What I Wish I'd Known About Equity Before Joining a Unicorn • Hacker News Board

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#161

Post by michaelbuckbee » Wed, Jan 18, 2017, 5:02 PM UTC

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

I think we need to coin a new term like: "early employee valley of death" [1]

Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.

This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.

1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death - http://businessofsoftware.org/2013/02/gail-goodman-constant-...

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#162

Post by cookiecaper » Wed, Jan 18, 2017, 5:03 PM UTC

adekok wrote: post #97

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money. One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No". Thanks, but no thanks. If you admit that you're not going to share the benefits, I have n…

Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big.

The systems are always going to be biased to the people who have the most money. You may realize you're getting a terrible deal, and their deal is much better. That's not an accident, and asking them to fix it is just going to cause suspicion and anger, especially if you blow past their facially spurious justifications for this ("I'm taking a lot of risk here!!!"). The real answer is "I have more money than you, so I can set the terms to favor myself".

I'm not necessarily saying there's anything wrong with that per se. Consider the flip side. You've promised an employee that he will make 10% of what you make that year, even if it means you're tithing that to him directly. You make $10M. Your employee makes $1M. Is your employee going to stay employed, or is he going to leave immediately and use that $1M to start something that will make him $10M next year, or even just to buy a fancy house on the beach and invest from home without having to pull a 9-5 every day? Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#163

Post by andreasklinger » Wed, Jan 18, 2017, 5:06 PM UTC

Imo it's the unspoken truth in our industry that nowadays the real opportunity costs aren't held by the founders nor investors but by (non-junior/experienced) employees.

It comes down to a very strong but important question: why should anyone work for your company

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#164

Post by mattkrause » Wed, Jan 18, 2017, 5:06 PM UTC

dpark wrote: post #89

wfh wrote: post #68

Earlier quoted context omitted.

I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically. I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.

The tax system was a mess before Intuit existed. I don't see a way to lay the blame at their feet.

Others may messed it up, but Intuit lobbies to keep things that way.

Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16. https://soprweb.senate.gov/index.cfm?event=getFilingDetails&...

Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 version:

"We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service.... However, future administrative, regulatory, or legislative activity in this area could harm our Consumer Tax business."

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#165

Post by temp246810 » Wed, Jan 18, 2017, 5:07 PM UTC

When I joined zenefits they offered me 500 shares before raising the 500MM round.

Then after the 500MM round they were 5000 shares.

When I was negotiating my offer, I didn't budge on getting a market rate salary and in the end, I got it.

Why? Because they did some hand wavy arithmetic and told me my 5000 shares would be worth 500K at some point. Yeah no thanks. As employee #500, I knew better.

What happened? I hated it there. Left after a year. Company lost half of its valuation.

Moral of the story: don't compromise your salary for equity, even for a unicorn. The only exceptions are if you are truly an early employee. If you're not sure whether or not that's you, then it's not you.

Even then you aren't safe, I saw them fire other engineers for no other reason other than they had too much equity.

Careers are messy. Even the people who WERE one of the early employees and got a shitload of equity eventually got their salaries adjusted.

Don't compromise on your salary.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#166

Post by tibbon » Wed, Jan 18, 2017, 5:07 PM UTC

mikemac wrote: post #154

tibbon wrote: post #31

I've worked at several small startups, in the range of seed to C-rounds. Except for the one that I've was co-founder, I never knew when/how to ask or negotiate options things. It always felt like something that was supposed to happen at 'other companies' and not the one I was applying/negotiating to work at. I know I should in theory ask to see the cap table, but it seems awkward and if shown it right then I'm not su…

I really doubt any startup would let you see the cap table as a prospective employee, ahead of being hired full time. It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.

I've always assumed an investor would want to see the cap table prior to investing (is this true?), but thought it odd that such is hidden from prospective employees. Both are investing, just in different ways.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#167

Post by in_cahoots » Wed, Jan 18, 2017, 5:07 PM UTC

khazhou wrote: post #153

jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

I'm always amused how employees are encouraged to think of their stock as zero-value, which founders and investors keep 85% of this "zero value" for themselves.

Founders and investors have favorable terms -- they can take money off the table in the former case, and have liquidation preferences in the latter. So their stock has non-zero value, though it may not be as much as the paper valuation suggests.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#168

Post by bitwize » Wed, Jan 18, 2017, 5:07 PM UTC

Accepting equity instead of cash is like asking for your paycheck to be denominated in Bison Dollars. If they want to add some options on top of my salary for the full amount I'm worth each year, that's one thing. But options in lieu of part or all of one's salary is tantamount to a cut in pay.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#169

Post by arethuza » Wed, Jan 18, 2017, 5:08 PM UTC

wfh wrote: post #68

arethuza wrote: post #28

Earlier quoted context omitted.

Most people in the UK don't even need to do tax returns.

I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically. I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.

I have to be nice about HMRC (the UK tax agency) as they were actually responsible for me making a chunk of money by refusing to make on a call on some options we'd been granted as the result of a ratchet agreement (which we'd actually tried to get removed from our first VC investment agreement!).

They wouldn't make a decision on how things would be taxed until after our IPO - so we were able to exercise the options and sell the shares to cover the worst case tax scenario.

After the IPO nice tax man said that the best case rules applied and we got to keep the money that would have been used to pay our tax bills.

Thank you HMRC!

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#170

Post by _yosefk » Wed, Jan 18, 2017, 5:09 PM UTC

jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.