Ask HN: Is startup equity just snake oil?
Is equity just an excuse for start-ups to motivate lower salaries and bad work hours, which in the end don't yield much anyway?
The tradeoff for the bad hours/pay is that you'll get more autonomy in your work and the ability to really influence the product. To me, this is why you should work for a startup. Certainly not for the stock options.
You also need to factor in that start-ups pay generally a below-market wage, and often do not have benefits on par with other employment options.
For a long time, the standard argument has been that you should view the expected payoff of the equity as a form of offsetting compensation. If your salary is X-thousand below market, but under average-case circumstances your equity is worth Y-thousand-per-year, and Y == X, then, in theory, you should view the offer as exactly a "market" pay rate. Of course there are also effects of being forced to defer compensation to the future, deal with tax implications, and potentially also be compensated for risk of failure, and so forth, so Y should actually have to be significantly above X, but the general idea is the same.
If you view the equity as lottery tickets (and I agree that you should), but you also accept a below market pay rate, or bad benefits (like an onerous regular premium for insurance, or the absence of a company matched 401(k), or extreme working hours, and so on), then you are basically doing nothing but accepting a job for below-market pay, without getting a single thing as a compensating benefit in return.
You are literally doing nothing but devaluing your own labor and by sending the market signal that employers are capable of hiring you like this, you are also contributing to driving the price of labor in your field down overall too, which could hurt your peers and your future self.
There are often further negatives about start-ups too. For one, they often try to cram you into low-productivity open-plan offices, but then turn around and try to defend it with buzzwords about teamwork and company culture. In some start-ups, your visible enthusiasm for the arbitrary workplace choices of the management is also a component of how you are evaluated. If you're merely neutral about something like, say, dog-friendly offices or frequent alcohol-focused gatherings, as opposed to being visibily excited about them, this often is held against you when it comes time for raises or promotions or, more often, layoffs.
Many start-ups don't really think for themselves either. They use management processes like Agile/Scrum because it gives management a convenient fiction that the company's development work can be commoditized, and that they can hot-swap new employees in at any time. They are notorious about not doing proper capacity planning or planning around an engineer's specialties. You might have been hired because you're great at front-end work and then end up spending 100% of your time migrating customer data from MySQL to Postgres. Or you might be a mathematics / statistics worker and spend all your time making web applications in Django. It will all be covered by catch-all excuses about the company pivoting or you needing to wear lots of hats or some bullshit, and if you raise any discontent over how much disrespect is being shown for your specialty or aptitudes, it will be ignored or punished.
And after all of this, the best case scenario, which is exponentially unlikely, is that you'll make a small amount of money from your stock options (assuming you saved enough from your below-market salary to actually exercise them), which still won't be enough to buy a house in the Bay Area.
I'm not saying start-ups are tautologically bad places to work. It would be great if at least some of them began acting as responsible employers. But, you really need to deeply consider a lot of this stuff before choosing to work for a start-up, and really have a clear understanding of what other benefit you are getting (maybe your significant other lives near the start-up and you don't need money or respect at work?).
The fact that so many people accept these bad working conditions is our own fault, as a community of developers, and until more engineers (especially younger ones) start to stick up for themselves by boycotting jobs that infantilize them, we have only ourselves to blame for the horrendous working conditions we're made to accept.
I'm beginning to really hate hearing this over and over. So many people accept this at face value when in reality it's dubious at best.
Case in point: 6 months ago I left a start-up for a medium-size company (~300-400 people) that has been around for ~15 yrs with no ambitions of going public nor taking outside investment. I get both amazing pay and an insane amount of autonomy. I doubt this could be matched by a Big or Small company.
Here's the rub: Silicon Valley markets itself VERY WELL and if you're willing to internalize everything that comes out of this marketing machine, then yes... it's snake oil.
I'm not diminishing the the importance or impact of entrepreneurial ventures, but I think we can do better than Cookie-cutter Generalisms repeated ad nauseam without independent thought.
First of all, they'll probably just tell you how many shares you get. So, you don't even know what percentage of the total you have! But even if they did tell you, they won't show you the cap table, so there's no way to even evaluate the worth, since you can't see how much the investors are going to be paid out first. And even if you did know that, the board can just print more shares and make yours irrelevant anyways, so you still can't tell what they're worth.
So, assume they're worthless.
Don't accept offers that don't give you enough information to value your shares, unless equity isn't a significant part of your compensation.
If you join a late stage startup and get a good salary and a few shares... not snake oil, but not going to be life changing. Base your decision on the salary and what you will be working on.
All the people in the middle offering you 50% of market pay plus 1% of a small company? Ya that is pretty much a scam to get cheap labor, don't fall for it.
It's hard to say that two guys who were new to management at the time are entirely representative of the entire small company market. Inexperienced small company market, sure, but not the market as a whole.
Also, because real life slipping into HN - why the heck did your sound script pipe a python regex matcher's stdout to perl to have it immediately go directly to stdout for another pipe pick it up?! The context switches... the p&l impacting context switches.... ;)
The golden question is "if you get an exit that makes you $10m, how much money does that mean for me?"
1) rounds of investments will dilute your shares 2) you have no control over the company and are now in the precarious position where the situation could get really bad, but you don't want to leave because you don't want to lose your shares (I've been there) 3) If the company is overvalued at some point, takes an investment, and then sells for less than that value, the investors will get paid back first (further reducing your chances at getting a payout).
Is it snake oil? Not necessarily, but it's a huge risk and you shouldn't think of it as your path to riches.
Employees are the ones who need to watch out for this, because the founders turn around and try to pretend the equity is real. An offer of $200k of this fake equity isn’t really $200k. And for you to ‘get rich’ and 10x your $200k, you will need to 10x the founders $4.5M of fake equity. All the founders need to do is see an exit and they are rich since the initial seed round gives them millions.
So don’t worry about $ numbers, just the percent of the company. If it is early, understand the cap table and fight for your fair share. And don’t stop fighting, especially if you are adding value. Remember the founders got millions of ‘fake equity’, they can and should share. Don’t forget that the ebullient founders see a payday on most any exit whereas you won’t. I like the advice that you are either learning or earning, and if you aren’t founding you most likely are learning.
Also, don’t let people talk you far below market salary since you aren’t just giving up big company salary, but also bonus and stock. Most of all though, you need to trust the founders since it’s easy for them to screw you and easy for them to screw everyone if they don’t make the right moves. Even if you build a good product and get customers, if there are bad ratchet clauses everyone but the investors will get screwed.
This is geared more toward early stage. For later stage you aren’t going to see the cap table or anything else. The main thing for mid to late stages is growth: users, customers, and revenue. You are stepping on to a rocket ship priced for perfection, if it goes off trajectory your equity is going to be worthless, so don’t feel obliged to stay and help out of charity. At this point the founders have likely already made millions, the senior employees are probably going to be okay, but the noobs are going to get burned.
YC and others have done a lot to help founders. Unfortunately, no one has done much to help employees. So pay attention and do your best to find people you trust. Remember, founders have every incentive to sell you the golden dream, since it’s likely to be golden for them.
Pretty much. Unless you have your lawyer (not a lawyer, your lawyer) tell you otherwise assume equity as compensation is worthless.
There are times and places where equity isn't meaningless, but that's not at Valley tech startups. There it's mostly used to mislead impressionable youths that haven't been burned yet.
I'm gonna do some math that probably doesn't apply to a new grad, but certainly could apply to an experienced SE/SWE/etc.
Look at it this way, if you are making $175k, with a 15% bonus and $55k of vesting stock at Google ("Alphabet"). Let's just assume the stock doesn't fluctuate over the course of the year. We'll call your total comp $255k real money (forgoing 401k and other benefits for simplicity).
Now, you join a well-funded seed startup. They pay you $150 (even in these crazy times this is a high startup figure). Congratulations! You just became an investor. I'll save you the spiel about paying for a better environment, accelerated learning, purpose, etc...You have invested 105k a year, in exchange for .1-.25 percent of the company, if it's still a pretty small startup. Oh yeah, and year one's money gets paid mostly towards your stock cliff; you paid to accrue the first years stock until the end of the year (if you make it to the end of the year). If you leave in month 11 you get nothing. However, at month 12 you get the stock from year one, then each month you earn 1/48 of your total equity stake.
A few more simplifying assumptions. Let's say your annual adjustments at BigCo and your annual adjustments at startup are equal, which they won't be. Also, there's no opportunity cost.
Next year you pay that $105k again. Then, the company raises a few rounds of capital, over the next 5 years. All in all you've been at the company for 7 years and paid $735k for (let's call it) .1% of a company that was worth $5 million post at the time. But, you've been diluted 30%, 20%, 15% and 7% in subsequent rounds, and then maybe re-upped a little along the way. You have 3 times your initial grant worth of stock, because you were really good at your job, so now you own .000189 % of the company.
If the company has a $500 million dollar exit, with no preferences, you get $94,500. But, with all the rounds you raised, $500 million is probably gonna trigger a liquidation preferences. Let's say it took $150 million VC money to get your exit. Well, you get $66,150. Damnit...
Well, that doesn't seem worth it. How big does the company have to get to make it worth it? Well, I haven't heard of any $10,000,000,000 acquisitions. So, let's say you IPO and after your lockup period, you leave the company and sell all your stock. You'll have a tax advantageous $1.89 million. Off all the startups you hear about, and many you don't, how many $10,000,000,000 exits have you heard about? And what is that risk factor worth?
Now, why do people do startups? Well, let's say your startup is Facebook. After your lockup period, you had a market cap of ~$100,000,000,000. Your .1% is now worth $18.9 million. Or if you had an original .25%, $47.25.
I hope you get the point.
So your post is very good advice to everyone. I encourage you to apply similar math. Of course, the hard part to evaluate is the variation: maybe the exit is 10X better. Or maybe it's 10X worse. How valuable is a high-risk/high-reward payoff? At least, by doing this math, you put hard numbers on just how high the payoff can be. If it turns out to be no so high, that's a great help to your decision.
No one is good at articulating these distributions, and many people who influence you during the hiring process with either be overtly nefarious in their attempts to get you to believe what their rosy-colored prior looks like, or they will be suffering from different biases (especially the earliest-stage employees).
For a young engineer who may or may not have a great command over this sort of probabilistic reasoning, and may or may not know any techniques to mitigate the biases that might creep in, it can be extremely risky to advise them to determine their own personal assessment of whether the exit will be 10X better and so on. Almost always they would be better off simply saying that they can't put a useful probability distribution on it, and therefore they cannot come up with a useful model of what the equity portion would be worth.
It sounds nice to teach these types of candidates about how to value the equity in terms of knowing about liquidity preference, asking about the composition of the board of directors, asking detailed questions about comparable companies and their exit numbers, and so forth. But in truth it's a bit like handing someone a loaded gun, pointing it at their foot, and saying, "you're welcome for the advice."
You may or may not choose to play this game but odds are not in your favor.
My suggestion is to postpone options/equity discussion up until after the salary discussion is settled. Let it be icing on the cake rather than replacement for the part of the cake.
I really don't understand why an experienced person would take a pay cut.
When you get a job offer with an equity component, you should be able to estimate its value. Figure out what you think the company is worth, figure out what % of the company you own, and multiply those two numbers together.
I have had friends get job offers where the equity component was worth less than $1000, and I have had friends get job offers where the equity component exceeded the salary component. It really just depends on the startup. So don't just dismiss the equity component as worthless without digging into it a bit more.