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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#111

Post by pzb »

harryh wrote: post #75
branchless wrote: post #70

Earlier quoted context omitted.

That says it all really. $30M and you see under $100k as 24th employee. So 0.3%.

What % of the company do you think the 24th employee should get? Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).

The percentage really doesn't matter. Assume that you could get a $150K cash/stock at a public company (meaning concrete valuation). A startup offers you $80K and says "here is equity to make up the difference". If you assume three years and a 10% chance of them being worth something that means you need RSUs worth at least $2.1M to meet expected loss of salary. I highly doubt you are getting that.

Re: We need to rethink employee compensation

#112

Post by serge2k »

harryh wrote: post #85
branchless wrote: post #81

Earlier quoted context omitted.

It's true we don't have enough info. I'm assuming he's a dev but I don't know.

I don't think that 0.3% is radially out of line. It sounds completely in the ballpark of reasonable to me.

I think it depends on the risk. Getting hired at #24 might be a much less risky proposition than number 10 or 15.

Re: We need to rethink employee compensation

#113

Post by fragmede »

kelnos wrote: post #99
drivingmenuts wrote: post #5

Earlier quoted context omitted.

I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.

I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on…

If you're joining a series C that's close to IPO, they should be able to pay market-rate, or close to. You're also not really going to be getting a significant amount of stock from it, and it won't be worth all that much, relatively speaking.

Re: We need to rethink employee compensation

#114

Post by tptacek »

branchless wrote: post #70
MCRed wrote: post #54

Earlier quoted context omitted.

Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.

That says it all really. $30M and you see under $100k as 24th employee. So 0.3%.

30bp is not a low number for employee #24.

I got a huge windfall from a year and a half I worked for just 50bp, as employee #5 and a principal contributor.

Do the math. Cut 30MM in half, and give half to investors. That leaves 15MM. Divide that 24 ways and nobody's getting 7 figures. But of course, that's not how it works; at 30MM, even an extremely egalitarian division of what's left after investors recoup is still going to get you into low 6 figures.

The problem for this person isn't that 30bp is a stingy allocation. It's that for a company with 24 employees - or, very conservatively, a 4-5MM annual burn - 30MM simply isn't a very good exit, no matter how big that number sounds.

Re: We need to rethink employee compensation

#115

Post by fezz »

Jemaclus wrote: post #3

In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend ti…

I have lots of options from various startups over the past 15 years. IPOs that got pulled, owners that refused to sell when they had the chance, bad management choices, etc.

Options are the equivalent of lottery tickets. Great if you number comes up, recycling if they dont.

Re: We need to rethink employee compensation

#116

Post by danielweber »

nissimk wrote: post #98
branchless wrote: post #64

Earlier quoted context omitted.

> I tend to think of options as worthless That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.

It's also information asymetry. A classic financial arbitrage move. The founders offering the employees options understand all of the terms and scenarios that people in this thread are discussing, but most potential employees are not aware of these factors. Many potential employees will discuss their offer with trusted "experts" in their personal network who also are not familiar with the multiple scenarios that can…

And if the company decides to screw you over, it's really easy. If the pie is so huge that it's worth you getting a lawyer to fight back, generally 1) they aren't so selfish, and 2) they realize you will get that lawyer to fight for your piece.

There's 10 ways for you to get devalued to 0 and you have to avoid all of them to make a payout.

Re: We need to rethink employee compensation

#117

Post by x0x0 »

harryh wrote: post #101
x0x0 wrote: post #90

Earlier quoted context omitted.

not as nuanced as all that as an employee, if you are lucky/skilled enough to end up at a successful startup, and you aren't very careful with tax issues, you can find yourself stuck: if you leave, you have to exercise, and immediately owe hundreds of thousands of dollars (or more!) on a completely illiquid asset that you can't sell. Which doesn't even take into account the potential for that asset to become less val…

That is certainly one point of view. And if one person leaves it's not likely to materially affect the business as everyone else keeps it going. Another point of view is that if all the early employees disappear at the 4 year mark (or whenever they feel they've vested "enough") that could cause very serious problems for the business. There is an element of a prisoner's dilemma here and it's not unreasonable to think…

I'm operating under the assumption that most people aren't counting down the seconds until they can leave, but some will want to. Four years is a long time, and 10+ years to IPO is a quarter of your career.

Re: We need to rethink employee compensation

#118

Post by djb_hackernews »

kelnos wrote: post #99
drivingmenuts wrote: post #5

Earlier quoted context omitted.

I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.

I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on…

Saying they are worthless is being a realist.

If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.

Re: We need to rethink employee compensation

#119

Post by danielweber »

JoeAltmaier wrote: post #24
toephu2 wrote: post #19

Earlier quoted context omitted.

Even if options vest, they could still be viewed as worthless. E.g., Pre-ipo company, 4 years pass, all your shares vest, however Company might tank in the next 5 years, goes bankrupt, never gets bought out nor goes IPO, your vested shares are worthless.

OR even succeeds, get bought out for 40 million dollars, which all goes to pay investors' convertible debt. Net result: stock worthless.

Or you have a disagreement with your boss and leave, and while you are gone the company devalues the shares of everyone who left "because they aren't contributing any more."

Re: We need to rethink employee compensation

#120

Post by harryh »

pzb wrote: post #111
harryh wrote: post #75

Earlier quoted context omitted.

What % of the company do you think the 24th employee should get? Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).

The percentage really doesn't matter. Assume that you could get a $150K cash/stock at a public company (meaning concrete valuation). A startup offers you $80K and says "here is equity to make up the difference". If you assume three years and a 10% chance of them being worth something that means you need RSUs worth at least $2.1M to meet expected loss of salary. I highly doubt you are getting that.

Startups aren't a roll of the dice where they are all the same with equal probabilities of success.

Make good decisions. Join the right team.

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