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Comment by eldavido | Hacker News Reader

I think the way we do options in startups needs a more fundamental rethink. I wouldn't be too sad if the current system falls on its face.

I like Buffett's proposal from a few years ago. They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money, after all.

What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders. This would probably take a big change in securities laws to create rules around how unaudited equities could be traded. But I keep seeing these stories about AMT, employees leaving who never vest, golden handcuffs, etc., it makes me think we need to make private company stock work more like public company stock, somehow.

Another thought: Zuckerberg has said a few times he doesn't think going public was as bad as people said it would be. Maybe the solution is for companies to become public earlier and have investors operate more like PIPE shops or activists who just hold big chunks of company stock?

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That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future.

Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

Nor does the ability to "buy in" exist for normal employees unless the business is public or sets up some kind of ESOP.

I don't think this is true anymore. I think this is one of those funny vestigial things that evolved in a different era.

If you think of a startup as a true "garage venture" with a few people toiling away trying to ship a product, maybe that's the right model.

That isn't really the model for SV entrepreneurship anymore, though, even though we kinda pretend it is. How it works today is, $8 million-dollar "seed" rounds, downtown office space, early-stage companies paying $150k or more for talent, incubators and signaling, etc.

Maybe one of those cases where the game has changed, but our mythos hasn't.

Maybe this is true in SV. My experience in other areas of the country is that startups, especially early stage ones, don't have that kind of cash.

That’s simply incorrect. I founded a company that raised a mammoth seed round in Silicon Valley (not $8m but more than $3m), and we do pay some high salaries, but Apple and Facebook still pay salaries that are much, much higher.

Critical employees have joined us while taking $100,000/yr pay cuts, despite. Having a salary in the six figures.

To think that startups can play that game of “equity doesn’t matter” is just wrong, even in an era of $8m seed rounds. I know HN likes to say “go for cash not stock,” which is a good way to negotiate if you want to avoid downside risk, but if you eliminate stock compensation there’s no way startups can play ball with incumbents. Full stop.

I don't think so. Why should employees make up such a large percentage of the money invested in the company? When you take a salary cut of 50K, it's like taking that money an investing it right then and there. Why should an employee be investing 50K of their own money into the company every single year? It's bad enough that someone would invest 50K in a single company: one that picked them, not the other way around, with all the information asymmetries that applies, but to add insult to injury: the risk is compounded by the fact that their investing all this money into the very same company they depend on for their paycheck.

VCs are much much better equipped to do investing: both in terms of skill sets, experience and information. Employees should not be forced to become angel investors just because they work at a start up.

VCs will always have enough money to invest in truely excellent opportunities. It just means, they'll need to invest more. And in this low interest rate world, I don't think the world is starving for cash is it?

Maybe an employee believes in the company and wants to take part, deeming the risk is worth it for them? Clearly that's what's happening.

It's certainly rational in some cases to take the risk of owning a portion of a company instead of taking the same amount of cash and putting it in the S&P 500. You're always investing your time and money, it's just a matter of where.

And for what it's worth, if you're getting paid $250k at Apple, you can probably go back at almost any time.

"Maybe an employee believes in the company and wants to take part, deeming the risk is worth it for them? Clearly that's what's happening."

And that belief is abused, and the employees get fucked over when it comes time for an acquisition, as their shares get dilluted to hell and back.

Yes, that often happens and it's clearly unethical. What's your point?

His point is, that you have to assume that will happen quite often. We're simply not equipped to forsee all the legal and financial risks of having stock options. We've seen too many ways that employees have been taken advantage of. You can't simply "trust" that if the company does well, you'll do well.

Sure, but who said we should simply "trust" that?

That's the implicit suggestion behind the entire options thing. Especially given that almost no individual developer has a bargaining position strong enough to demand the safeguards that would avoid those problems.

Look, people still gets big payouts, even if many get stiffed. One can still rationally take the leap even knowing that the game is rigged.

> it's like taking that money an investing it right then and there.

I disagree. This is only the case if the options are $50k in cash, or $50k in equity. With startups, the options are $0k in cash or $50k in equity. Startups can wish equity into existence, but they can't magically produce cash.

> Why should an employee be investing 50K of their own money into the company every single year? It's bad enough that someone would invest 50K in a single company: one that picked them

Recruiting and hiring, after new grad level, is a two way street. You have the choice to accept, deny or negotiate an offer.

So why are you going after these guys that need to take such big pay cuts? I can almost guarantee you that there are plenty of people with a high enough level of talent that are in other areas.

Find them for me, and I'll hire them and pay you a referral bonus.

Go outside the Valley.

We hire remotely. It's not the instant solution to all problems, despite what HN would have you believe. A lot of experience is still concentrated and SV and highly-compensated.

> “go for cash not stock,” which is a good way to negotiate if you want to avoid downside risk

I think significant amount of people would be fine with "just risk". They are not fine with risk plus malicious business practices - diluting stocks, delaying IPO indefinitely, creating different tiers of stocks with multipliers, preferential stocks for non-employees, etc.

Silicon Valley isn't the world. I think the reality is that a startup is often the "garage venture" or somewhere well below a well-funded startup. Most startups of the world don't have multi-million dollar seed funding, even many that do aren't paying 150k plus salaries.

At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience.

What's happening now IMO is that the hot talent has figured this out and they have accepted positions at Tesla, Salesforce, Google, Facebook, Apple, or Amazon. That said, I know someone who walked away from a $10M package over 4 years to be the CTO of his startup. I wouldn't have, but everyone has to follow their path, right?

It all depends. It’s certainly hard to compete with a $500k/yr sure thing, but personally I’d rather have a $150k/yr salary with a chance to retire if the company does well than a sure $200k/yr. It just all depends.

Risk-adjusted, the best way to get returns is probably to take an equity-heavy stake at a post-series-B startup with obvious growth and product market fit.

I used to feel that way too until I tried it multiple times. All of the startups I've been involved with have been buried or purchased with deals that made my options worthless or effectively worthless (i.e. needing to come up with enough capital to execute the options for such a meager gains that it was hardly worth the effort).

On the other hand I know hundreds of people that this kind of equity made millionaires.

The other problem is cryptocurrencies have created a ton of new companies that are paying big for talent. I actually think this is a good thing. Too many people were working on dumb startups back then. I want more engineers at Tesla.

Are they paying in cash, or in their cryptocurrency?

ICO tokens obv

They're paying cash. I've seen as much as $500 USD / hour.

> At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience.

I agree that if you can get into one of the established companies in the top quintile of the industry you are probably better off than if you joined a startup. I'd hazard a guess, though, that the startup jibs are easier to obtain and more plentiful than those BigCo jobs.

> What's happening now IMO is that the hot talent has figured this out...

It sounds like Tesla et al. have figured out the market clearing rate for great engineers. Why haven't the other companies also figured this out? There are plenty of other companies with big budgets. And early stage startups could certainly offer bigger percentages in equity (or at least better terms on the equity they offer).

On the other hand, even $1M/year doesn't look good compared to what you would have made via options/RSUs if you were employee < 10 at Facebook/Google/Amazon...

Getting a few downvotes for this comment but my point is I think it's too simplistic to frame it as options are junk, it's a rigged lotto for naive young guns yada yada. Sure, the stats aren't great but if you're young, talented, looking for a thrill and aware how the game is stacked, I don't think options/RSUs are bad 100% of the time.

Personally, I'd like that road to always exist and make the choice myself rather than having it disappear from the tech scene completely. I personally know more people that have done well out of startup stock grants than I do earning >$500K in tech.

A lot of the US's problems with share options could be solved with saner tax. It seems bonkers to me that you are taxed when you exercise rather than when you sell.

It's not that options are worthless, they're great in fact. It's that the C-suite and the investors usually divvy up the pie amongst themselves and give the rank and file the crumbs that stuck to the pie pan. But let's do the math. The average startup exit is ~$243M, let's call it $250M for say 4 years of work.

https://www.inc.com/issie-lapowsky/average-successful-startu...

Let's say you get paid $150K salary for those 4 years of work at the startup vs $300K at BigCo. To break even, you need to close a $600K deficit, that means you need at least 0.25% just to break even with a guaranteed ROI.

Now let's say you're experienced and you're getting $500K at BigCo, now you need ~0.6% just to break even.

Finally, now you're a domain expert and you're getting $1M at BigCo, now you need ~1.4% just to break even.

In my case, I would need at least 2x the listed equity in each of these scenarios to choose the startup over BigCo. I have never been offered numbers like that. I have had CEOs and CTOs get indignant with me over my math though. Math is hard I guess.

However, if you crave autonomy and freedom, I think the message is clear here: be the C-suite at your own startup, even if you have to bootstrap from a place with a lower cost of living. Lifestyle income is a lot easier than building a $250M+ company IMO.

I've heard Tesla and Apple actually generally don't pay that well (though my source is a few employees, so that may not be uniform across the company).

> ... but everyone has to follow their path, right?

That's the thing. I'm sure I could make more in salary from a larger company, but I'm addicted to autonomy, limited amounts of process, and having significant influence on what the company does and on its success.

Yeah, but all the risk of that bet is put on the employee. The employer faces none of it.

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares.

To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it.

Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock and the company sells at 100m. You are most likely not going to get 1m because of preferred shares. Preferred shares are truly a cancer on the system.

Or like in the uk for approved (ie tax friendly) enforce the issuing of the same shares to employees as the others.

I'm not sure that is better. Extra provisions on capital might be adding more capital to the mix, which increase wages all around. It might be shooting yourself in the foot.

But hiding the information is a way for investors to have more leverage over employees. That is an undoubtedly unfair surplus to them.

Its not the only thing I'd change. I would do away with the restriccions of investing in startups as well. That would allow employees to buy stock whenever they want to (and the company is willing to sell them for) without this obscure negotiation. The minimum limits on investing in startups is a way to give higher returns to investors, while harming founders and employees.

Why its to stop some shareholders being taken advantage of by companies with different share classes.

I think that effect is somewhat overrated. In the end, its best to let people get what they want. In that sense, not having information doesnt let people choose what they want.

Limiting what can be offered is more likely to prevent people from being able to get what they want.

Its possible that investors are very risk averse and so, are willing to pay a big premium for the preferred shares, one that employees are not willing to pay. In that case, employees actually win out on the deal, as they might not be as risk averse (as its only a small part of the compensation).

But in that game, the employee is barred from buying unlimitedly (min 1mm in assets) and also from knowing what everyone else is getting (which investors know).

I cant emphasize how big a loss it is to not let employees invest. Employees know a lot of things investors don't and share that information amongst each other, but can't give market signals because they cant buy or sell or disclose freely. I.E. if you saw a company where employees are all buying shares now, its great for both employees and the general public AND investing in general.

Not only that, but not being able to sell and exchange shares between employees means you cant hedge bets as employee. For example, you could pool a bunch of startup shares that way. Thats only for investor groups today.

Sometimes when I think the US is supposed to be the pinnacle of economic liberalism, I shed a few tears.

Exactly and as a Union activist I shudder at some of the sharp practice and poor treatment of employees when it comes to share options by both employers and the govenment

It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity.

For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-th...

They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

It seems as though it just makes investing in any startup that's expected to at least be acquired at some point a 'risk-free' investment.

Anyone have any thoughts on why this might be a good thing?

I made another comment about them below, but i will repeat in a different way.

People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich.

The existence of blue cheese sandwiches is moderately irrelevant to the existence of regular sandwiches. And banning them would only increase the price of regular sandwiches and also make those people less happy. Less sandwiches would be sold.

Preferred shares don't really hit common shares. If you knew exactly how it went, then you would make an assessment of the value of the shares as they are. Your internal valuation of sandwiches will adjust to the existence of blue cheese sandwiches.

The reason why they feel unfair, and they are unfair in this sense, is that the guys with preferred shares know what they are getting, and you dont. And also, as an employee you dont get to buy preferred shares. If you dont know the price of blue cheese sandwiches and you can't buy them, you will find them unfair. Banning sandwiches is not the solution to the problem.

I'm not so sure about the analogy, but I get your point.

I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares).

The terminology surrounding this is quite misleading too - as you mentioned in the grandparent, having 1% of a company sold for 1M, doesn't mean you'll get 10k, which is pretty weird. Not sure what the solution is though - maybe it's just for everyone to be aware of how preferred stock works and make the cap table public.

It would also be nice if there were a standardised way for a company to say "We won't offer preferred stock for at least X years". Something like that would make me much more confident in taking equity in a company. Which, in principle, is actually what I want to do - but all these kinds of tricks essentially mean I can't (because I can't properly estimate the value of what I'm offered). Public cap tables would help, but wouldn't protect against future investment rounds with preferred shares.

If it were of public knowledge that when a company IPO's, employees in total collect less than 10% of the gains, the public outrage would soon ban the practices that we see everyday.

Today we have a lottery where we dont know the winners and so they are protected. I dont have animosity against investors for protecting their gains, that is fine (for them, ofc, but they are reacting to their incentives).

The main reason cap tables are hidden is because the only person that can buy shares is an accredited investor, which means the company has to cater to them, not to capital.

If you as an employee were able to buy and sell the shares with liberty, companies would almost immediately make cap tables public to get cheaper funding from the general public. Suddenly, investors capacity to ask for things like privacy and preferred shares would dissipate: there are millions of employees in the bay area alone that would pour considerable money into it.

Increased capital means less concentrated gains, larger absolute gains, considerable increase in wages and overall greater investing efficiency.

> If it were of public knowledge that when a company IPO's, employees in total collect less than 10% of the gains, the public outrage would soon ban the practices that we see everyday.

What do you mean? Of course this is public knowledge. Anyone accepting an equity grant as an employee who doesn't know this isn't doing their due diligence.

Asking about the cap table of a small startup while interviewing is an entirely reasonable thing to do, and I've immediately discounted an interview at a company where they've been cagey about giving me details. I mean, I'm fine with them not breaking it down into what percentage each investor owns, but telling a prospective employee how much of the company in total is owned by VCs vs. founders vs. employees/option pool is pretty uncontroversial.

> If you as an employee were able to buy and sell the shares with liberty, companies would almost immediately make cap tables public to get cheaper funding from the general public.

This doesn't really make sense. You've just described a publicly-traded company, and obviously an early-stage startup can't afford to be one of those.

> What do you mean? Of course this is public knowledge. Anyone accepting an equity grant as an employee who doesn't know this isn't doing their due diligence.

Really. Can you tell me what were the employee gains of facebook, google and twitter on stock divided by the market compensation at the time that the engineers got? Where the engineers back then at every single founding round making a proper decision based on the information they had?

Please.

> Asking about the cap table of a small startup while interviewing is an entirely reasonable thing to do, and I've immediately discounted an interview at a company where they've been cagey about giving me details. I mean, I'm fine with them not breaking it down into what percentage each investor owns, but telling a prospective employee how much of the company in total is owned by VCs vs. founders vs. employees/option pool is pretty uncontroversial.

Its not always available on the decision for the employee. The cost of acquiring that information is orders of magnitude different from the employee than the founders/investors. Its still asymmetry of information, even if it is provided, which it isn't always. In any case, if thats what you believe, then you would have no concerns of making it public, since it already is.

> This doesn't really make sense. You've just described a publicly-traded company, and obviously an early-stage startup can't afford to be one of those.

Why cant it afford to be "one of those"?

> Really. Can you tell me what were the employee gains of facebook, google and twitter on stock divided by the market compensation at the time that the engineers got? Where the engineers back then at every single founding round making a proper decision based on the information they had?

Of course I can't, but a) why would _I_ personally be able to, about companies I've never been financially tied to?, b) that's not really the point. It's exceedingly rare that anyone outside of an institutional investor, founder, or non-founding C-suite exec will get 10% (or even close to that) of the proceeds at IPO or acquisition time. If that's not common knowledge to anyone who has either worked at a startup and/or has done a minimum amount of reading about startup equity grants, then I guess I don't know what common is.

> Please.

Mind keeping it civil? That kind of dismissiveness is rude and uncalled-for.

> Its not always available on the decision for the employee. The cost of acquiring that information is orders of magnitude different from the employee than the founders/investors. Its still asymmetry of information, even if it is provided, which it isn't always. In any case, if thats what you believe, then you would have no concerns of making it public, since it already is.

I'm not saying anyone makes it public. Asking questions like these is pretty basic advice when receiving an equity grant, and companies that I actually respect give a reasonable answer. No, they're not going to open their books to you, but they'll give you enough information to at least be useful.

> Why cant it afford to be "one of those"?

The cost to IPO (assuming the unlikely event you can find a reputable bank to underwrite) would easily eat up any funding you've gotten in the beginning, and then some.

> Mind keeping it civil? That kind of dismissiveness is rude and uncalled-for.

It's a ludicrous position to say that because the rules of hidden information are known, there would be no effects in the information where to be known. I can't fathom making the argument that because there is potential access to information, its the same as the information being public being done in good faith.

> I'm not saying anyone makes it public. Asking questions like these is pretty basic advice when receiving an equity grant, and companies that I actually respect give a reasonable answer. No, they're not going to open their books to you, but they'll give you enough information to at least be useful.

If its useful to collect it and for the investor to know it, it's useful for the employee to have access to it, and it is also useful for the employee for the general public to have access to it. An employee is woefully unprepared to make an analysis in comparison to investors, even if the company disclosed 100% to their employees, there would still be asymmetry of information.

There is no extra effort for the startup. Just disclosure.

> The cost to IPO (assuming the unlikely event you can find a reputable bank to underwrite) would easily eat up any funding you've gotten in the beginning, and then some.

The cost of an IPO is made up. If there is anything showing that clearly, is the craze for ICO's.

It isn't absurd. You need to distinguish between participating and non-participating preferred. Participating preferred is a lot worse than non-participating, which is always converted into equity in the success case.

The scenario this is trying to block is that entrepreneur raises $1mil for 10% of the company, and it's flipped tomorrow for $5mil. The investor gets 500k=50% loss in one day. It's completely reasonable and fair IMO that an investor should want protection in this case.

What's not reasonable is the way silly SV journalists treat preferred as equivalently-valued as common. It's not, it's worth a lot more, making it incorrect to say that "10% of company is 1 mil => whole company worth 10 mil" when that 10% is preferred. It's probably more like 5 million, or 6. Because that downside protection is _worth something_ so those preferred shares by rights, are worth more than common.

> They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

I'm torn on this. I agree that, in general, capital consolidation isn't a good thing. But you have to consolidate somewhat. If a startup founder has to deal with 100 separate investors to put together enough cash for an A round, that's a huge problem. Consolidation of some amount of capital into VCs helps with that.

The VCs, when it comes to money, are also taking on much more risk than the option-granted employees are taking on. As a sibling poster mentioned, though, you really need to make a distinction between participating and non-participating preferred stock. The former is super bad for founders and employees, but these days it seems like the latter is the norm, except for perhaps in medical/biotech startups. It gives the VC a better chance of recouping their initial investment in the case that the company sells for an unfavorable amount. If the company is successful, they'll almost certainly convert their shares to common and take no more of the pie than they're entitled to.

>What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders. This would probably take a big change in securities laws to create rules around how unaudited equities could be traded.

Most option/stock agreements give the company right of refusal and they can block sales

>They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money

Doesnt work for private companies, there's no market to buy them in

> Maybe the solution is for companies to become public earlier and have investors operate

I've recently been thinking about the ramifications of more and more of our economy being privately traded. It means that many groups of people are unable to use that slice of the economy to back things like retirement funds. Also can technically lead to a run on equity where folks are trying to save but are just competing over the same limited pool of assets. Articles like [1] are indicating that the number of IPOs per year are dwindling. Maybe a law that says companies valued over $THRESHOLD must be public?

[1]: http://fortune.com/2017/01/20/public-companies-ipo-financial...

>> They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money

> Doesnt work for private companies, there's no market to buy them in

Personally I'd like to see more employee profit-sharing arrangements. Difficult for a lot of companies though that run at a loss for years.

Link to Buffett's proposal?

It's from the 2016 earnings letter. He was making a completely different argument, namely, that accounting that ignores options expense is bullshit (many companies still present this separately in their earnings reports).

The relevant section is as follows: "To say “stock-based compensation” is not an expense is even more cavalier. CEOs who go down that road are, in effect, saying to shareholders, “If you pay me a bundle in options or restricted stock, don’t worry about its effect on earnings. I’ll ‘adjust’ it away.” To explore this maneuver further, join me for a moment in a visit to a make-believe accounting laboratory whose sole mission is to juice Berkshire’s reported earnings. Imaginative technicians await us, eager to show their stuff.

Listen carefully while I tell these enablers that stock-based compensation usually comprises at least 20% of total compensation for the top three or four executives at most large companies. Pay attention, too, as I explain that Berkshire has several hundred such executives at its subsidiaries and pays them similar amounts, but uses only cash to do so. I further confess that, lacking imagination, I have counted all of these payments to Berkshire’s executives as an expense. My accounting minions suppress a giggle and immediately point out that 20% of what is paid these Berkshire managers is tantamount to “cash paid in lieu of stock-based compensation” and is therefore not a “true” expense. So – presto! – Berkshire, too, can have “adjusted” earnings."

Full pdf: http://www.berkshirehathaway.com/letters/2016ltr.pdf

I guess the difference is that big scaled companies have revenues, and cash, whereas small companies don't. But I don't think that's so true anymore in a time when companies are doing nine-figure investment rounds. I'm not saying it's typical, but I do think this model of "bundled options+cash" has got to go.

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