Joining a startup: high salary, no equity OR "startup salary" with equity? • Hacker News Board

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

#51

Post by beagle3 » Wed, May 23, 2012, 2:20 PM UTC

aamar wrote: post #39

beagle3 wrote: post #22

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 o…

This is a good comment because it steps through the math. People seem to go to amazing lengths to avoid doing back-of-the-envelope calculations of this sort. Thank you. I will say that "3% of $100M (and no other outcomes)" would be an extremely pessimistic assessment of a startup, a so-called "risky double."

> I will say that "3% of $100M (and no other outcomes)" would be an extremely pessimistic assessment of a startup, a so-called "risky double."

It's a way to get people to think of expected value. I Could have instead said "$3M expected value". Would you say it's pessimistic to assume that's what a startup will eventually bring in (as cash) to shareholders?

I think it might even be optimistic. There are thousands of 3-people startups that fold giving out $0.

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

#52

Post by beagle3 » Wed, May 23, 2012, 7:56 PM UTC

Drbble wrote: post #46

beagle3 wrote: post #23

A very important aspect that people usually overlook in these cases is the exercise price (in case of options), or immediate tax consequences (in the case of an RSU 83(b) election). If the question is relevant to you, CONSULT SOMEONE WHO'S PROFESSIONALLY DOING THIS STUFF, or at the very least, make sure you read a lot about it. Generally speaking, the equity you receive (in whatever form) will effectively only reflec…

83b election and postponed exercise protect you from tax on forfeiture. They don't protect you from decrease in share value, though.

My point is even deeper:

People think "wow, options for 1% of the company. If the whole company is worth $1B, that's $10M!" but that's wrong - the options have an exercise price, which must be realistic at the time of grant. So if the company is already worth $100M, and at the time you can exercise is worth $110M, your 1% options are worth exactly $100K.

And about 83b: it doesn't protect you from tax. It just locks in a specific value for tax purposes (but you have to pay the tax at that second). It's an artificial tax event, which may be in your favor if things work out well, but has immediate costs regardless.

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

#53

Post by aamar » Thu, May 24, 2012, 7:14 AM UTC

beagle3 wrote: post #51

aamar wrote: post #39

Earlier quoted context omitted.

This is a good comment because it steps through the math. People seem to go to amazing lengths to avoid doing back-of-the-envelope calculations of this sort. Thank you. I will say that "3% of $100M (and no other outcomes)" would be an extremely pessimistic assessment of a startup, a so-called "risky double."

> I will say that "3% of $100M (and no other outcomes)" would be an extremely pessimistic assessment of a startup, a so-called "risky double." It's a way to get people to think of expected value. I Could have instead said "$3M expected value". Would you say it's pessimistic to assume that's what a startup will eventually bring in (as cash) to shareholders? I think it might even be optimistic. There are thousands of 3…

Point well taken. Maybe $3M is a good default value for a "credible" startup nowadays or maybe it's a bit high. Depending on the particular risk factors and assets the startup has (team track records, market, etc.), it could be either a low or a high estimate. The important thing, I think, is that people do that analysis.