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

Re: Who pays when startup employees keep their equity?

#151

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

jusben1369 wrote: post #4

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…

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 have. The basic issues with most options is will the %90 best case scenario of this risky reward mechanism beat working at FaceGooSoft by a significant margin? My %90 best case would be something like IPOing at $1 billion.

If the startup stock doesn't, then it's extra stupid to work at that place unless they provide you with a special non-standard working arrangement.

Usually they don't, it's open offices in the bay area with a pretty similar organizational structure and work type. Not a flexible remote working situation at bay area salaries or similar.

Re: Who pays when startup employees keep their equity?

#152

Post by Jerry2 » Tue, Jul 05, 2016, 10:48 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…

>same conclusion many years ago and has been making money "arbing" it out ever since.

Can you (or someone else) please explain how you'd make money based on set of assumptions listed above?

Re: Who pays when startup employees keep their equity?

#153

Post by hkmurakami » Tue, Jul 05, 2016, 10:52 PM UTC

Jerry2 wrote: post #152

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…

> same conclusion many years ago and has been making money "arbing" it out ever since. Can you (or someone else) please explain how you'd make money based on set of assumptions listed above?

Basically your thesis is that as an asset class, late stage private technology companies are underpriced, since the presumed employee option pool will be smaller than previously assumed, and thus dilution will be smaller than previously assumed. Thus you can bid a higher price than your competitors and still come out ahead in your investment in this asset class.

What I don't understand is how you get around the fact that you would still have to "pick winners".

Re: Who pays when startup employees keep their equity?

#154

Post by pm24601 » Tue, Jul 05, 2016, 11:07 PM UTC

rhizome wrote: post #113

rezlov wrote: post #70

Earlier quoted context omitted.

That's the name of the game. You take a risk to make big money, and sometimes that risk doesn't pay off.

Or you start working for a company thinking their product(s) are cool, strong and survivable as its own thing, and then it turns out the plan was not to build a business but to cash out.

or you get laid off, or you get diluted, or it takes 6 years and you want to do something else with the rest of your life, ....

Re: Who pays when startup employees keep their equity?

#155

Post by shostack » Tue, Jul 05, 2016, 11:15 PM UTC

morgante wrote: post #143

shostack wrote: post #134

Earlier quoted context omitted.

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 (thou…

Where do a lot of them tend to end up if they jump ship, and where to they tend to end up if they don't have the foresight to jump ship and are fired?

Re: Who pays when startup employees keep their equity?

#156

Post by bjacokes » Tue, Jul 05, 2016, 11:25 PM UTC

jonknee wrote: post #55

landryraccoon wrote: post #48

Earlier quoted context omitted.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

No, having your options be worth a lot is a very rare event. That's why they hand them out instead of giving you more money.

The main reason that options are handed out is to compensate for below-market salaries, and the main reason salaries are below market is that the company wants to increase its runway. Some specific valuations or offers warrant cynicism, but remember that any startup with negative cash flow (even successful ones with near-market salaries) should be giving out equity to keep their salaries costs down.

Re: Who pays when startup employees keep their equity?

#157

Post by Retric » Tue, Jul 05, 2016, 11:34 PM UTC

nommm-nommm wrote: post #136

Retric wrote: post #133

Earlier quoted context omitted.

Depends on # of kids. Many great schools are well under 10k/year, but that's only so useful if you have 5 kids.

9k a year is not cheap.

Sure, though that only starts after pre-k and k, which tends to be much cheaper.

Anyway, if you compare starting a family with ~1M in the bank and 1 income at 50k vs. dual income 220k in the valley and no savings outside of home equity there are benefits on both sides.

Re: Who pays when startup employees keep their equity?

#158

Post by wtvanhest » Tue, Jul 05, 2016, 11:44 PM UTC

cubano wrote: post #109

wtvanhest wrote: post #9

Equity is one area where I would encourage YC to get more involved. We need someone to step in and lobby the government for tax treatment of options that reflects their economic reality to early stage employees. We also need to encourage companies to use a 'standard' stock option agreement which is well known by everyone so that equity offers can be compared across companies. If you take equity from an early stage co…

It wouldn't be very hard to collect existing data points and come up with a rough approximation, would it? I would think enough data now exists to allow such an analysis to have some idea of those numbers.

I doubt it. The past 5 years have been somewhat unique in that companies were given lots of cash with liquidation preferences and 'fake' valuations.

A good example are T Rowe Price's 'unicorns': http://www.marketwatch.com/story/uber-airbnb-and-other-unico...

If UBER IPOs for any less than $12.5Bn, what will the early employees get? Probably not much compared with the value they helped create. Right now, that looks impossible, but who knows what will happen?

My point is that there is not a historic president for what has happened in the private markets and I would do anything I could to cash out of equity if I held it in a unicorn and I was liquid.

I would love to see YC step up and encourage founders to issue employee friendly stock options.

Re: Who pays when startup employees keep their equity?

#159

Post by harryh » Tue, Jul 05, 2016, 11:53 PM UTC

landryraccoon wrote: post #48

bradleyjg wrote: post #42

Earlier quoted context omitted.

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

He's talking about expected value in the probability sense.

EV = payout * probability

So for cash:

EV = 150k (or whatever your salary is) * 100% (it's guaranteed)

For equity it might be:

EV = 1M * 10% = 100k

Re: Who pays when startup employees keep their equity?

#160

Post by harryh » Tue, Jul 05, 2016, 11:56 PM UTC

logicallee wrote: post #93

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…

I would like to point out that there is a practical third option given that some people say "Pay Employees A Market Salary", whereas some companies may not yet be able to afford it. In practice when you're a technical founder (or cofounder with one), you might have three fantastic people you can't afford, great technical roles. They'd do great work for 40 hours per week, they believe in your vision and you, because y…

Not sure why you're getting downvoted. A huge % of highly successful startups were started more or less just like this.

How awful do you think the original Facebook PHP codebase was? Or Google's original hacked together web crawler.