Which means the job offer still includes stock options, but during the job offer call we don’t talk up the future value of the stock options. We don’t create any expectation that the options will be worth anything.
Upside from a founder perspective is we end up giving away less equity than we otherwise might. Downside from a founder perspective is you need up increase cash compensation to close the gap in some cases, where you might otherwise talk up the value of options.
Main upside for the employee is they don’t need to worry too much about stock options intricacies because they don’t view them as a primary aspect of their compensation.
In my experience, almost everyone prefers cash over startup stock options. And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
I personally went through a successful exit of a company where I was one of the early engineers and was privy to orchestrating the sale (working with potential buyers and consultants) and saw this happen.
I now am granted stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud.
Multiple classes of stock for non-investors in a pre-IPO/private company should be illegal because there's no visibility or transparency. The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Maybe have an out if you have verified third-party audits and cooking the books like you mention (which happens all the time) carries the same fraud penalties as if you did it for a public company.
I agree with your concerns re. transparency but I don't think eliminating share classes would fix that.
* Class A - voting shares, founders / controlling parties, etc. Typically small fixed share count (e.g. 100), not issued dividends directly but used to represent percent of controlling interest.
* Class B - non-voting shares, early stage employees, advisors, supporters, etc. Used to issue dividends.
* Class C - Same as class B but reserved for future issuance through more formal programs like ESOP when you're ready for that
Then you might have some preferred shares for investors, say class D and E for two investor groups and then a Class F for convertible debt (even bootstrapped companies can have owner / friends / family / seed / etc money, plus may want to not rule out raising at some point).
This is obviously a lot of classes, but by doing something like this you can separate control from economic upside, create different terms / stock agreements for different classes, keep room for future planning (things like ESOP), facilitate investor needs (they almost always want preferred shares), have more flexibility with fundraising or convertible debt, etc.
I'm not actually trying to argue that exactly six classes are necessary or optimal, but moreso that its common to want not just one single share class. Practically speaking I imagine that firm does six because they're trying to give a template that'll work for many of their companies and reduce the amount of per-customer customization. My company has less although more than one.
However, if your employer is a public organization then all of this information needs to be made available to shareholders. While you may not have access to this information, it is not secret and can be shared by any of the shareholders. Due to this, there is an implicit requirement to reduce risk and “cooking the books” while allowed is generally seen as risky since shareholders may run for the hills. In a smaller, privately run company there are no shareholders to run for the hills. Just a bunch of employees who hold paper IOUs. In order to get that audit protection, the employee would need to negotiate that into their employment agreement!
Are private companies allowed to share some information with a subset of their investors and not others?
How's this different than if an option pool exists? The more people have options, the further the pie will be split up. Having an option pool or not doesn't change this.
It's super unfair to give an employee "x shares" that turn out on exit to be shares of a fixed pie that is different from the one the investors have their shares in.
The only real advantage to the options pool is ease of management of the shares. There’s a lot of paperwork around issuing new shares you don’t want to do it every time you hire a programmer. And I guess you could argue that telling people the pool exists lets them not be surprised by the future dilution when they’re issued. But the pool itself hasn’t diluted anyone.
Dilution is created by increasing the number of shares held by the company’s owners. Actions like issuing shares from a pool (or the inverse, buyback or cancellation of grants) affect every shareholders relative dilution.
high quality investors will in most cases, decline a fundraise if there is no options pool - since it signals that the founders are not serious about the most valuable asset of any startup.
The people.
There can be value here for sure, but everyone dreams big, never asks questions, and never tells. My other favorite in this industry is "stealth mode" lol.
What happened in your exit scenario?
Additionally there was some liberty on what “sale price” actually was in the contract. This may be common operation, but the sale price according to my contract was much lower than the amount of dollars which was exchanged for the company.
There's a lot of room for improvement in legal systems and they move extremely slow due to the political nature of things.
> implied contractual obligations
- Granted $500k of stock on start, and then have it diluted as stock is added for new investors
- Hollywood accounting - net vs gross
There's lot of places where a contract can be represented as one thing, only to have it be far less than that.
Dumb question: Do you think the average dev in Silicon Valley pays a third-party employment contract lawyer to review the terms and conditions before agreeing? Sadly, I feel the answer is "no". Speaking personally, I would never agree to such complex employment compensation terms without third-party advice. Yes, I know it is not cheap (maybe 500 USD per hour), but the alternative looks much worse, and most people here facing these contracts can afford it.
Well, yes? I mean, we're talking about a situation where one of the parties involved in the contract isn't acting in good faith. And people frequently can't understand contracts. Is there anything surprising about the fact that someone was misled or "tricked" in such a situation?
Nobody is suggesting that any law would.
> Either it is written (and agreed) or not.
Yet you managed to infer things that weren't in the post.
> So, I would say anything that is not explicit is meaningless in term of contract law.
Again, where is anybody saying anything to the contrary?
Banana republics like almost all countries with Civil Law rather than Common Law? And also, you know, some US states and the UCC?
The doctrine that anything not explicit is meaningless in contract law is also referred to as 'the four corners' referring to where you look to interpret the contract; this is considerably relaxed in many jurisdictions (and some situations in the US) where there is considerable information asymmetry and/or power imbalance between parties. With employment contracts in particular; to be a good coder for instance, why would you need to know how dilution of options works? Only to avoid being mislead by your prospective employer?
Conversely, in Civil Law jurisdictions, you see that corporations (rather than employees/consumers and sometimes small businesses) are mostly held to the four corners of the contract as they are professional parties that have legal departments and should be presumed to do their due diligence.
People are often not aware that the value of common is nonlinear, so the value of 0.5% in this case is zero. (For the ML fans out there, the common price per share has one or more ReLU activation layers. :) )
The general rule of thumb is that acquisitions are bad for employees, and IPOs are good, especially if the share price is stable for 6 months.
1) the company has Nx preferences, for N >1, in which case the company has essentially failed to fundraise or
2) the company sells for less than they raised, which again, is a polite form of failure.
Business people hired lawyers to design means and methods to commit _implicit_ fraud and deceptive practices to improve the value of their capital assets.
Those lawyers then go on to sell this product to others.
I'm sure there's some lawyers out there that are going out there shopping this stuff around, but it's Capitalism and Business thats the active agent, not Lawyers.
2. Most (all?) companies will not show you their cap tables so it basically boils down to “trust me bro”
I think founders are doing themselves a serious disservice. I loved working at startups but it’s just not worth it in most cases. The trade-off was always take lower salary for a chance at making big money and repeatedly investors and founders perform a rug pull.
Blaming employees for a change in the gentleman’s agreement is certainly one way to look at it. But, it sure feels exploitive, especially for younger folks that haven’t yet been burned by it. If founders keep doing it… well good luck finding anyone willing to work at their startup.
It seems like most founders love pretending that there are armies of top-tier engineers rushing to work at their startup in exchange for pay that's well below market and stock that still won't be worth very much even if the company has a wildly successful IPO.
I really wonder why this happens - is it just greed from the founders? The VCs? Do early employees value stock like shit regardless of how transparent the company is?
Equity can be worth something via acquisition from private equity doing roll-ups, corporate buyers looking to fill strategic product niches, etc
Also, for the more heavily vc-funded late stage still pre-ipo plays, secondary market, which can be at a discount to the most recent vc round, or in some rare instances in a hot sector, premium.
One other thing - waiting for the IPO might be the worst thing to wait to do. The public markets are much more fickle than private markets. Once a company IPOs, there's usually a trading moratorium on insider shares, usually 180 days, so by then, the equity value may have completely imploded.
Lets say you've got
Founder A 25% - Voting, Founder B 25% - Voting, Investor A 10% - Voting, Investor B 15% - Voting, Investor C 8% - Voting.
Former Employee A 0.5% - Non Voting, Former Employee B 0.4% - Non Voting, Employee C+ 0.2-0.3% each all Non Voting.
If say Big Co want's to buy the company why do they care about buying out former Employee B? If they can pickup the two founders and the three investors, thats enough for complete practical control.
> Stock options are only really, truly worth anything if they IPO.
I’d have bought huggingface, openAI, anthropic, unsloth, and many others stock right at this moment if I could get in for less than 10K.
Prove me wrong internet. I’m ready to buy in these companies this minute.
If $10k or $25k is an amount of money you have to pause to think about at all you have zero business investing in early stage startups. Simply by the way the math works out you are better off buying lottery tickets because at least then you'll get to scratch something off before going bankrupt.
Folks who work in AI/ML know how to invest in the space! You're welcome to ignore the fact that Unsloth is objectively going to pop off (likely be acquired by huggingface) and anyone who invests in it will come out ahead.
If you want to gamble that's your right I'm sure there is a roulette table somewhere near you. But the social harm caused by allowing dentists and grandmothers to invest in seed stage startups greatly outweighs any social good caused by letting that near-zero overlap get rich a little easier.
In reality, my project needs funding now. If i bootstrap and get customers, I don’t need to worry about your lunch money. I need someone (or customers) who can fund that same amount for a year.
As one example, SpaceX is privately held but routinely does funding rounds with large investors so employees can sell shares and access liquidity[1][2]. A $10,000 minimum purchase amount is trivial for those investors.
[1] https://www.reuters.com/markets/us/elon-musks-spacex-raises-...
[2] https://www.reuters.com/business/aerospace-defense/spacex-fu...
We can argue whether the accredited investor process is good or bad (I think it’s more good than bad), but I don’t blame companies for not wanting a bunch of $872 high roller outsiders on the cap table.
You really need some kind of a proxy to aggregate anything less than that in practice - thinks like crowdcube or similar. Can you imagine having to draw up paperwork just to transact $1200 or something? Doesn't make much sense.
legally, no
Banks aren't even allowed to suggest buying high risk stuff.
And ownership stake in the company should be a simple thing to understand, not some byzantine mess designed to fuck over the engineers.
Maybe there's management carve-outs. Maybe the total value of the acquisition is lower, but as part of the negotiation, there are great transaction bonuses, or retention bonuses. The investors with preferred shares still get their liquidation preferences, but the common stock is worth a pittance. Maybe instead of an acquisition, some of this is turned into an asset sale, or there's some considerations for founders that involve very friendly rollover equity. Maybe the founders add a new kind of stock, or create a new legal entity as part of the acquisition that does... "interesting" things. An inventive legal team cannot do miracles, can make sure that the employees feel robbed either way.
The acquirer, the founders and the VCs with the biggest share will get what they want, and come up with something neither will challenge. So it can be down to just the workers to pool together and decide to sue for violation of fiduciary duty, which might not be fast or easy to prove. You aren't in the room where it happens, but everyone else is.
Dilution is sort of a necessary evil that comes with raising new rounds of capital. I understand how >1x liquidation preference is legal, but it seems incredibly unethical, especially since it's never communicated to common stockholders.
IMO, if you feel the need to hide your cap table from your employees, it's probably unethical. Yes, indeed, most cap tables are unethical.
The guy gave me a "Pre selection" letter (bokded at the top that it was "NOT A LEGAL DOCUMENT") that I was selected to receive 1,000,000 shares, vested at 250k a year (no one year cliff into monthly). 1,000,000 of how many? Didn't say. Percentage? Nope. Was it 25% 3% .00003% Who knows!
I eventually was forced out after him verbally abusing me, making unsubstantiated accusations about how I spoke to other employees, and doing things like asking me to clock out and continue to talk about work.
I received two death threats after I quit. And, seven years later, I get a threatening letter falsely accusing me of defaming the company under random online accounts. After rejecting the allegations, I got a "settlement letter" that demands I forfeit all obligations, and can never talk about the employer again. It also explicitly stated I'd get $0 and that they "wouldn't appear at my place of residence" as my benefits.
Last I saw the SEC audited them and said they had no revenue and no products to commercialize.
They raised $6m on fundraising sites selling SAFEs, but had $800k in assets and $6m in debt. Oh, the most interesting part is the owner had the company paying his other computer repair business $5k a month for IT services.
It really reenforced for me how meaningless the whole process. Working for that company was a lifetime mistake.
This is super uncommon.
> stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud
The exact same fraud rules apply to private and public stock.
It happened in the largest medtech acquisition in history (at the time) its Public knowledge.
I’m not saying it doesn’t. Just that founders having a separate class of stock is very, very rare.
> happened in the largest medtech acquisition in history (at the time) its Public knowledge
Supervoting stock is absolutely a thing with companies. We’re not talking about that. We’re talking about start-up founders.
I recommend researching a topic at least a little bit before going on and commenting on it
I said I have to value them at zero without more information and they would act all offended when I asked for more (happened at least 3 times).
This suggests to me that founders either don’t understand the mechanics themselves or are preying on lack of financial understanding.
I’m not anti-startup but the VC backed startup culture of the last 10 years or so has been pretty souring.
My fav manager had a great way of phrasing this: "There are more ways for your options to be worthless than to make you rich"
But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.
Ultimately I think you should never take an uncomfortable pay-cut to join a company and you should maximize your stock compensation on top of that. Don't forget other types of equity – brand, exposure to good problems, network.
There's probably something like a 99% chance they are worthless, a 0.9% chance they are worth a decent holiday, a 0.09% chance it'll let you retire early, and a 0.01% it'll make you somewhat rich. Worst of all, unless you're the CxO you have very little control over the outcome.
Equity is a nice bonus, but you might just as well treat it like the company giving you a lottery ticket for Christmas. Nobody is going to take a significant pay cut or work 80 hours a week for a lottery ticket, so don't do it solely for the stock options either.
One of the startups I did some time at was as close to a sure thing as one can hope for (unicorn valuation at one point) but it still went to zero in a very public flame out. It’s still impossible not to get imaginative about what could have been as I was a very early employee… such is life.
The most lucrative stretch of my career was working for a big company that paid good base salaries.
The primary benefit of startups is getting to do more work to learn more faster and not deal with Process.
I think people have updated to be much too negative on the prospect of equity paying out. It's obviously much better than 1%, at least if you work at anything other than extremely early-stage companies.
Stock options are a lottery ticket, and I value them roughly the same.
Some companies experience liquidity events. Therefor the value of equity in those companies is positive. Some companies go out of business. Therefor the value of equity in those companies is zero.
If N is the ante hoc chance that a company will experience a liquidity event, then:
N * X + (1 - N) * 0 = value of liquidity
X is positive. 0 < N < 1.
Therefor the value is positive.
If you like, I'm happy to update my claim to, "startup equity often has non-trivial value, say, >$1000 per year."
Ok it's not zero. Is it 0.0000000000000000000000001?
Surely you're aware that obtaining 0.50$ is not going to have a large impact? Even if the sum is 3000$ the impact is extremely limited.
But you had to go and be a r/iamverysmart material because you actually have no more information than me.
Also learn to spell therefore please.
Something is different than nothing. When people repeatedly insist that something and nothing are the same, they get trivial answers.
And learn which side of the digits a dollar sign goes on please.
so, anecdote.
People can make intelligent decisions about equity without hyperbolically insisting that the chance that that equity will be worth money is one in a million.
In a typical year, a double-digit number of tech companies IPO (there was a big jump in 2021 and then a crash in 2022/2023, with 2024 seemingly back in the double-digit range). https://www.visualcapitalist.com/charted-four-decades-of-u-s...
Let's be really clear, though: there's "getting good value for options" and then there's "getting some value for options." It is straightforwardly true that in general big public companies have better comp than pre-IPO companies: the guaranteed value of equity in your Metas or Googles or even lower-tier public companies is generally higher than the expected value of pre-IPO equity, even if you are relatively risk-insensitive.
That is importantly different from "the value of pre-IPO equity is zero," or "it is a one-in-a-million event to get value from pre-IPO equity."
You want to tell me you’d be feeling like your equity was worth something in colloquial terms if you got what amounted to a mediocre bonus one year through your liquidity event?
I really want to insist on the principle that we are nuanced enough people to say, "startup equity is worth less, in expected value, than public company equity, but 'less than public company equity' is still more than zero."
To get to the point of the community feeling like startup equity is worth something on average, I think we need to figure out how to generate more favorable outcomes for startup employees.
If startup equity is worth something 20% of the time, the average person would need to work at 4 startups before seeing value. And the statement that it has non-zero, but low, expected value, just isnt true. On average it wasn’t.
If we could make startup equity worth something-minus-x 100% of the time (instead of just something 20% of the time), I’d be more amenable to agreeing with you that you can place a reliable non-zero value on startup equity.
That means things like removing liquidation preferences. Unfucking the tax situation around options or making it standard politcy that the company buys your options for you. Universally allow secondary markets. Build in participation structures for existing employees through funding rounds.
Would you say the expected value of a lottery ticket is > 0? Because startup equity is just too unreliable for an average person to not treat it like a lottery ticket.
I will concede that if you are very very discerning in which startups you work for and a good negotiator and have access to questionably legal secondary markets, you may be able to beat the curve. But that’s certainly not the average case.
There are all kinds of bets where the modal value is zero or negative that are good bets!
Imagine say, that you joined Stripe in 2014. By then, probably 500-1000 employees and a a real name on the industry, yet private. It's perfectly reasonable to not consider the stock they might have offered at that time as straight out money, like you'd have treated Google RSUs. But discounting the shares to zero, or just "a nice bonus" is also silly. I bet anyone that got a year or two of stock in that era is well into the retire-early/somewhat rich cadre, and that wasn't all much of a risk.
You're wildly exaggerating here (but unsurprisingly). I know someone who joined Stripe in 2015, and he said there were about 300 employees globally at the time.
But I do generally agree with the rest of your point, I'm just contextualising the information.
I had this mindset at a startup and decided not to risk any of my money exercising my stock options. They eventually expired. Years later the company IPO'd and I would have made a lot of money had I exercised.
Waiting for more certainty before exercising means the fair market value will likely be higher then and you'll have to pay AMT.
I now approach a job with the mindset that stock options are probably worthless, but I'll risk what I can afford to by exercising as soon as I can.
I personally view Stock Options in the same way as lottery tickets - sure they might pay out big sometimes, and people do win lotteries, but, for the most part, they're going to be losers.
There might be argument about the difference in how often stock options lose compared to lottery tickets, but that's missing the point.
But since there are different classes of lottery tickets, the payouts can change arbitrarily at the last minute depending on the specifics of the deals.
So even after accounting for the fact that most lottery tickets don't pay out, you need to account for the fact that some within the same startup might pay out while yours don't. And there's no perfect way of knowing ahead of time.
Definitely look at them as worthless untill they're worth something, but the untold secret is the secondary and private market. SpaceX employees have gone that route and some are quite rich despite there not being an IPO. Again, the failure mode to be aware of is you could end up in debt and owe money which is worse than if you'd never played.
One (of numerous) problems with stock options is almost all stock option contracts require you to exercise within 90 days of leaving the company.
Often times employees leave a company, and then need to decide within 90 days whether they will spend anywhere from $5-50k+ to exercise the options to keep the stock, otherwise you forfeit the options after 90 days.
The stars really have to align for you to make money with options without risking/gambling your own capital by exercising them.
Unfortunately secondary markets only exist for very large companies like Stripe. I’m not aware of secondary markets for small < 100 person companies, which is where you see the most blatant hyping up of stock option value.
Many companies offer early exercise, so you can reduce the amount you gamble by a lot.
Also, you already "pay" in terms of opportunity costs by being at that startup vs something more established where you get RSUs of a public company. So using some of the money from the startup in order to exercise the shares is really useful. If the startup's cash compensation is just enough to pay your bills, then of course it's different.
But absolutely no one should read this and think anyone's paper valuation is worth actual dollars until the money hits your bank account.
Absolutely agree
> Lesser known names that still pay out, not in the millions, but a couple hundred thousand dollars range
FTR This is the same for lottery tickets, they don't all win the top prize (or a share of it), most will win a few dollars, some tens of thousands, and so on.
Equity is an extremely important factor for many candidates, especially more senior ones and executives.
I would not pitch it as future value, and instead pitch as % of company. If it's a minuscule amount that doesn't move the needle in offer conversations, than perhaps you are not offering enough, or you're identifying candidates who value more predictable income than investment in the company.
Many people have seen those options become worthless because of legalistic maneuvers and violate what's said in the initial options.
So this tangent isn't really clarifying anything. Some people would simply want larger salaries and options be valued as 0$ for evaluating compensation because how easy Capitalists have made it to screw over classes of options/share holders.
The idea that they’re a lottery ticket is the only way they keep hiring and I’ve heard plenty of engineers refer to actual lottery tickets as idiot tax
As an IC, there’s little I can do to affect the company valuation because I’m just executing the CEOs vision. And there’s nothing I can do to affect their decisions about potential exits.
My experience has been a little different. We had a lot of people demanding both very high cash comp and then demanding very high equity packages on top.
Giving people a sliding scale option did put some of the control back in their hands, but it also produced an analysis paralysis for some where they couldn’t decide what to pick.
> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.
Much of this is due to startups failing. Every random “startup” trying to pay people with options because the founders have no hope of success inflates this statistic.
However another driver of this statistic is the extremely short exercise window upon quitting. People may work somewhere for 1-3 years but the company could be 5-10 years away from acquisition. Employees have to give the company money at time of quitting to get any equity, which few want to do.
I know the common wisdom, but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.
isn’t this illegal? private stock ownership needs approval from company/BoD to change hands, no?
At the end of the day, it means a lot to the candidate if the company _wants to compete_ for a hire, especially in the current economy (layoff-friendly and SWE saturated, especially versus 10 years ago). A story like “your options could be worth $XXX in 4 years” I hope is not seen as competitive today.
Good to know, because its common for the founder and hiring manager guilt trips to be insane.
Effective organizations understand you actually don’t need to look inside the box. If someone is continuing to do good work for you it’s working. You don’t need to second guess their reasons why, or give them a reason to question their commitment.
Also most founders ideas aren't unique and there is often a tone deafness there. Employees with experience have already seen their idea even if it was in a prior cycle.
There's a reason many startups are built on hordes of college kids and it's not that they "have more energy" or "are more willing to think outside the box". They're less experienced and thus easier to manipulate. They're also less likely to have dependents they need to take into consideration, don't understand their limits or trade-offs between short-term performance and long-term endurance (e.g. burnout), and are more likely to be naive about their place in the company and the effect/function of the company. Plus, of course, they're "less risk-averse" which is another way of saying bad at judging the odds of certain outcomes.
Also, even if the company ends up worth a lot of money, there's no guarantee that a way to liquidate, such as an IPO, exit or secondary market, will become available in any reasonable time frame. And as a regular employee you have exceedingly little to say in bringing about such events. There's not much fun in having a winning lottery ticket that can't be cashed in, in fact it's highly stressful.
When the value was zero, of course you had to talk up future value - you were selling something worth $0 for $1,000's. Now that it is worth something, it represents actual value for the employees to swap for salary, which is why you no longer offer as much!
You make money on the amount the company value increases starting the day the options were granted.
(This comment isn’t 100% technically accurate, but gets the point across in fewer words)
one of my coworkers at databricks say their TC is like 900k or something based on some BS imaginary options value. lol .
And honestly, a company of that size giving huge option packages would make me suspicious (I'm a very suspicious person though ;) ).
It’s super unlikely that a cash-out event ever happens for a startup, so until then, it’s just fake money to me.
And I say this having owned and exited my own 8-employee startup and continued to work for startups for the last 15 years. I work for cash, not imaginary future profits.
This isn't actually true from a historical perspective. The primary reason why the gap between the wealthy and and everyone is increasing is that employees started preferring cash compensation over equity. Joseph Blasi documented this in his book The Citizen's Share, and that book is why Elizabeth Warren recently passed legislation making it easier for employers to give equity to their employees.
You're making it sound like equity turns companies into co-ops when in reality most equity remains unexercised (because that literally involves paying your then likely former employer money) or ends up being worthless for all the reasons others have explained.
The gap between the wealthy and everyone else has been sharply increasing ever since Reagan[0].
CEO pay alone has massively skyrocketed, detached from all other economic growth factors (most of the growth occurred in the 1990s)[1]:
> From 1978 to 2020, CEO pay based on realized compensation grew by 1,322%, far outstripping S&P stock market growth (817%) and top 0.1% earnings growth (which was 341% between 1978 and 2019, the latest data available). In contrast, compensation of the typical worker grew by just 18.0% from 1978 to 2020.
The reason workers prefer cash compensation is that you can't use equity to pay your bills. Cost of living has increased since the 1970s[2], housing costs and college tuition have become a lot more expensive[3]. While electronics may have gotten cheaper, the day to day expenses have gone up and those in lower income brackets will necessarily spend more of their income on things like groceries and rent. Standards of living increasing with income may increase those expenses but there's a cut-off point where those increases no longer track linearly even if you throw in money sinks like private yachts. If you want to reduce cash preference, you'd need to first address the underlying socioeconomic insecurities that drive the real need for cash that this preference comes downstream from.
You can't have multi-billionaires (or even near-trillionaires) and a steady socio-economic progression to them from sub-minimum wage. Multi-billionaires can only exist in a system that allows for disproportionate amounts of wealth to be drained out of the system into a minute fraction of the top percentile. The gap is a necessary conclusion of a system that allows multi-billionaires to exist.
Thinking this can be fixed by "making it easier" for corporations to give workers equity not only ignores why workers prefer cash (and why they're more likely to do so now than decades ago) but also why corporations want to use equity for compensation (i.e. because it usually reduces cash compensation while coming with very low (and in any case: delayed) risk due to workers not exercising options or shares becoming worthless or near-worthless due to the way preferential shares are usually structured). If we were talking about actual worker ownership (or at least revenue sharing) things would look very different, but that's not something most corporations want and definitely something most investors/VCs would reject outright.
[0]: Reagan cut the top marginal income tax rate by 20% to a mere 50%, after it had already previously been cut sharply by Johnson from 91% to 70%[a]. He also slashed capital gains tax on dividends by 20%[b]. The 1980s also saw the rise of Financialization[c], i.e. the rise of the finance economy (rapidly eclipsing the real economy), and a sharp decline in the already scarce labor union participation[d]. It's also worth pointing out that the response to Republican neoconservatism from the Democratic Party was (like in much of the West - possibly due to the Cold War hard line against socialism) not a stronger leftist opposition but instead a shift towards Third Way[e] politics and neoliberalism, i.e. while Reagan may have been the starting point, the widening of the wealth gap was a bipartisan effort.
[a]: https://taxpolicycenter.org/statistics/historical-highest-ma...
[b]: https://www.forbestadvice.com/Money/Taxes/Federal-Tax-Rates/...
[c]: https://en.wikipedia.org/wiki/Financialization
[d]: https://www.imf.org/external/pubs/ft/fandd/2015/03/jaumotte....
[e]: https://en.wikipedia.org/wiki/Third_Way
[1]: https://www.epi.org/publication/ceo-pay-in-2020/
[2]: https://www.investopedia.com/ask/answers/101314/what-does-cu...
[3]: https://www.consumeraffairs.com/finance/comparing-the-costs-...
Sometimes you can't tell how it will be from the outside. You only know whether you'll like the job, or whether it has prospects, after trying it.
Bouncing isn't a bad move. In fact it's smart from a diversification perspective. Once you realize a company has no future, just get out and try again. As an employee, choosing whom to work for is one of the few ways you can diversify against risk.
> Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside (down) you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.
However investors that put money in get preferred shares (not common stock) right?
The tradeoff is not equal: taking less salary and receiving stock of less value seems risky to me. I can't imagine the employees discount is very good (those preferred shareholders don't want to be diluted).
Better sibling comment here with in depth opinion: https://news.ycombinator.com/item?id=43677084 : which answers my question:
when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).isn't the idea that you buy shares at book value, which is way less than "last round valuation"? so you're getting a discount.
I mean, hopefully that's how it works, I never put enough money when exercising my option to care...
Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.
So, considering this, the expected value of $100 in stock options is actually more than $100.
If you get 25k shares worth <$1.00 and, you won't double your salary even if the share price doubles. Not to mention that only 1/4 would be able to be exercised, and you have no liquidity to realize the gain.
If that wasn't the case then yes, there would be no reason to take options as comp because obviously (as you say) you can just buy NFLX on the stock market directly with some or all of your cash.
---
Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.
Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.
If you'd taken the cash you'd have $300,000.
If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.
But you can take the cash and immediately invest it all in NFLX options. That should be the baseline for comparison, when answering "why would one pick options vs cash"?
I'd imagine you _must_ have some benefits to pick options. Perhaps tax treatment is better; perhaps you pay less fees than buying them yourself. But still, there must be some incentive to pick NFLX options from the company, instead of picking whatever options you want from your broker.
(also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
> (also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).
Yes indeed, that is why options are a risky investment and no company pays people entirely in options.
Another benefit of the company's options is that they have a 10 year term, vs most market options which expire in < 1 year. You can get LEAPS but those are still max 2-3 years.
- cash bonus
- RSUs
- More OTE Options
You got to pick two and your ratio. IIRC, 80/20, 60/40, 50/50.
in my experience, most startups do offer you a sliding scale of cash vs equity, just not 90% as NFLX does. they may not advertise it or be upfront about it, but i've never personally experienced a startup that wouldn't trade one for the other.
https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_...
I've posted this before but it's a great read. Even if you have millions of shares, the dilution and later investors could still leave you with nothing.
I worked for 2 startups, both failed, but I never got to see the cap table.
I got $0 for my equity. Start ups have SO many ways to screw employees out of their equity.
The most basic is that you have options that you are not allowed to sell during equity rounds. If you accept them then you need to pay the strike price and they count as taxable income even though you got shares instead of money so you just lose a lot of money.
Say what you will about Elon, but at Space X employees are allowed to sell their shares for actual money at regular intervals. Very few start ups that succeed allow their employees to do that.
90% of startups that succeed just want to grind down their employees rather than pay them the equity they earned.
https://www.cooleygo.com/what-is-a-section-83b-election/
So I ended up writing checks of $60 and $100 to buy thousands of shares at $0.0001 a share. I left both startups before they went under but everyone lost that small amount. When people ask me how much money I made at the startup I joke that I lose $60.
I'm not a lawyer so I don't know if an LLC would have to comply in the same way.
I do know that there was an operating agreement and we had a very strange meeting at one point where the CEO and the financial guy told us that we had the right to see the operating agreement. Someone who left shortly after must have hired a lawyer and demanded that.
I did see it the operating agreement but not the cap table. When I left the company I did not even know what a cap table was so didn't even know that it was a thing that existed. I only found that reddit post a year later. I'm post that link so that people don't make the same mistakes I did. There were a lot of other questions I should have asked before joining both startups.
Options do get pretty nasty if you exercise and hold, when the fair market value is higher than the fair market value; because then you have to have an AMT return and a regular return and reconcile them.
ESPP with a discount was pretty bad the last time I had it; the brokerage said they were specifically required by IRS rules to report the wrong cost basis, and you had to adjust it when you sold, or you'd have the discount reported on your w-2 and again as a capital gain. Maybe that changed, capital gains reporting has changed over time.
They sell-to-cover when my stocks vest quarterly, which pisses me off because the stock constantly goes up and I wish I could keep them until the time my tax bill is due.
And, I have to manually report to the taxman all the money paid via those sell-to-covers, because even though eTrade sends me the transaction details each year, and they clearly tell the IRS how many stocks I got, they don't tell the IRS how much tax I already paid on it.
Now I work at a smaller company doing the same thing (cloud consulting) making the same amount all cash. I much prefer that over cash + RSUs.
1. My RSUs vest monthly. I've been selling immediately. For the last ~2 years, I guess I've been unlucky, and the sales have generally been small losses. Each of those sales gets washed by a vest that occurred either a month before or a month after. I used to track these by hand in a spreadsheet. It become essentially impossible due to increasing complexity every year caused by the long chains of vest+sale. Now I wrote a 1000+ line Python program to calculate my wash sales. It probably took 20+ hours to write. It takes about 30s to run, that's how large the vest+sale graph is (and the program isn't optimized for runtime). A single sale is now being washed by chains of vest+sale that are extremely long. And due to each vest involving different amounts of fractional shares due to changing compensation and changing tax rates, the washes are constantly doing partial washes, that split lots into sublots. So a single sale might involve many many sublots. The holding period is also propagated to the new lot. The chains are starting to get so long, that if this were to continue a few more years, I would have some sales that are partially long term (>= 1 year) and partially short term, which I can't find any information online about how to file. It takes me hours to format my data from my 1099B and statements into a CSV to put into the program, and hours more to take the output CSV and put it into Turbotax. Quarterly vests would partially solve this problem (you would still get washes caused by multiple vests happening on the say day sold for a loss washing each other, but at least it wouldn't propagate to future or past vests).
I have now resolved to never sell for a loss (where loss is defined as for any sublot within the lot, the sale price is lower than the original basis + the basis added by all the previous sells washed by this sublot's vest), to avoid this problem. This may mean I have to hold on to stocks that I want to sell, potentially until I die.
2a. I live in CA, but worked from MI a few days a few years back. That means I now have to pay MI tax for 4 years. I receive ~48 vests per year (monthly vests of 4 different grants (from the 4 prior years)). For each of those ~48 vests, I need to calculate what percent of the days between grant and vest I worked in MI, and pay that amount of MI tax on that vest. Turbotax has some bugs related to MI taxes and 401ks and IRAs. Even though my 401ks and IRAs have nothing to do with MI, I now have to deal with these Turbotax bugs every year because I have to file MI taxes.
2b. If you need to file NY taxes as a non-resident (like I have to do for MI), it's even worse, because not only do you need to do that calculation for each vest (~48/year in my case), but you also need to file a new IT-203-F form for each vest. That's 48 IT-203-Fs to file each year. And each one is a complex form involving workdays, weekdays, holiday days, sick days, vacation days, etc.
3. If you move between states with different tax rates, your vests are taxed completely at the new state's tax rate. They're also taxed proportionally (based on time between grant and vest) at your old state's tax rate. So they're double taxed. You do end up with a tax credit that undoes the smaller of the taxes. But this means that when you move, for 4 years you're taxed at the maximum tax rate of the 2 states (on at least some portion of the vests). This makes WA->CA movers mad, because all they have to pay CA tax on 100% of their vests immediately. It also makes CA->WA movers mad, because they have to pay CA tax for 4 years on some portion of their vests.
I dearly wish to be paid in cash.
I think it'd be good to visit with a CPA to cover some of these topics. I'm not saying definitely hire one but I think you may have misunderstandings of the tax codes.
Even if I acquire new shares < 30 days later?
My employer (Google) had a CPA give a recorded presentation about how to file RSU taxes. In it he said that the vests can was your sales, and this is especially prevalent if you have monthly vesting. This was a CPA who specializes in helping Google employees file taxes.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting.
See https://www.reddit.com/r/tax/comments/q8ythd/interstate_move... .
Also, that same CPA gave a different recorded presentation specifically about state-to-state RSU taxes, and he said that if you work from another state, you need to track the number of days between grant and vest that you work from that other state in order to properly attribute the earnings to non-resident states.
The IRS defines a wash sale with
> A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
> Buy substantially identical stock or securities,
> Acquire substantially identical stock or securities in a fully taxable trade,
> Acquire a contract or option to buy substantially identical stock or securities, or
> Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Is vesting RSUs acquiring shares in a fully taxable trade or buying stock? I don't know and never considered it, but the statute of limitations has run on my RSU days. I also didn't have monthly vests.
> Your other two points - states don't do income tax calculations based on the grant, but only what vested while you lived/worked in the state in the respective year of the vesting. Basically you don't owe Michigan income tax for a given tax year if you didn't live or work in Michigan during that tax year.
I don't know about Michigan, but California's Franchise Tax Board asserts that it is owed tax in tax years where RSUs vest if you lived or worked in California during the vesting period; even if you don't live or work in California during that particular tax year. After I moved to WA, I continued to pay CA income tax, as I had partially vested RSUs. I've heard some companies will cancel and reissue RSUs when you move states, but this wasn't offered for me. FTB is kind enough to say you can use any reasonable method to allocate RSUs and they never asked me to show my work, so I must have done fine?
The only downside of all cash compensation is it attracts mercenaries. Personally I find believers and missionaries more pleasant to work with.
* All else being equal, such as the payout schedule.
RSUs aren't quite that deal, because they're "invested" before they vest. Even assuming that the employer would be equally willing to give you either $X/yr in cash or $4X in RSUs over the next 4 years, you can definitely come out ahead if the stock keeps going up. It's effectively a form of leverage through time arbitrage; you get to buy $4X worth of stock at today's prices using money you don't have yet.
Consider a simplified scenario where the stock is flat forever, except that it doubles in a single day when you've been there for a year. If you take the $X in cash and immediately buy your employer's stock with all of it, you only double your money on that first year's paycheck. By the end of the 4 years, you would have $5X (the $4X you earned in salary/bonus, plus one extra X from the doubling). On the other hand, if you take the RSUs, that entire grant, including what hasn't vested yet, benefits from the increase. In this scenario, by the end of the 4 years, you have $8X.
Similar happens with any scenario where the price is monotonically-increasing, but with more arithmetic. If you assume that the stock will go up over time, and that you wouldn't want to be trying to time the market, this starts to look like a pretty good bet. Compound that with the fact that most employers will be willing to offer a much higher number in RSUs than in cash - that is, if they would offer $X in cash bonuses, they'll offer >>$4X over 4 years in RSUs, especially as a starting/signing-bonus offer - for reasons having to do with financial accounting, and it's suddenly a very attractive deal.
The main reason to prefer cash over RSUs is for diversification. But if we're talking about a public company, you can still sell the RSUs as soon as they vest in order to diversify (and the standard advice is to do so). You really only stand to lose if your employer's stock goes down between grant and vest - not just worse than market, but actually down - which, on average, is an easy bet to take. Getting RSUs at a private company is a much dicier prospect, of course, because now you're locked into that lack of diversification in a way that really matters; even after the point where you get the paycheck, you don't get to bail out if the ship starts to sink.
> Wall Street pays cash.
Selling my “equity” in a private company once it vested wouldn’t have been an option.
Note for those who don’t know: Amazon has a 5/15/40/40 vesting schedule with their first four year offer. The first two years you get a large pro rated cash signing bonus to make up for the back heavy vesting.
In terms of the amount of tax to MI, it's not a whole lot. A couple hundred dollars. And it doesn't change my total taxes paid, because I get a tax credit for that against my CA taxes. MI's tax rate is lower than CA's.
It's been a while since I used autosale, but I think the problem still existed then, because I think even with autosale the sale price wasn't identical to the vest price, so there were still loss sales, which could be washed. But I think since the sale happened the same day as the vest, the problem wasn't as bad, because in 31-day months, the loss sale couldn't be washed by the next month vest. So there wasn't the case of constantly increasing complexity, because the complexity would reset in 31-day months.
I tried ETP back when it was introduced. I didn't like it. It's been a while, so my memory of why I didn't like it is a little foggy. For one thing, when you're enrolled, you're not allowed to buy or sell any Google shares manually. One of the biggest problems was that there's a cooling off period, and the shares that vest during that period don't get autosold right away, and you can't sell them manually. I think they get autosold a month or so after vesting. My memory might be wrong, but I think that's what happened. Another thing that annoyed me is that my sells got split across 2 1099-Bs: the 1099-B from my individual Schwab account and the 1099-B from my EAC Schwab account. I think shares that vested during the cooling off period went on one 1099-B and the shares that vested during other times went on the other 1099-B. And somehow in the confusion I ended up with some shares that never got sold at all.
Sure. You also don’t get to turn them into cash the way shareholders can. Consider that it’s been VCs most vocally singing their praises.
I have a hard time understanding this comment because this is exactly what employers do when paying out RSUs.
At the end of the year, you get a 1099 indicating the fair market value of shares you've received. There's no trickery here--this is literally the amount you owe income tax on.
I'm not sure what tax software you're using that requires you to guess inputs and numbers. TurboTax makes this trivially straightforward.
I’ve been in Silicon Valley a long time, since the dotcom boom. My first company, the executive assistant got so rich from the pre-dotcom IPO she quit and bought a vineyard. That’s how things used to be. And we aren’t talking about some crazy ipo, it was before those times.
Fast forward to these days, the startup I worked for got acquired. I was engineer < 15. The founders got low 9 figures, I got 5 figures. Almost everyone got fucked for years of loyalty.
But that’s what YC and other accelerators teach founders. Be cheap with equity. And this document just perpetuates that.
Founders can easily make life changing money but the people that do the actual work get fucked unless it becomes a >100B company like a Facebook. That’s not realistic and they know that. Employees need a bigger piece of the pie when things go great for the company and not just when it becomes a Facebook, Uber, etc.
If you want to know how to evaluate equity, pick a total valuation of the company at exit and then multiply by your stake. If the company needs to exit at > 10B for you to make a life changing amount of money, then ask for much much more equity or don’t take the offer.
Which is part of why my founder co-matching profiles mention that I'm looking to spread the equity wealth around among early hires, more than is usual.
If a prospective co-founder is turned off by that, without a really compelling reason, then we'd probably clash on other values as well. And I'd also think there's a good chance they'll backstab me when they think they can.
Startups were definitely much better in the past but in the mid 2020s they exist on the stories of 15 years ago to try and hire talent for bargain prices
In the Post-Series A numbers, the lowest numbers are in the ~0.5% range. This is at most 2 figures off what the founders could get together. In a world where founders together got 9 figures, a senior engineer would get 7 figures, not 5 figures like in your situation.
Will there be lucky founders that become very rich? absolutely. Founders are generally very risk aggressive and are willing to go boom or bust. But for an average person that just want a good life why risk lower living standards for a low change of riches?
If you are very risk aggressive you can push for more equity, but expect your salary to be much lower than your peers. Most veteran SE will advise against it.
The other reason this isn’t true is that equity becomes a lottery ticket that is written in a founder and investor-preferred manner and is used to fleece mostly young employees who don’t know better and are romanced by the thought of being a part of the next Uber or Airbnb.
The practical reality is that it becomes “this job is worth $150,000 but we’ll pay you $100,000 and you can have some equity that might be worth hundreds of thousands if the casino pays out.”
But then you have investor preference multiples, valuation fuckery, and other ways that even a successful exited company can pay out less than your fair share.
To me cash is king because I can invest it however I want. Equity is fine if it’s for a public company, as that’s effectively just deferred cash as an incentive to stay longer.
The VCs have convinced the founders that they are special people and they deserve 10-100x the rewards of their best employees. They do this to create room in the cap table for themselves of course. They also give the founders early liquidation opportunities to keep them on their team.
It’s disgusting, and the founders wonder why some people don’t want to grind as hard as they do.
Have to love the HN crowd. A guy goes out of his way to write a very detailed, high-quality guide demystifying a very complex and consequential topic, open sources it so it's free, and immediately people suspect the entire document is build just to make startup employees think lower percentages are OK?
Disclaimer: I know the author personally, so can definitely attest to the motivation behind this guide. I'll also say I've used this guide both as a founder and as a startup employee and it's been immensely helpful.
I stand by exactly what I wrote.
https://www.stockoptioncounsel.com/blog/standards-ownership-...
Technologists joining one of these should know the "business domain" "partners" are either buying into or awarded partnership interests, but structures can be available for non-business domain roles (in firms that think technology isn't in their business domain cough), such as "profits interests", "synthetic equity", "phantom equity", or etc.*
If the firm has a product and you're helping build it, look for equity-like that let you not only share in profits (if any, most starting things don't have profits) but have a stake in capital events (from asset sale to IPO).
Think of these two forms as something like dividends and something like a combination of options and RSUs. If the profit component is intended as part of annual comp, it should pay at 100% from the start even if you don't "own" it until you vest. Meanwhile if it's a future reward, then both it and the capital-like would have a "tail" that remains in effect if profits or a capital event happens after you leave.
These are very complicated and very bespoke per firm since they are 'made out of' the partnership interests of the LP where ownership is handled as "capital accounts" and may have no accounting method for "goodwill" value separate from partner capital accounts. In such cases, generally partners have shaved off some portion of their rights and allocated those rights to employees, and the mechanisms of this "waterfall" amount to where you stand in that line if at all.
Ideally (a) seek advice from someone experienced with these that (b) you don't have to spend $1200 an hour on.
* Partnerships that understand their business domain is in the technology business — since technology is just another word for tools, and business humans should be tool crafters too — will be using this and have told you about it during interview, and it will all go more smoothly.
repurchase rights are exceedingly common.
https://fairmark.com/compensation-stock-options/
There are several books also available, including a 2014 book aimed at financial planners and tax advisors that I have on my shelf and find myself consulting several times a year, as it is still pretty relevant under today's tax law.
I do wonder how much of this applies to RSUs granted by public corps
https://github.com/jlevy/og-equity-compensation/blob/master/...
> Topics **not yet covered**:
> - Equity compensation programs, such as [ESPPs](https://www.investopedia.com/terms/e/espp.asp) in public companies. (We’d like to [see this improve](#please-help) in the future.)