Don’t Get Trampled: The Puzzle for “Unicorn” Employees
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If you are going to get enough out of working for a company then great, go for it. Conversely if your only motivation for working for the company is that they have offered you a lot of shares then you should take a step back and think long and hard about that.
That flips of course for a publicly traded company, those shares have recognizable value right from the start and you can use Black-Sholes or other future value estimators to get a handle on how much you should be swayed by those shares.
As the article points out, it is particular corrosive around the c-suite (CEO, CTO, Cx0 what ever) of people who founded the company. They will often hold a solid number of shares already and even though they shouldn't, will often do the math that if they had sold their shares in this round rather than generating new shares they would be multi-millionaires. Sometimes protecting that illusion becomes more important than making good decisions.
But what advice would you give someone who has an offer from Uber/Airbnb/Dropbox/Pinterest/Palantir? They're derisked to the point where the RSUs/options should have some value, and their offers to employees definitely reflects this. In addition, many of these very late stage companies' employment offers are very heavy on the equity side. Would you still just tell someone who has an Airbnb offer who's weighing it against say, one from Microsoft, to consider the options to be worth $0?
I had a friend who was in a similar predicament and the friend didn't seem to want to believe the steep discounts I told him he needs to apply to the RSUs/Options. At the very least 5%/year compound discounting for the illiquidity premium, as well as a steep 20-30%+ discount for uncertainty for actual exit. Not just business metrics, but macro market conditions as well as the random whims of the board.
I personally value liquidity a lot, and made a strong case that a comparable offer from a publicly traded tech firm to blow a late stage startup's equity heavy package out of the water.
Wasn't there a post here recently about one of those companies having restrictions that made it more-or-less impossible to cash out your equity if you ever left?
It is pretty egregious that options employees are in that predicament.
Edit: please correct my fact or otherwise respond. If I am incorrect I'd like to know; the drive-by downvote doesn't help.
This is fascinating because at other companies, you can easily have the opposite: A company goes from having option with an extended option exercise period (say 2, 7, 10 years) to RSUs. The RSUs, whether they are on a delayed vesting with handoff when employee leaves, or outright confiscation upon departure, are both worse than the options scenario.
The scheme with Uber is the options can be exercised up to 90 days after departure, but the RSUs are held until IPO, at which the employee/former employee takes possession of them and is responsible for paying taxes on the income.
Secondary share sales are essentially prohibited, only being authorized if the board approves them. Illiquid until IPO.
1) Regular RSU vesting schedule. You'd get a tax hit on illiquid equity (I've never heard this happen at late stage startups so far).
2) RSU vesting is delayed until IPO. If you leave before IPO, you lose all your equity.
3) RSU vesting is delayed until IPO. If you leave before IPO, you get the equity you have vested on paper so far. You will owe ordinary income tax on the shares.
"more-or-less impossible to cash out your equity" seems to be somewhere in between (2) and (3). I'm interested to read the exact legal language used in the contract, if anyone can find said post.
Businesses are like camp fires, camp fires need heat, fuel, and oxygen to burn, if you run out of any one of those three things they go out. By the act of burning, the camp fire can warm the air above it, forcing it to rise which pulls in new oxygen from the surrounding air. They can increase in size which allows them to reach fuel "on their own", and the heat they generate can dry otherwise wet an unsuitable wood and turn it into fuel.
Startups burn cash which as their "fuel", their "heat" is goods and services with which they can change the way a market operates which pulls in more customers giving them more "oxygen" to work with.
As a result, startups and camp fires, share an interesting similarity. The longer you have to work to keep them going the less likely it is that then can survive on their own.
From what is available to the public, it seems that any one of Uber/Airbnb/Dropbox/Pinterest/Palantir would be sold for scrap if they were unable to raise money from private (or public) placement. The key is that they are all losing money so their fires are not self sufficient.
So a really good question is, why not go public?
My experience is that risk is a big factor here. And a number of unicorns have huge risk factors, whether it is bad labor judgments against Uber or sweeping hospitality laws against AirBnB, they have some unresolved 'nut' in their operation which prevents them from showing a risk tolerance that the public would be able to look past. So to evaluate a company that has been around for a while but hasn't shown it can be a profitable business, you have to find the unresolved systemic change that is keeping them unprofitable, and then you have to evaluate whether or not the odds are in favor of that issue being resolved in the company's favor. Which, given their longevity, suggests it is not going so well.
Can't speak for the others but Dropbox is not losing money. (To be clear they are free cash-flow positive but not profitable, however the point is they can survive indefinitely without raising more money.)
https://www.bloomberg.com/news/articles/2016-06-14/dropbox-c...
Uber/Airbnb/et al aren't still private just because there's some uncomfortable risk they're afraid will push away public investors. There's a whole host of reasons to stay private (lawyers, executive time/energy, SEC compliance, public investors are generally more myopic than private ones, etc, etc, etc). The "nut" you mention might be an inconvenience, but it's surely not even close to the most important reason to stay private.
That said, while I agree with you that there are lots of reasons a perfectly functioning, operationally cash flow positive company might choose to stay private. None of those reasons apply to companies that are diluting themselves with additional investment in order to stay in business.
The money gets more and more expensive from investors, and more and more people get screwed, and then all that's left is to write the amazing journey blog entry.
Aren't they both founded on the principle of flounting the law?!
Perhaps, but I value diversification of my investments. Investing my sweat and my equity into the same company is not diversifying. It'd also be easy for me to overestimate just how much they've derisked, underestimate the fine print, golden handcuffs, and generally fuck myself over.
Rounding to $0 is a useful and "safe" oversimplification. If they turn out to actually have value - hey, sweet, an unexpected bonus.
Absolutely. It's never an accurate assessment, but when the vast majority of people are in no position to even ballpark estimate the value of their equity package, rounding down to $0 prevents a lot of heartache.
I could see this being a valid argument if there were systemic risk to the industry that could have a simultaneous effect on your equity and salary compensation. e.g. if you're a truck driver and get equity in your company, then automated trucks could be disastrous and you'd want to diversify away from the equity.
Put another way, you're right that the equity is the only way that you are exposed to the company's success, but there are catastrophic ways you can be exposed to its failure.
Bad assumption. I've known people who lost a large chunk of their retirement funds in the dot-com bubble, despite "diversifying" within it. More recently, there was the housing bubble. Both of these had implications for the job market - and salaries - at the same time.
Some people would argue we're in the middle of a tech, games, or VC bubble - and while they might be wrong, diversification is what you do to mitigate the risk in case they're right.
This makes some assumptions about risk-aversion and rationality – it's possible that the latter is an optimistic assumption, given the amount of koolaid-drinking inherent in joining startups. But as long as you're telling your friend to discount his startup offers, and articles like this are being written, I think it's logical to think that the pendulum will swing towards mid- and late-stage startups building in such a premium to their offers, especially if they're serious about getting good talent.
They are like option grants that last about 7-10 years, that exercise on IPO/acquisition and don't let you exercise before then.
So with these companies, all of the tax complexity goes away, and you don't have the 'if I leave after 2 years, all of my stock options go away after 90 days' dilemmas. You don't have the rich man option of pre-exercising to potentially get some long term capitol gains tax savings although. If the trump administration gets rid of the AMT stock option trap, then you will also not have that advantage with ISO-type stock options.
Since IPO is the realistic condition for these companies, you also will have the 6 month SEC lockup period. The company might add their own additional lockup period afterwards too.
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The attraction about joining these companies a few years before probable IPO is you have not insignificant potential to increase your income above the average tech worker income level. Facebook is the success example, twitter, fitbit, etc are the not as successful example. You can also get similar effects by joining apple before the iPhone was released or during the early iPhone years.
It's definitely a risk, but isn't as risky as joining a startup where you can't see an IPO in it's future any time soon.
One Caveat: if your RSU terms are that you "vest" your vested RSUs when you leave the company before IPO, you'll have a substantial tax burden on a grant of illiquid equity. This will be effectively the same as the option lock in scenario we've been discussing here for several years now. I know that some companies don't have such a clause, but it's entirely conceivable that some do.
So yeah, read your RSU contract! :)
I would argue that it is more about having the power to make a big difference (however cliche that sounds) and working on new projects (as opposed to maintaining code)
The biggest difference I ever made was while working for a big established 10k+ employee firm. The smallest was while working for 10-15 employee startup.
Yes - VCs use a 30-50% discounting rate on investments during the growth phase, so that's what employees should use. (Whether this is illiquidity or uncertainty is left for the holder)
IMHO - for the companies you've listed, they can actually be higher risk, as the employees will likely have much higher strike prices. If you're already there, you can have a better idea of if you're in the money. ("Mine strike at 20 cents, the last funding round was at a dollar, put in a discount and let's call it 50 cents, leaving me 30 in the money") If you're a later employee, you're more likely to wind up out of the money, and less likely to get a significant stake.
I take issue with this statement. I think there's a confusion here between longevity and future risk. Yes, these companies have been around for a long time. That does not mean that they are low risk. The classic example here is something like Good Technology. It had been around for a while, and it had an extremely high valuation... right up until it didn't, and it was sold to RIM for a fraction of its peak. Or Twitter, for example. It debuted at $45. Now it's at $16. Imagine if a large portion of your compensation had been negotiated at that $45 price. Now that portion of your salary is worth less than half of what you were told it was going to be worth.
No, I agree with ChuckMcM. Valuing equity at $0 may seem overly conservative, but you at least have the assurance that you'll never make less money than that. Any positive equity on top is just gravy.
That seems to be a bit of a false dichotomy, though. I'd assume it'd be vanishingly rare to find someone whose only motivation to work for a company is their illiquid equity comp.
I hear a lot of people who suggest that equity in a private company is worth $0, and I even preached that as well, but I think it's counterproductive to do so. Sure, it's difficult to properly value such equity, but I think discounting it down to $0 is nearly as bad as assuming it's worth a lot more than it's possible to be worth.
Let's say that you're lucky enough that comp isn't your #1 motivation for working at a company; maybe it's down at #4 or #5, after working on cool projects, autonomy, working with smart people, etc. Comp is important, but it's not the most important thing. If you're really convinced that a particular private company's options could be worth something someday, and you're able to negotiate a reasonable cash salary, looking at the equity comp as a differentiating factor as compared to another company that has a less attractive equity package is perfectly reasonable. Assuming that the equity packages of both companies is $0 throws away useful information.
I think of the "value it at $0" strategy as a knee-jerk reaction to overzealous fresh college grads thinking a big number of options automatically means they're going to be rich. It's a useful phrase to throw at someone who has limited ability to do a risk assessment, but is a bit patronizing to someone who does.
Unusual options contracts usually have to be presented to, sold to, and approved by the board. So, unless you're extra special, you're going to get the boiler plate contract. And, the boiler plate contract has gotten much less attractive over the years - filled with enough clauses to make the options effectively worthless.
If you can assume that your CEO, the board, the acquiring company, and the lawyers are generous, and that the company will be unusually successful, then maybe it's worth it for the average employee to take options into consideration. But, that is a lot of assuming.
The only things I think most people will need to negotiate wrt comp is their salary number and the number of shares in their option package, both of which the hiring manager usually has some flexibility in. And when that flexibility isn't enough, one can also try negotiating simpler things like number of vacation days, a more liberal work-from-home policy, etc. (that is, things that don't require a legal or board review).
Well, no one said that all the $0 equity is valued at the same zero. There's nothing wrong with comparing those zeroes, but that's not the mistake most people make. Too many people use one of those zeroes to offset something that is nonzero (cash compensation differences, public company equity, quality of working environment and so on). Encouraging people to "value it at $0" is about making sure that they don't make that mistake.
That is very true. The specific situation of a Unicorn is somewhat value growth (+ dilution) without direct market corrections for an extended period of time. For a Unicorn the possibility of being able to encash the value in real money needs to be considered.
In general, the value needs to be multiplied by one of two factors.
Possibility of an 83(B) + your ability to buy yourself out of the golden hand-cuffs against the potential length of your tenure, even in the last months of a pre-IPO hold-out situation within the company.
Those are realistic factors to consider, with the latter being the biggest toss-up bet there.
It's a big gamble. That delta between your market rate and your cash comp at FancyStartup.com is the money you're taking into the casino in your pocket. Be okay with coming back out with zero of it. Take the chance on a startup because you love the product & team, because it's the right role for you in your career development, and because you can afford to allocate some of your lifetime earning potential to taking a chance on it.
Okay, so you're still going to do it. Be smart about it. You're an investor: observe the company from an holistic standpoint. Ask the tough questions to give yourself as much transparency as you can get. Reevaluate your decision periodically to make sure it still makes sense. Advocate for your own interests. And be prepared to cut your losses, if need be.
That matches pretty exactly what three independent US (Californian & one NY) lawyers advised me: Only consider shares from startups if all else is equal.
Here is a simple open-source site (FD: which I wrote) which handles this for you: https://friendlyoptions.org/
Give the site to your prospective employer, ask them to fill it out with the details of your stock option grant and then share the link with you (all the information is stored in the URL so no data leaks to the site --- or just run it locally if you are paranoid). The site asks for the minimum amount of information possible for you to start valuing your stock options so if they can't fill it out, you essentially have no way to value your options.
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With that advertisement out of the way, I disagree with this article a little bit. I think questions about the past/present are all completely fair game and should be asked and answered:
* How much money have you raised and at what terms?
* What is the current stock option plan and what are the details of my stock option grant?
* Have their been any secondary sale transactions in the past? Who participated?
But once you get into the future, prepare to be sold a very optimistic vision of the future that may or may not coincide with reality. And this isn't necessarily anybody doing anything wrong, generally the people who run these types of companies are very optimistic people who believe that what they are saying is true. However, this doesn't mean it is likely to happen. I'm not saying you shouldn't ask, get all the information you can, but a company will never tell you a pessimistic view of the future (and nor should they). They may say they'd never take debt and are shooting for an IPO in 2 years, but I guarantee you if something changes in a year those plans might all go out of the window.
1) If there has been one in the past, you may reasonably expect another one in the future. They may even reveal that they have secondary sales at regular intervals. This derisks your equity illiquidity somewhat.
2) If there was a secondary sale where only part of the "leadership" participated, then that's at least a yellow flag for management's attitudes towards its workforce.
1) Purely as a sign of disrespect to employees, I'd never work at a company where founders sold shares and employees never had the opportunity to. I think it is a very meaningful proxy of if the founders care about their employees or not. If founders want to have a policy prohibiting employees and themselves from selling shares, I'm perfectly fine with that (though I'd want to know that policy exists), but not founders get to sell and employees can't.
2) More importantly, a secondary share offering means that at some point in time the common shares were worth enough that somebody bought them. That is a good sign that at the time when the secondary sale was happening, the company was going well. If the secondary sales are ongoing it also gives you a realistic estimate of what the shares are worth right now. This is pretty rare but I think at least a few large "unicorn" companies have regularly scheduled secondary share sales.
Thanks, that's actually a nice feature.
For anyone curious, it works because using an URL like http://example.com/page?foo=bar#secret in a browser will not actually send "secret" to the server, as per RFC 1808.
Of course, there's nothing stopping some sneaky JS that runs later from reading the data and sending it back through another channel, but that's another story.
var hash = window.location.hash.substr(1);
$.ajax( "example.php?hash=" + hash );
Here, see for yourself:
data:text/html,<script>alert(window.location.hash.substr(1))</script>#because+anchors+are+always+safe
Already covered :P
Which I did, when checking out the app. It's why I mentioned it as a possibility.
If the goal is to gauge how a grant compares to competitive offers, I say we should focus on more objective, immediate metrics like percentage ownership. And some of the important terms you tool highlights, like exercise windows.
My perspective when making the site is that companies will often be too optimistic about options even when the company does blow up, which leads people to be misled even if the company does do extraordinary well. The site gives a realistic view of what you can expect in an optimistic scenario.
Of course very few companies every achieve this, but the idea is to at least gauge what your upside might be if a really lucky outcome happens.
If I had good statistics about what % of companies reach Series A, then Series B, then Growth it would be great to put that on the site as well but I'm not sure where I can find that...
I would love to hear examples. Otherwise I'm calling bullshit on this one.
My pay is about equal to Big 4/Corporate goonshop, and I do way more interesting work. That's enough for me :) If I get paid out, realistically it may be only 100k, perhaps even less. Maybe nothing. Maybe more.
Sure they try to turn it around and say that the employees aren't "asking the right questions". In reality, companies don't want to give that info out because it's to their advantage not to since w/o it you will almost certainly over value their offer unless you subscribe to the it's probably worth zero mantra.
"Cuz' they're really, really, really, really GREAT?"
(looks at employee; doesn't have the heart to tell them.) "Uh, yeah. That's exactly why."
Mumbles to himself: 'poor kid.'
So since they're originally mythical, if you see an actual Unicorn - well, there's a good chance it's a horse with a cone taped to its forehead...
It doesn't originally just mean very great: it originally means basically mythical.
Is that really the best single question to ask? It's actually a complex question as it depends on subsequent funding rounds and terms such as dilution and liquidation prefs. You should not need to run a simulator to figure out if you're getting a decent grant.
If the goal is to compare grant sizes to other offers, how about a simple objective metric like percentage ownership? That will give you a general sense of how sizable a chunk you are getting. It will of course vary by growth stage, but within stages it's closer to apples-to-apples than anything I can think of (even FMV).
Not only are options often worth less then you think, you get all the tax complications, all the exercise window complications - how do people not discount their value even more?
I think a company like Uber should just offer cash. They are not a rocket ship, they are already in space but haven't IPOed for weird reasons. They raised enough money to just pay cash. If the financiers want to play financial games, they should play them amongst themselves, not with employees livelihood. All of this advice pops up, "Get an (expensive) lawyer to review it", "Take this online seminar" etc. It's like writing a job offer in a foreign language and suggesting someone take a few Duolingo classes so they can read it and make sure it doesn't screw them. And if you need a lawyer to review it, reimbursing an independent one should be part of the job offer, full stop.
Nowadays people are saying don't join startups for money.
But it seems that the founders and VCs are very interested in money. It seems they think _you_ are the only one who shouldn't be worried about money. Work yourself to the bone because "we're a startup", don't expect to get paid because you're "changing the world", but excuse me while I drive off in my ferrari I bought.
Yes, the startup will "change the world", almost always in the sense that every company changes the world by offering goods and services. But if you want to work for charity, work for a non-profit, why do people think it makes sense to sacrifice their own income so some rich VC can get richer?
The tune has changed recently as well. Because pg used to say startups were the way to get rich, by compressing your work years. Zach Holman used to say the same thing. Nowadays you do the compressing your working years in terms of work output, just not in terms of compensation. And Zach Holman is now writing every other blog post on how startups don't pay out and they "move fast and break people."
With the crappy salaries startups offer, it's almost impossible to buy a house in the Bay Area, yet somehow you get looped into the anti-tech villinization. If I'm going to be the big bad evil rich bogeyman, might as well actually try to get paid like one.
Startups were romanticized. These billion dollar companies that are clearly not startups tried to retain the startup "brand". And even the early-stage startups are really just product areas of the VC firm. You are still working for a big company. The VCs call the shot, your "CEO" is the PM. But it's great for the VCs since they can screw you over, screw the customer over, screw the public over, and it doesn't matter because each one of these dinky startups is their own brand you can shut down tomorrow.
They rode the waves of a lot of romanticism from pg essays, the Social Network, Airbnb/Uber/Snapchat, but now bigger companies are paying more, too many engineers have gotten screwed by equity grants, and I think we're seeing a general trend away from startups. Maybe it will eventually restart, but VC companies will not be appealing until VCs fix these issues.
Most of the people joining these companies, especially early on, are young people straight out of school. When would they ever have had exposure to it, or to any situation which would indicate these kinds of questions are appropriate to ask?
Perhaps in college/high school, we need some kind of "startup economics" course, or at least a lesson on it in a personal finance course. This, and so many other things about the working world. Cause it's so easy to say, "Why didn't you ask about this before you took the job?" But most people have no idea that they can ask about "it", let alone what "it" is.
> They raised enough money to just pay cash.
Doubling their cash burn for compensation seems like a pretty poor move when you can get away with basically deferring payment, so to speak.
I'm not holding my breath. The only thing that would fix this is regulation. The information asymmetry and power differential between founders and employees all but ensures that in the average case, the employees get the shaft. Since "regulation" is such a bad word, let's say "incentivization". Give employers a tax-advantaged way of offering equity in standard, comprehensible ways.
The current tax rules do the opposite by forcing employees to navigate the complex world of options. If employers could simply grant common stock on a vesting schedule, that would be a start. And then add in some rules to incentivize not screwing over the employees and ironing out any other quirks.
I am not convinced that the problem is exactly the lack of comprehension -- it's that startups going public are a probabilistic thing, not a deterministic thing. Given a population you can talk about the distribution of this or that happening, but you can't know if this particular one will get to milestone X. (See also cancer 5 year survival rates.)
You could get around this if you could do a ton of startup jobs, because then it starts getting likelier that you actually hit on a winner. But you can't do many in a lifetime, because of the option / tax due on exercise / long pre-IPO / vesting schedule.
Even if you could come up with something crystal clear, like "X% chance that you get $Y", and even if you could agree on those probabilities, you still only get to sample that distribution, not enjoy the big-N expected value.
I think my best attempt at a solution here probably is forcing the light of public trading onto a company sooner rather than later, via regulation. My understanding is that usually the going public forcing function is the value of assets and the number of shareholders; perhaps some additional constraint on the number of (company-issued) option holders or volume thereof or amount of debt or ... something? as well? (Stupid risk-brain is just inventing loopholes for every rule I can think of.)
I also really like the advice about privately held companies, who want to remain private. Things get very tricky there and on top of that mostly no one understands what to do with the stock options.
Unless you are able to do a secondary sale of the stock options they dont carry any value and i don't think a lot of privately help companies allow that. Not to ignore the tax you have to pay when you want to buy stocks, even though you cannot sell it.
Due to tax guidelines, companies are highly incentivized to grant employees options struck at the last 409A valuation price. For companies who have raised multiple institutional rounds, this is usually the last round's post money valuation. This number is essentially the market valuation for the company, so an employee option is just a security with a strike price at fair market value. It has value due to optionality but only due to that.
It's very different from an option that you can sell on the open market though. I would take an at the money call option (with an expiration years in the future) for any publicly traded company over a startup.
There is no one-size-fits-all recommendation though. Everybody is different, and everybody's situation is different. What works for me won't necessarily work for you.
Equity comp, especially in non-publicly-traded companies, indeed is closer to a lottery than a lot of people think, and articles like this are helpful because they are educating people about it.
I also once wrote a blog post about this topic - http://www.somic.org/2015/12/28/on-employees-investing-in-th...
If you want to find talent, you must find a way to develop it in-house.
This is a great sentiment, but doesn't scale at hypergrowth. P&G and McKinsey can do this, because they're growing slowly. If you're growing at 100+% a year (or even 50+%) you just don't have time to grow all your own talent.
It's a very challenging problem. Great leaders rely on bringing people in that they've worked with before, but there's limits to how much this can scale.
Overall the OP is spot on for what he says.
So you're right, I didn't read it but I will now.