Who pays when startup employees keep their equity? • Hacker News Board

Re: Who pays when startup employees keep their equity?

#141

Post by morgante » Tue, Jul 05, 2016, 10:04 PM UTC

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

> But if you're going to have to invest anyway, why not work for a company you believe in and have a chance at influencing the company's success as well as your own?

For one thing, it's fiscally unsound to have the majority of your net worth and your salary tied to a single investment.

Re: Who pays when startup employees keep their equity?

#142

Post by morgante » Tue, Jul 05, 2016, 10:05 PM UTC

shon wrote: post #77

rdtsc wrote: post #61

Earlier quoted context omitted.

> I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash) I have watched friends get paid a smaller salary, hoping for a great exit only to find their options diluated or the company just simply failing. Now you probably only have lucky and successful friends or that friends who didn't get enough cash to buy a house are probably not i…

In my mind, startups are less like the lottery and more like blackjack. You are gambling either way (as with any investment) but, with blackjack and startups you can optimize. Unlike the lottery, knowledge and skill play a role here.

The odds for startups are a lot closer to a lottery than they are to blackjack.

Re: Who pays when startup employees keep their equity?

#143

Post by morgante » Tue, Jul 05, 2016, 10:10 PM UTC

shostack wrote: post #134

bradleyjg wrote: post #125

Earlier quoted context omitted.

In the investment banking industry you can't be a lifetime associate, it is up or out. If you make it to managing director you are doing very very well for yourself, but you still don't have any job security. That big pay packet is a ripe target when fortunes turn and the bank needs to cut costs. And if you get let go as an MD it is unlikely you will find another bank to take you in (the usual thing where it is harde…

Interesting research and thanks for the link. So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing. But for junior analysts and such, there really isn't that stigma since their performance is not measured on a sales basis (and thus their mobility is not necessarily hindered by a down year). Do you have any info or insights in…

> So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing.

I've never worked in finance, but I have a lot of friends who do.

From the day they entered (ie. as junior analysts), up or out has been the mantra. You simply cannot be in a position for more than a few years. If you're not promoted to the next level, you're fired (though most of them had the sense to switch industries when it became clear they weren't going to be promoted).

Deal sourcing comes in at higher levels, but the "tournament" structure is embedded throughout.

Re: Who pays when startup employees keep their equity?

#144

Post by danieltillett » Tue, Jul 05, 2016, 10:20 PM UTC

I have always thought that companies should work out the salary of a new employee in all cash then once the parties are happy allow the employee to trade in whatever percentage they liked for equity. If you value the equity at zero why should the company give it to you and if you value it very highly why should they give you cash?

Re: Who pays when startup employees keep their equity?

#145

Post by morgante » Tue, Jul 05, 2016, 10:21 PM UTC

gringofyx wrote: post #5

Either way it's a losing game, consider a company like Google - how would they attract new employees on either scheme given that the company has been around for 15+ years? The only people who win are those who get in early, or invest big. Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.

As far as I know, Google hands out stock to employees.

Stock which is highly liquid and very valuable. I don't think they're having any trouble attracting talent.

Re: Who pays when startup employees keep their equity?

#146

Post by thedufer » Tue, Jul 05, 2016, 10:27 PM UTC

shon wrote: post #99

mikeash wrote: post #86

Earlier quoted context omitted.

How much is needed for something to qualify as "significant wealth"? You seem to be dismissing differences in salary as unimportant, so it's fine to take a pay cut in exchange for even a small chance at significant wealth, because that's all that matters. Let's say the salary difference is $50,000/year. Over 20 years, that's maybe half a million dollars, post tax, that you gain by ditching options. Maybe that's not s…

In my experience the salary difference isn't usually that large. Sometimes it is, and some companies do pay unusually low salaries in exchange for options, obviously increasing risk, perhaps to an undesirable level. I'm CEO and co-founder of a funded company. We pay competitive salaries + options. I don't begrudge someone who isn't interested in options. Options are actually expensive to me. We are still fairly early…

> In my experience the salary difference isn't usually that large.

Speaking as someone who recently did a round of interviewing with a mix of established companies and startups, $50k is a _very_ conservative guess. The difference between my Google offer and the highest startup one was ~$100K - if you drop to the average startup offer, it goes up to ~$150k. And that was at ~3.5 years of experience - it gets worse as you become more experienced.

It's hard for me to imagine how sure of a bet a startup would have to be for their equity to be worth $150k/year.

Re: Who pays when startup employees keep their equity?

#147

Post by mahyarm » Tue, Jul 05, 2016, 10:28 PM UTC

chollida1 wrote: post #3

There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise. Their thesis was that - startups would remain private longer. - employee's lost their options when they leave - longer periods to go public means more employees return options to the pool which means employee option pools can be smaller - longer private periods leads to more rounds raised which benefits investors over…

Well ESO fund has been around for 3 years-ish. VCs also do this ad-hoc sometimes too with employees. I think other older engineers have known this to be a 'problem' too for many years.

Re: Who pays when startup employees keep their equity?

#148

Post by infinite8s » Tue, Jul 05, 2016, 10:31 PM UTC

jamie_ca wrote: post #51

timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

Is that a US thing? I'm up in Canada, and the RSU structure for my employer is an initial grant of $3x, with $x vesting every year for three years. Only when I exercise the vested RSUs (flat exchange at fair market value - typically the average stock price over the past week) do I declare them as income, at which point it's taxed as per usual for employment income.

Is your employer public? It's much easier to liquidate a portion of your RSUs to cover taxes on the rest in the public markets.

Re: Who pays when startup employees keep their equity?

#149

Post by infinite8s » Tue, Jul 05, 2016, 10:33 PM UTC

dohertyjf wrote: post #33

buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

I value stock options at zero . There is potentially a huge upside if you are an early employee at a company that gets enormous. Even then, you have to be top 20 or 30 to get f-you money, and even then it might not even be that. I had stock options (not RSUs) at BigCo where I worked for 2 years. At one point, had I been fully vested, I was sitting on about $240k worth of stock. After a 3x1 split and the company going…

Do option counts not change as a result of a split?

Re: Who pays when startup employees keep their equity?

#150

Post by mavelikara » Tue, Jul 05, 2016, 10:40 PM UTC

morgante wrote: post #139

jusben1369 wrote: post #4

Earlier quoted context omitted.

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I've worked for two startups. In both cases, one of the defining factors in choosing the particular startups that I work for was that the founders were very employee-friendly. In both cases, I was granted actual stock (ie. not options). In my view, options (as typically offered) are basically useless as compensation. They have a strike price which isn't much lower than the price investors last bought stock at. Compan…

  They have a strike price which isn't much 
  lower than the price investors last bought stock at.

Why is this so? I recently became aware of a case where the Fair Market Value of the common stock was only about 7% lower than what the last round of investors paid - preferred stock which, it was rumored in the press, came with a ratchet.

My impression was that the original thesis of the employee options were that common stock is marked down to a significantly lower price than the preferred stock.