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Just how much is that 2% really worth?

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

#81

Post by IgorPartola »

diego wrote: post #70
IgorPartola wrote: post #68

Earlier quoted context omitted.

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."

That is really good for you and your employees (no sarcasm intended at all; it really is a good thing). However, this case is an outlier. The percentage of startups that straight up fail or at least don't get sold is huge. The percentage of startups that succeed and make it to a sale/IPO but don't get a high valuation at this point is huge. The percentage of startups that get sold/go public but don't pay out or don't pay out enough to their common stock holders is huge. It's true that every lottery winner thinks that the $2 lottery ticket they bought was a great investment. That doesn't mean that investing significant amounts of money/time in lottery tickets is sound investment advice.

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

#82

Post by eloff »

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…

I know you're not being serious about the bank thing, but I just want to say, if you're a programmer and you love what you do, and you're good enough to be choosy, don't work for anyone (especially banks!) whose main job is not software. There are a few exceptional companies, but mostly it's a good rule of thumb. Working for Dilbert's pointy haired boss is just not a recipe for happiness - who cares if it pays well. Life is short, if you don't enjoy your job, change your job!

At any rate that was advice given to me by my father, who worked in the IT department of a large oil company, had a long line of pointy haired bosses who took the credit for anything that went well, which was eventually gutted and outsourced leaving just him and a couple others as insurance. I've regretted it when I did not heed that advice.

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

#84

Post by imrank1 »

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…

In my experience companies won't share what the percentage is of the stock you are getting. They just say you are getting X number of shares and won't tell you anything else. How do you verify what they are saying is correct?

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

#85

Post by cgriswald »

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…

Okay, so let's look at it as an investment.

Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it.

Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell.

And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings).

This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move.

I am not a financial advisor, this is not advice, blah blah blah...

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

#86

Post by tomp »

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…

The risk profiles and the investment profiles of most investors are completely different from those of most employees, so there is no way that equity has (proportionally) the same value for employees and investors.

Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse).

All in all, as an employee, I would value equity between 4-10 times less than the investors would.

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

#87

Post by btilly »

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…

The difference between an employee and an investor is that the investor puts their eggs in many baskets, and an employee puts all of their eggs in one basket. So investors get diversification of risk while employees do not. Therefore consistently accepting low probability but potentially high return choices on average works out well for investors and not for employees. And in fact investors push this way - their incentive is always to "swing for the fences" because their business model is based on the one or two investments that work out which pay for the failures.

If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it.

When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed.

If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will.

But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.

(Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)

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

#88

Post by [deleted] »

silverlake wrote: post #71
birken wrote: post #64

Earlier quoted context omitted.

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…

Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.

[deleted]

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

#89

Post by georgemcbay »

eloff wrote: post #82
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…

I know you're not being serious about the bank thing, but I just want to say, if you're a programmer and you love what you do, and you're good enough to be choosy, don't work for anyone (especially banks!) whose main job is not software. There are a few exceptional companies, but mostly it's a good rule of thumb. Working for Dilbert's pointy haired boss is just not a recipe for happiness - who cares if it pays well.…

Well onion2k's premise was that you wanted to make millions in software. If that is your #1 priority, then working in finance is probably your best bet (unfortunately, IMO).

Working for a "pure" software company is great advice if you are optimizing for overall happiness, but not so much for maximizing your income.

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

#90

Post by mason55 »

silverlake wrote: post #71
birken wrote: post #64

Earlier quoted context omitted.

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…

Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.

I think you're confusing some concepts here. Dilution happens when new shares are issued causing your percentage ownership to go down. In general it's not a bad thing - when there's a new funding round the new cash will increase the value of the company to balance out the dilution and you end up with your equity being the same value. The thing people forget about when they talk about dilution from new rounds is that the cash added to the balance sheet increases the value of the company, probably even more than 1:1.

Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.

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