side at all, I'm just not quite sure I'd throw them in jail over it. I'd definitely call it "cooking the books" comfortably.
Intentional misrepresentation is fraud, but I understand pragmatically how the line could become blurred. What I object to is the idea that blurring that line is intentional, even if that is not acknowledged.
Founders will almost always have common stock too, so they're in the same boat - it's only investors who will have preferred stock. If you don't spend 10 minutes to understand liquidation preferences before accepting a startup offer, that's kind of your problem.
1. If the company is bootstrapped the founders can have preferred stocks with whatever clauses they want on it
2. Most (all?) companies will not show you their cap tables so it basically boils down to “trust me bro”
The logical conclusion to #2 is valuing the equity compensation at zero, and foregoing it and asking for extra cash.
I’ve yet to work at a startup where liquidation preferences and investor participation is freely given or ever even mentioned. I only know about because I participated in TechStars. So, I guess we can blame employees for not hiring a lawyer to review their sign-on agreement (which, again, doesn’t have that info) or we can hold founders accountable for not sharing all relevant data needed to evaluate an offer. As a prospective candidate It’s one of those things you need to know about to even know to ask about.
I think founders are doing themselves a serious disservice. I loved working at startups but it’s just not worth it in most cases. The trade-off was always take lower salary for a chance at making big money and repeatedly investors and founders perform a rug pull.
Blaming employees for a change in the gentleman’s agreement is certainly one way to look at it. But, it sure feels exploitive, especially for younger folks that haven’t yet been burned by it. If founders keep doing it… well good luck finding anyone willing to work at their startup.
Seriously - the whole point of giving your early employees equity is so that you can attract talent without blowing your budget.
It seems like most founders love pretending that there are armies of top-tier engineers rushing to work at their startup in exchange for pay that's well below market and stock that still won't be worth very much even if the company has a wildly successful IPO.
I really wonder why this happens - is it just greed from the founders? The VCs? Do early employees value stock like shit regardless of how transparent the company is?
Kinda? The underlying issue is someone you think you can trust not telling you the full details so they can fuck you later.
The underlying issue is trusting someone you should not trust, someone on the other side of the negotiating table who has interests opposite to yours.
Yeah but I'm a programmer and don't innately understand that social power dynamics stuff. They're friendly and nice people and offer me drinks and snacks when I meet up with them. What do you mean they don't have my best interests at heart?
There's also just the case that a buyer is happy buying say 88% of the company and having 12% (usually non-voting) shares lie with employees/former employees. Stock options are only really, truly worth anything if they IPO.
True that stock _options_ are only worth something after an IPO, but vested and exercised stock options that get turned into equity is a different story.
Equity can be worth something via acquisition from private equity doing roll-ups, corporate buyers looking to fill strategic product niches, etc
Also, for the more heavily vc-funded late stage still pre-ipo plays, secondary market, which can be at a discount to the most recent vc round, or in some rare instances in a hot sector, premium.
One other thing - waiting for the IPO might be the worst thing to wait to do. The public markets are much more fickle than private markets. Once a company IPOs, there's usually a trading moratorium on insider shares, usually 180 days, so by then, the equity value may have completely imploded.
My point still stands even if it's equity. PE/corp buyers may not care about buying out the very small minority stock holders, that is the point I 'm making.
Lets say you've got
Founder A 25% - Voting, Founder B 25% - Voting, Investor A 10% - Voting, Investor B 15% - Voting, Investor C 8% - Voting.
Former Employee A 0.5% - Non Voting, Former Employee B 0.4% - Non Voting, Employee C+ 0.2-0.3% each all Non Voting.
If say Big Co want's to buy the company why do they care about buying out former Employee B? If they can pickup the two founders and the three investors, thats enough for complete practical control.
That hasn't been my experience. I've never had the experience of BigCo only acquiring just enough for 50.1% ownership. There's also clauses in the equity plans for participation on change of control (assuming that BigCo taking 50.1% constitutes change of control)
it's a particular issue with PE, who aren't really doing it for strategic reasons, but really are just there to make money.
Not since... I'm not sure the regulatory change, but if employees are able to sell back to the company or to private investors, resulting in cold hard cash in employee bank accounts, without the company going public, I'd say they are worth something. We can argue about how, without an IPO, the price isn't fairly decided upon, but having cold hard cash in the bank is nonetheless real.
I've never heard of being able to sell back stock options. You don't own anything with an option. You just have the right to buy at a price in the future.
I didn't say stock options. There is a mechanism through which SpaceX employees have been able to cash out some sort of financial object that they received, despite the company not being public.
The comment you were replying to ended with this:
> Stock options are only really, truly worth anything if they IPO.
fair. the important thing here is that IPO is not the only way to liquidity for early employees
Well, I'm not sure it is. People are pretty aware of salaries already for example. This was about stock options specifically.
Right so for options, when the employee leaves the company, they can convert them to shares, and then there are ways for them to sell those shares somehow, and it results in cash money somewhere down the road that isn't just the salary.
IPO is not the only way for employees to access liquidity
It sure fucking seems like it is! Have you tried to buy early stock in startups? You have to have 10K minimum in most cases.
I’d have bought huggingface, openAI, anthropic, unsloth, and many others stock right at this moment if I could get in for less than 10K.
Prove me wrong internet. I’m ready to buy in these companies this minute.
I'm generally pretty against paternalism in markets, but when you get to the more "finance-y" stuff like this the opportunity for large scale fraud is just so prevalent and there are so many people just looking for their next mark.
If $10k or $25k is an amount of money you have to pause to think about at all you have zero business investing in early stage startups. Simply by the way the math works out you are better off buying lottery tickets because at least then you'll get to scratch something off before going bankrupt.
Sorry, but I DO have business investing in early stage startups. I called huggingface being this big back in 2019. And given your first sentence, I'm going to 100% call this out as projection on your part.
Folks who work in AI/ML know how to invest in the space! You're welcome to ignore the fact that Unsloth is objectively going to pop off (likely be acquired by huggingface) and anyone who invests in it will come out ahead.
The Venn diagram of people who are sophisticated enough to make these kinds of investments with better odds than gambling and people for whom $10k is hard to scrape together is indistinguishable from two circles. I'm sure there are some in the intersection but it's such a small piece of the pie we can effectively call it zero.
If you want to gamble that's your right I'm sure there is a roulette table somewhere near you. But the social harm caused by allowing dentists and grandmothers to invest in seed stage startups greatly outweighs any social good caused by letting that near-zero overlap get rich a little easier.
People here get u on their high horse about investment minimums and the like. Sure, they get real excited about some startup and they may turn out to even be right. I also know people who do angel and seed investing who are beating the bushes for capital or are just holding tight. Startup investing isn’t some magic money tree reserved for the well off. Heck, I’m pretty selective about even purchases of even individual public companies.
In 2019 they didn’t need your $10k of funding. If you contacted them within the 6 months they were starting they would have said yes. In 2019 it was more time consuming than it was worth. So they encourage you to go through a pool of investors which you are scoffing at.
In reality, my project needs funding now. If i bootstrap and get customers, I don’t need to worry about your lunch money. I need someone (or customers) who can fund that same amount for a year.
An outside individual purchasing shares is not the same as employees accessing liquidity.
As one example, SpaceX is privately held but routinely does funding rounds with large investors so employees can sell shares and access liquidity[1][2]. A $10,000 minimum purchase amount is trivial for those investors.
[1] https://www.reuters.com/markets/us/elon-musks-spacex-raises-...
[2] https://www.reuters.com/business/aerospace-defense/spacex-fu...
Across the universe of accredited investors, I don’t think that a $10K minimum is a significant barrier.
We can argue whether the accredited investor process is good or bad (I think it’s more good than bad), but I don’t blame companies for not wanting a bunch of $872 high roller outsiders on the cap table.
I don't usually see minimums below 25K, which is fine and sensible.
You really need some kind of a proxy to aggregate anything less than that in practice - thinks like crowdcube or similar. Can you imagine having to draw up paperwork just to transact $1200 or something? Doesn't make much sense.
See my comment further down. Im not going to go into any more details than that as the details of the sale are not public.
It is fraud to take advantage of the fact that your employees don't realise their stocks are not the same kind of stock that the VC and the founders have.
morally, yes
legally, no
I don't know where you live but in my country going to some old person and trick them into signing stuff they don't understand is illegal.
Banks aren't even allowed to suggest buying high risk stuff.
Different stock classes SHOULD be illegal. I have yet to hear a single good argument for it that isn't obviously self-serving.
And ownership stake in the company should be a simple thing to understand, not some byzantine mess designed to fuck over the engineers.
Can you share at a high level what you meant by cooking in the context of the exit?
When the founders still control the board, in practice the buying company understands that what makes the acquisition work is that said founders end up happy, and that the outcomes for your typical employee can be sacrificed to the edge of what the law allows.
Maybe there's management carve-outs. Maybe the total value of the acquisition is lower, but as part of the negotiation, there are great transaction bonuses, or retention bonuses. The investors with preferred shares still get their liquidation preferences, but the common stock is worth a pittance. Maybe instead of an acquisition, some of this is turned into an asset sale, or there's some considerations for founders that involve very friendly rollover equity. Maybe the founders add a new kind of stock, or create a new legal entity as part of the acquisition that does... "interesting" things. An inventive legal team cannot do miracles, can make sure that the employees feel robbed either way.
The acquirer, the founders and the VCs with the biggest share will get what they want, and come up with something neither will challenge. So it can be down to just the workers to pool together and decide to sue for violation of fiduciary duty, which might not be fast or easy to prove. You aren't in the room where it happens, but everyone else is.
Dilution and liquidation preference.
Dilution is sort of a necessary evil that comes with raising new rounds of capital. I understand how >1x liquidation preference is legal, but it seems incredibly unethical, especially since it's never communicated to common stockholders.
IMO, if you feel the need to hide your cap table from your employees, it's probably unethical. Yes, indeed, most cap tables are unethical.
dilution
I got forced into working for some garbage startup at a job early in my career. The CEO was absolutely psychotic and never put much effort into hiding his motives.
The guy gave me a "Pre selection" letter (bokded at the top that it was "NOT A LEGAL DOCUMENT") that I was selected to receive 1,000,000 shares, vested at 250k a year (no one year cliff into monthly). 1,000,000 of how many? Didn't say. Percentage? Nope. Was it 25% 3% .00003% Who knows!
I eventually was forced out after him verbally abusing me, making unsubstantiated accusations about how I spoke to other employees, and doing things like asking me to clock out and continue to talk about work.
I received two death threats after I quit. And, seven years later, I get a threatening letter falsely accusing me of defaming the company under random online accounts. After rejecting the allegations, I got a "settlement letter" that demands I forfeit all obligations, and can never talk about the employer again. It also explicitly stated I'd get $0 and that they "wouldn't appear at my place of residence" as my benefits.
Last I saw the SEC audited them and said they had no revenue and no products to commercialize.
They raised $6m on fundraising sites selling SAFEs, but had $800k in assets and $6m in debt. Oh, the most interesting part is the owner had the company paying his other computer repair business $5k a month for IT services.
It really reenforced for me how meaningless the whole process. Working for that company was a lifetime mistake.
Damn, that really sucks. It really is the luck of the draw. I started at a company that just paid me an hourly rate with no promises of stock options but I could just as easily have been dragged into some kind of mess like you experienced.
That's what I started as well with this employer. I never wanted to get involved with their other project but they forced me on it. I was trying to find another employer the entire time but it was just around the time Trump got elected the first time and nobody seemingly wanted to hire
> the founders have different stock class than employees
This is super uncommon.
> stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud
The exact same fraud rules apply to private and public stock.
I've personally seen it happen multiple times from inside, it happens all the time.
It happened in the largest medtech acquisition in history (at the time) its Public knowledge.
> personally seen it happen multiple times from inside, it happens all the time
I’m not saying it doesn’t. Just that founders having a separate class of stock is very, very rare.
> happened in the largest medtech acquisition in history (at the time) its Public knowledge
Supervoting stock is absolutely a thing with companies. We’re not talking about that. We’re talking about start-up founders.
Its very common, so common that they call them "founders shares"
Not a separate class of shares. Almost always, founder shares refer to the magnitude of the grant and the voting-rights agreement attached to it. ("Stock class" is a very specific term.)
That’s not what that term means
Please enlighten us
Founder stock almost always convert to common not preferred. Carta article about it: https://carta.com/learn/startups/equity-management/founder-s...
I recommend researching a topic at least a little bit before going on and commenting on it
This serves my point not yours, the process is often very misunderstood by those being promised the equity, and it's often "converted" in ways that dilutes or outright takes away most of the value by the time the employees ever see financial gains from the equity.
That’s not what happens. Literally TFA covers the term “founders stock”. It really is a meaningless term to refer to common stock held by a founder.
Where can I read more about this?
https://www.therobotreport.com/jj-must-face-lawsuit-auris-he...
I often had startups offer me a number of shares with no explanation for the percentage ownership or the number of total shares.
I said I have to value them at zero without more information and they would act all offended when I asked for more (happened at least 3 times).
This suggests to me that founders either don’t understand the mechanics themselves or are preying on lack of financial understanding.
It’s the latter.
Ignorance is a big problem too. One time I had someone offended when I asked if their insurance plan qualified as a high deductible - they didn’t know it was a legal classification and thought I was accusing it of being expensive.
I’m not anti-startup but the VC backed startup culture of the last 10 years or so has been pretty souring.
It's kinda both sometimes haha
> The vast majority of cases stock options end up worthless
My fav manager had a great way of phrasing this: "There are more ways for your options to be worthless than to make you rich"
But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.
Ultimately I think you should never take an uncomfortable pay-cut to join a company and you should maximize your stock compensation on top of that. Don't forget other types of equity – brand, exposure to good problems, network.
I think the main thing to remember is that you should assume they are worthless.
There's probably something like a 99% chance they are worthless, a 0.9% chance they are worth a decent holiday, a 0.09% chance it'll let you retire early, and a 0.01% it'll make you somewhat rich. Worst of all, unless you're the CxO you have very little control over the outcome.
Equity is a nice bonus, but you might just as well treat it like the company giving you a lottery ticket for Christmas. Nobody is going to take a significant pay cut or work 80 hours a week for a lottery ticket, so don't do it solely for the stock options either.
I’m 0 for 3 on startup equity being worth anything and have since left the industry.
One of the startups I did some time at was as close to a sure thing as one can hope for (unicorn valuation at one point) but it still went to zero in a very public flame out. It’s still impossible not to get imaginative about what could have been as I was a very early employee… such is life.
The most lucrative stretch of my career was working for a big company that paid good base salaries.
Same. 1 startup is dead-dead. 1 startup is now a husk of itself used by the CEO for fractional CxO consulting, and 1 is down from unicorn status to limping along with 1/5th the staff.
The primary benefit of startups is getting to do more work to learn more faster and not deal with Process.
I've worked at 8 companies, 3 have resulted in value from equity (all granted pre-IPO), all of them in certainly much larger than "a decent holiday" level.
I think people have updated to be much too negative on the prospect of equity paying out. It's obviously much better than 1%, at least if you work at anything other than extremely early-stage companies.
I've worked at 10 startups since 2006, with equity or options each time. Only one time did it turn out to be worth anything at all (~6 months salary), and that one time wasn't even a successful "exit". It was more of an aquihire, and they paid out the options for everyone they didn't want, ie everyone not living in the Bay. The other nine times my options have been worth precisely zero, either I get let go or quit because the company is circling the drain, or fizzles out, or gets rid of a bunch of people to goose the numbers before a fire sale.
Stock options are a lottery ticket, and I value them roughly the same.
Sounds like your startup equity has been worth about $3000-$5000 per year?
Well statistics shows that it is best to value equity at 0. I will take equity in a non public company. But not in exchange for cash compensation at my market rate.
I assure you that statistics do not show it is best to value equity at 0.
Care to show your source?
I'm honestly stunned that people here are performatively math-illiterate.
Some companies experience liquidity events. Therefor the value of equity in those companies is positive. Some companies go out of business. Therefor the value of equity in those companies is zero.
If N is the ante hoc chance that a company will experience a liquidity event, then:
N * X + (1 - N) * 0 = value of liquidity
X is positive. 0 < N < 1.
Therefor the value is positive.
People aren’t saying the chance is literally zero. They are saying it is low enough that they can’t consider it reliable comp for income purposes in their own personal situations. I can’t say my experience has been any different so I don’t blame them. People commenting aren’t math illiterate. I’m kinda amazed you are taking things so literally when it’s so obvious to anybody reading how to interpret the discussion.
They sure are insistent on it being literally zero for people who don't think it's literally zero.
If you like, I'm happy to update my claim to, "startup equity often has non-trivial value, say, >$1000 per year."
Add a few zeros and I think we’d be in the right ballpark. You have to make up for the haircut before you start counting positive net value.
And then take into account the risk/reward premium and alternatives.
I hoped you had some real data, but all you had was a joke.
Ok it's not zero. Is it 0.0000000000000000000000001?
Surely you're aware that obtaining 0.50$ is not going to have a large impact? Even if the sum is 3000$ the impact is extremely limited.
But you had to go and be a r/iamverysmart material because you actually have no more information than me.
Also learn to spell therefore please.
You played a stupid game, you won a stupid prize.
Something is different than nothing. When people repeatedly insist that something and nothing are the same, they get trivial answers.
And learn which side of the digits a dollar sign goes on please.
"Statistics" on its own doesn't tell you anything; you have to consider your own risk aversion. Only VCs can afford to be risk-neutral and only consider expected value.
How are the founding dates of the startups distributed? Are recent startups still exiting well?
Founding dates? I don't know. IPO dates were 2007, 2019, 2023.
ok, so you're a mini elon musk pet that has good name recognition. The probability that anyone can replicate this ins the million+ employee mark is worthless, also.
so, anecdote.
The rate of having a liquidity event for startups, particularly startups past the A stage, is just obviously not ultra low. Like, is it better than 50%? Reader, it is not! But it's not sub 10%, either.
People can make intelligent decisions about equity without hyperbolically insisting that the chance that that equity will be worth money is one in a million.
Are there statistics about funding round (A, B, C, etc) and getting good value for options?
It's not really possible to have nice uncontested stats about this because the definitions of the rounds aren't fully neat, there are potentially generational effects, and how you divide up industries isn't fully neat either.
In a typical year, a double-digit number of tech companies IPO (there was a big jump in 2021 and then a crash in 2022/2023, with 2024 seemingly back in the double-digit range). https://www.visualcapitalist.com/charted-four-decades-of-u-s...
Let's be really clear, though: there's "getting good value for options" and then there's "getting some value for options." It is straightforwardly true that in general big public companies have better comp than pre-IPO companies: the guaranteed value of equity in your Metas or Googles or even lower-tier public companies is generally higher than the expected value of pre-IPO equity, even if you are relatively risk-insensitive.
That is importantly different from "the value of pre-IPO equity is zero," or "it is a one-in-a-million event to get value from pre-IPO equity."
It’s not importantly different if the value you get from pre-IPO equity is less that the haircut you took to work at the startup, which is overwhelmingly the case.
You want to tell me you’d be feeling like your equity was worth something in colloquial terms if you got what amounted to a mediocre bonus one year through your liquidity event?
Yes. Something is more than nothing. This is not rocket science.
I really want to insist on the principle that we are nuanced enough people to say, "startup equity is worth less, in expected value, than public company equity, but 'less than public company equity' is still more than zero."
I truly empathize with your desire. But I can’t agree.
To get to the point of the community feeling like startup equity is worth something on average, I think we need to figure out how to generate more favorable outcomes for startup employees.
If startup equity is worth something 20% of the time, the average person would need to work at 4 startups before seeing value. And the statement that it has non-zero, but low, expected value, just isnt true. On average it wasn’t.
If we could make startup equity worth something-minus-x 100% of the time (instead of just something 20% of the time), I’d be more amenable to agreeing with you that you can place a reliable non-zero value on startup equity.
That means things like removing liquidation preferences. Unfucking the tax situation around options or making it standard politcy that the company buys your options for you. Universally allow secondary markets. Build in participation structures for existing employees through funding rounds.
Would you say the expected value of a lottery ticket is > 0? Because startup equity is just too unreliable for an average person to not treat it like a lottery ticket.
I will concede that if you are very very discerning in which startups you work for and a good negotiator and have access to questionably legal secondary markets, you may be able to beat the curve. But that’s certainly not the average case.
You don't appear to know what "average" means. You mean that the modal value is zero. The average value is not.
There are all kinds of bets where the modal value is zero or negative that are good bets!
It really depends of the stage of the startup. I recall reading someone doing analysis on this (unfortunately I don't have a link) showing that joining a company that isnt public yet, but is already large-ish and showing some real product-market fit gets people better payouts. Yes, employees 1-40 of a future unicorn will to great (if they could afford to buy the shares, and AMT doesn't kill them which is another story), but it's relatively safe to get into a company that hasn't IPO'd yet.
Imagine say, that you joined Stripe in 2014. By then, probably 500-1000 employees and a a real name on the industry, yet private. It's perfectly reasonable to not consider the stock they might have offered at that time as straight out money, like you'd have treated Google RSUs. But discounting the shares to zero, or just "a nice bonus" is also silly. I bet anyone that got a year or two of stock in that era is well into the retire-early/somewhat rich cadre, and that wasn't all much of a risk.
> By then, probably 500-1000 employees and a a real name on the industry,
You're wildly exaggerating here (but unsurprisingly). I know someone who joined Stripe in 2015, and he said there were about 300 employees globally at the time.
But I do generally agree with the rest of your point, I'm just contextualising the information.
> you should assume they are worthless.
I had this mindset at a startup and decided not to risk any of my money exercising my stock options. They eventually expired. Years later the company IPO'd and I would have made a lot of money had I exercised.
Waiting for more certainty before exercising means the fair market value will likely be higher then and you'll have to pay AMT.
I now approach a job with the mindset that stock options are probably worthless, but I'll risk what I can afford to by exercising as soon as I can.
> But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.
I personally view Stock Options in the same way as lottery tickets - sure they might pay out big sometimes, and people do win lotteries, but, for the most part, they're going to be losers.
There might be argument about the difference in how often stock options lose compared to lottery tickets, but that's missing the point.
The main difference is that people often think they share a fate as a startup. They all have the same lottery tickets (in varying amounts) that pay out under the same conditions. After all, that's how managers often motivate the early employees.
But since there are different classes of lottery tickets, the payouts can change arbitrarily at the last minute depending on the specifics of the deals.
So even after accounting for the fact that most lottery tickets don't pay out, you need to account for the fact that some within the same startup might pay out while yours don't. And there's no perfect way of knowing ahead of time.
Sorta. You could definitely go in on something worthless that never gets any traction and end up with less than zero, as in, you owe money after the experience. But for every Stripe or Airbnb there's 100 more lesser known names that still pay out, not in the millions, but a couple hundred thousand dollars range, which is still enough to change most people's situation.
Definitely look at them as worthless untill they're worth something, but the untold secret is the secondary and private market. SpaceX employees have gone that route and some are quite rich despite there not being an IPO. Again, the failure mode to be aware of is you could end up in debt and owe money which is worse than if you'd never played.
> Definitely look at them as worthless untill they're worth something
One (of numerous) problems with stock options is almost all stock option contracts require you to exercise within 90 days of leaving the company.
Often times employees leave a company, and then need to decide within 90 days whether they will spend anywhere from $5-50k+ to exercise the options to keep the stock, otherwise you forfeit the options after 90 days.
The stars really have to align for you to make money with options without risking/gambling your own capital by exercising them.
Unfortunately secondary markets only exist for very large companies like Stripe. I’m not aware of secondary markets for small < 100 person companies, which is where you see the most blatant hyping up of stock option value.
> without risking/gambling your own capital by exercising them.
Many companies offer early exercise, so you can reduce the amount you gamble by a lot.
Also, you already "pay" in terms of opportunity costs by being at that startup vs something more established where you get RSUs of a public company. So using some of the money from the startup in order to exercise the shares is really useful. If the startup's cash compensation is just enough to pay your bills, then of course it's different.
I can't speak to their individual deals, but Hiiive, Forge, and ESO fund are all working with companies that aren't stripe sized.
But absolutely no one should read this and think anyone's paper valuation is worth actual dollars until the money hits your bank account.
There are companies that will finance your options exercise in exchange for a cut of the earnings in the event of an exit. I haven't personally used one, but they do exist.
There’s a much better option - simply offer nso conversion with much longer exercise window
and the most important thing someone told me is that 100% of $0 is $0. x% of a big number > $0
Yeah, but you should try to shop for a deal where 100 - x is as big a number as you can negotiate.
Oh absolutely, the important bit is that 100% of $0 is $0.
> You could definitely go in on something worthless that never gets any traction and end up with less than zero
Absolutely agree
> Lesser known names that still pay out, not in the millions, but a couple hundred thousand dollars range
FTR This is the same for lottery tickets, they don't all win the top prize (or a share of it), most will win a few dollars, some tens of thousands, and so on.
Pre/post pandemic startup equity seem to have wildly different outcomes
So would you trade your founder equity for a fixed salary? My guess is probably not.
Equity is an extremely important factor for many candidates, especially more senior ones and executives.
I would not pitch it as future value, and instead pitch as % of company. If it's a minuscule amount that doesn't move the needle in offer conversations, than perhaps you are not offering enough, or you're identifying candidates who value more predictable income than investment in the company.
Exactly. If I'm joining a 30 person startup it's not because of the size of the paycheck. Any larger company will obvioulsy be able to easily beat the offer. I want a significant amount of equity. I want to see the cap table. I want to see details about funding rounds, finances, available runway. I want to see MRR/ARR, recently closed deals. If founders dance around these questions and say "equity is not imporant, see how much we are paying you" then I'm walking out the door.
Reading through the thread, the point is the startups arn't providing transparent accounts of what the equity is and how it can be diluted and reduced over the life time and sale of the company. That's all the debate.
Many people have seen those options become worthless because of legalistic maneuvers and violate what's said in the initial options.
So this tangent isn't really clarifying anything. Some people would simply want larger salaries and options be valued as 0$ for evaluating compensation because how easy Capitalists have made it to screw over classes of options/share holders.
Nothing wrong with wanting a guaranteed salary and job stability, but people in this situation should simply not be working at a VC funded tech startup. “Boring” software companies exist. Banks, government, aerospace, manufacturing, consulting Countless mid-large software companies of all conceivable types. Practically all of them will be able to beat a tiny startup on salary. Go work at them instead.
The question is more so to startups looking for proper staff. I'm not really certain you're getting the best quality staff if your best offer is to pimp up options. Seems like only morons would take that, and well, isn't that a problem itself?
If you think about it the vast majority of startup options are worth $0 so you have to treat them as worthless or you’re not being rational.
The idea that they’re a lottery ticket is the only way they keep hiring and I’ve heard plenty of engineers refer to actual lottery tickets as idiot tax
the founder has so much more control over the direction of the company and what an exit looks like that it makes sense for them to want equity.
As an IC, there’s little I can do to affect the company valuation because I’m just executing the CEOs vision. And there’s nothing I can do to affect their decisions about potential exits.
Yes I would trade founder equity for an increased fixed salary. Statistically, equity is going to be worthless.
> In my experience, almost everyone prefers cash over startup stock options.
My experience has been a little different. We had a lot of people demanding both very high cash comp and then demanding very high equity packages on top.
Giving people a sliding scale option did put some of the control back in their hands, but it also produced an analysis paralysis for some where they couldn’t decide what to pick.
> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
Much of this is due to startups failing. Every random “startup” trying to pay people with options because the founders have no hope of success inflates this statistic.
However another driver of this statistic is the extremely short exercise window upon quitting. People may work somewhere for 1-3 years but the company could be 5-10 years away from acquisition. Employees have to give the company money at time of quitting to get any equity, which few want to do.
I know the common wisdom, but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.
> but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.
isn’t this illegal? private stock ownership needs approval from company/BoD to change hands, no?
While board approval can be a condition of transfer (consult the options agreement), forward contacts can be used (with counterparty, liquidity, and price risk) when transfer conditions cannot be met to effectuate a de jure transfer.
This is why I will never work somewhere with a short post termination exercise period (PTEP). If it’s not at least 5 years, ideally 10, they don’t seriously consider equity something that employees are owed.
I would have ignored anything you said about the value of stock options anyway, having many years ago learned that they are practically always worthless, so making me a straightforward, honest, non-speculative offer would make me more interested in working for your company, not less. Kudos. Keep it up!
A candidate wants a _competitive_ offer. While stock is almost impossible to compare across offers, candidates can at least stack-rank the company’s funding and check to see how the proffered percentage compares to the mean for the funding round. So if a company has high-percentile funding, and gives a high-percentile equity fraction, it’s a good sign to the candidate. But of course, the company could be WeWork, or even OpenAI could get risky if the tender offers stop (which will happen when/if the market crashes).
At the end of the day, it means a lot to the candidate if the company _wants to compete_ for a hire, especially in the current economy (layoff-friendly and SWE saturated, especially versus 10 years ago). A story like “your options could be worth $XXX in 4 years” I hope is not seen as competitive today.
> In my experience, almost everyone prefers cash over startup stock options.
Good to know, because its common for the founder and hiring manager guilt trips to be insane.
Startups have this weird psychological purity testing I have never seen outside of religious groups.
Effective organizations understand you actually don’t need to look inside the box. If someone is continuing to do good work for you it’s working. You don’t need to second guess their reasons why, or give them a reason to question their commitment.
It’s a basic lack of empathy. Many founders do have the privilege of choosing opportunities and seemingly cant or are unwilling to relate to people just working with integrity and sometimes being fulfilled by their choice of trade, without needing to be married to someone else’s idea and cause.
Also most founders ideas aren't unique and there is often a tone deafness there. Employees with experience have already seen their idea even if it was in a prior cycle.
"Believing in the mission" requires a suspension of disbelief that can reduce the impact of various factors that would otherwise decrease morale (e.g. lower cash compensation, fewer benefits, unfair working conditions, longer hours, etc).
There's a reason many startups are built on hordes of college kids and it's not that they "have more energy" or "are more willing to think outside the box". They're less experienced and thus easier to manipulate. They're also less likely to have dependents they need to take into consideration, don't understand their limits or trade-offs between short-term performance and long-term endurance (e.g. burnout), and are more likely to be naive about their place in the company and the effect/function of the company. Plus, of course, they're "less risk-averse" which is another way of saying bad at judging the odds of certain outcomes.
I was a hired early to a startup (my hiring manager was the CEO) that's now public and worth $10B+ that you've heard of. It took them over 10 years to go public, and I would have done just as well putting my money in FAANG, but with lower risk and more liquidity.
Well to be fair 10+ years ago it’s hard to find too many dollar for dollar investments that beat MAAMA.
True! But it's crazy that the risk, successful startup didn't even beat established tech for returns.
It isn’t crazy, it’s that startups are just that bad of an investment when averaged out. You have better odds playing the lottery.
I'm not saying this is right or wrong. But, if you're ventured backed, then this strategy is usually at odds with your investors. The reason stock options were used in the past was because you were signaling to everyone (you, your family, your grandma, your early employees, your current investors, your advisors, your future investors, etc.) that you were strapping on to a rocket ship. By paying them more and giving less stock, this means your capital raises don't stretch as far (from a perspective of time). This in turn will be a signal to your investors that you may take the $1M and not the $3B deal (see Google/Yahoo), which they may not like.
Isn't that the point of equity compensation? I don't care about owning a percentage of the company - that just sounds complicated. I care about converting it into cash later. To compensate for the small chance that will be able to happen, you better make it seem like a lot more cash than the alternative cash compensation you're offering. The upside to you is that you don't have to pay that bundle of cash for a while, and you only have to pay it if you have it. And not you personally, but all investors indirectly.
> The vast majority of cases stock options end up worthless
Also, even if the company ends up worth a lot of money, there's no guarantee that a way to liquidate, such as an IPO, exit or secondary market, will become available in any reasonable time frame. And as a regular employee you have exceedingly little to say in bringing about such events. There's not much fun in having a winning lottery ticket that can't be cashed in, in fact it's highly stressful.
This is the way. Options aren't really worth much for the rank and file startup employees after about 7-10 hires. That fraction of a percent is just not going to be life changing unless it's the next OpenAI or something. For very early employees it's different, but even for them some founders will assign far too little equity to really make a difference.
As your 30 person startup has grown, the (future) value of the stock has gone from $0.00 to not $0.
When the value was zero, of course you had to talk up future value - you were selling something worth $0 for $1,000's. Now that it is worth something, it represents actual value for the employees to swap for salary, which is why you no longer offer as much!
That’s not really how it works, though. The price of your options is set based on when you join the company. If the company is already valuable by the time you join, you’re essentially buying in at the current valuation with the hope that the valuation will continue to increase.
You make money on the amount the company value increases starting the day the options were granted.
(This comment isn’t 100% technically accurate, but gets the point across in fewer words)
Almost always stock options at a startup are the equivalent of an unsecured iou. Even if there is a conversion at some point due to a buyout, common employee stock rarely ever sees any of that money. If anything they’re often negative value because you pay taxes on their claimed value at assignment.
> t’s almost always the right decision to place very little value ($0) on the stock option component of your offer
one of my coworkers at databricks say their TC is like 900k or something based on some BS imaginary options value. lol .
People offering stock comp in an unlisted private are the moral equivalent of Jeff foxworthy’s “oh you’ll take a cheque? Hell I’ll pay the whole damn thing off then. I didn’t know you’d take a check I thought you wanted real money.”
I mean, dbx will probably be worth something but unless he or she has been there 10+ years, it's unlikely to be life-changing.
And honestly, a company of that size giving huge option packages would make me suspicious (I'm a very suspicious person though ;) ).
I find it refreshing that you prioritize cash compensation over stock options. Many employees may feel more secure with a higher salary rather than relying on uncertain equity.
The hiring managers / founders equating the stock options to real money is actually a red flag to me.
It’s super unlikely that a cash-out event ever happens for a startup, so until then, it’s just fake money to me.
And I say this having owned and exited my own 8-employee startup and continued to work for startups for the last 15 years. I work for cash, not imaginary future profits.
> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
This isn't actually true from a historical perspective. The primary reason why the gap between the wealthy and and everyone is increasing is that employees started preferring cash compensation over equity. Joseph Blasi documented this in his book The Citizen's Share, and that book is why Elizabeth Warren recently passed legislation making it easier for employers to give equity to their employees.
> The primary reason why the gap between the wealthy and and everyone is increasing is that employees started preferring cash compensation over equity.
You're making it sound like equity turns companies into co-ops when in reality most equity remains unexercised (because that literally involves paying your then likely former employer money) or ends up being worthless for all the reasons others have explained.
The gap between the wealthy and everyone else has been sharply increasing ever since Reagan[0].
CEO pay alone has massively skyrocketed, detached from all other economic growth factors (most of the growth occurred in the 1990s)[1]:
> From 1978 to 2020, CEO pay based on realized compensation grew by 1,322%, far outstripping S&P stock market growth (817%) and top 0.1% earnings growth (which was 341% between 1978 and 2019, the latest data available). In contrast, compensation of the typical worker grew by just 18.0% from 1978 to 2020.
The reason workers prefer cash compensation is that you can't use equity to pay your bills. Cost of living has increased since the 1970s[2], housing costs and college tuition have become a lot more expensive[3]. While electronics may have gotten cheaper, the day to day expenses have gone up and those in lower income brackets will necessarily spend more of their income on things like groceries and rent. Standards of living increasing with income may increase those expenses but there's a cut-off point where those increases no longer track linearly even if you throw in money sinks like private yachts. If you want to reduce cash preference, you'd need to first address the underlying socioeconomic insecurities that drive the real need for cash that this preference comes downstream from.
You can't have multi-billionaires (or even near-trillionaires) and a steady socio-economic progression to them from sub-minimum wage. Multi-billionaires can only exist in a system that allows for disproportionate amounts of wealth to be drained out of the system into a minute fraction of the top percentile. The gap is a necessary conclusion of a system that allows multi-billionaires to exist.
Thinking this can be fixed by "making it easier" for corporations to give workers equity not only ignores why workers prefer cash (and why they're more likely to do so now than decades ago) but also why corporations want to use equity for compensation (i.e. because it usually reduces cash compensation while coming with very low (and in any case: delayed) risk due to workers not exercising options or shares becoming worthless or near-worthless due to the way preferential shares are usually structured). If we were talking about actual worker ownership (or at least revenue sharing) things would look very different, but that's not something most corporations want and definitely something most investors/VCs would reject outright.
[0]: Reagan cut the top marginal income tax rate by 20% to a mere 50%, after it had already previously been cut sharply by Johnson from 91% to 70%[a]. He also slashed capital gains tax on dividends by 20%[b]. The 1980s also saw the rise of Financialization[c], i.e. the rise of the finance economy (rapidly eclipsing the real economy), and a sharp decline in the already scarce labor union participation[d]. It's also worth pointing out that the response to Republican neoconservatism from the Democratic Party was (like in much of the West - possibly due to the Cold War hard line against socialism) not a stronger leftist opposition but instead a shift towards Third Way[e] politics and neoliberalism, i.e. while Reagan may have been the starting point, the widening of the wealth gap was a bipartisan effort.
[a]: https://taxpolicycenter.org/statistics/historical-highest-ma...
[b]: https://www.forbestadvice.com/Money/Taxes/Federal-Tax-Rates/...
[c]: https://en.wikipedia.org/wiki/Financialization
[d]: https://www.imf.org/external/pubs/ft/fandd/2015/03/jaumotte....
[e]: https://en.wikipedia.org/wiki/Third_Way
[1]: https://www.epi.org/publication/ceo-pay-in-2020/
[2]: https://www.investopedia.com/ask/answers/101314/what-does-cu...
[3]: https://www.consumeraffairs.com/finance/comparing-the-costs-...
That mindset can definitely simplify negotiations, but I’ve noticed that removing equity from the perceived value stack can change how people show up. Some folks who might've gone the extra mile with even a slim shot at ownership now treat the role more like a job than a mission. I’m curious—have you seen any shifts in long-term engagement or retention since downplaying equity?
It is a job, no matter how you pitch it. Equity is not real ownership and doesn't come with any real decision making power. It is a slim chance at a big bonus. I've had equity in most of my jobs and the job sucks then I'll leave before my stock vests which I've done twice.
> I've had equity in most of my jobs and the job sucks then I'll leave before my stock vests which I've done twice.
Sometimes you can't tell how it will be from the outside. You only know whether you'll like the job, or whether it has prospects, after trying it.
Bouncing isn't a bad move. In fact it's smart from a diversification perspective. Once you realize a company has no future, just get out and try again. As an employee, choosing whom to work for is one of the few ways you can diversify against risk.
The Netflix approach to this [1], where Netflix allows employees to choose how much of their compensation is cash vs options seems like the best approach - you can tune based on your risk tolerance.
> Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside (down) you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.
[1]: https://jobs.netflix.com/work-life-philosophy
The stock options are for common stock, right?
However investors that put money in get preferred shares (not common stock) right?
The tradeoff is not equal: taking less salary and receiving stock of less value seems risky to me. I can't imagine the employees discount is very good (those preferred shareholders don't want to be diluted).
Better sibling comment here with in depth opinion: https://news.ycombinator.com/item?id=43677084 : which answers my question:
> when your options vest, is that you are essentially allowed to make an equity investment
isn't the idea that you buy shares at book value, which is way less than "last round valuation"? so you're getting a discount.
I mean, hopefully that's how it works, I never put enough money when exercising my option to care...
Is there some bonus given if you choose stock options? Otherwise, what would be the incentive of taking options over cash in any amount?
An understated benefit is that, if you have 4 year vesting, you can choose after year 1 or year 2 whether you want to stay.
Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.
So, considering this, the expected value of $100 in stock options is actually more than $100.
> Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.
If you get 25k shares worth <$1.00 and, you won't double your salary even if the share price doubles. Not to mention that only 1/4 would be able to be exercised, and you have no liquidity to realize the gain.
The assumption in my comment is that your entire salary is in stock — otherwise, obviously you need to adjust accordingly. But only 1/4th of the stock being exercisable makes sense if you think of vesting like a monthly salary — each month, another 1/48th becomes exercisable. Even if you technically own the rest as well, it's more appropriate to think that you don't.
If you think NFLX is going to increase x%, then your total comp goes up accordingly. If you took straight cash, you'd only recognize those same gains if you had purchased NFLX with it.
It's actually more than that, because the option costs less than the price of a full share. i.e. if your comp is $400k and you choose 100% stock options as your comp, that value allocation will almost certainly control more shares than if you took 400k in cash and used that to buy all NFLX shares.
If that wasn't the case then yes, there would be no reason to take options as comp because obviously (as you say) you can just buy NFLX on the stock market directly with some or all of your cash.
I realize this is still confusing, so here is a concrete example with made-up numbers.
---
Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.
Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.
If you'd taken the cash you'd have $300,000.
If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.
> If you'd taken the cash and immediately invested all of it in NFLX, you'd have $400,000.
But you can take the cash and immediately invest it all in NFLX options. That should be the baseline for comparison, when answering "why would one pick options vs cash"?
I'd imagine you _must_ have some benefits to pick options. Perhaps tax treatment is better; perhaps you pay less fees than buying them yourself. But still, there must be some incentive to pick NFLX options from the company, instead of picking whatever options you want from your broker.
(also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
You're going to get a better strike price from the company than from the market.
> (also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
Yes indeed, that is why options are a risky investment and no company pays people entirely in options.
At least when I was there the options cost 40% of the strike price (whatever the current market price was at time of issue). The other difference is that you shift the income tax to time of exercise.
Yeah my numbers were made up, 40% of strike price does sound more reasonable (and obviously provides less leverage, but still some). It being pre-tax also helps with leverage vs taking cash.
Another benefit of the company's options is that they have a 10 year term, vs most market options which expire in < 1 year. You can get LEAPS but those are still max 2-3 years.
I know a few years ago spotify had a similar selector:
- cash bonus
- RSUs
- More OTE Options
You got to pick two and your ratio. IIRC, 80/20, 60/40, 50/50.
this is a bad comment for this subject. NFLX options are on a publicly traded stock. the terms are also different than a startup stock option. you've really just introduced confusion into this subject, judging from all the child comments.
in my experience, most startups do offer you a sliding scale of cash vs equity, just not 90% as NFLX does. they may not advertise it or be upfront about it, but i've never personally experienced a startup that wouldn't trade one for the other.
Why didn't I get any money from my startup? - A guide to Liquidation Preferences and Cap Tables
https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_...
I've posted this before but it's a great read. Even if you have millions of shares, the dilution and later investors could still leave you with nothing.
I worked for 2 startups, both failed, but I never got to see the cap table.
I worked at a startup where I joined as the second employee before they raised any money and I basically got 0.5% of the company. They went on to raise over $100 million in VC.
I got $0 for my equity. Start ups have SO many ways to screw employees out of their equity.
The most basic is that you have options that you are not allowed to sell during equity rounds. If you accept them then you need to pay the strike price and they count as taxable income even though you got shares instead of money so you just lose a lot of money.
Say what you will about Elon, but at Space X employees are allowed to sell their shares for actual money at regular intervals. Very few start ups that succeed allow their employees to do that.
90% of startups that succeed just want to grind down their employees rather than pay them the equity they earned.
At both startups we bought our shares early using Section 83(b) of the IRS tax code. That first year when we bought the shares I had to file extra paperwork but it shifts the tax rate to long term capital gains.
https://www.cooleygo.com/what-is-a-section-83b-election/
So I ended up writing checks of $60 and $100 to buy thousands of shares at $0.0001 a share. I left both startups before they went under but everyone lost that small amount. When people ask me how much money I made at the startup I joke that I lose $60.
This is excellent and illustrates that unless you have access to the cap table, you have no idea what your options are worth. Sometimes you can at least get a founder to tell you what the preference stack looks like, and what multiples were given to investors, and that might be enough to kind of sort of work out what an exit looks like.
If they are Delaware C corporations and you own at least one share, you have a legal right to demand access to the cap table.
It was registered in Delaware but it was an LLC.
I'm not a lawyer so I don't know if an LLC would have to comply in the same way.
I do know that there was an operating agreement and we had a very strange meeting at one point where the CEO and the financial guy told us that we had the right to see the operating agreement. Someone who left shortly after must have hired a lawyer and demanded that.
I did see it the operating agreement but not the cap table. When I left the company I did not even know what a cap table was so didn't even know that it was a thing that existed. I only found that reddit post a year later. I'm post that link so that people don't make the same mistakes I did. There were a lot of other questions I should have asked before joining both startups.
On this April 13 in these United States, I can't help but think of the incredible inconvenience of how RSUs and shares sold seem to be calculated for the sake of income taxes. Please just add it up and send me the bill. I don't want to pay more than what's due. And I don't want to cheat. For whatever reason, the typical tax interview software guesses wrong or has insufficient inputs when I feed it info from employer + brokerage. So what remains feels like guesswork with liability on both ends.
RSUs aren't really that bad, unless your employer does sell to cover in annoying ways. Net share withholding works out super simple, the shares that weren't withheld are at the brokerage with the correct basis, and the income and withholding are reported accurately on your w-2.
Options do get pretty nasty if you exercise and hold, when the fair market value is higher than the fair market value; because then you have to have an AMT return and a regular return and reconcile them.
ESPP with a discount was pretty bad the last time I had it; the brokerage said they were specifically required by IRS rules to report the wrong cost basis, and you had to adjust it when you sold, or you'd have the discount reported on your w-2 and again as a capital gain. Maybe that changed, capital gains reporting has changed over time.
I wonder if you worked for a certain california-named company based in another california city... Your experience sounds a lot like mine.
They sell-to-cover when my stocks vest quarterly, which pisses me off because the stock constantly goes up and I wish I could keep them until the time my tax bill is due.
And, I have to manually report to the taxman all the money paid via those sell-to-covers, because even though eTrade sends me the transaction details each year, and they clearly tell the IRS how many stocks I got, they don't tell the IRS how much tax I already paid on it.
When I worked for the company named after a rain forest, we had the choice of sell to cover, sell all or pay taxes without selling shares. I always chose to sell all. I would never have taken 25%-30% of my hypothetical cash compensation and bought one stock. Why would I keep my RSUs?
Now I work at a smaller company doing the same thing (cloud consulting) making the same amount all cash. I much prefer that over cash + RSUs.
I agree options are worse than RSUs. But RSUs are very bad. 3 reasons:
1. My RSUs vest monthly. I've been selling immediately. For the last ~2 years, I guess I've been unlucky, and the sales have generally been small losses. Each of those sales gets washed by a vest that occurred either a month before or a month after. I used to track these by hand in a spreadsheet. It become essentially impossible due to increasing complexity every year caused by the long chains of vest+sale. Now I wrote a 1000+ line Python program to calculate my wash sales. It probably took 20+ hours to write. It takes about 30s to run, that's how large the vest+sale graph is (and the program isn't optimized for runtime). A single sale is now being washed by chains of vest+sale that are extremely long. And due to each vest involving different amounts of fractional shares due to changing compensation and changing tax rates, the washes are constantly doing partial washes, that split lots into sublots. So a single sale might involve many many sublots. The holding period is also propagated to the new lot. The chains are starting to get so long, that if this were to continue a few more years, I would have some sales that are partially long term (>= 1 year) and partially short term, which I can't find any information online about how to file. It takes me hours to format my data from my 1099B and statements into a CSV to put into the program, and hours more to take the output CSV and put it into Turbotax. Quarterly vests would partially solve this problem (you would still get washes caused by multiple vests happening on the say day sold for a loss washing each other, but at least it wouldn't propagate to future or past vests).
I have now resolved to never sell for a loss (where loss is defined as for any sublot within the lot, the sale price is lower than the original basis + the basis added by all the previous sells washed by this sublot's vest), to avoid this problem. This may mean I have to hold on to stocks that I want to sell, potentially until I die.
2a. I live in CA, but worked from MI a few days a few years back. That means I now have to pay MI tax for 4 years. I receive ~48 vests per year (monthly vests of 4 different grants (from the 4 prior years)). For each of those ~48 vests, I need to calculate what percent of the days between grant and vest I worked in MI, and pay that amount of MI tax on that vest. Turbotax has some bugs related to MI taxes and 401ks and IRAs. Even though my 401ks and IRAs have nothing to do with MI, I now have to deal with these Turbotax bugs every year because I have to file MI taxes.
2b. If you need to file NY taxes as a non-resident (like I have to do for MI), it's even worse, because not only do you need to do that calculation for each vest (~48/year in my case), but you also need to file a new IT-203-F form for each vest. That's 48 IT-203-Fs to file each year. And each one is a complex form involving workdays, weekdays, holiday days, sick days, vacation days, etc.
3. If you move between states with different tax rates, your vests are taxed completely at the new state's tax rate. They're also taxed proportionally (based on time between grant and vest) at your old state's tax rate. So they're double taxed. You do end up with a tax credit that undoes the smaller of the taxes. But this means that when you move, for 4 years you're taxed at the maximum tax rate of the 2 states (on at least some portion of the vests). This makes WA->CA movers mad, because all they have to pay CA tax on 100% of their vests immediately. It also makes CA->WA movers mad, because they have to pay CA tax for 4 years on some portion of their vests.
I dearly wish to be paid in cash.
If you've been selling everything at every vest event, then wash sale rules don't apply - essentially the IRS doesn't want you to claim a loss when you haven't effectively closed a position, and if you don't hold any shares, then you have closed the position. Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting. Basically you don't owe Michigan income tax for a given tax year if you didn't live or work in Michigan during that tax year.
I think it'd be good to visit with a CPA to cover some of these topics. I'm not saying definitely hire one but I think you may have misunderstandings of the tax codes.
>if you don't hold any shares, then you have closed the position.
Even if I acquire new shares < 30 days later?
My employer (Google) had a CPA give a recorded presentation about how to file RSU taxes. In it he said that the vests can was your sales, and this is especially prevalent if you have monthly vesting. This was a CPA who specializes in helping Google employees file taxes.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting.
See https://www.reddit.com/r/tax/comments/q8ythd/interstate_move... .
Also, that same CPA gave a different recorded presentation specifically about state-to-state RSU taxes, and he said that if you work from another state, you need to track the number of days between grant and vest that you work from that other state in order to properly attribute the earnings to non-resident states.
If they're vesting every month, there's a reasonable question of if the newly vested shares are replacement shares for the shares sold.
The IRS defines a wash sale with
> A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
> Buy substantially identical stock or securities,
> Acquire substantially identical stock or securities in a fully taxable trade,
> Acquire a contract or option to buy substantially identical stock or securities, or
> Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Is vesting RSUs acquiring shares in a fully taxable trade or buying stock? I don't know and never considered it, but the statute of limitations has run on my RSU days. I also didn't have monthly vests.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting. Basically you don't owe Michigan income tax for a given tax year if you didn't live or work in Michigan during that tax year.
I don't know about Michigan, but California's Franchise Tax Board asserts that it is owed tax in tax years where RSUs vest if you lived or worked in California during the vesting period; even if you don't live or work in California during that particular tax year. After I moved to WA, I continued to pay CA income tax, as I had partially vested RSUs. I've heard some companies will cancel and reissue RSUs when you move states, but this wasn't offered for me. FTB is kind enough to say you can use any reasonable method to allocate RSUs and they never asked me to show my work, so I must have done fine?
Wall Street pays cash. Trading firms pay cash. Cash is the best form of compensation because it's the most fungible*. If you really believe your employer's stock will double in value, you can take your cash bonus and buy shares of it. Of course if you're that confident in your market prediction power you're in the wrong line of work. Wall Street pays cash because it gives employees the power to invest it however they wish (read: no one knows the future so they invest in a diversified basket of assets).
The only downside of all cash compensation is it attracts mercenaries. Personally I find believers and missionaries more pleasant to work with.
* All else being equal, such as the payout schedule.
> If you really believe your employer's stock will double in value, you can take your cash bonus and buy shares of it.
RSUs aren't quite that deal, because they're "invested" before they vest. Even assuming that the employer would be equally willing to give you either $X/yr in cash or $4X in RSUs over the next 4 years, you can definitely come out ahead if the stock keeps going up. It's effectively a form of leverage through time arbitrage; you get to buy $4X worth of stock at today's prices using money you don't have yet.
Consider a simplified scenario where the stock is flat forever, except that it doubles in a single day when you've been there for a year. If you take the $X in cash and immediately buy your employer's stock with all of it, you only double your money on that first year's paycheck. By the end of the 4 years, you would have $5X (the $4X you earned in salary/bonus, plus one extra X from the doubling). On the other hand, if you take the RSUs, that entire grant, including what hasn't vested yet, benefits from the increase. In this scenario, by the end of the 4 years, you have $8X.
Similar happens with any scenario where the price is monotonically-increasing, but with more arithmetic. If you assume that the stock will go up over time, and that you wouldn't want to be trying to time the market, this starts to look like a pretty good bet. Compound that with the fact that most employers will be willing to offer a much higher number in RSUs than in cash - that is, if they would offer $X in cash bonuses, they'll offer >>$4X over 4 years in RSUs, especially as a starting/signing-bonus offer - for reasons having to do with financial accounting, and it's suddenly a very attractive deal.
The main reason to prefer cash over RSUs is for diversification. But if we're talking about a public company, you can still sell the RSUs as soon as they vest in order to diversify (and the standard advice is to do so). You really only stand to lose if your employer's stock goes down between grant and vest - not just worse than market, but actually down - which, on average, is an easy bet to take. Getting RSUs at a private company is a much dicier prospect, of course, because now you're locked into that lack of diversification in a way that really matters; even after the point where you get the paycheck, you don't get to bail out if the ship starts to sink.
Why would I be a “believer” or missionary in a for profit company? It’s a business transaction. I give them labor and they give me money.
if you accept a large portion of your compensation in the form of stock, then you are pretty much a de facto believer.
Yes and when I did receive a large portion of my compensation in stock, I had it set to sell all as soon as it vested and diversified it. If I had gotten the same amount of compensation in cash, I wouldn’t have put 25% of my compensation in AMZN. So why would I keep my vested RSUs? In fact this year I will get the same amount in cash that I did in 2022 in cash + RSUs. I have no plans on putting 25% of my compensation in any one stock.
Selling my “equity” in a private company once it vested wouldn’t have been an option.
Note for those who don’t know: Amazon has a 5/15/40/40 vesting schedule with their first four year offer. The first two years you get a large pro rated cash signing bonus to make up for the back heavy vesting.
I'm not a tax professional but this hardly seems necessary. Have you consulted with a tax professional to confirm that this is all necessary? How much of a difference does it actually make, i.e. how much tax do you actually pay to MI?
See my answer in https://news.ycombinator.com/item?id=43687920 .
In terms of the amount of tax to MI, it's not a whole lot. A couple hundred dollars. And it doesn't change my total taxes paid, because I get a tax credit for that against my CA taxes. MI's tax rate is lower than CA's.
Are you using autosale? It sounds like you’re manually selling, perhaps that is why it’s so complicated. I used autosale while I worked at Google and had no problems
I used to use autosale back when it existed. Now it no longer exists, and has been replaced by an ETP program.
It's been a while since I used autosale, but I think the problem still existed then, because I think even with autosale the sale price wasn't identical to the vest price, so there were still loss sales, which could be washed. But I think since the sale happened the same day as the vest, the problem wasn't as bad, because in 31-day months, the loss sale couldn't be washed by the next month vest. So there wasn't the case of constantly increasing complexity, because the complexity would reset in 31-day months.
I tried ETP back when it was introduced. I didn't like it. It's been a while, so my memory of why I didn't like it is a little foggy. For one thing, when you're enrolled, you're not allowed to buy or sell any Google shares manually. One of the biggest problems was that there's a cooling off period, and the shares that vest during that period don't get autosold right away, and you can't sell them manually. I think they get autosold a month or so after vesting. My memory might be wrong, but I think that's what happened. Another thing that annoyed me is that my sells got split across 2 1099-Bs: the 1099-B from my individual Schwab account and the 1099-B from my EAC Schwab account. I think shares that vested during the cooling off period went on one 1099-B and the shares that vested during other times went on the other 1099-B. And somehow in the confusion I ended up with some shares that never got sold at all.
Sounds way more complicated these days! That’s too bad, I would expect Google to do a better job
the broker should be adjusting the cost basis in the 1099 to account for wash sale. are you not seeing that? what broker are you using?
RSUs in private companies are super illiquid.
You don't have to pay tax if your RSUs aren't liquid.
This is not true at all. It only has to do with if you have "substantial risk of forfeiture". If they are your shares to own forever, the IRS considers receiving them taxable. This is why double trigger RSUs have expiration dates. It's possible they never become liquid. Therefore they're not your property yet. Therefore you don't owe tax until they are. Or they expire worthless someday, and you don't owe anything.
> You don't have to pay tax if your RSUs aren't liquid
Sure. You also don’t get to turn them into cash the way shareholders can. Consider that it’s been VCs most vocally singing their praises.
> Please just add it up and send me the bill. I don't want to pay more than what's due. And I don't want to cheat.
I have a hard time understanding this comment because this is exactly what employers do when paying out RSUs.
At the end of the year, you get a 1099 indicating the fair market value of shares you've received. There's no trickery here--this is literally the amount you owe income tax on.
I'm not sure what tax software you're using that requires you to guess inputs and numbers. TurboTax makes this trivially straightforward.
Those equity percentages in this document are EXTREMELY FOUNDER FRIENDLY and I believe this entire document was written to anchor new employees with lowered expectations on equity. I think this entire document is a disingenuous scam to make new startup employees think that those percentages are okay.
I’ve been in Silicon Valley a long time, since the dotcom boom. My first company, the executive assistant got so rich from the pre-dotcom IPO she quit and bought a vineyard. That’s how things used to be. And we aren’t talking about some crazy ipo, it was before those times.
Fast forward to these days, the startup I worked for got acquired. I was engineer < 15. The founders got low 9 figures, I got 5 figures. Almost everyone got fucked for years of loyalty.
But that’s what YC and other accelerators teach founders. Be cheap with equity. And this document just perpetuates that.
Founders can easily make life changing money but the people that do the actual work get fucked unless it becomes a >100B company like a Facebook. That’s not realistic and they know that. Employees need a bigger piece of the pie when things go great for the company and not just when it becomes a Facebook, Uber, etc.
If you want to know how to evaluate equity, pick a total valuation of the company at exit and then multiply by your stake. If the company needs to exit at > 10B for you to make a life changing amount of money, then ask for much much more equity or don’t take the offer.
It's crazy how "founder friendly" and "investor friendly" (read: "employee unfriendly") the norm has gotten. I would never work for someone else's startup these days. No way, no how. Four orders of magnitude difference between the founders' exit and the early employees' exit is totally unacceptable.
Yeah, I've been burnt badly by that before.
Which is part of why my founder co-matching profiles mention that I'm looking to spread the equity wealth around among early hires, more than is usual.
If a prospective co-founder is turned off by that, without a really compelling reason, then we'd probably clash on other values as well. And I'd also think there's a good chance they'll backstab me when they think they can.
Ah selection bias is the best shield when being used correctly.
The main issue anyway is if the founders and investors own a controlling stake of the business they can just do whatever they want.
Startups were definitely much better in the past but in the mid 2020s they exist on the stories of 15 years ago to try and hire talent for bargain prices
I don't think your complaint/experience actually lines up with the numbers here.
In the Post-Series A numbers, the lowest numbers are in the ~0.5% range. This is at most 2 figures off what the founders could get together. In a world where founders together got 9 figures, a senior engineer would get 7 figures, not 5 figures like in your situation.
The majority of comments here seem to argue the ideal equity share for employees is zero, since it probably won't be worth anything. That seems like an even more founder friendly viewpoint, no? Mass inequality of ownership is how we end up normalizing the corrupt billionaire class. I agree with you we need an industry desire for better ownership terms, but instead I see people arguing employees should just take a salary, look the other way, and let owners hoard all the spoils.
That is not what people are arguing. Labor sellers should assume equity in a non publicly traded company is worth far less than the labor buyer wants the labor seller to think it is, so labor sellers should demand more cash such that the compensation is competitive with other potential job offers that offer more cash.
Don't get sucked into blind rage over nothing. Why do most employees nowadays prefer cash over options in startups? because for every successful startup where the secretary got a vineyard there are 99 when the startup limps along for 12 years and then closes without a sale. Generational wisdom turned into "Dont get suckered for low wage and options, get a high wage and invest in the S&P".
Will there be lucky founders that become very rich? absolutely. Founders are generally very risk aggressive and are willing to go boom or bust. But for an average person that just want a good life why risk lower living standards for a low change of riches?
If you are very risk aggressive you can push for more equity, but expect your salary to be much lower than your peers. Most veteran SE will advise against it.
Earning a salary in cash doesn’t stop you from investing the cash. I have never earned equity from an employer but most of my net worth is sitting in publicly traded companies. So obviously I am not lacking company ownership just because the company I worked for didn’t loop me in.
The other reason this isn’t true is that equity becomes a lottery ticket that is written in a founder and investor-preferred manner and is used to fleece mostly young employees who don’t know better and are romanced by the thought of being a part of the next Uber or Airbnb.
The practical reality is that it becomes “this job is worth $150,000 but we’ll pay you $100,000 and you can have some equity that might be worth hundreds of thousands if the casino pays out.”
But then you have investor preference multiples, valuation fuckery, and other ways that even a successful exited company can pay out less than your fair share.
To me cash is king because I can invest it however I want. Equity is fine if it’s for a public company, as that’s effectively just deferred cash as an incentive to stay longer.
Came to write this same comment. The first 10 employees of a company are so critical to success and they tend to be drastically underpaid. A founding engineer (often employee 3 or 4) would be lucky to get 1.5% at most places while the CTO has 30-50% and they probably have very equal impact on the company in the early days. And engineers do well by comparison. The first customer-facing roles often get barely any equity at all while they hustle to actually make an idea into a business.
The VCs have convinced the founders that they are special people and they deserve 10-100x the rewards of their best employees. They do this to create room in the cap table for themselves of course. They also give the founders early liquidation opportunities to keep them on their team.
It’s disgusting, and the founders wonder why some people don’t want to grind as hard as they do.
> I believe this entire document was written to anchor new employees with lowered expectations on equity. I think this entire document is a disingenuous scam to make new startup employees think that those percentages are okay.
Have to love the HN crowd. A guy goes out of his way to write a very detailed, high-quality guide demystifying a very complex and consequential topic, open sources it so it's free, and immediately people suspect the entire document is build just to make startup employees think lower percentages are OK?
Disclaimer: I know the author personally, so can definitely attest to the motivation behind this guide. I'll also say I've used this guide both as a founder and as a startup employee and it's been immensely helpful.
Both can be true!
The fact that you are a founder that agrees with these extremely low equity percentages for early employees confirms exactly my point. It's to anchor lowered expectations for new employees coming in.
I stand by exactly what I wrote.
Genuinely curious. What percentages do you think are fair and why? As both a founder and employee, I anchored to the market. But maybe the market isn't fair. So what is?
Conspicuously missing from this is any discussion of clawbacks or repurchase rights, which can be a big deal. Sadly most people do not seem to be too familiar with these, but they should as they are quite common and very dangerous to employees.
https://www.stockoptioncounsel.com/blog/standards-ownership-...
Also missing, any discussion of equity-like or profit-participatory structures from LPs (limited partnerships).
Technologists joining one of these should know the "business domain" "partners" are either buying into or awarded partnership interests, but structures can be available for non-business domain roles (in firms that think technology isn't in their business domain cough), such as "profits interests", "synthetic equity", "phantom equity", or etc.*
If the firm has a product and you're helping build it, look for equity-like that let you not only share in profits (if any, most starting things don't have profits) but have a stake in capital events (from asset sale to IPO).
Think of these two forms as something like dividends and something like a combination of options and RSUs. If the profit component is intended as part of annual comp, it should pay at 100% from the start even if you don't "own" it until you vest. Meanwhile if it's a future reward, then both it and the capital-like would have a "tail" that remains in effect if profits or a capital event happens after you leave.
These are very complicated and very bespoke per firm since they are 'made out of' the partnership interests of the LP where ownership is handled as "capital accounts" and may have no accounting method for "goodwill" value separate from partner capital accounts. In such cases, generally partners have shaved off some portion of their rights and allocated those rights to employees, and the mechanisms of this "waterfall" amount to where you stand in that line if at all.
Ideally (a) seek advice from someone experienced with these that (b) you don't have to spend $1200 an hour on.
* Partnerships that understand their business domain is in the technology business — since technology is just another word for tools, and business humans should be tool crafters too — will be using this and have told you about it during interview, and it will all go more smoothly.
clawbacks are not common, and no one should ever accept such a package. (maybe executives, since they may have other golden parachute provisions.)
repurchase rights are exceedingly common.
Another resource I've found very useful (disclaimer - no affiliation on my part) is
https://fairmark.com/compensation-stock-options/
There are several books also available, including a 2014 book aimed at financial planners and tax advisors that I have on my shelf and find myself consulting several times a year, as it is still pretty relevant under today's tax law.
Equity compensation is an essential part of modern corporate incentive structure. In particular, it incentivizes prospective employees to accept lower compensation, by making it appear larger on paper.
I've always evaluated it at 0, and that's all I got from the equity I got in my whole career. If I didn't think the salary was enough I wouldn't have accepted.
AKA fraud.
This seems mostly geared toward private companies that grant equity. As it’s part of the Galloway series that targets this audience that makes sense.
I do wonder how much of this applies to RSUs granted by public corps
Basically none of it. RSUs at public companies are as good as cash that just happens to be pre-invested. The tax implications are very simple (they're just regular income like getting paid in cash), and so are your legal rights (you're not much different from anyone who bought a share on the stock exchange). You should risk-adjust their value like any investment, but there's are very few if any sneaky things that can happen to pull the rug entirely.
Would they be referring to that here?
https://github.com/jlevy/og-equity-compensation/blob/master/...
> Topics **not yet covered**:
> - Equity compensation programs, such as [ESPPs](https://www.investopedia.com/terms/e/espp.asp) in public companies. (We’d like to [see this improve](#please-help) in the future.)
My personal preference has been for post series B companies that have some kind of name recognition and legitimate business model. You get less equity but the chances of the equity being worth something is higher. Plus its a smaller team: just a personal preference, I like smaller teams.
I got hit with a new equity compensation fugazi with RSUs at a small public company recently.
My offer letter pledged something like $100,000 of stock, vesting over four years. I was told that I would receive the grant within the first three months of my employment, once it was approved by the board.
Once I finally received the grant, it was 1/5 of what it should have been. “What gives?”, I inquired.
Apparently the stock incentive plan has a “price floor” for grants at $5 / share, and the stock had plunged to approximately $1 / share at my time of hire.
So my offer letter says my grant is for $100k, but in reality it’s $20k.
I learned this was because there was a limited pool of stock available for employee award grants, and a recent rout in the stock price meant there was an insufficient amount of stock available for grants.
Apparently going forward, offer letters specify the number of RSUs rather than a $ amount. So I guess a charitable interpretation is that it may not have been so much an intentional deception as a set of unfortunate circumstances coming together with some poor oversight on the details of my offer letter.
Still, I am incensed.
I referred to a previous employer’s offer letter and RSU grant for comparison. The offer letter also specified a $ amount, and did not specify how it would determine the price of the stock to calculate the awards by.
In that case, it seemed to be the average closing price of the stock in the month the award was granted. Which I’m content with, but these details also were not specified in the offer letter.
tldr if you get an offer letter for a $ amount of RSUs, make sure to clarify (in writing) how the valuation of the stock is determined for the calculation of the number of units awarded.
Oh that is bad! It is a 20k/y pay cut you weren't expecting.
If they were keen to make amends they should just bump your pay that much. Unless they are struggling.
By the way I have a similar RSU amount and schedule. So gar so good but cognizant that in the contract they can stop it at any time. I took the risk as I can also quit at any time!
This is strange and possibly illegal. If the stock falls, you should get more stock since they’re worth less. If they don’t have enough stock then they shouldn’t have offered you that as compensation.
In any case… $1- $5 is penny stock territory. I believe you get delisted from NYSE if ur stock stays at $1 for too long.
All of the RSU offers I ever got stipulated the grant was "subject to the approval of the board", i.e., not guaranteed. That said, I'd be absolutely livid if something like this happened, and would be expecting my manager to either make it right, or I'd look for a new job at the first available opportunity.
You can't do good business with bad people.
I got offered .3% as a first developer at a company. That's just insane.
No benefits, $45k pay cut, and even when everything goes well I might break even.
Were they people you'd like to work with on a project you'd like to help build? Maybe it's worth it. Life is for living, after all, and we do a lot of our living at our jobs; there's more to consider than just what you get paid.
I would not want to work so closely with someone trying their hardest to minimize the benefit to me. Since life is for living, we should work on teams where there is genuine respect for all members, not animosity and greed.
The sad fact is that being able to work just for personal satisfaction and not just for money is an extremely privileged position.
Until they get rich off your labor and you get bitter about it.
Isn't it just insane from your point of view. For somebody else couldn't the same offer be appealing?
My personal preference only: I'm glad my current employer has no equity compensation altogether; just base salary and bonus. My former employer did have RSUs, but they have an auto-sell program that I utilized every year.
In college the computer science department had an extracurricular talk about finances for a software engineer; the invited speaker was very adamant that holding most of your net worth in a company that employs you was an unacceptable concentration risk. I remembered that to this day.
A lot of employers who only pay cash have salaries similar to companies that pay cash salary plus equity. Perhaps the equity won't be worth anything, but often times it's extra on top of what's being offered. Those accepting cash only are often leaving potential expected value on the table.
Not true at all in my experience. Employers who do not give equities tend to pay much more generous bonuses.
Is there a way to find out current average/going price of shares (I have ESOPs; I have not yet exercised and was laid of sometimes ago) of an unlisted US company? I would also not like the company to find out (if possible).
Can I even sell in secondary market? I do not live in USA. Can the company stop me from selling and also refuse to buy it back themselves?
A guide for non-US employees at US companies that offer equity would be super helpful. It's an absolute minefield, especially in Britain. I'd love to contribute that information to your guide if contributions would be considered?
I've earned stock options from three startups and none of them ever went public. The only company that ever actually paid me equity was Amazon and it was a pretty big payout. You will earn a lot more with RSUs than options.
This doesn't even mention ESOPs[1], which have very favorable tax benefits in the US. I don't think that ESOPs are very compatible with high-risk/high-reward startups, but for businesses that turn a profit and grow at a sustainable rate, they are excellent.
[1]: https://en.wikipedia.org/wiki/Employee_Stock_Ownership_Plan
Any suggestions on the topic relevant for other countries than the US?
Just a few weeks ago, I met a CTO that got the company to a series A level of revenue by building the whole product over two years. Was fired by the CEO, who brought on new investors, recapped the equity table, and drove his option value to almost nothing.
The guy is now a senior engineer at a decent company, but effectively had 10+ million of value he created lifted from his hands.
These stories are extremely common
One thing not pointed out in the article, but I would like to hear others perspective on, is what happens at the 4 year mark when all options are fully vested and exercisable. This is a scenario for employees that have been there long-term. Should requests be made for further option grants? Should employers think about further option grants to retain employees? What are people’s thoughts and experiences?
You should be getting refreshers every year. If you don't then you are either not negotiating hard enough or the company just doesn't want you around for the long term.
There is a mistake on NSO in this guide, there is not tax on grant even if the strike price is lower than FMV.
Can you provide a reference for this?
The sin in Silicon Valley’s equity model is the lack of voting rights attached to employee shares. Once an ESOP plan has more than 1,000 members (or an employer more than 1,000 employees), the ESOP should—as a class—get a Board seat.
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After seeing several option grant story arcs from start to finish (including one I’ve experienced personally), I find this type of compensation utterly worthless and frankly insulting to the workforce.
What happens in the average case scenario when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).
Let’s run the math here really quickly. You leave your high paying, hard, cold cash job at megacorp XYZ (let’s call it $300k), to join hot startup ABC that just raised a series A at a $50MM post. The startup offers you $150k in cash because … everyone is in it for “the mission”, and if they’re generous another $250k in options compensation to basically be on par with the XYZ salary that you’re leaving. Now, that $250k options grant is based on where the founders want the company to be by the time that your vesting schedule starts kicking in. So really, what you’re getting is more like 0.25 of the company if the company hits $100m valuation. We’re not going to even bother discussing pref, dilution and all the other factors that are constantly fighting to reduce that equity value. ANYWAY… once you vest you’re presented with the right to exercise, which costs money and is going to result in a tax bill which…costs money. Now you’re a wise financial planner and know that the sooner you exercise, the less tax you have to pay in the case of a liquidation event…so you fork up the cash. Now what’s it going to cost? Probably not 0, because strike prices are determined based on the valuation of the company when the options are issued…so you’re probably more in line to spend maybe $50k if you’re lucky but mostly closer to $100k. If there hasn’t been a 409A adjustment, you don’t have to pay tax on that. Now if you’re closer to a series B and let’s say the founders got where they wanted to be and valuation doubled, the 409a was filed and now you get to pay regular income tax, so you find yourself being taxed as if you just made that coveted $250k…but you didn’t. You are making an investment … just like any other investor, albeit with a lot less favorable terms. The best part is..guess what? If your circumstances change and you want to move on to a different job, you are now getting to choose between staying with the company until it has a liquidation event..or you have to effectively invest in it. Pretty shitty deal!
Now, this obviously assumes that you exercise your options and that you’re trying to optimize your tax bill. You could just as well be vesting and staying with the company for a long period of time, not having to really exercise your options and effectively you can make a ton of money without putting anything up for equity besides your sweat. Or you could have stayed at megacorp and taken that half of your salary that you gave up to invest in this ABC startup OR maybe a big bundle of the same kinds of startups with a much better risk profile because of diversification (and less reward).
Now let’s actually talk about a happy case. You joined early, you’re now an exec, you earned your stock, you vested, the company was gracious enough to give you a low interest loan to exercise your options…you’re golden. Company is getting acquired by a legacy big pocketed company or PE firm, you’re about to make bank and retire early. BUT…there is a caveat. During the sale proceedings it has been decided that half the purchase price is going to be stock and half is going to be cash. Moreover, all the execs should roll half of their equity into the new venture and you’re locked in for another 3 years, but now…you’re holding equity in a totally different beast of a company and you have 0 say or idea as to how that company works or trades.
In any case, as one of the comments here said…there are a lot more ways for your options to be worth nothing than there are for you to become rich from them. There are just too many variables to consider. It is not a good way to become rich. In order for it to be worth it, you have to be at a company that succeeds in making your equity worthwhile despite all of these caveats.
Your description seems directionally correct, but I don’t understand this part:
> You are making an investment … just like any other investor, albeit with a lot less favorable terms. The best part is..guess what? If your circumstances change and you want to move on to a different job, you are now getting to choose between staying with the company until it has a liquidation event..or you have to effectively invest in it. Pretty shitty deal!
Why would you have to stay with the company after you vest? Is there some kind of clause that strips you of your share ownership or forces you to sell if you leave the company?
> Why would you have to stay with the company after you vest?
I'm assuming they are referring to someone that _did not_ exercise their options and is leaving.
[you might already know the following based on the rest of your comment, but thought i'd add it]
With options, vesting is only half of the story; you need to exercise the options which converts them to shares. ISO options (what you get as an employee) have a PTEP (Post-Termination Exercise Period) that gives you 90 days from voluntary leave (maybe varies?) to decide whether or not you'll exercise. If you don't exercise, you forfeit them.
I believe the longer PTEPs that you hear about (5-10 years) do some ISO->NSO conversion which changes the tax situation, but at least gives you flexibility & wait for some liquidity event before committing the cash.
That must be correct. The phrase “You are making an investment… “ followed by a discussion of whether or not you should invest threw me off.
Another common one, is you hold a big equity position, but get pushed out/leave early long before there is an exit event. The investors and executives still at the company will fuck you over on your options, and like diluted your options after you left. This happens literally all the time, and if you arent the CEO, there is almost nothing you can do.
Just a few weeks ago, I met a CTO that got the company to a series A level of revenue, by building the whole product over two years. Was fired by the CEO, who brought on new investors, recapped the equity table, and drove his option value to almost nothing.
Statistically, stock options are often lottery tickets that the holder may have a tiny say in.
It's hilarious that people still take them seriously.
Just remember this is the forum run by the dudes that set up Sillion CON Vallee bank.
> this is the forum run by the dudes that set up Sillion CON Vallee bank
No. Y Combinator didn’t found SVB.