Why give employees big payouts, when they'll work just as hard for mere unsubstantiated promises of such payouts?
The article shows how most employees are too occupied counting their imaginary fortunes to seek the most basic grasp of how their options really work.
The race for riches in early-stage startups has become a gold-rush, and now that we are clearly after the peak, most employees are chasing the dreams of yesterday's big-payoff exits, failing to look around and notice that these were rare even back in the day, and now they hardly ever happen at all.
Investors got savvy about protecting their investment, while employees are just as clueless as ever, so even when big IPOs do rarely happen, the employees see very little profit.
This works very well for the investors. The downside is the erosion of equity as an incentive, but even more so - any sense of working towards a common goal and shared success, which is what startups are supposed to be about.
This will hurt the entire industry. On an individual level, if you accept substantially lower pay, for a tiny unprotected bit of equity and someone's unsubstantiated promises that it will be "one day" earn you millions, then you are a fool.
Sometimes I admire investment banks. They screw over anybody else who doesn't work at their company but within the company the pay seems really generous for everybody. Tech companies could easily pay much, much more and still make a lot of money for investors. Why are bankers so highly paid? Is it because they are asking for more money?
If you're in it for the big windfall, consider bootstrapping your own company.
It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding. Learn to set goals and execute, sell a product, deal with happy and angry customers, build partnerships, market, price, negotiate, and more.
You'll get much more out of it than working for someone else. When you work for someone else, someone else's dreams are the priority.
Now that we're past peak VC-backed startups I've noticed a trend on HN pushing the benefits of the bootstrap path.
There are many positives, true. But the negatives should not be understated. If you don't fail outright, the most common outcome from bootstrapping is often worse than raising VC or working for a VC-backed startup. That is, you'll work years and years and years with lower pay, work more hours, and endure a hell of a lot more stress only to fizzle out at the end (also without a big payout).
Try to go back to corporate after wasting the best years of your life bootstrapping your small-name, small-reputation startup for 5-10 years. And if you do go back to corporate, watch them lowball you on salary and position.
If you do succeed, yes the payout is greater. But chances of a big exit are rare in the VC-backed world as is, and imo, even rarer in the bootstrapped world.
This is the negative side of bootstrapping that is rarely mentioned. YMMV of course.
I was one of the first employees in a UK tech startup. I was given share options that I calculated represented about 0.5% of the value of the company. When the company was sold about 10 years later, making the founders multi-millionaires, I got about £30K. I was clueless and didn't realise the shares could and would be diluted many times.
Ten years ago it was much harder to find information on all of this - and even if you went in knowing it, there was little or nothing you could do about it.
I knew enough then to discount options to 0, but I'm permanently jaundiced in retrospect by just how many outright lies I was told at interviews, and saw being told to my colleagues.
Yea, and dilution is just one issue, its almost impossible to know as a employee what the stock options represent, you have no insight in to the corporate structure and what entity the stock options are given for.
Don't do startup for the potential payout. If you are not going to be happy and content with the salary don't do it. Most won't have any exit. Any exit that leaves one with $350k windfall beats many that leaves people with $0 and jobless. Negotiate hard on the salary. Assume the shares are worthless.
The thing about this advice is, it basically reduces to "don't work for startups". Because paying below-market salaries in exchange for equity is pretty much universal. It's not even malice, most startups just don't have the cash on hand to pay competitive wages.
> Negotiate hard on the salary.
Recent CS grads (who are the most common startup workers) don't really have the leverage to the do this. And experienced (or, ugh, "10x") developers can probably always get a better deal at a big company.
I feel like "working for a startup is almost never economically rational" is the elephant in the room that everyone is trying not to talk about. (As for me, I do take my own advice and deliberately work for BigCorp, but when I've tentatively brought this up to others I'm usually met with hostility so I don't do it in person anymore)
Be careful what one wishes for. I know some cases of people who eschewed stock options for a larger salary. When the payday came, and they got none of it while their buddies did, they were very bitter. This held true even when the payday was relatively small.
So if you're not going to do it for the payout, which was the main reason to do it, then why do it? Why put yourself through the crap and the unpaid overtime and the stress and the subpar pay for the chance to make someone else rich?
"Another interesting idea to reduce complexity for employees came from Brian Neider at Lead Edge Capital, who suggested a single question for employees to ask management: “Can you please let me know how much money I’d make from my options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?” Of course, the answers will inevitably have some disclaimers and dependencies, but the answers will expose the potential impact of terms from late-stage financings."
If you IPO at substantially lower prices than you thought you were valued at, or you IPO at a fine price and then shortly post-IPO, the stock value drops considerably, then it wasn't a big IPO.
Not to dismiss issues of employees being at the "back of the line" for equity payout. That is certainly a thing. But this article lists a bunch of examples of employees getting somewhat disappointing payouts when the ultimate valuation of the company was somewhat disappointing, while presenting it as employees getting somewhat disappointing payouts from "big IPOs."
A lot of people seem to have a problem with understanding that you can't just look at absolute numbers for a company's value. If your company raised a lot of money with the expectation that they would be a $4B company, and then they were a $750M company, well, $750M is a lot of money, but sorry, you had a disappointing IPO and preference is going to eat up a lot of the company's value -- maybe all of it.
Dude earns $750K in 4 years what must have been probably very long hours but with : No health risk. Not being confronted to violence in any way. No legal risk tied to his profession.
Complains that he hoped he did enough work for a lifetime and that he could retire, but that he actually still has to work.
This is not how this works. This is not how any of this works.
Clearly there needs to be some sort of transparency about how many shares are outstanding, what terms are for new investors, etc.
If people are misjudging their packets by 10x it would suggest they are being underpaid, because they think they're negotiating for a lot more than they are.
As someone who worked in options I can tell you there's a lot of depth to how to price an option. If you don't know how Black-Scholes works along with more esoteric subjects under option theory, you should heavily discount whatever you're being told.
The exception is firms which have already gone public, where you can just look up what the market thinks your shares/options are worth.
Even more perspective. Let's say hypothetically the salary difference came down to being able to afford to buy a starter home in London versus renting for that period. The tax free property appreciation would dwarf the return on the options.
financial literacy is a huge issue in society and especially startup land, many folks don't learn about the pros/cons of 83(b) elections and how to properly calculate the value of your options... also negotiation skills aren't really taught so many people don't negotiate for a better deal
Hell, many years ago, before some of our HN readers were born, I co-founded a start-up that had trouble recruiting people because we only created 200,000 shares at founding, and other companies were giving away millions of options. How could we compete only offering hundreds of options?
I don't know if the candidates were playing stupid, or really that dumb, or trying to angle for something better, or just didn't like the company and were trying to back out politely, but it got damn frustrating.
Lots of people just want to be lied to. You know why employers spew bullshit to candidates? Because candidates eat it up.
I like that this article places a portion of the blame on the founders or recruiters who try to hire new employees. In order to attract the best talent, it is easy for these people to say everything is going awesome and the options will be worth a million dollars. I think the blame for missed expectations and dilution is often placed on VCs. But in reality, it's the founders and the board who decide whether or not to take VC funding and who should communicate clearly and realistically with employees to keep expectations in check.
Most people joining companies don't even get the entire capital structure disclosed to them. There is no way to know exactly how much your options are worth. You're trusting the company you're joining blindly, which can be a very dangerous thing.
Companies should be more transparent about options they give to employees.
I was once offered with X shares of options from a well-funded startup. X seems like a relatively large number. But the company didn't want to disclose neither of the following to me but just selling me `this is a good offer`,
1. percentage offered
2. FMV per share
3. strike price
The company is OK and the job is interesting. But this opaque destroyed trust between two parties. This is a completely a joke and I turned down the offer.
[+] [-] wowdidntreal|9 years ago|reply
The article shows how most employees are too occupied counting their imaginary fortunes to seek the most basic grasp of how their options really work.
The race for riches in early-stage startups has become a gold-rush, and now that we are clearly after the peak, most employees are chasing the dreams of yesterday's big-payoff exits, failing to look around and notice that these were rare even back in the day, and now they hardly ever happen at all.
Investors got savvy about protecting their investment, while employees are just as clueless as ever, so even when big IPOs do rarely happen, the employees see very little profit.
This works very well for the investors. The downside is the erosion of equity as an incentive, but even more so - any sense of working towards a common goal and shared success, which is what startups are supposed to be about.
This will hurt the entire industry. On an individual level, if you accept substantially lower pay, for a tiny unprotected bit of equity and someone's unsubstantiated promises that it will be "one day" earn you millions, then you are a fool.
[+] [-] ones_and_zeros|9 years ago|reply
[+] [-] maxxxxx|9 years ago|reply
[+] [-] serge2k|9 years ago|reply
That's why we should start teaching people that they won't get rich.
[+] [-] acedinlowball|9 years ago|reply
[deleted]
[+] [-] katzgrau|9 years ago|reply
It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding. Learn to set goals and execute, sell a product, deal with happy and angry customers, build partnerships, market, price, negotiate, and more.
You'll get much more out of it than working for someone else. When you work for someone else, someone else's dreams are the priority.
[+] [-] ithinkinstereo|9 years ago|reply
There are many positives, true. But the negatives should not be understated. If you don't fail outright, the most common outcome from bootstrapping is often worse than raising VC or working for a VC-backed startup. That is, you'll work years and years and years with lower pay, work more hours, and endure a hell of a lot more stress only to fizzle out at the end (also without a big payout).
Try to go back to corporate after wasting the best years of your life bootstrapping your small-name, small-reputation startup for 5-10 years. And if you do go back to corporate, watch them lowball you on salary and position.
If you do succeed, yes the payout is greater. But chances of a big exit are rare in the VC-backed world as is, and imo, even rarer in the bootstrapped world.
This is the negative side of bootstrapping that is rarely mentioned. YMMV of course.
[+] [-] brianwawok|9 years ago|reply
[+] [-] maxxxxx|9 years ago|reply
[+] [-] rglover|9 years ago|reply
Perfect, and yes.
[+] [-] anthay|9 years ago|reply
[+] [-] neffy|9 years ago|reply
I knew enough then to discount options to 0, but I'm permanently jaundiced in retrospect by just how many outright lies I was told at interviews, and saw being told to my colleagues.
[+] [-] _lbaq|9 years ago|reply
Its just all a lottery ticket...
[+] [-] geebee|9 years ago|reply
http://danluu.com/startup-tradeoffs/
A quick summary: pay has gone up enough at top bigcos that simply working and accumulating money can exceed even very good outcomes at startups.
[+] [-] edoceo|9 years ago|reply
3 years at my startup now I have a million - on paper. Hopefully in the next three there is an event I can cash out on.
One path is 99% chance One path is a 1% chance
I'm having more fun at the startup than I did at MS
[+] [-] user5994461|9 years ago|reply
Forget about free food for a minute and you may soon realize that startups are terrible all over the board.
[+] [-] segmondy|9 years ago|reply
[+] [-] Analemma_|9 years ago|reply
> Negotiate hard on the salary.
Recent CS grads (who are the most common startup workers) don't really have the leverage to the do this. And experienced (or, ugh, "10x") developers can probably always get a better deal at a big company.
I feel like "working for a startup is almost never economically rational" is the elephant in the room that everyone is trying not to talk about. (As for me, I do take my own advice and deliberately work for BigCorp, but when I've tentatively brought this up to others I'm usually met with hostility so I don't do it in person anymore)
[+] [-] WalterBright|9 years ago|reply
[+] [-] st3v3r|9 years ago|reply
[+] [-] preetish|9 years ago|reply
"Another interesting idea to reduce complexity for employees came from Brian Neider at Lead Edge Capital, who suggested a single question for employees to ask management: “Can you please let me know how much money I’d make from my options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?” Of course, the answers will inevitably have some disclaimers and dependencies, but the answers will expose the potential impact of terms from late-stage financings."
[+] [-] zeroer|9 years ago|reply
[+] [-] aetherson|9 years ago|reply
Not to dismiss issues of employees being at the "back of the line" for equity payout. That is certainly a thing. But this article lists a bunch of examples of employees getting somewhat disappointing payouts when the ultimate valuation of the company was somewhat disappointing, while presenting it as employees getting somewhat disappointing payouts from "big IPOs."
A lot of people seem to have a problem with understanding that you can't just look at absolute numbers for a company's value. If your company raised a lot of money with the expectation that they would be a $4B company, and then they were a $750M company, well, $750M is a lot of money, but sorry, you had a disappointing IPO and preference is going to eat up a lot of the company's value -- maybe all of it.
[+] [-] danielweber|9 years ago|reply
[+] [-] IMTDb|9 years ago|reply
Complains that he hoped he did enough work for a lifetime and that he could retire, but that he actually still has to work.
This is not how this works. This is not how any of this works.
[+] [-] lordnacho|9 years ago|reply
If people are misjudging their packets by 10x it would suggest they are being underpaid, because they think they're negotiating for a lot more than they are.
As someone who worked in options I can tell you there's a lot of depth to how to price an option. If you don't know how Black-Scholes works along with more esoteric subjects under option theory, you should heavily discount whatever you're being told.
The exception is firms which have already gone public, where you can just look up what the market thinks your shares/options are worth.
[+] [-] elmar|9 years ago|reply
[+] [-] lostboys67|9 years ago|reply
And this is the share options scheme for every one even the lowliest call centre worker and not a senior role.
[+] [-] neffy|9 years ago|reply
[+] [-] caniszczyk|9 years ago|reply
I found this repo on GitHub to be the best resource on startup equity, highly recommend it: https://github.com/jlevy/og-equity-compensation
[+] [-] danielweber|9 years ago|reply
I don't know if the candidates were playing stupid, or really that dumb, or trying to angle for something better, or just didn't like the company and were trying to back out politely, but it got damn frustrating.
Lots of people just want to be lied to. You know why employers spew bullshit to candidates? Because candidates eat it up.
[+] [-] seattle_spring|9 years ago|reply
Anecdotally, the expectation I had for my shares at my last startup ended up being 10x (as the article stated) what they were worth after acquisition.
[+] [-] Eridrus|9 years ago|reply
[+] [-] jartelt|9 years ago|reply
[+] [-] charlesdm|9 years ago|reply
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] yueq|9 years ago|reply
I was once offered with X shares of options from a well-funded startup. X seems like a relatively large number. But the company didn't want to disclose neither of the following to me but just selling me `this is a good offer`,
1. percentage offered 2. FMV per share 3. strike price
The company is OK and the job is interesting. But this opaque destroyed trust between two parties. This is a completely a joke and I turned down the offer.
[+] [-] grzm|9 years ago|reply