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Employee Equity

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Re: Employee Equity

#201

Post by michaelochurch »

johngalt wrote: post #176
redmaverick wrote: post #126

Earlier quoted context omitted.

overperformance is far more dangerous (in large companies) than underperformance. Why? Can you explain.

The curse of competence. In your next family gathering people will ask you to fix their computer. You say 'Sorry I'm not IT, I'm a programmer'. Suddenly they dislike you. Do they dislike your cousin who waits tables for not fixing their computer? No, just you. Similar themes play out in a business setting. If you're competent everyone will want you to do everything important. Which will result in: 1. You get stretche…

Precisely. If you're "not working up to potential" you may not get fired but you're not going to be promoted. If you drop from a 9 to 7, people notice the -2 delta because changes in performance are much easier to pick up than absolute performance.

I'm (mildly) bipolar. The highs hurt me more at work than the lows. The lows I can push through and compensate for. I have a strong enough work ethic that except in an absolute mind-breaking depression (which I haven't had since my early 20s) I can handle it. In the highs, I either overperform or raise expectations. I always do a very good job of something, but that something might piss someone off.

Reliable median performers, on the other hand, don't piss anyone off or surprise anyone.

Re: Employee Equity

#202

Post by harryh »

patio11 wrote: post #162
ritchiea wrote: post #134

Earlier quoted context omitted.

There's not much job security elsewhere either

This is one of the things which we like to say about startups, but it doesn't stand up under scrutiny. The competing job offer is Google or another megacorp. What's their turnover for engineers in a year? 10%? 15%? The definitionally average startup has a higher turnover even if we restrict it to turnover caused by business failure , to say nothing of voluntarily or involuntarily losing one's job. If you exit a posit…

For engineers above a certain skill level it's difficult to imagine job security becoming a real concern in the foreseeable future.

You're certainly correct about the opportunity cost of forgoing higher guaranteed comp at a BigCorp in return for a potentially higher reward, but I don't think that directly relates to the question of job security.

Re: Employee Equity

#203

Post by Spooky23 »

larrys wrote: post #64
spo81rty wrote: post #41

This is where having a startup outside of the valley is nice. Nobody where we are (KC) really even expects stock options. We just pay a good competitive salary and don't have to compete with someone like Google paying 2x as much. We have given some people stock incentives but because we pay well and competitively it isn't the primary compensation. The costs of running a startup are so much lower here.

I'm curious why the people who are not in the valley don't go to the valley. Is it because they: a) aren't motivated to b) don't know what the potential is there may not even know what is going on. May not even know about YC or VC's etc. c) don't think there is potential there (think it's all over hyped and focuses on a few people who win). d) have family obligations which prevent them from moving to the valley e) Ot…

The Bay Area is a ridiculously expensive place to live.

I live in a small northeast city. I have a 4 bedroom, 2500 ft^2 house that cost about $200k, and is in a great school district. I'll own it outright in about 10 years.

In SV, I'd probably make 2x the salary, but my cost of living would be about 5x. The taxes are probably higher than even New York.

Re: Employee Equity

#204

Post by delive »

philovivero wrote: post #139
x0x0 wrote: post #124

Earlier quoted context omitted.

I've exercised before. Typically, you email hr and say, "I want to exercise"; they send you some paperwork which you fill out; you write the company a check. DO NOT DO THIS BEFORE UNDERSTANDING TAX CONSEQUENCES. You will typically pay tax on the spread between strike (your price per option) and the fair market value (fmv) which is set by the board and often updated quarterly. This can also be a backdoor way of a boar…

And be sure the accountant knows what he's talking to. I did that and it was still fail, because they didn't understand ISO+AMT Tax Trap. As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.

Going for long term capital gains will only destroy you if the stock falls, which can happen in any investment.

If there is enough confidence in the stock, a happy medium can be to sell enough ISO's at the time of exercise to cover the tax cost for that year. However, if the stocks you have are a massive % of your overall (potential) wealth, short term tax on a big # is still better than long term gains on a volatile #.

Re: Employee Equity

#205

Post by alexandros »

Iftheshoefits wrote: post #89
jstrate wrote: post #69

I've worked at two startups, including one YC. Both were acquired by larger tech companies. I was employee #3 at one and rebuilt most of a broken codebase in the other. I got nothing out of either WRT options. I agree with the author on point 4 but I don't think more options are the answer, I should have just asked for a higher salary I would have been better off. Startup-bucks are even worse than a lottery ticket, b…

You've identified one of the reasons I hesitate to put myself in the "startup labor market" for any startup that isn't well-funded. Even well-funded startups give me pause. I'm not interested in putting in founder-like work for entry-level employee-like compensation plus a lottery ticket. Unless the equity is meaningful and imbues the recipient with an actual, real voice in the direction of the company it's just a wa…

I'd be loathe to join a company where 10 people have a "real voice in the direction of the company". When you join an early team the only way is to trust the founder(s) as knowing what they're doing and listening to the team when there's a good point being made. The alternative is a recipe for politics from day 1.

Re: Employee Equity

#206

Post by tptacek »

marvin wrote: post #119
jstrate wrote: post #69

I've worked at two startups, including one YC. Both were acquired by larger tech companies. I was employee #3 at one and rebuilt most of a broken codebase in the other. I got nothing out of either WRT options. I agree with the author on point 4 but I don't think more options are the answer, I should have just asked for a higher salary I would have been better off. Startup-bucks are even worse than a lottery ticket, b…

Has anyone stopped to think what a massive failing of the startup part of the industry this is? Practically everything I read online indicates that if you consider your stock options to have any value at all even in a moderately successful company, you are a major sucker and about to get exploited. Surely this must reduce the quality of the talent pool available to new startups, as the experienced developers conclude…

First of all, if you go looking for market inefficiencies in tech hiring (across the board, not just at startups), you will find lots of them. Software development hiring is folkloric; traditions handed down from Sr. Mgr Software Developer to Associate Developer tracing back to the beginning of time (1982 or so).

Second, regarding the talent pool available to employers, two factors confound the analysis: the first and by far the strongest is stated preference vs. revealed preference --- to wit, good developers will make large concessions on comp in exchange for working at companies that seem more fun; the second is that software developers are as a demographic cohort terrible at negotiating.

Re: Employee Equity

#207

Post by 7Figures2Commas »

marvin wrote: post #119
jstrate wrote: post #69

I've worked at two startups, including one YC. Both were acquired by larger tech companies. I was employee #3 at one and rebuilt most of a broken codebase in the other. I got nothing out of either WRT options. I agree with the author on point 4 but I don't think more options are the answer, I should have just asked for a higher salary I would have been better off. Startup-bucks are even worse than a lottery ticket, b…

Has anyone stopped to think what a massive failing of the startup part of the industry this is? Practically everything I read online indicates that if you consider your stock options to have any value at all even in a moderately successful company, you are a major sucker and about to get exploited. Surely this must reduce the quality of the talent pool available to new startups, as the experienced developers conclude…

> Has anyone stopped to think what a massive failing of the startup part of the industry this is?

The failing is not that the employee equity math rarely works out, it's that the "industry" is so focused on equity. It often falls short as a recruiting tool (a significant number of prospective employees are clued in to the fact that it's likely to be worthless) and it's usually a poor retention tool as well (just look at startup turnover and the number of employees who don't stay with one company long enough to fully vest).

The startup value proposition today is actually quite compelling in some cases. Employees, many of them young and without significant real-world experience, can earn six-figure salaries working at companies that, without outside investment, could not sustain themselves.

Too much capital chasing too few opportunities has given many startup founders the ability to raise capital on terms that are insane. I mean, you have entrepreneurs raising million-plus convertible note seed rounds with caps that make absolutely no sense. Where does all that cheap money go? For many if not most startups, one word: salaries.

If you're being paid $120,000/year plus benefits to work on a CRUD Rails app at a startup that probably won't be around in five years, you should forget about equity. You have already won the lottery.

Re: Employee Equity

#208

Post by hga »

michaelochurch wrote: post #201
johngalt wrote: post #176

Earlier quoted context omitted.

The curse of competence. In your next family gathering people will ask you to fix their computer. You say 'Sorry I'm not IT, I'm a programmer'. Suddenly they dislike you. Do they dislike your cousin who waits tables for not fixing their computer? No, just you. Similar themes play out in a business setting. If you're competent everyone will want you to do everything important. Which will result in: 1. You get stretche…

Precisely. If you're "not working up to potential" you may not get fired but you're not going to be promoted. If you drop from a 9 to 7, people notice the -2 delta because changes in performance are much easier to pick up than absolute performance. I'm (mildly) bipolar. The highs hurt me more at work than the lows. The lows I can push through and compensate for. I have a strong enough work ethic that except in an abs…

Of course, as our host points out in Beating the Averages (http://paulgraham.com/avg.html), "If you do everything the way the average startup does it, you should expect average performance. The problem here is, average performance means that you'll go out of business."

Which, if you're one of these "overachievers", increases the chance the start up that hires you, at least early enough that stock options might even vaguely maybe be worth something someday, will fail. This has happened at several that I've worked for, they died hard after I was purged.

Re: Employee Equity

#209

Post by sparkzilla »

As a founder I looked into paying vendors/employees with options, but have found they are too brittle. Because option deals are created at the start of employment they require a lot of faith on the part of the founder, who does not know the employee's abilities or temperament. Options do not track well with performance and cannot be adjusted easily. I also do not want to be in the position of considering terminating an employee because they have more options than what I think they are worth, and employees should not have that fear either.

Instead I am working on giving vendors and employees a convertible note that is based on their performance month-by-month. Let's say an employee or vendor is taking $5000/month less than they should be because it's a startup. The company credits them $5000 to their note each month (this can be more if there's a risk premium), and adds any performance bonuses as well as they come up. This lets management clearly track performance against the shares they are giving, and lets the employee know that if they work more they can get more. As time goes on the value of the note increases and the employee can converts their note to shares at the current valuation (or a discounted valuation).

This seems a lot more flexible to me than options, and is less stressful for the founder and the employee. Am I missing something?

Re: Employee Equity

#210

Post by acgourley »

paulbaumgart wrote: post #164
acgourley wrote: post #53

Earlier quoted context omitted.

It would be more realistic if it accounted for the expected growth of the company valuation. It's unrealistic that the company should be valued at 10m for the next 4 years - it's going to grow or zero. Also their salary is likely to bump. Just doing some quick numbers it might be realistic to give the same "EV" as google by granting 2.3% with no raise or 1.5% with a salary that approaches market over 4 years. I think…

The valuation is the expected value. And since we're talking about investors who get preferred shares, the actual valuation for determining the value of the common shares (which employees get) is lower than that, still.

You're not wrong and that view represents the normal thinking I suppose. But don't you think it feels weird to say, "We're going to pay you next year in equity at this years valuation"? if you choose to stay in the company for year 2, it's strange to think that your risk goes down while value per share goes up. Your effective cash+stock compensation for year 2/3/4 goes way way up if you think in those terms. Then drops sharply at year 5!

I don't know, I suppose in a fair world you would be given more equity on yr1, less y2, etc. But that doesn't motivate people to stick around like the existing structure.

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