Just how much is that 2% really worth? • Hacker News Board

Re: Just how much is that 2% really worth?

#61

Post by binarysolo » Thu, Jul 03, 2014, 4:46 PM UTC

IgorPartola wrote: post #40

onion2k wrote: post #7

My advice to people who want to work in a startup is always very simple: Ignore any equity. If you'd take the job without any equity then take the job. If the equity is part of your reason for taking the job, you probably shouldn't take it. Base rate neglect[1] means we are terrible at evaluating the probability of equity being valuable. For every story about someone making millions out of their equity when the start…

So why the hell do startups bother offering equity? It seems like for the founders there are only downsides in offering it, while for the employees there is no upside at all. Perhaps a better model for a two founder startup looking for a first employee is to just find a third partner who will only take equity (that is in double digit percentages), then actually start paying only salaries to person 4+.

Because early on when you only have 500k-1M in the bank, you can't get the tier-1 150k+/year engineers and preserve your runway easily. Also, base+equity allow people a bit more of a trial period and spreads out the risk more. Lastly, retention is super important and you want to align risks/rewards. The idea is that you are giving people stock and diluting your share because you have conviction that post-dilution your sum will be a LOT more. :)

FWIW, I joined a startup as that third partner (domain expert + execution guy), taking 10% of the equity while collecting 70k/yr (my base rate is north of 200k/yr otherwise). It would have brutalized the startup's seed money and jeopardized them if I somehow didn't perform and deliver.

Re: Just how much is that 2% really worth?

#62

Post by Airic » Thu, Jul 03, 2014, 4:46 PM UTC

Cool resource but it seems like there's a risk that an employee would inadvertently reveal sensitive financing information by completing this form.

Re: Just how much is that 2% really worth?

#63

Post by russianbandit » Thu, Jul 03, 2014, 4:47 PM UTC

newcf wrote: post #6

I'm not entirely sure the calculations work.. Maybe I entered data wrong, but I was trying to model the acquisition/startup that I just went through. with our numbers, and our dollars, and my shares.... I walked with a heckuva lot of money, but that's not what the site said.

Mind sharing which start-up?

Re: Just how much is that 2% really worth?

#64

Post by birken » Thu, Jul 03, 2014, 4:48 PM UTC

onion2k wrote: post #7

My advice to people who want to work in a startup is always very simple: Ignore any equity. If you'd take the job without any equity then take the job. If the equity is part of your reason for taking the job, you probably shouldn't take it. Base rate neglect[1] means we are terrible at evaluating the probability of equity being valuable. For every story about someone making millions out of their equity when the start…

Equity clearly has some value though, based on the fact that in any successful startup investors pay a lot of money for it.

If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there).

Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.

Re: Just how much is that 2% really worth?

#65

Post by jaksmit » Thu, Jul 03, 2014, 4:51 PM UTC

Even as a company founder, I don't keep half the stuff mentioned on here top of mind, so I doubt that any employee is going to have enough information to complete it correctly. e.g. to model what you "would have made" if you'd joined Uber at X stage, you'd have to know the pre-money valuation of each funding round they received, along with the investors' liquidation preferences etc and who knows, they may take on even more funding before going public, which would mean your shares would get diluted even further.

Overall, if anything, this just serves to illustrate all the complexities involved in trying to model how much a startup's equity offer is actually "worth" in the long-run and that trying to do calculations to model it against an offer at a big company is totally the wrong way to go about it.

It just validates what Mark Suster says here: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

don't join a startup because you could potentially make millions of $. Join if you want to learn; any money you make would be if you got really lucky and is a nice side bonus.

Re: Just how much is that 2% really worth?

#66

Post by IgorPartola » Thu, Jul 03, 2014, 4:59 PM UTC

krschultz wrote: post #57

IgorPartola wrote: post #40

Earlier quoted context omitted.

So why the hell do startups bother offering equity? It seems like for the founders there are only downsides in offering it, while for the employees there is no upside at all. Perhaps a better model for a two founder startup looking for a first employee is to just find a third partner who will only take equity (that is in double digit percentages), then actually start paying only salaries to person 4+.

For retention. If the company actually starts taking off, the equity keeps people there. If they don't have equity, every person with a decent title at a fast growing startup will jump ship to other competitors immediately and get a big (cash) raise. The equity keeps people in the fast growing startup longer. Golden handcuffs and all that.

But if it's worthless, and the employee realizes it, then it will not serve its purpose. Case in point: my last gig gave me something like 0.15% of the company vested over 4 years. I left after 2.5 years and the equity did nothing to keep me there even though the company was in a reasonable place financially. Why? Because 0.15% * the valuation * likelihood of a sale * sale price * likelihood of my shares actually being given any value in a sale is effectively 0.

Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.

Re: Just how much is that 2% really worth?

#67

Post by IgorPartola » Thu, Jul 03, 2014, 5:06 PM UTC

binarysolo wrote: post #61

IgorPartola wrote: post #40

Earlier quoted context omitted.

So why the hell do startups bother offering equity? It seems like for the founders there are only downsides in offering it, while for the employees there is no upside at all. Perhaps a better model for a two founder startup looking for a first employee is to just find a third partner who will only take equity (that is in double digit percentages), then actually start paying only salaries to person 4+.

Because early on when you only have 500k-1M in the bank, you can't get the tier-1 150k+/year engineers and preserve your runway easily. Also, base+equity allow people a bit more of a trial period and spreads out the risk more. Lastly, retention is super important and you want to align risks/rewards. The idea is that you are giving people stock and diluting your share because you have conviction that post-dilution you…

Right, so in your case it makes perfect sense. You are a third partner with a 10% stake in the company. Contrast this with a first employee who is getting a 1% stake and less than half the normal salary. Would you have taken this position for a 1% stake, all else being the same?

Edit: your point is that good engineers cost $150k (really closer to $200k with taxes, etc). That's correct. So what happens when these engineers as a group realize that taking $70k + 0.5% equity is not the same as taking $150k + full benefits elsewhere? What other options do startups actually have at that point? More importantly, will this point happen and will it happen soon?

Re: Just how much is that 2% really worth?

#68

Post by IgorPartola » Thu, Jul 03, 2014, 5:13 PM UTC

diego wrote: post #47

IgorPartola wrote: post #40

Earlier quoted context omitted.

So why the hell do startups bother offering equity? It seems like for the founders there are only downsides in offering it, while for the employees there is no upside at all. Perhaps a better model for a two founder startup looking for a first employee is to just find a third partner who will only take equity (that is in double digit percentages), then actually start paying only salaries to person 4+.

That's the same as asking why do startups bother with starting a company. If the startup succeeds, you want employees to be aligned with the company success and motivated to stay and vest. If the company doesn't succeed, the equity is worthless.

From a strictly monetary point of view (as in, not counting the type of environment in which you want to work, etc.), let's say E1 is the expectation value of a payout of your equity in cash. So E1 = probability of a sale where your type of stock does not get screwed * cash value of your stock in this deal. E1 is by all accounts and all advice incredibly low.

Now let's look at E2 which will be the expectation value of a payout from investing your salary difference between a high paying corporate job and a startup. Let's set this number at a safe value of $50,000/year. Invest $50k a year for 10 years in some safe stock and bond mutual funds and I bet E2 and much higher than E1. Heck, invest $50k year in lottery tickets and you might make out better than working at a startup.

That's not to say you should ignore startup jobs. They have a ton of other benefits. Just seems like equity is not one of them unless you are a founder.

Re: Just how much is that 2% really worth?

#69

Post by scrozier » Thu, Jul 03, 2014, 5:22 PM UTC

birken wrote: post #64

onion2k wrote: post #7

My advice to people who want to work in a startup is always very simple: Ignore any equity. If you'd take the job without any equity then take the job. If the equity is part of your reason for taking the job, you probably shouldn't take it. Base rate neglect[1] means we are terrible at evaluating the probability of equity being valuable. For every story about someone making millions out of their equity when the start…

Equity clearly has some value though, based on the fact that in any successful startup investors pay a lot of money for it. If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this informati…

Yes, but investors spread their risk, as an essential part of their strategy. Employees have no such opportunity.

Re: Just how much is that 2% really worth?

#70

Post by diego » Thu, Jul 03, 2014, 5:24 PM UTC

IgorPartola wrote: post #68

diego wrote: post #47

Earlier quoted context omitted.

That's the same as asking why do startups bother with starting a company. If the startup succeeds, you want employees to be aligned with the company success and motivated to stay and vest. If the company doesn't succeed, the equity is worthless.

From a strictly monetary point of view (as in, not counting the type of environment in which you want to work, etc.), let's say E1 is the expectation value of a payout of your equity in cash. So E1 = probability of a sale where your type of stock does not get screwed * cash value of your stock in this deal. E1 is by all accounts and all advice incredibly low. Now let's look at E2 which will be the expectation value o…

My former employees from IndexTank would differ. Our acquisition was life-changing to them. They didn't value equity at all when they joined, yet it worked out really well.

You can think of employee equity as insurance against "I joined Facebook early and all I got was this lousy t-shirt."