Joining a startup: high salary, no equity OR "startup salary" with equity?

First, it depends on your risk aversion. If you have kids to support, you usually can't afford take as much risk - so the "startup salary" might not even be an option.

But assuming you can afford the risk: Make a guesstimate about the expected value of an exit, add some risk premium, and compare. e.g.

If you assume $1B exit with prob. 3% (and no other outcomes), the expected value of the company is $30M. If you are offered 2% of the company over 4 years, that amounts to $600K or $150K/year at most (probably less, given tax considerations, exercise price, etc -- but let's assume the maximum).

Now the risk premium: you can be fired at any point, you are 97% likely to only be left with salary, and there's the opportunity cost (if something good comes your way, you'll have to choose and essentially forgo the equity). Altogether in my book, that's a 75% risk premium. It's down to ~$40K/year for the equity value.

So, in this case, I'd value e.g. $120K "no equity" with $80K "with equity".

Now, if you think the company is going to top out at $100M at 3%, I'd value $120K "no equity" as $116K "with equity".

When you look at it this way, it is clear that in the vast majority of cases, you should treat options/RSUs as lottery tickets or potential bonuses, but not much more.

Unless you happened to be an early Microsoft, Google or Facebook employee (what's the probability of that?), you're almost surely better off with high salary.

It might be the case that its generally not economically sensible for talented engineers to join validated startups.

This also explains the "its so hard to hire" sentiment.

@benjaminwootton: reasonable argument that typical early stage employee equity is dwarfed by what engineers can get by founding their own company and that engineers might rationally require larger salaries at startups to compensate for failure risk (sucks to job hunt, even if its not hard to get a job).

on the other side, the founders who are trying to give away 120k and 1% to get a great hire have the responsibility of maximizing their own total EV as well, so if they were to give away 10%, it would have to be clear that the hire would be expected to grow the total founder EV by more than 10%, and in fact, more than that to compensate for the risk of the failure of the engineering hire to do so.

So if the founders are sitting on a validated, funded, post-revenue startup, its not necessarily enough for the engineering hire to help accelerate product. they have to make the total pie bigger, and by enough to compensate for the variance in outcomes for how much bigger they can make that pie.

So if you want 10%, and you're trying to join a startup with 100k/yr in revenue, you can't just help them get to 1mm/yr in revenue 1 year faster. you have to demonstrate that if you forked the universe into two paths, one where the founders gave you 10% and salary, and one where they walked away from you, the present value of the cash flows (or some metric) of they company in the "hired you" scenario is:

    1. > 10% better with 100% certainty
    2. more than > 10% + x% better with something less than 100% certainty to compensate the founders for the variance...

The more established / validated the startup, the harder it is for the engineer to deliver sufficient value or certainty to the founders to warrant more than the standard early-stage hire stake.

So generally these decisions are probably made with non-economic reasons, like "We like each other" or "I get off on working on bleeding edge technologies" or "The engineer is willing to give up substantial economic EV in return for te ability to feel like part of a team or affect decision making".

TLDR: engineers work for companies when the needs of the engineer and the company converge. the bid and ask between "what an engineer needs/delivers" and "what the startup offers/needs" separate as early stage startups move past "MVP" into being somewhat validated.

Tech blogs make it look easy, but raising hundreds of thousands or millions in funding is actually very difficult-most startups try to raise money and fail. You could be the most brilliant engineer in the world, but if you're not good at sales, you won't be able to get funding. Your only options for significant upside are thus either to: 1. Find a sales/business cofounder 2. Join a startup for a mix of salary and equity Any startup giving away a few points of equity is likely well funded, removing a significant amount of risk for you.

High salary 95 out of 100 times.

I look back on a "startup salary" with equity and wonder what the hell I was thinking. They recently had a very small exit and after raising money and screwing over early employees on options...high salary would have still been ahead.

High salary. Most businesses fail.

Sure, they might win big, but you'll enjoy life a lot more and be less stressed with a higher salary.