Comment by birken | Hacker News Reader

Comment by birken | Hacker News Reader

Startup L. Jackson has a good tweet about it:

> 4/ You'd likely do better financially, on average, joining a Series A company, AND have more career upside.

> Source: https://twitter.com/StartupLJackson/status/65515425472269107...

Why anybody would want to be an employee at a unicorn company is crazy to me, especially in the world of ultra-inflated valuations.

If you join a huge public company you'll get liquid stock, at a real valuation, along with lots of salary and perks. The stock can't 10x, but companies will generally give you pretty large grants so if the stock goes up 20-50% you'll probably get a nice bump in your total compensation.

If you want to join a startup, you are much better off joining a ~10-20MM one. You still get a salary, though maybe not as high as at a unicorn or public company. However, it is much easier for a ~10-20MM company to 10x in value than a 1B company, and if the smaller company does 10x you'd be a somebody at a ~100MM company rather than a nobody at a ~10B one.

Typically employees get options for common stock, which is discounted to preferred. Media report of valuations, though, typically multiplies the per-share price of latest preferred round by total number of shares outstanding, ignoring the layers upon layers of liquidity preferences, board seats or ratchet provisions thrown into the deal.

What do you mean common stock is discounted to preferred? If all goes to plan, does liquidity preference matter?

they mean that the purchase price is discounted. a company with 5M shares outstanding might sell 1M shares for $5 each to Series A investor. Now they have 6M shares and a "30M valuation". But they're still giving common grants at a $1 strike price because common shares aren't as valuable as preferred shares at this stage. In sufficient liquidity, the gap will close.

The strike price for common stock is lower. So a company whose valuation might had been trumpeted in the media as $50 bil would issue common stock at, let's say, $15 bil valuation.

Urgh that's not a source, that's just literally those words. I thought you meant the link was going to substantiate that claim.

If you join a Series A company your stock may well 10x on paper. But what're your chances of actually getting to cash that out? If you join a "unicorn" they can quite probably match the salary and perks you'd get at a large public company, and are likely to give you more stock, which probably still has better odds of getting a decent bump than the large public company stock does. Heck, apart from anything else, the "IPO bump" is a thing.

You're missing how startup equity works. At these multi-billion dollar companies, employee shares are priced way less than the valuations you are seeing published in the media. So you're almost guaranteed a nice payoff even if the company merely treads water.

A low strike price only matters if there is some eventual liquidity for the shares. For common stock this means IPO, acquisition or some other share buyback. Both IPOs and acquisitions generally don't apply to companies "treading water", only the extremely successful and growing ones manage to IPO (and even then it doesn't work out so great for shareholders: see YELP or BOX) or get acquired. Get acquired for less than your ultra-inflated valuation? Then the common shareholders get killed by liquidation preferences.

And as for other share transactions, you'll need to find a buyer. Most savvy investors aren't going to be willing to pay huge valuation premiums for common stock. And if they aren't going to pay a premium, then you really haven't gained anything by issuing common shares at a lower strike price.

So basically, common shares have lower strike prices because they are worth less.... It isn't some magic trick that automatically benefits employees.

Both YELP and BOX made a lot of people very rich.

Box clearly did not make a lot of people very rich. They made a tiny group of people richer (very early investors). Employees have not done well, as the stock has been a disaster. All of the big rounds that Box raised basically valued them at or above where their stock is now. They're worth $1.6 billion and raised $558 million; their last round was at $2.5 billion.

Their latest quarter they did $73m in sales and lost $50m, with rapidly slowing growth. Even worse, they're bleeding significantly on an operating basis, implying the business may never be capable of making money. They might be lucky if they have four or five quarters of cash left before disaster hits. The near future returns for employees holding stock, is not likely to be pretty.

Even the primary founder didn't get very rich in SV terms, after he had to be diluted down to a sliver of ownership to keep the lights on.

Even the late stage investors probably made money. The only employees who didnt make money are the handful hired at the very end when the common valuation finally meets up with preferred.

Any equity compensation depends on future liquidity which unicorns have much more of.

Incorrect. The employee shares are priced lower because they are for common stock. If the company merely "treads water", then ends up getting acquired for lower than its previous valuation, it's likely that your shares will be worth little if anything (after preferred stock liquidation preferences).

That assumes that the company reaches the IPO and its value holds. And still I don't get how lower they must be priced to be comparable to a growing startup, even risk adjusted. (And consider that the IRS could have something to say...)

If the company doesn't reach the IPO and get acquired, well check what liquidation preference means. Check this post to understand better how stocks in a startup works: http://heidiroizen.tumblr.com/post/118473647305/how-to-build... (it is focused on founders, but employee get the same treatment).

IRS wise, it's easy to demonstrate that common stock, which doesn't having voting rights and preferences, is much less valuable. The secondary market for unicorn shares is pretty vibrant these days.

Just a couple of days we all dissected Square's upcoming IPO. Valued at $6 billion, the average employee () stock value is at $294K, or $73.5K per year of vesting. Not super awesome.

() Not a founder or executive/director, who'll get up to 5000x that.

Average employee seems like a poor metric, considering that employee count increases exponentially.

I'd be interested a breakdown based on "joined at funding stage X". From what I understand, if you joined Square in 2011, when it was already super hot, you're doing pretty well and could sell your stock on the secondary markets for a handsome windfall even well before this IPO.

I agree -- typical pitfall of average.

Do you have any sense of what the equity numbers would have been like at year 0, 1, 2, 3... based on your general knowledge of startups (not necessarily Square)?

exponentially decaying.

How is that not super awesome? All of those employees had market wages well before the IPO.

Agreed, if the employees negotiated fair cash compensation, a bonus equivalent to a $70K bonus/year for four years in a row is solid. If employees were told that the stock options were a significant portion of their compensation and thus salaries would be lower, it's less great, but probably still not unreasonable.

"market wages" is a pretty loaded term.

$130K plus 15% bonus plus $70K/yr in stock for a senior engineer isn't that out of the ordinary at big public companies. Total comp ends up around $220k. I don't see too many startups paying over $150k, so the average employee at an exceptional startup like Square makes around the same if not less than at a big company, even with a decent payout.

"Market wage" doesn't end the discussion. Some people had market wage, some had above, some below, many were millionaires or hundred-millionaires coming in.

~$300K is great cash, but it's peanuts relative to $6B. Everyone worked hard, but only the founders and the very top tier actually get rich. The rest get one-thousandth or many-thousandths of what founders get.

People are shitty negotiators, and everyone just accepts that they should get a tiny little slice of the pie. I believe in part it's because they think everyone has a small slice. They don't realize how much the founders kept for themselves (they think it mostly all went to the big VCs), and how huge the drop was from founders to engineer #1, and from #5 to #6, etc.

Everyone just accepts that the leadership (and ONLY the leadership) should become ultra-rich at the end, while the rest move on to the next venture and hope to do a bit better next time.

"But I took the risk!" says the founder. Sure, buddy, you took the risk and everyone else just enjoyed a walk in the park.

Opportunity cost - assuming everyone has fair market cash wages, the BigCos are offering more in bonuses and stock - at GOOG/FB it's not uncommon to see $150-200k+ per year in stock, with less uncertainty.

You'd expect that for taking on the risk (relatively low as it may be for a unicorn) you'd do better than the extremely low-risk public stock packages being offered by BigCos.

So I am clear, you are saying that it's not uncommon for an engineer at GOOG to be given $150-200k in stock every year on top of their salary?

Correct, clearly not every engineer at GOOG is getting it but it's also not rare. And not particularly high-level engineers either - I'm talking almost exclusively about level 4/5 SWEs.

I also know some people at other BigCos getting similar levels (to be clear: $300-400k/yr total comp of cash + public stock) so it's not just a GOOG/FB thing.

Not everyone can get employed by Facebook or Google.

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