Just how much is that 2% really worth?(tejusparikh.com)
tejusparikh.com
Just how much is that 2% really worth?
http://www.tejusparikh.com/projects/equity_calculator/index.html
157 comments
>If you want to make millions in software, get a job writing code at a bank and invest your salary.
This is actually a very good piece of advice.
This is actually a very good piece of advice.
Very true, and thanks for the link.
I think that this also applies the other way around. If you're a founder building your early team, you should not hire people who want to join because of the equity. You should be bringing in people because they want to work on the problem for the salary that you can give them or promise to give.
If you hire someone who has an expectation that he will make a million dollars in 4 years - it can lead to a lot of bitterness while you are building the product - especially when you are having a few bad months. Have seen this happening a bunch of times.
Equity != Money, equity ~= the percentage of ownership and responsibility.
Edit: Salary AND relatively high ownership of the company / product. Some people don't mind taking risks if they have an opportunity to build and own something great.
I think that this also applies the other way around. If you're a founder building your early team, you should not hire people who want to join because of the equity. You should be bringing in people because they want to work on the problem for the salary that you can give them or promise to give.
If you hire someone who has an expectation that he will make a million dollars in 4 years - it can lead to a lot of bitterness while you are building the product - especially when you are having a few bad months. Have seen this happening a bunch of times.
Equity != Money, equity ~= the percentage of ownership and responsibility.
Edit: Salary AND relatively high ownership of the company / product. Some people don't mind taking risks if they have an opportunity to build and own something great.
@equity ~= the percentage of ownership and responsibility.
I think this holds in starting but ownership and responsibility is more on people's attitude. The equity will also remains the same(in %).
I like your point about not joining/hiring to make few millions in 4 years. It probably is a driving factor in start but wont sustain for 4 years. Again people's attitude.
I think this holds in starting but ownership and responsibility is more on people's attitude. The equity will also remains the same(in %).
I like your point about not joining/hiring to make few millions in 4 years. It probably is a driving factor in start but wont sustain for 4 years. Again people's attitude.
> equity ~= the percentage of ownership and responsibility.
The entire point of the corporate form is separating degree of ownership from degree of responsibility.
The entire point of the corporate form is separating degree of ownership from degree of responsibility.
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>If you want to make millions in software, get a job writing code at a bank and invest your salary.
Really? Even if some 'banks' pay better, these banks tend to be located in a handful of cities in the world - but there are startups in a lot of more locations.
And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000, not far ahead of the average base salary of $87,000 for a software engineer at a tech company, according to salaries self-reported by employees on the jobs and careers site Glassdoor.com. http://www.marketwatch.com/story/silicon-valley-vs-wall-stre...
Really? Even if some 'banks' pay better, these banks tend to be located in a handful of cities in the world - but there are startups in a lot of more locations.
And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000, not far ahead of the average base salary of $87,000 for a software engineer at a tech company, according to salaries self-reported by employees on the jobs and careers site Glassdoor.com. http://www.marketwatch.com/story/silicon-valley-vs-wall-stre...
I think you may be missing the point. The way to make millions was less about "work at a bank" and more about "invest your salary". With any decent salary and good financial planning, a few million dollars by retirement is easily within reach.
The best in finance have most of their compensation on a perfomance-bonus basis.
so for a highly sought after trading associate (real example, really high valued financial institution), get 100k base but also getting forward guidance for a 200k bonus at an absolute minimum - e.g. if not turning out to be completely incompetent.
so for a highly sought after trading associate (real example, really high valued financial institution), get 100k base but also getting forward guidance for a 200k bonus at an absolute minimum - e.g. if not turning out to be completely incompetent.
And the best in software make tens of millions. What is your point? If we're comparing outliers, software engineers at software firms win by a long shot.
I think you've misunderstood my point, and in the process of doing that you've made one about which you are, in my experience, wrong.
1.) My point was to answer (here, I'm quoting)
> And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000
by saying (and here I'm quoting the first sentence of my post)
> The best in finance have most of their compensation on a perfomance-bonus basis.
which is a relatively straightforward clarification, and on which point I went on to cite 100k base + 200k bonus.
As to the second point?
2.) I've yet to meet anyone "software engineers at software firms" who "make tens of millions". Or maybe that's just biased to my age group? But the best from my circles turned a 200+ offer to found a startup, and then a year after that didn't work out, has since taken a 300+ offer. I can assure the level of talent required for something like this is, indeed, atypical.
But I also can't say that you're wrong, since I can't say I'm familiar with every outlier case. Just that your experience has been different?
Well, at risk of sounding nasty, I actually don't think what you're talking about -- again, people working as software engineers at software firms making annual incomes measured in multiple 8-figures -- exists anywhere, even as an outlier.
1.) My point was to answer (here, I'm quoting)
> And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000
by saying (and here I'm quoting the first sentence of my post)
> The best in finance have most of their compensation on a perfomance-bonus basis.
which is a relatively straightforward clarification, and on which point I went on to cite 100k base + 200k bonus.
As to the second point?
2.) I've yet to meet anyone "software engineers at software firms" who "make tens of millions". Or maybe that's just biased to my age group? But the best from my circles turned a 200+ offer to found a startup, and then a year after that didn't work out, has since taken a 300+ offer. I can assure the level of talent required for something like this is, indeed, atypical.
But I also can't say that you're wrong, since I can't say I'm familiar with every outlier case. Just that your experience has been different?
Well, at risk of sounding nasty, I actually don't think what you're talking about -- again, people working as software engineers at software firms making annual incomes measured in multiple 8-figures -- exists anywhere, even as an outlier.
The "tens of millions" (for outliers) is exaggerated, I'll give you that. What I meant to say, perhaps a bit more tactfully was that if you're an above average software engineer capable of getting a Wall St/Hedge fund type job, you will also have options of riding "rocketships" where your equity package can turn out to be several-millions to tens of millions. And your base pay these days will also not be anything small, although perhaps not as large as Wall St.
I also happen to know quite a few finance guys at top tier shops who are not quite cracking google-level compensation, even all in. But this is all anecdotal, and may not be representative of shops you're talking about.
I also happen to know quite a few finance guys at top tier shops who are not quite cracking google-level compensation, even all in. But this is all anecdotal, and may not be representative of shops you're talking about.
I think about startup employee equity like this:
Salary = compensation for doing the job
Equity = compensation for taking the risk of working at a company with a high chance of failure
Therefore, in the future, an employee with lots of equity should still be paid a normal salary/raise/bonus because the equity isn't "current" compensation for doing the job, but a reward for taking a risk long ago.
But ignoring equity entirely is silly. Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.
Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool.
Salary = compensation for doing the job
Equity = compensation for taking the risk of working at a company with a high chance of failure
Therefore, in the future, an employee with lots of equity should still be paid a normal salary/raise/bonus because the equity isn't "current" compensation for doing the job, but a reward for taking a risk long ago.
But ignoring equity entirely is silly. Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.
Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool.
I had a job offer once that gave me two options to choose from, which was really cool.
In which they suckered you into a false dilemma. You should always reply to those stupid negotiating tactics with "Both. Higher salary and more options."
In which they suckered you into a false dilemma. You should always reply to those stupid negotiating tactics with "Both. Higher salary and more options."
Perhaps. I was younger then and didn't feel comfortable negotiating. I'm better at it now. He even had to explain to me how options worked.
But I learned a lot from working with him and met people that I still keep in contact with. I don't regret my choice to take the offer.
But I learned a lot from working with him and met people that I still keep in contact with. I don't regret my choice to take the offer.
Do you have any place you'd suggest online to learn more about options?
"Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.
Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool."
So the two options you were given was more cash less equity or more equity less cash. Doesn't that negate your point that you should consider salary and equity separately? I don't really see from a financial perspective how you can seperate the two when considering a job as both relate to the risk you are taking.
So the two options you were given was more cash less equity or more equity less cash. Doesn't that negate your point that you should consider salary and equity separately? I don't really see from a financial perspective how you can seperate the two when considering a job as both relate to the risk you are taking.
I don't think it negates my point. It's just that I don't follow my own advice perfectly. :)
It's also a little similar to how founders essentially work for free in exchange for lots of ownership. If, as an employee, I can work for less money now, then I'm taking a bigger risk betting on the outcome of the company.
Startups often want to minimize cash flow, and some employees are interested in helping out with that in exchange for having more ownership. So it works for both sides.
But I try to keep "doing the job for salary" and "taking a risk for equity" separate in my mind.
It's also a little similar to how founders essentially work for free in exchange for lots of ownership. If, as an employee, I can work for less money now, then I'm taking a bigger risk betting on the outcome of the company.
Startups often want to minimize cash flow, and some employees are interested in helping out with that in exchange for having more ownership. So it works for both sides.
But I try to keep "doing the job for salary" and "taking a risk for equity" separate in my mind.
I'm not sure I see your point. Isn't what you are describing the risk reward ratio:
http://www.investopedia.com/terms/r/riskrewardratio.asp
By trading salary (you could get paid more at a big co) for equity you are inherently making a financial decision by investing the difference. Keeping these things seperate is not the same as not thinking about them.
If you are talking taking about taking a pay cut to work with people you really like or to do more interesting or less stressful work then I understand. Apart from that I don't see any reason why you would take less salary unless you think the rick reward ratio was favorable.
http://www.investopedia.com/terms/r/riskrewardratio.asp
By trading salary (you could get paid more at a big co) for equity you are inherently making a financial decision by investing the difference. Keeping these things seperate is not the same as not thinking about them.
If you are talking taking about taking a pay cut to work with people you really like or to do more interesting or less stressful work then I understand. Apart from that I don't see any reason why you would take less salary unless you think the rick reward ratio was favorable.
My original point was that ignoring equity when evaluating a job offer isn't the best approach.
Most job offers don't include two options to choose from. Since I did have that choice, I evaluated my options exactly as you mention: whether to (effectively) invest the salary difference in exchange for more equity.
In most cases, job offers don't include that choice. If that had been my situation too, I would have evaluated whether the salary was worth doing the job. And then evaluated whether the equity was worth the risk of joining an insecure company.
But since this isn't an absolute rule, I might have tried to negotiate more equity if the salary wasn't quite high enough for me to make the jump. Or maybe asked for extra vacation time, or the option to work from home. (I've done all of those.) I know salary and equity cannot be kept totally separate, but I do start there when evaluating how I will respond to a given job offer.
Most job offers don't include two options to choose from. Since I did have that choice, I evaluated my options exactly as you mention: whether to (effectively) invest the salary difference in exchange for more equity.
In most cases, job offers don't include that choice. If that had been my situation too, I would have evaluated whether the salary was worth doing the job. And then evaluated whether the equity was worth the risk of joining an insecure company.
But since this isn't an absolute rule, I might have tried to negotiate more equity if the salary wasn't quite high enough for me to make the jump. Or maybe asked for extra vacation time, or the option to work from home. (I've done all of those.) I know salary and equity cannot be kept totally separate, but I do start there when evaluating how I will respond to a given job offer.
Isn't it the case that they have been decoupled such that a prospective employee could negotiate for a higher salary than that which was calculated on the risk/reward see-saw, merely by saying they have to protect themselves from a Zynga option-clawback scenario? It's not a hypothetical.
>Equity = compensation for taking the risk of working at a company with a high chance of failure
But if you are getting a normal salary, what is this risk?
But if you are getting a normal salary, what is this risk?
You're probably drawing lousy benefits and a no-frills 401k with bad funds. Plus the bonus of having to figure out when the payroll dollars run out.
I worked at a startup where towards the end before their buyout, they weren't paying the phone bills, and their core profit center was a call center. When you work in that situation and trying to troubleshoot downed circuits, which turn out to be shut off for non-payment, that's some serious stress.
Right now I work for a government org with some really awesome technology challenges. Plenty if politics, but also security and ok pay. I'd rather have a constitutionally protected pension and startup+ pay than startup pay and no equity
I worked at a startup where towards the end before their buyout, they weren't paying the phone bills, and their core profit center was a call center. When you work in that situation and trying to troubleshoot downed circuits, which turn out to be shut off for non-payment, that's some serious stress.
Right now I work for a government org with some really awesome technology challenges. Plenty if politics, but also security and ok pay. I'd rather have a constitutionally protected pension and startup+ pay than startup pay and no equity
It is much more likely the startup will fail than an established company. Consequently startup employees are taking a greater risk than established company employees. This, however, isn't really reflected in salary and is instead reflected in the lottery ticket/equity grant.
And just to add: my view is that at a startup, "market rate" is too low, even with equity on the table (to a certain extent--if it gets to double-digit equity my opinion is the negotiation isn't about bringing on an employee so much as a legitimate co-founder) especially given the broad responsibilities early employees are tasked with and the high likelihood of failure.
And just to add: my view is that at a startup, "market rate" is too low, even with equity on the table (to a certain extent--if it gets to double-digit equity my opinion is the negotiation isn't about bringing on an employee so much as a legitimate co-founder) especially given the broad responsibilities early employees are tasked with and the high likelihood of failure.
That is a bit shortsighted way to look at value added for being part of a startup. Experience and an elevated role can increase earning power regardless of the start-up outcome.
I think you're either overestimating the value of experience and title gained at a startup, or undervaluing the same at established companies, or possibly both.
Having a role at a startup doesn't automatically imply useful experience has been gained, or that the specific position and duties are somehow more solid than equivalent roles at established companies.
Having a role at a startup doesn't automatically imply useful experience has been gained, or that the specific position and duties are somehow more solid than equivalent roles at established companies.
You're assuming this evaluation is from the point of view of someone early in a programming career. If you've already got a bunch of experience, and had elevated roles, the cost benefit analysis is going to be different.
It's the risk you'll be out of a job in three months when the seed funding runs out, right before your benefits kick in.
That you can lose that job all of a sudden.
Increased risk of losing your job.
Right, but for engineers working in startup hubs, is that really a risk? You can pick up a phone and have a parade of offers on your desk in a few days.
At most your risk is missing out on, say, a week's wages between jobs.
At most your risk is missing out on, say, a week's wages between jobs.
There are many of us on an H1-B here potatolicious. Technically I get 10 days to wrap my affairs and leave the country, not to mention losing any greencard application...
I'm also on a H1B, transferring one is trivial, though you're right that green cards make it more complicated.
You may loose your job at start up at the most unfortunate moment. In 2000 you can find 10 jobs in about an hour, in 2001 you could not find one job if you life dependent on it. Big companies do layoffs too of cause - but probability to be cut is lower and they almost always offer generous severance package. Also your personal circumstances may make lay off extremely inconvenient - for example right before child is born or you have medical emergency.
You should definitely get some premium for this risk - how much is open to interpretation.
You should definitely get some premium for this risk - how much is open to interpretation.
So why the hell do startups bother offering equity? It seems like for the founders there are only downsides in offering it, while for the employees there is no upside at all. Perhaps a better model for a two founder startup looking for a first employee is to just find a third partner who will only take equity (that is in double digit percentages), then actually start paying only salaries to person 4+.
That's the same as asking why do startups bother with starting a company. If the startup succeeds, you want employees to be aligned with the company success and motivated to stay and vest. If the company doesn't succeed, the equity is worthless.
From a strictly monetary point of view (as in, not counting the type of environment in which you want to work, etc.), let's say E1 is the expectation value of a payout of your equity in cash. So E1 = probability of a sale where your type of stock does not get screwed * cash value of your stock in this deal. E1 is by all accounts and all advice incredibly low.
Now let's look at E2 which will be the expectation value of a payout from investing your salary difference between a high paying corporate job and a startup. Let's set this number at a safe value of $50,000/year. Invest $50k a year for 10 years in some safe stock and bond mutual funds and I bet E2 and much higher than E1. Heck, invest $50k year in lottery tickets and you might make out better than working at a startup.
That's not to say you should ignore startup jobs. They have a ton of other benefits. Just seems like equity is not one of them unless you are a founder.
Now let's look at E2 which will be the expectation value of a payout from investing your salary difference between a high paying corporate job and a startup. Let's set this number at a safe value of $50,000/year. Invest $50k a year for 10 years in some safe stock and bond mutual funds and I bet E2 and much higher than E1. Heck, invest $50k year in lottery tickets and you might make out better than working at a startup.
That's not to say you should ignore startup jobs. They have a ton of other benefits. Just seems like equity is not one of them unless you are a founder.
My former employees from IndexTank would differ. Our acquisition was life-changing to them. They didn't value equity at all when they joined, yet it worked out really well.
You can think of employee equity as insurance against "I joined Facebook early and all I got was this lousy t-shirt."
You can think of employee equity as insurance against "I joined Facebook early and all I got was this lousy t-shirt."
That is really good for you and your employees (no sarcasm intended at all; it really is a good thing). However, this case is an outlier. The percentage of startups that straight up fail or at least don't get sold is huge. The percentage of startups that succeed and make it to a sale/IPO but don't get a high valuation at this point is huge. The percentage of startups that get sold/go public but don't pay out or don't pay out enough to their common stock holders is huge. It's true that every lottery winner thinks that the $2 lottery ticket they bought was a great investment. That doesn't mean that investing significant amounts of money/time in lottery tickets is sound investment advice.
I think people who equate startup equity with lottery tickets don't really belong in startups to begin with. The whole point of working at a startup is that you go there and you make it succeed. Now of course there is still luck involved, and you shouldn't be so naive as to blindly take every founder's change-the-world pitch at face value, but whether you are a founder or early employee you have to believe that you can make it work.
There is a huge difference between making a startup succeed and a sale that pays out to you. A startup can get sold for lots of money but if during that sale your stock is not set up to be paid out, you lose. As an employee you can make a difference for whether the sale happens or not. You have very little control over how it happens.
Seems like you're moving the goal posts. I acknowledged luck in the equation, but how the sale happens has a lot to do with the founders, that is the people you decided to fall in with. Again, it's different from a lottery ticket because you can have knowledge about the founders, their track record and there modus operandi. The average first time startup employee might not have a clue, but that doesn't mean it's impossible to gain good insight that you can apply in your decision to join as an employee.
It's not impossible to get life-changing money by being an employee in a start-up. But it does require a bunch of things to all line up, many of them outside of the employee's control, many others the employee hasn't even considered.
Because early on when you only have 500k-1M in the bank, you can't get the tier-1 150k+/year engineers and preserve your runway easily. Also, base+equity allow people a bit more of a trial period and spreads out the risk more. Lastly, retention is super important and you want to align risks/rewards. The idea is that you are giving people stock and diluting your share because you have conviction that post-dilution your sum will be a LOT more. :)
FWIW, I joined a startup as that third partner (domain expert + execution guy), taking 10% of the equity while collecting 70k/yr (my base rate is north of 200k/yr otherwise). It would have brutalized the startup's seed money and jeopardized them if I somehow didn't perform and deliver.
FWIW, I joined a startup as that third partner (domain expert + execution guy), taking 10% of the equity while collecting 70k/yr (my base rate is north of 200k/yr otherwise). It would have brutalized the startup's seed money and jeopardized them if I somehow didn't perform and deliver.
Right, so in your case it makes perfect sense. You are a third partner with a 10% stake in the company. Contrast this with a first employee who is getting a 1% stake and less than half the normal salary. Would you have taken this position for a 1% stake, all else being the same?
Edit: your point is that good engineers cost $150k (really closer to $200k with taxes, etc). That's correct. So what happens when these engineers as a group realize that taking $70k + 0.5% equity is not the same as taking $150k + full benefits elsewhere? What other options do startups actually have at that point? More importantly, will this point happen and will it happen soon?
Edit: your point is that good engineers cost $150k (really closer to $200k with taxes, etc). That's correct. So what happens when these engineers as a group realize that taking $70k + 0.5% equity is not the same as taking $150k + full benefits elsewhere? What other options do startups actually have at that point? More importantly, will this point happen and will it happen soon?
For retention. If the company actually starts taking off, the equity keeps people there. If they don't have equity, every person with a decent title at a fast growing startup will jump ship to other competitors immediately and get a big (cash) raise. The equity keeps people in the fast growing startup longer. Golden handcuffs and all that.
But if it's worthless, and the employee realizes it, then it will not serve its purpose. Case in point: my last gig gave me something like 0.15% of the company vested over 4 years. I left after 2.5 years and the equity did nothing to keep me there even though the company was in a reasonable place financially. Why? Because 0.15% * the valuation * likelihood of a sale * sale price * likelihood of my shares actually being given any value in a sale is effectively 0.
Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.
Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.
Conversely, if the startup starts taking off, the startup might look for an excuse to fire you to weasel out of paying your unvested options. That happened at Zygna and Facebook.
So, there are several bad things that can happen with options/equity.
1. The company fails, the options are worthless
2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience).
3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).
So, there are several bad things that can happen with options/equity.
1. The company fails, the options are worthless
2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience).
3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).
in my case I built the product and got sales going on my own. Lived EXTREMELY frugal for the next two years and stashed away six figures of profits. At that point I decided to bring people on at market rate salaries. Investors were impressed and since the need was on their end, they gave me quite a sizeable first round of investment, which I used to hire more people at market rate
Equity clearly has some value though, based on the fact that in any successful startup investors pay a lot of money for it.
If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there).
Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.
If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there).
Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.
The difference between an employee and an investor is that the investor puts their eggs in many baskets, and an employee puts all of their eggs in one basket. So investors get diversification of risk while employees do not. Therefore consistently accepting low probability but potentially high return choices on average works out well for investors and not for employees. And in fact investors push this way - their incentive is always to "swing for the fences" because their business model is based on the one or two investments that work out which pay for the failures.
If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it.
When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed.
If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will.
But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.
(Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)
If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it.
When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed.
If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will.
But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.
(Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)
'Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.'
I think this is spot-on.
I think this is spot-on.
hmm, I just got a gig where we want to cut a salary/equity deal (we're checking each other out for mutual fit via hourly at first). I will be in no way a founder, but it appears to me that my job will be in significant part to get the code into a state where it's in a state for handover for acquisition.
So I don't think it's quite that clear cut.
So I don't think it's quite that clear cut.
I am also in the 'worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder' category. What I meant to say is that founders take more risk and get more equity than early employees, and that is how it should be.
Once a company has enough revenue (or investment money) to hire employees, much of the risk has already been removed. A product is either prototyped and tested or partially built. Discussions with potential customers have already taken place. Initial marketing strategies and plans have been made. And founders often do that without getting paid or even a guarantee that they will ever get paid.
They also end up with 10x-20x more equity than an early employee who gets paid a normal salary.
So if equity in a company is highly motivating, and you don't mind working on an exciting idea knowing that you may never see any money, then founding a company might be a good fit.
Or you can make job decisions now that will help you learn to be a founder in the future.
Founding a company is a roller coaster of joy and despair, so it's not for everyone. I haven't tried it yet, but a side project of mine has felt like that roller coaster. I can only imagine that doing it full-time would be the same, except magnified.
Once a company has enough revenue (or investment money) to hire employees, much of the risk has already been removed. A product is either prototyped and tested or partially built. Discussions with potential customers have already taken place. Initial marketing strategies and plans have been made. And founders often do that without getting paid or even a guarantee that they will ever get paid.
They also end up with 10x-20x more equity than an early employee who gets paid a normal salary.
So if equity in a company is highly motivating, and you don't mind working on an exciting idea knowing that you may never see any money, then founding a company might be a good fit.
Or you can make job decisions now that will help you learn to be a founder in the future.
Founding a company is a roller coaster of joy and despair, so it's not for everyone. I haven't tried it yet, but a side project of mine has felt like that roller coaster. I can only imagine that doing it full-time would be the same, except magnified.
Okay, so let's look at it as an investment.
Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it.
Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell.
And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings).
This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move.
I am not a financial advisor, this is not advice, blah blah blah...
Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it.
Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell.
And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings).
This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move.
I am not a financial advisor, this is not advice, blah blah blah...
Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.
I think you're confusing some concepts here. Dilution happens when new shares are issued causing your percentage ownership to go down. In general it's not a bad thing - when there's a new funding round the new cash will increase the value of the company to balance out the dilution and you end up with your equity being the same value. The thing people forget about when they talk about dilution from new rounds is that the cash added to the balance sheet increases the value of the company, probably even more than 1:1.
Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.
Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.
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The risk profiles and the investment profiles of most investors are completely different from those of most employees, so there is no way that equity has (proportionally) the same value for employees and investors.
Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse).
All in all, as an employee, I would value equity between 4-10 times less than the investors would.
Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse).
All in all, as an employee, I would value equity between 4-10 times less than the investors would.
Yes, but investors spread their risk, as an essential part of their strategy. Employees have no such opportunity.
In my experience companies won't share what the percentage is of the stock you are getting. They just say you are getting X number of shares and won't tell you anything else. How do you verify what they are saying is correct?
I've never experienced that; I wouldn't stick around in any negotiation where that occurred.
to me, that's a red flag on multiple levels.
to me, that's a red flag on multiple levels.
Telling you total outstanding number of shares is required before you can have any idea what level of equity you are receiving. If they can't tell you that, then you have one problem. If they won't tell you, then you have another. Either way, I would be concerned.
I know you're not being serious about the bank thing, but I just want to say, if you're a programmer and you love what you do, and you're good enough to be choosy, don't work for anyone (especially banks!) whose main job is not software. There are a few exceptional companies, but mostly it's a good rule of thumb. Working for Dilbert's pointy haired boss is just not a recipe for happiness - who cares if it pays well. Life is short, if you don't enjoy your job, change your job!
At any rate that was advice given to me by my father, who worked in the IT department of a large oil company, had a long line of pointy haired bosses who took the credit for anything that went well, which was eventually gutted and outsourced leaving just him and a couple others as insurance. I've regretted it when I did not heed that advice.
At any rate that was advice given to me by my father, who worked in the IT department of a large oil company, had a long line of pointy haired bosses who took the credit for anything that went well, which was eventually gutted and outsourced leaving just him and a couple others as insurance. I've regretted it when I did not heed that advice.
I disagree and I would change your statement:
Don't work for anyone whose success is not tied to the success of their software.
Plenty of non-software companies can live or die on the quality of their algorithms. It could be a small development team but it can be challenging and rewarding. Plus it will give you a bigger perspective.
The key is to work somewhere that you are valued.
Plenty of non-software companies can live or die on the quality of their algorithms. It could be a small development team but it can be challenging and rewarding. Plus it will give you a bigger perspective.
The key is to work somewhere that you are valued.
> [...] if you're a programmer and you love what you do, and you're good enough to be choosy, don't work for anyone (especially banks!) whose main job is not software.
I cannot agree enough with this. I know it's anecdotal, but I've had more than ten jobs in my career so far and the only exception to what you're saying was an initiative by a highly technical and visionary director (later VP), which was scrapped as soon as he left the company.
The point I'm trying to make is that it sure is possible to have a really fun and challenging job as a programmer in a non-software company, but it's a stroke of luck you should never, ever rely on and it won't last. At least, that's according to my experience so far.
I cannot agree enough with this. I know it's anecdotal, but I've had more than ten jobs in my career so far and the only exception to what you're saying was an initiative by a highly technical and visionary director (later VP), which was scrapped as soon as he left the company.
The point I'm trying to make is that it sure is possible to have a really fun and challenging job as a programmer in a non-software company, but it's a stroke of luck you should never, ever rely on and it won't last. At least, that's according to my experience so far.
I disagree. I have only worked for companies whose main business was not software and it was great: high salary and great hours. Since we weren't under the gun to get the next release out, we could tke our time and do things right.
Well onion2k's premise was that you wanted to make millions in software. If that is your #1 priority, then working in finance is probably your best bet (unfortunately, IMO).
Working for a "pure" software company is great advice if you are optimizing for overall happiness, but not so much for maximizing your income.
Working for a "pure" software company is great advice if you are optimizing for overall happiness, but not so much for maximizing your income.
Like every industry, "finance" spans a wide gamut of jobs both low and high paying.
Well, to be more specific, when I say "finance" I basically mean doing HFT/quant software development. High stress, high burnout, but also really high reward/bonuses on success when compared to most software jobs.
Lots of "software" companies are just as political as big corporations, and startups in particularly are often much more chaotic/stressful and offer far less job security.
Notwithstanding the fact that a ton of companies that would like to believe they're "software" companies really aren't, the high turnover at Silicon Valley firms suggests that working for these types of software-centric employers isn't the happiness panacea you make it out to be.
Notwithstanding the fact that a ton of companies that would like to believe they're "software" companies really aren't, the high turnover at Silicon Valley firms suggests that working for these types of software-centric employers isn't the happiness panacea you make it out to be.
"I know you're not being serious about the bank thing, but I just want to say, if you're a programmer and you love what you do, and you're good enough to be choosy, don't work for anyone (especially banks!) whose main job is not software. "
I'd disagree with that. Some of the most entertaining bits of work I've ever done were for companies whose main job wasn't software.
The problem isn't companies who aren't focussed on software. The problem is companies that don't value the great things that software-oriented folk can produce. Unfortunately there are plenty of the latter in the software-focused end of the spectrum too.
Don't work anywhere that treats you badly. Sure. Don't work anywhere that doesn't value you. Sure. Don't work anywhere you don't enjoy yourself. Sure.
But I know some folk who are having excellent fun at banks. Solving stupidly hard problems that fascinate 'em, fostered by great management, and being compensated very well for their trouble.. I know others who have worked at large tech focussed companies that have had bloody awful stories of management idiocy. Hell — I've got more than enough horror stories from smaller tech-focused organisations.
I'd disagree with that. Some of the most entertaining bits of work I've ever done were for companies whose main job wasn't software.
The problem isn't companies who aren't focussed on software. The problem is companies that don't value the great things that software-oriented folk can produce. Unfortunately there are plenty of the latter in the software-focused end of the spectrum too.
Don't work anywhere that treats you badly. Sure. Don't work anywhere that doesn't value you. Sure. Don't work anywhere you don't enjoy yourself. Sure.
But I know some folk who are having excellent fun at banks. Solving stupidly hard problems that fascinate 'em, fostered by great management, and being compensated very well for their trouble.. I know others who have worked at large tech focussed companies that have had bloody awful stories of management idiocy. Hell — I've got more than enough horror stories from smaller tech-focused organisations.
Yes, there are exceptions, and the converse doesn't hold. But it works as a simplification when you're hunting for a job. You're right that the underlying problem is finding work where you're valued and, I'll add, where you work with great people. If pointy haired boss did the hiring, your coworkers are likely going to be inept to add to your misery.
It has always struck me as little more than a fraud when employees are hired with promises of equity and then additional rounds or other trickery simply dilute their share and contributions to approaching zero and they walk away having put their work, effort, and innovation into making the parasites of our society wealthy just for investing.
> making the parasites of our society wealthy just for investing.
Are they less parasitic if they just sit on their money, or are they parasites just for having the money in the first place?
Are they less parasitic if they just sit on their money, or are they parasites just for having the money in the first place?
I'm starting to feel like the entire equity offering model is broken.
While I agree that you should take a job at a startup for reasons intrinsic to the job itself, and not just the comp (or possible comp) - it is still part of the offer.
If someone is offering you a form of compensation, that means you should be able to evaluate it. Otherwise the offer might as well come with a guarantee of two unicorns after four years.
Additionally, almost EVERY startup trying to entice people to work for them mentions the equity as part of the sales pitch. "Meaningful equity", "Ownership in the company", "Shares of a pre-IPO company", etc, etc.
So if you're pitching people based off of an intangible, almost meaningless number, that smells like a problem, to me.
I understand all of the complications, the effect of future rounds being an unknown, etc...but is there a way to improve this?
Perhaps if, at the time of offer, and with each change in funding - there was a clearly spelled out, given possible outcome at this time, here's the breakdown of what you get - that could help?
I.e., If were were bought out at $100M right now, the founders would receive $12M, and you would end up with $37k...maybe people could evaluate better how "worth it" it is to them.
Additionally, when things happen like founders getting cashed out for some sort of comfort effect, like "OK guys, you each at least got a million out of this, run the company now with some security behind you"...employees should be made aware.
I guess I just feel like there needs to be more transparency, but I'm not savvy enough to know a good way to offer that.
While I agree that you should take a job at a startup for reasons intrinsic to the job itself, and not just the comp (or possible comp) - it is still part of the offer.
If someone is offering you a form of compensation, that means you should be able to evaluate it. Otherwise the offer might as well come with a guarantee of two unicorns after four years.
Additionally, almost EVERY startup trying to entice people to work for them mentions the equity as part of the sales pitch. "Meaningful equity", "Ownership in the company", "Shares of a pre-IPO company", etc, etc.
So if you're pitching people based off of an intangible, almost meaningless number, that smells like a problem, to me.
I understand all of the complications, the effect of future rounds being an unknown, etc...but is there a way to improve this?
Perhaps if, at the time of offer, and with each change in funding - there was a clearly spelled out, given possible outcome at this time, here's the breakdown of what you get - that could help?
I.e., If were were bought out at $100M right now, the founders would receive $12M, and you would end up with $37k...maybe people could evaluate better how "worth it" it is to them.
Additionally, when things happen like founders getting cashed out for some sort of comfort effect, like "OK guys, you each at least got a million out of this, run the company now with some security behind you"...employees should be made aware.
I guess I just feel like there needs to be more transparency, but I'm not savvy enough to know a good way to offer that.
I think that's why it's best to know the percentage of the company you are being offered. Share count is meaningless without knowing total number of shares.
Once you know the percentage (say 0.1%), you can figure out some other stuff. Asking about the company's hopes to go public or be acquired, and at what valuations, can lead to a lot of good discussions.
Once you know the percentage (say 0.1%), you can figure out some other stuff. Asking about the company's hopes to go public or be acquired, and at what valuations, can lead to a lot of good discussions.
(All this is from US tax viewpoint ...)
Also factor in the huge one-time payout and how that's taxed at a higher rate than your normal big-company earnings. I know people who got hammered at Federal + California + special-California/Federal-taxes at 50%+ tax rate, all because the acquiring company decided to close a few days into 2013, when tax rates went up considerably, with special surtaxes to boot. A few days earlier would have cut the tax rate by a lot.
That tax is magnified if you don't pre-exercise for long-term capital gains advantages -- the whole liquidity event becomes straight income.
Also factor in the huge one-time payout and how that's taxed at a higher rate than your normal big-company earnings. I know people who got hammered at Federal + California + special-California/Federal-taxes at 50%+ tax rate, all because the acquiring company decided to close a few days into 2013, when tax rates went up considerably, with special surtaxes to boot. A few days earlier would have cut the tax rate by a lot.
That tax is magnified if you don't pre-exercise for long-term capital gains advantages -- the whole liquidity event becomes straight income.
If the founder is motivated by equity it would be disingenuous to expect an employee to be equally motivated for a much smaller slice of equity.
I.e. if a founder can expect a payout of $X for working 16 hrs a day he shouldn't be surprised if an employee; who can expect 1/100 of that, only feels motivated to work 8 hours a day.
I.e. if a founder can expect a payout of $X for working 16 hrs a day he shouldn't be surprised if an employee; who can expect 1/100 of that, only feels motivated to work 8 hours a day.
The typical number of shares created for startups these days is 10M, so it might be worth putting that in as the default number of shares issued.
Cool site. Re Onion2's top post, could add this into a 90%, 8%, 2% calculator of different liquidation events.
Good job!
Underwater means no big payday. :(
Or worse.
You can get screwed on AMT tax on fictional gains, you can also lose real upfront money if you exercise at a strike price early for long term cap gains [almost always a bad move for common stock employees, but lots do it because of their borderline irrational hatred of the idea of taxes].
You can get screwed on AMT tax on fictional gains, you can also lose real upfront money if you exercise at a strike price early for long term cap gains [almost always a bad move for common stock employees, but lots do it because of their borderline irrational hatred of the idea of taxes].
Like the design. Good job!
I think people forget just how complex cap tables can get. Add in rules about vesting and strike price, and dilution in future rounds and debt financing, and the likelihood that lowly employees receive meaningful amounts at an acquisition diminish further. Sure, big time paydays and public offerings are possible, but these are the exception.
Bottom line: Insist to get paid what you're worth and take any options as a free lottery ticket that will probably never get you anything.
Bottom line: Insist to get paid what you're worth and take any options as a free lottery ticket that will probably never get you anything.
And equally importantly, get paid for the work you do (i.e. don't let anyone convince you to work nights & weekends for a year to "build the company" based on a hypothetical payout).
Cap tables are indeed very complex. Often there's also a preference on preferred stock, meaning that the preferred gets a minimum return (often 300% or 400%) before the common gets anything.
Fully agreed with the other comments: ignore equity in early stage startups and go for a market rate salary.
The one situation where I would take a lower salary is if there's concrete plans that a company will go public within 12 months, and you're going to be in a senior enough job that you'll be in the know about it.
Fully agreed with the other comments: ignore equity in early stage startups and go for a market rate salary.
The one situation where I would take a lower salary is if there's concrete plans that a company will go public within 12 months, and you're going to be in a senior enough job that you'll be in the know about it.
I wonder what if I used the stock options money to purchase lottery tickets, would I have more chance of winning big? Since stock options vests over 5 years and lottery tickets draws every week, I tend to think you have better chance winning the lottery than winning on your options.
I'm not entirely sure the calculations work.. Maybe I entered data wrong, but I was trying to model the acquisition/startup that I just went through. with our numbers, and our dollars, and my shares.... I walked with a heckuva lot of money, but that's not what the site said.
There is a bug that triggers when you add a funding round. It takes your equity percentage down to zero, regardless of the amount raised or pre-money valuation.
Raise an issue in bug tracking. Name it the Zynga bug.
That's not a bug.
How so? I agree that as soon as you add a round of funding, the math gets wonky.
For example, I'm trying to model what a ~5% ownership looks like, and as soon as I add a round of funding that creates 10% dilution with no liquidation preferences, the site says the final ownership percentage is zero. It doesn't even matter what the exit is for at that point, without liquidation preferences, the ownership should still be ~4.6%.
For example, I'm trying to model what a ~5% ownership looks like, and as soon as I add a round of funding that creates 10% dilution with no liquidation preferences, the site says the final ownership percentage is zero. It doesn't even matter what the exit is for at that point, without liquidation preferences, the ownership should still be ~4.6%.
Because in real life, you still end up with nothing of value. :)
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What are you doing here on HN. Shouldn't you be on a beach?
Don't tell us you have the startup bug!
Don't tell us you have the startup bug!
Ha! I hear you.. beach is good.... it was a truckload,not a boatload? :) I still have to work, but , you know.... I can do what I want when I want.. ok... I need to stop getting braggy.. sorry ...
Yeah, I think it was with the equity addition.... Once I did that, my delta went in the negative, and it would have beeen better to stay corporate ;)
Yeah, I think it was with the equity addition.... Once I did that, my delta went in the negative, and it would have beeen better to stay corporate ;)
In my books, heckuva lot of money == never having to work again.
I got taught the various levels of FU (f*ck you) money...
Here are the responses available, when dealing with a pain in the ass at work:
Level 1) FU, I don't have to work here.. but I should probably find a job in the sometime near future.. like.. the next year
Level 2) FU, I don't have to work here.. or anywhere. I'm out
Level 3) FU, I don't have to work here.. or anywhere... I'm going to my yacht.
I got level 1 ;)
Here are the responses available, when dealing with a pain in the ass at work:
Level 1) FU, I don't have to work here.. but I should probably find a job in the sometime near future.. like.. the next year
Level 2) FU, I don't have to work here.. or anywhere. I'm out
Level 3) FU, I don't have to work here.. or anywhere... I'm going to my yacht.
I got level 1 ;)
OH, and TOTALLY have the startup bug.. I got lucky with a ton of blessings on the first one... I know it doesn't happen often.. but apparently it happens
Mind sharing which start-up?
Unfortunately I can't... lots of people "didn't" do too well, since it was a little early exit.. I was in early enough that I did well..
I'd include in this calculator a negative value per 'passion' speech given by the founders to convince the employees they are building something 'bigger than themselves'.
Nice skit.
Small point: Fixed positioning of column on right (contaning calculations) obscures the bottom few lines on desktop (the result), probably due to expecting a greater vertical resolution. On mobile (Android) it completely obscures all input forms.
Small point: Fixed positioning of column on right (contaning calculations) obscures the bottom few lines on desktop (the result), probably due to expecting a greater vertical resolution. On mobile (Android) it completely obscures all input forms.
This reminds me of the early-stage startup that offered me a $55k salary in a big city and zero equity to be engineer #3. They told me that if after a year I'd become an integral member of the team then we could discuss equity. Meanwhile they tried to sell me on the job by saying that if the company succeeded we'd never have to work again.
I really don't understand what these companies try to accomplish by essentially lying to you and trying to defraud you of your value. Do they really think you'd sitck around for long under these terms after you find out inevitably how badly you're getting fucked?
A lot of the startups that I see that try this are doing it because they really believe that they're bringing the value in this relationship - that they're going to be so successful, there's so much money here, they have SUCH a good concept, that the applicant should be grateful to get in on the ground floor.
Of course, 90%+ of the time they're totally wrong about everything about what they're bringing to the table, and in the other times, they'll often conveniently change things around to benefit them, like, "Well, you know, I know we said 4% of the company once we raised series A, but honestly, your contributions have not been what we expected, and so you really only are entitled to 1%"
To quote "The Spanish Prisoner":
Jimmy Dell: I think you'll find that if what you've done for them is as valuable as you say it is, if they are indebted to you morally but not legally, my experience is they will give you nothing, and they will begin to act cruelly toward you.
Joe Ross: Why?
Jimmy Dell: To suppress their guilt.
Of course, 90%+ of the time they're totally wrong about everything about what they're bringing to the table, and in the other times, they'll often conveniently change things around to benefit them, like, "Well, you know, I know we said 4% of the company once we raised series A, but honestly, your contributions have not been what we expected, and so you really only are entitled to 1%"
To quote "The Spanish Prisoner":
Jimmy Dell: I think you'll find that if what you've done for them is as valuable as you say it is, if they are indebted to you morally but not legally, my experience is they will give you nothing, and they will begin to act cruelly toward you.
Joe Ross: Why?
Jimmy Dell: To suppress their guilt.
I'm going to have to watch that movie. I've actually seen that happen and could never figure out why.
I got an offer last year from a company who offered me a 25% salary cut from my current salary and some negligible equity percentage, and then got all huffy when I tried to negotiate the salary. In their mind, the equity was worth so much money, they could pay me peanuts and I should still take the job. It was a huge turn-off. The guy basically told me to go off. "Why bother with startups, then?" he says. Completely missed the point of equity/salary.
Also, if the equity is worth so much money, why are they even offering it to you in the first place? You'd think they'd want to keep it all for themselves.
I had a conversation one time that went sorta like this (I don't remember the exact numbers):
Me: I'd rather be paid, say, $250k to do the work in a year and zero equity
Guy: But if the equity will be worth, say, $4 million in a year, why wouldn't you do the work for $25k?
Me: If the equity will be worth $4 million, why are you arguing over it - wouldn't it be better for you to pay me the $250k and pocket the remaining $3.75 million?
Guy: But the $4 million isn't guaranteed! That mightn't happen.
Me: My fucking point exactly!
And even after saying that himself, he STILL couldn't understand why I would turn down the equity...
Me: I'd rather be paid, say, $250k to do the work in a year and zero equity
Guy: But if the equity will be worth, say, $4 million in a year, why wouldn't you do the work for $25k?
Me: If the equity will be worth $4 million, why are you arguing over it - wouldn't it be better for you to pay me the $250k and pocket the remaining $3.75 million?
Guy: But the $4 million isn't guaranteed! That mightn't happen.
Me: My fucking point exactly!
And even after saying that himself, he STILL couldn't understand why I would turn down the equity...
I think you underestimate the number of programmers who are willing to work under such conditions for the "glory" they perceive the position to bring (and, of course, there is no shortage of people who actually think their lottery ticket is worth far more than it really is).
In an area where there is a high concentration of people who are young (naive) and (relatively) debt/responsibility free it's easy, almost trivial, for a founder to exploit them. I perused Angel List some time ago. The salary offerings were hilarious. It's very clear to me (mid-30s guy with a family and mortgage) that they are targeting a certain age and social group.
In an area where there is a high concentration of people who are young (naive) and (relatively) debt/responsibility free it's easy, almost trivial, for a founder to exploit them. I perused Angel List some time ago. The salary offerings were hilarious. It's very clear to me (mid-30s guy with a family and mortgage) that they are targeting a certain age and social group.
It's like spam, right? If you respond based on hilarious numbers, you're exactly who they're looking for.
I didn't know about that site so I went and checked it out.
Holy crap. Most of the listings there are completely hilarious. They expect anyone to work in the bay area for those salaries? (and I'm a different demographic than you -- 20s guy, no mortgage, family w/ no kids.)
Holy crap. Most of the listings there are completely hilarious. They expect anyone to work in the bay area for those salaries? (and I'm a different demographic than you -- 20s guy, no mortgage, family w/ no kids.)
They try to sell it because they believe it themselves.
This is almost worse than them lying, insofar as incompetence can be more damaging than selfishness: you can negotiate with a selfish person to get something for giving them what they want. You can't get anything out of someone who can't deliver.
This is almost worse than them lying, insofar as incompetence can be more damaging than selfishness: you can negotiate with a selfish person to get something for giving them what they want. You can't get anything out of someone who can't deliver.
Is that even minimum wage in SF? My neighbor is a toll booth colector and makes double that amount
That's not really much different than the standard one year cliff.
Of course it is. All things being equal, if you're still employed a year later your stock vests. In his situation he'd have to start negotiations about his equity. That's a huge difference.
I don't agree. If he's indispensable he'd have an easy time getting equity after a year. If he's underperforming he'll be let go in just under a year to avoid the cliff...
The biggest problem in his situation is there's not contract in place to keep the employer honest. There's nothing to prevent them denying they ever offered equity, nor to prevent them starting the clock on vesting at the time the option agreement is signed. "Here's a meager salary for now, and you'll have to trust us to do The Right Thing later."
The employee is the one getting the work done. And he's got to watch out for his bottom line like everyone else. If you're being promised equity without a written agreement, then take that into account- assume it's not even part of the equation and negotiate better pay or move on.
The employee is the one getting the work done. And he's got to watch out for his bottom line like everyone else. If you're being promised equity without a written agreement, then take that into account- assume it's not even part of the equation and negotiate better pay or move on.
True, but the employer can always fire the employee before the cliff.
If you don't trust the employer, don't work there.
If you don't trust the employer, don't work there.
'accelerated vesting'.
Keeping employers honest with a contract in place is a lot easier than without.
Anyway, you seem to be stuck on this being equal so I have no illusions I'll be able to convince you of the differences.
Keeping employers honest with a contract in place is a lot easier than without.
Anyway, you seem to be stuck on this being equal so I have no illusions I'll be able to convince you of the differences.
It's not strictly equal, and true, accelerated vesting is a factor.
Just attempting to make the point that one should not take too much comfort in any options package before he/she is over the cliff and unless he/she has seen the cap table.
Just attempting to make the point that one should not take too much comfort in any options package before he/she is over the cliff and unless he/she has seen the cap table.
I think it's even more complicated than this. But props on the design. Nice to look at.
pretty good job! my only comment is to make more standard options to select from a list vs. typing in any value.
Don't forget taxes will take a large chunk of any payout away. Sometimes as much as 50% when you factor in state taxes.
If you get an early stock grant and file your 83(b) you'll actually be taxed as long term capital gains.
Not necessarily, it only starts the long term capital gains clock: you still need to hold the stock for a year and have the grant be at least two years in the past to qualify.
Also, the company may not allow you to early exercise. Ask them before accepting an offer!
Also, the company may not allow you to early exercise. Ask them before accepting an offer!
Instead of working for a big company you could just freelance and temporarily contract out to large companies. You get all of the $$$ but also the flexibility for high-optionality events afforded to you from copious free time to build startups and side projects (as well as time to network with others.)
In my opinion it is far better to secure a high salary and the free-time and autonomy to work on your own higher-risk pursuits, than it is to secure a low salary and share a tiny percentage of optionality and autonomy with others on a high-risk pursuit.
The only exception I'd make is when you're truly enamoured with a vision, a founder, prone to loneliness and need to belong, or don't wish to focus on your economic livelihood at all.
At the end of the day the likelihood is that the high-risk pay-off never comes. Just like almost everybody else you'll become old, have a family and want to be able to provide for them.
In my opinion it is far better to secure a high salary and the free-time and autonomy to work on your own higher-risk pursuits, than it is to secure a low salary and share a tiny percentage of optionality and autonomy with others on a high-risk pursuit.
The only exception I'd make is when you're truly enamoured with a vision, a founder, prone to loneliness and need to belong, or don't wish to focus on your economic livelihood at all.
At the end of the day the likelihood is that the high-risk pay-off never comes. Just like almost everybody else you'll become old, have a family and want to be able to provide for them.
My impression (and I may be wrong) is that you need to be pretty connected or have some a very niche skill-set to be able to freelance for a living.
I'm a full-time C++ programmer and I'd love to freelance, but I wouldn't know where to even start.
Maybe this makes more sense for web developers
I'm a full-time C++ programmer and I'd love to freelance, but I wouldn't know where to even start.
Maybe this makes more sense for web developers
When friends ask me where I work, and I tell them a startup, they always ask if I got stock. I tell them yet, but it isn't worth anything until it is. I agree with the idea that you should take the job if you would without equity.
Shouldn't this have a field for the salary you make at the startup?
As I always like to say, equity doesn't pay rent in SF or put food on the table.
Don't forget that equity doesn't vest immediately. If you take a pay cut in exchange for equity but you leave or are let go before your cliff, you've essentially forfeited a portion of your compensation package in exchange for nothing. I guess this should be obvious, but it may not seem like a real consequence when the founders are asking you about what kind of car you think you'll buy when the start-up explodes.
Cool resource but it seems like there's a risk that an employee would inadvertently reveal sensitive financing information by completing this form.
Even as a company founder, I don't keep half the stuff mentioned on here top of mind, so I doubt that any employee is going to have enough information to complete it correctly. e.g. to model what you "would have made" if you'd joined Uber at X stage, you'd have to know the pre-money valuation of each funding round they received, along with the investors' liquidation preferences etc and who knows, they may take on even more funding before going public, which would mean your shares would get diluted even further.
Overall, if anything, this just serves to illustrate all the complexities involved in trying to model how much a startup's equity offer is actually "worth" in the long-run and that trying to do calculations to model it against an offer at a big company is totally the wrong way to go about it.
It just validates what Mark Suster says here: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
don't join a startup because you could potentially make millions of $. Join if you want to learn; any money you make would be if you got really lucky and is a nice side bonus.
Overall, if anything, this just serves to illustrate all the complexities involved in trying to model how much a startup's equity offer is actually "worth" in the long-run and that trying to do calculations to model it against an offer at a big company is totally the wrong way to go about it.
It just validates what Mark Suster says here: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
don't join a startup because you could potentially make millions of $. Join if you want to learn; any money you make would be if you got really lucky and is a nice side bonus.
The most interesting thing is that this website is licensed under GPLv2. Seems excessive.
There is a blatant bug in the computation. Do not trust the site!
Enter $100k as the startup salary, and zero equity (0 shares, $0 strike price, no funding round, any sale price for the liquidity event happening after 12 months).
Enter $150k as the big co salary, and the default 5.75% rate of return.
The result should be Total Big Co Earnings = $152,875 ($2,875 is the interest gained on the $50k salary diff for 12 months), but instead it shows $196,947!
Enter $100k as the startup salary, and zero equity (0 shares, $0 strike price, no funding round, any sale price for the liquidity event happening after 12 months).
Enter $150k as the big co salary, and the default 5.75% rate of return.
The result should be Total Big Co Earnings = $152,875 ($2,875 is the interest gained on the $50k salary diff for 12 months), but instead it shows $196,947!
It appears to apply the interest rate monthly. I'd love to have a 5.75% interest every month.
Here's the calculation. It's a little high because we should be getting 1/12th of the 50k per month and compounding, but I'm assuming we got the full 50k up front and got a 5.75% interest compounded per month.
edit 2: The bug is in this function and the one below it: https://github.com/vijedi/equity_calculator/blob/master/js/a...
If your interest rate is zero, the calculated interest is 11 * the monthly difference. Then it's added to your base big company salary, which is clearly wrong. It should be 12 * the monthly difference added to the startup salary.
edit 3: Opened a pull request with what I think is the fix: https://github.com/vijedi/equity_calculator/pull/4
Here's the calculation. It's a little high because we should be getting 1/12th of the 50k per month and compounding, but I'm assuming we got the full 50k up front and got a 5.75% interest compounded per month.
50000*(1.0575 ^ 12)
97799.02314394798212000000
edit 2: The bug is in this function and the one below it: https://github.com/vijedi/equity_calculator/blob/master/js/a...
If your interest rate is zero, the calculated interest is 11 * the monthly difference. Then it's added to your base big company salary, which is clearly wrong. It should be 12 * the monthly difference added to the startup salary.
edit 3: Opened a pull request with what I think is the fix: https://github.com/vijedi/equity_calculator/pull/4
I'm the guy that wrote this. Thanks for playing with it and fixing the issue. I guess writing interest calculation functions late at night is a really bad idea.
I think the 5.75% return is over the 48 month vesting duration, on the extra money you would have earned (and invested). So, the excess (per year) would be something more like (50(1.0575^3)+50(1.0575^2)+50*(1.0575^1))/4. (Though it seems I'm a little off, so maybe they do the calculation monthly or biweekly).
Edit: Search http://www.tejusparikh.com/projects/equity_calculator/js/app... for bigCoInterest.
Edit: Search http://www.tejusparikh.com/projects/equity_calculator/js/app... for bigCoInterest.
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If you'd take the job without any equity then take the job. If the equity is part of your reason for taking the job, you probably shouldn't take it.
Base rate neglect[1] means we are terrible at evaluating the probability of equity being valuable. For every story about someone making millions out of their equity when the startup they're working for exits there are thousands of stories of people who walked away with nothing but a few years having fun solving challenging problems. That is the reason to work in a startup, because that is the definite, concrete thing on the table. If you want to make millions in software, get a job writing code at a bank and invest your salary.
[1] http://en.wikipedia.org/wiki/Base_rate_fallacy