61–70 of 342 posts
I've been thinking of putting together something simple to analyze employee option paperwork and add some plain English annotations to help employees understand exactly what they're signing. Based on my experience, there's something like 5 or so templates that cover 90% of the startups in the valley, so shouldn't be too hard. Is there any interest in something like this?
But what really needs to be addressed is the fact that employee startup equity rarely produces the kind of reward that one would expect it to given the outsize attention that is paid to it. Sam writes:
> As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.
It's worth testing these numbers against real-world data. For this, I'll use CB Insights' 2013 Global Tech Exits Report[1], which shows that:
1. 1,825 private tech companies exited in 2013.
2. Only 19 of them exited at a $1 billion-plus valuation.
3. 45% of exits were under $50 million, and 72% of exits were under $200 million.
If you assume that the first 10 employees receive 10% of a company's equity, and that each employee in that group receives 1%, a $200 million exit produces up to $2 million before taxes for each of the early employees. A $50 million exit produces $500,000. If you're making $125,000/year as a senior engineer, $500,000 gross after 4 years is the equivalent of what you earned in salary over the past 4 years. That's a nice bonus, but not life-changing wealth. $2 million is nicer, but if you plan to stay in the Bay Area, you might spend half or more of that on a modest house or condo.
Once you factor in the cost of exercising your options, taxes, dilution, liquidation preferences, lack of acceleration and the fact that a good portion of employees leave before fully vesting, you can see that even in a scenario where 10% of the company is given to the first 10 employees, employees aren't likely to see the type of compelling returns that Silicon Valley dreams are made of. Facebook and Twitter-like exits, where thousands of employees become paper millionaires overnight and the earliest gain tens or hundreds of millions of dollars, are the exception, not the rule.
What's worth considering further is the fact that 66% of the companies that exited in 2013 had raised no institutional capital according to CB Insights. So, as a prospective employee, in joining a venture-backed company (or a company coming out of a prominent accelerator), you may be putting yourself at a disadvantage even before you take into account the fact that employee equity is most vulnerable to dilution and liquidation preferences at these companies.
Final note: CB Insights' 2012 Global Tech Exits Report[2] shows similar trends to the 2013 report. In fact, in 2012, over half of exits were under $50 million and 76% of the companies that had an exit had not raised institutional capital.
[1] https://www.cbinsights.com/blog/global-tech-exits-report-201...
[2] https://www.cbinsights.com/blog/tech-mergers-acquisitions-de...
Regarding the question of knowing what percentage of total equity your stock grant represents, most companies that are not incredibly early stage will simply not tell you. Pushing the subject further will make you look like you're nosing around where you shouldn't, often leading to the offer being dropped (this has happened to me). Not to say it wasn't a not-so-great company to start with, but a dropped offer is a dr…
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.
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) Other reasons?
Thoughts?
I don't understand why options are taxed at exercise. You aren't getting money out of the transaction. If you have an option to buy a share at $1 (when the share is valued at $10), and later you sell at $50, why isn't the tax treatment just that you have a $49 capital gain? Why do we instead do a $1 -> $10, and then a $10 -> $50 tax thing?
The stock is an asset that has value. This view makes a lot more sense when the stock is liquid and you can go and get rid of it right after you exercise your option. I agree that this totally sucks if there is no easy/public market for the stock.
I appreciate that in this case you're turning an asset into a slightly different asset, and that's not like just ordinary appreciation, but I don't know why it really matters. A rule of "capital gains gets charged when you turn an asset into cash" makes sense.
I could be wrong, but I've come to the conclusion that after dilution and taxes, any thing short of a billion dollar exit isn't going to be compensatory for my efforts. I don't know how correct my conclusion is, and whether I should try negotiating for more.
This is probably not the right vehicle to ask 'Am I being treated fairly?', but I think I will anyways. The startup is pre Series A, I'm the first non founding/non executive level engineer, I'm technically a contractor but treated pretty much exactly like an employee (I know that's a whole separate thing), I'm not the most experienced engineer, i.e. last year at my prior job I was an intermediate level but this year…
Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder.
The problem with the 10%/20%/30%/40% thing is that if the company shoots way up in value, an employee could theoretically be fired after two years and not capture much of the value they helped to create. It also doesn't necessarily need to be malicious [1], sometimes companies change and a person's skills aren't as valuable anymore. If I were a prospective employee I would never take a deal like this, because it is r…