Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures.
> As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR in two years) to become a founder and that is when it clicked - I expected to feel stressed, pressured, and the weight of all of the risk I was taking.
Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!
The bigger secret is that stock sold in secondary sales by founders and employees is usually common stock, and the purchasers will often get the right to convert this to preferred stock. This means that the company is instantly encumbered with a greater liquidation preference, without the increase in balance sheet to offset it.
How is that legal and not considered self-dealing and unjust enrichment? If I was a minority common stock owner in a business I assume I would have standing to sue for damages if a majority owner or officer made my position materially worse while enriching themselves in such a manner? Are you sure such a right is typically granted? I mean even the gap between 409A valuations and preferred valuations, as well as a huge amount of precedent, give a different material value to preferred and common stock. Giving that right out of thin air in a sale by an insider is effectively theft from common holders and I have trouble believing what you’re saying as I’m not sure how that could be kosher, if perhaps infrequently litigated. But is it really standard like you make it sound? That would be a very dirty secret and I expect would and should lead to litigation.
Who has the cause of action? The majority shareholders. Who authorized the stock sale? The majority shareholders. Are they really likely to sue the founder for something that the shareholders authorized?
Only in some states would minority shareholders have a cause of action. So there are some states in which the courts agree with you. As you might imagine, startups do not typically incorporate in those states.
Flip it around - it becomes a condition of the deal happening imposed by investors, who themselves are motivated to present the best deal to founders, and to have founders less economically stressed. No secondaries - no deal, and that doesn’t help anyone.
It is very common and usually a condition of closing. Investors know that preferred is way better than common. They are buying highly speculative assets and want strong downside protection.
Founder Preferred is a special class of stock that can convert into Preferred when sold. It’s different from Common as it doesn’t affect the 409A. IANAL.
Not never. E.g. all the capital we as founders put in the business before we raised our seed round was converted into Series Seed Preferred shares at the same rights as angels / seed VC. Small portion of total equity but still.
Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away.
Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really want. You might have foregone your shot at a partner to build a company to mostly profit someone else who did nothing but write you a check. If you do have kids, you'll be old as hell raising them. All you'll have is extra stuff hardly anyone cares about - except maybe you - if you're the type of person chasing down a decimillion net worth.
I hope these people truly enjoy their boats and their third homes in Aspen! It sure is a lot of work to get them.
You’re obviously overstating the FAANG SWE lifestyle.
But beyond that, it’s interesting you picked FAANG SWE and not startup SWE as the basis of your comparison.
The whole premise of the article is that startup employees are often sold a bag of goods about equity and upside that’s simply a terrible deal. Not terrible in the sense that it’s highly risky, but that it doesn’t even come close to compensating for that risk premium. Its sold as FAANG is low risk medium upside but startup SWE is high risks high upside but really its extreme risk and almost no upside because VCs find dozens of ways to carve it out. And people will say startups pay “market” compensation but they almost always mean base salary only, and the equity is such a horrible deal, it’s borderline fraudulent scam on the part of founders to sell startup employees on the equity as a fair deal.
As an aside, when people think SWEs don’t need unions/ professional associations, they think of teachers unions or autoworker unions where pay is standardized on seniority. Instead, we could have something where our lawyers in our camp could review equity terms and we could collectively advocate for things like liquidity deals. That will never ever happen if you only trust the deals the VCs and founders offer.
This 100%. Really the only reason to work at a startup as an engineer is if you really want to, because everyone pays low and the tiny bit of equity is essentially worthless in 99% of cases, which gives it a very low value.
And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options. If you've gotten laid off, eating into your savings while searching for a job is a pretty risky proposition. If you have an appreciable amount of equity, that bill can be rather high. Then there's AMT. Many end up letting the options expire. So, taking that pay cut for equity really didn't work out -- you had less money to exercise the options and because you couldn't, the option portion of your compensation was effectively clawed back.
I very much appreciate the startups pushing to extend the exercise window out to 5 - 10 years, but that's far from the norm. I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable, but that's certainly not the case when folks are laid off. And we commonly discuss people thriving in one particular phase of a company. If you're not in that phase, it's no good for either the company or the employee to continue the relationship just to defer having to exercise options.
> I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable
I don't think that's debatable at all; I think it's bullshit. Once your options vest, they are yours. They are compensation for the work you have already done, not the work you will do in the future.
Once/if your company switches to RSU grants from option grants, then at vest day your stock is yours, and can't be taken away when you leave the company (well, I imagine they could write up a contract that says that, but that would be quite non-standard, and I would never work for a company that did something like that). The vested RSUs are, again, compensation for the work you have already done, not the work you will do in the future. I don't see why options and RSUs should be considered differently here.
(I might even stretch that into the idea that it's bullshit that startup options expire at all, even if you stay with the company forever, but I do think that's debatable.)
If equity is going to be a material component of compensation, then the argument "you're not committed enough, you deserve nothing if you leave..." is utter nonsense.
Imho, many/most of these draconian equity / option terms are nothing more than attempts at 'golden handcuffs' to make it more challenging for employees to leave these startups.
Sadly, they work: I know many who couldn't leave roles til they'd saved up for years, or could finally ink second mortgage on their home, etc in order to purchase all their equity in their 90 day post-exit windows....
> And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options.
This is why I advise everyone that you must early exercise (exercise your option as soon as you start with the company) if you're going to join a startup.
Some startups don't let you early excercise. Run far, far away. Find a different startup. Never join a startup that does not let you early exercise.
> This is why I advise everyone that you must early exercise (exercise your option as soon as you start with the company) if you're going to join a startup.
That's terrible advice, if you present it in an absolutist, blanket way like that. I do wish I early-exercised at my last startup, since I had a nasty AMT bill when I finally did exercise, and I could have had better tax treatment under the small business qualified stock rules when I finally sold. But: a) early exercising my initial grants would have cost me $40k, which would have eaten into my savings to a degree I wasn't comfortable with at the time, and b) I early exercised at two previous startups, which failed, and that ended up being money flushed down the drain to the tune of around $9k.
Sometimes people want to wait a bit to get a better idea of the company's prospects before investing their own money into it. Maybe they want to hold off until the company has revenue, or hits/maintains a particular revenue or growth metric. Sure, if you're a super early employee and have 5-cent options, maybe you'll feel comfortable gambling that money away (but maybe you won't be!). Yes, there will likely be a tax penalty for waiting, but that can be a reasonable and sound financial decision.
I was (fortunately) a few years too young to get mired in the original '00s dot-com bust, but I know several people who were encouraged/pressured to take out loans in order to (early) exercise their startup stock options, and ended up with worthless or underwater stock, but still had to repay those loans. It would have to be a pretty exceptional situation for me to recommend anyone take that route.
(I do agree that a startup not allowing you to early exercise is a red flag, though.)
> Maybe they want to hold off until the company has revenue, or hits/maintains a particular revenue or growth metric.
It is far too late then.
One of the many benefits of doing early exercise is that you exercise the option when the grant price is the same as the current valuation so there is zero profit (and you file an 83(b)).
If you wait too long, your grant might've been at $0.01 but now the valuation is $5.00 (making up numbers but both of these are in the ballpark of my past startup experiences). It is way too late to exercise those options, you'll be paying tax on $4.99 of profit on a stock that you can't sell and might go down! If you waited that long, now you need to keep waiting until there is liquidity so you can do a same day sale.
> take out loans
That would be a terrible idea. Like I said in parallel comments, if the price is too high for your comfort level, don't join that startup.
> high risks high upside but really its extreme risk and almost no upside
Extreme risk? Some startups pay fair salaries.
I don't think startups are that risky (unless you start putting money into them, that is a suckers deal). Or if you work for free, what you naturally should not do. Not everyone can get a FAANG job so it is not very clear alternative.
If you get paid a slightly below market rate and get some worthless equity, what's the big deal? You can always quit any time and change to a corporate career. It is not an end of the world.
> If you get paid a slightly below market rate and get some worthless equity, what's the big deal?
If you really do, agree that it's ok and a fun ride.
But where are you going to find a startup that pays market rate? Never seen one.
Base salary can be very close! But at an established company you are also making money on RSUs, often more than your salary. And usually have a bonus, which can be quite significant.
So your base salary might be 250K in an established company and 200K at the startup. Not a huge difference. But total comp at the established company is more like 500K-600K vs. at the startup just 200K. Huge difference.
> But where are you going to find a startup that pays market rate? Never seen one.
I guess you're looking in the wrong places. Over the past 13 years, I've worked for five startups (both full-time and contract) that paid market rate (two paid a fair bit above, even). In my professional and social circles, this has been pretty common. Certainly some have worked below market rate for some companies, but that seems to be the exception, not the rule.
> But at an established company you are also making money on RSUs, often more than your salary
That's definitely not been my experience. At established companies, the RSUs are usually a nice quarterly bonus, in the wide range of 10-50% of base (annualized). Certainly there are some where the RSUs can end up being several multiples of base (I've worked at one like that, though my equity comp level was not common, and was mainly a consequence of my long tenure there from when they were small), but I don't think it's that common. A lot of people seem to assert that you can easily get that at a FAANG, but that doesn't seem to be true. Some people can, but not the median employee.
Also consider that a lot of the stories of high equity comp come from people talking about the FAANGs. Those companies were founded 20-25+ years ago, and matured into established companies 10-15+ years ago; the "rules" have changed quite a bit since then.
It's possible! I live in the silicon valley bubble.
I've worked for 5 startups (and had offers from about ~5 more to know what they would've paid). None have been close to total comp at a public company.
All of them have been very competitive (or even higher!) on base salary.
But there's no recurring RSUs in a startup (since there is no stock to trade), and rarely bonuses. So total comp is about 30-40% of my total comp when working at public companies.
Extreme risk is driving truck in Iraq or smuggling drugs to Singapore. Working in air conditioned office for double median US salary is not extreme risk by any means.
With that I agree with you that upside is often lower than people expect.
I think we're talking about the risk level when compared to various ways to work at a tech company, not risk level when compared against all possible occupations.
Let's not forget that FAANG companies were all startups at one point. Early employees at those companies experienced significant upside. Startups can be very high risk, and in rare cases, extreme upside.
This is the “startup myth” that lets the scam perpetuate.
The world has changed. Google IPOed just a few years after it founded. Now Stripe, objectively one of the most successful startups ever, still hasn’t IPOed after 15 years.
Liquidity preference
Dilution
Even the F in FAANG had a major movie made about early employees getting shafted by dilution!
FAANG is 5 companies founded a long time ago. Since then VCs have completely rewritten the rules of the game. But they’ll still point to extreme outliers in the old rules. The fairy tale of the Google masseuse has probably cost tens of thousands of engineers millions in compensation.
You need to get things in writing and do the math and startups make it as difficult as possible to do that and then the math never adds up. So they resort to fairy tales.
Many huge private companies, like Stripe, have found ways to provide liquidity to their employees without going public, e.g., through tender offers. Some more recent examples of companies where early employees did very well would be AirBnB, Coinbase and DoorDash.
Early executives at those companies did very well. Early employees did well, but risk-adjusted , not really. I know people who were fairly early at those companies and they own nice SFH in the Bay Area but they're still working as Directors or whatever.
Consider that if you could make 400k (including liquid stock) in compensation at FAANG but you take 180k at the startup, you're basically betting 220k a year on the company. Except unlike any other company you bet 220k on, you won't get a board seat, you won't get access to key metrics, your influence will be dominated by "real" investor's influence.
If your NW is less than 10M, which presumably it is, anyone who's heard even heard of the words "Kelly Criterion" would tell you your nuts for betting 220k a year on one startup. And yet, you get treated like "an employee" and not like "an investor" for taking that insane risk.
So YC has invested in 5000 companies, and you can name 3 that had top-notch outcomes, thats 0.06% success - and you had to work like a dog to realize it! And that money was locked up. Those same early employees could have taken that $220k/ year, put it on Bitcoin or Apple stock, and retired off that. And Bitcoin and Apple were much easier "picks" than an given startup.
The math simply does not add up and the whole system runs off mystique and naivety. And I've worked at startups that gave me a hard time about asking about outstanding shares, about asking about the cap table, about asking about liquidation preference. This is _critical_ information before you invest a significant portion of your life and net worth on a company and that they're guarded about and it should raise the ultimate alarm bells that they don't fall over themselves to explain every part of it.
There's a bunch of propaganda out there "Explaining ISOs, written by a16z" that's a smoke screen of the truth. The math does not add up.
The dream startup employee is really really good at Transformer architectures and really really bad at personal finance. Fortunately for startups, a shocking amount of these people exist. But it doesn't change that if sharp financiers looked at employee equity packages at startups objectively, every single one would agree it's a scam deal.
First of all, we're on the same page about the risk profile of working for larger companies being better for employees. But the reality is there aren't enough of those jobs for every single startup employee out there to get one. Some people also like the startup environment - move fast and break things, etc.
Your denominator (5000) is _all_ investments that YC has made. You need to look at investments of a certain vintage, e.g., 10 years or more. You also need to include all the other companies of that vintage where employees did well (way more companies in that cohort have sold or gone public). The result is 0.06% is a gross understimation of the success rate (where success is defined as successful enough for early employees to make a lot of money).
> Consider that if you could make 400k (including liquid stock) in compensation at FAANG
I'm very skeptical of the idea that this is common for new hires at FAANGs today. Certainly some people can command that level of comp, but I find it hard to believe the median employee can.
The median employee also isn't the guy who's going to make a killing by being an instrumental early employee at startup. It's apples and oranges. I'd argue that the person who is versatile and productive enough to help build a startup from zero is also in the upper tier of those FAANG employees, and commanding 400k+ per year isn't out of reach.
I personally have taken both paths, and made what I considered a ridiculous amount of money at a startup (after I'd been gone for a while, having bought my stock). When I got my cash out, I didn't quit my not-technically-FAANG-but-pretty-close job and that comp continues to grow. I never expected this, but my comp has grown to the point where the cumulative amount I've made here has actually surpassed the startup money. 7 years at each place, and the steady paycheck eventually outpaced the big windfall. The difference is I can keep the steady paycheck indefinitely, so it's definitely the win if I stick it out. Of course, now I'm itching to do a startup again. :)
I don't agree it's a myth. Is it an extreme risk? Yes, of course. Do people view the risks to be way too low? Yes. But I worked at Cloudflare pre-IPO, got shares at 1.73, and at one point CF was at 200 a share. That was more or less what I was "promised" from the equity.
Stripe is one example of a successful startup not going public, but there are tons of startups that are going public. And there are many startups that wish they could go public, but they simply don't have the finances or business to do so.
I don't think VCs changed much from when Google went public until COVID. We were seeing massive overvaluations of tech companies for years. Once through 2020, VCs got scared and now the landscape is a bit different. But the AI craze has started to get VCs back out of their shells taking bets on risky projects.
So, yeah, idk what I agree with this assessment. At least it's not been my experience in tech over the last 8+ years.
> I don't think VCs changed much from when Google went public until COVID.
VCs changed a ton over that time. In 2004 VCs were still smarting from the dot-com bust. And VCs were hardly spewing cash during and in the aftermath of the GFC of 2007/08. The days of easy VC money were mainly in the early-mid to late '10s.
And as you point out with your end date of COVID, VCs have now backed off again, as they did around 2000 and 2008 during those bust/bear cycles. I would credit interest rate increases with the current backoff, though, not COVID. During early COVID, funding was still fairly well available, assuming your business wasn't something that required in-person contact; even better if your business facilitated home-office work.
> At least it's not been my experience in tech over the last 8+ years.
That's only ~4 years pre-COVID; either seems like too short a horizon to make this sort of assessment. (Source: been in tech for 20-odd years.)
The expected value of startup equity is far, far, far below a casino. The ON bet at a craps table is 50% odds. Less than 1% of startups survive.
You might as well go to the casino. You will save years of sweat, heartache, and stress-induced mental decline.
Instead at a casino you get to blow your money quickly, enjoy fun, free drinks, and still have the upside potential to become super rich if you are in the 0.000001 luck percentile.
I think a better analogy would be a poker room than a craps table. You don't get to influence the outcome at a craps table, but your performance at a startup will influence its probability of success. Also your choice of which craps table to play at doesn't change your odds, but you can certainly change your odds of success at a startup by choosing which one to join. Obviously there are no sure things, but after a while you can at least weed out most of the dumb startup ideas and/or the incompetent founders.
Or, based on examples I've witnessed, 5 years down the road you own 20% of a $1M company because your forecasts were off by an order of magnitude. You've gone through a couple down rounds, where investors took at least 20% each time. You feel obligated to your investors and employees, while there is almost zero chance of walking away with anything.
One of the greatest quotes I've ever heard from a founder buddy was when his startup was going through a particularly dark moment and struggling: One of the investors said to him "Maybe you should seriously think about shutting down and giving us our money back", to which he replied:
Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."
Not realistic to maintain control past A unless you built a real rocketship. The board doesn’t usually want to run your company - they have enough other companies, some evidently better than yours as they don’t require this intervention.
Each round carves out 10+% for employee options, on top of 10-30+% to investors (Seed can be anywhere from 10-30%, Series A is typically 20% to just the lead, Series B 10%+).
Equity ownership and voting control are also different things. After the B you commonly have 2 investors and an independent director on the board, alongside 1-2 founders.
It can get much worse. Companies can have multiple “seed” rounds. It may not be doing well enough for a real “A” round. The naming of the rounds doesn’t matter. Valuation at each round does. If your valuation goes lower from one round to the next (“down round”) you’ll give up more equity, diluting everyone else faster.
Can never happen, the guy who says that this ain't ur money no more has made sure that investors know their place on board, they r afterall just passive investors who r spreading risks around, even wework a company that has fucked up financials had to give their founder close to a billion dollars just for stepping down, as long as the founder is a majority stakeholder, he will always remain in control
That very much depends on the stage of the company and how much control has been given up at different points. Do you think the management team of a public company could just decide to shut it down? As you raise consecutive rounds, your control is eroded.
If you, the founder, only own 20% of the company, the investors absolutely do control it (absent super-voting shares, anyway). You can propose shutting down the company, but the investors can fire you and bring in a CEO who will keep it going.
Not necessarily true. Most control is exerted at the board level through board director seats. You can have a low % and a majority of board director seats, depending on the leverage you had in each round raised.
Except the "$200K" is purely paper, and has an expected value of closer to zero. Remember, common shareholders are the last ones to get paid. Investors have preferences and get paid back first (often with interest.)
Also realize you were probably forced to take a pay cut and have a below average salary due to cost-cutting measures from the board. We'll ignore the non-financial problems, like tons of stress, complaining employees demanding more equity because you couldn't give them raises...
That's how risk works. The FAANG employee friends have exactly a 0% chance at a 9-figure outcome. They'll easily be at top decile if they pull a nominal $10M+ post-tax in 20 years.
>while your peers are all making ~$1M per year working 6 hour days at FAANG
I highly doubt ALL your peers are making that much. And I think the people making $1M per year at FAANG tend to work much more than 6 hour days. You have to be very productive to get $1M per year.
Nobody is forced to become a founder. A lot of people are naive to the sheer level of stress involved, and think it’s going to be easier than it actually is. You don’t find out just how stressful it is until you’re already super committed, have raised money, have employees, and there’s no easy way out without screwing a whole bunch of people over.
Founders tend to only talk about the good things happening at their companies, and tech press tends to focus on the successes. These things contribute to more people starting companies.
On the flip side, though, any regular HN reader has likely seen dozens of accounts written by startup founders whose companies have failed. And there's quite a bit of overlap between the set of HN readers and the set of past, current, and likely-future startup founders.
Yes and optimism bias leads people to believe they won’t experience those negative events. Everyone must believe they are going to do better than the median outcome when they start a company.
I know a red badge director (10-15 years) at Amazon who dipped well below 500k due to the last 4 years of stock prices. Though this recent climb has been great for their morale.
You are completely detached from the real world. Even in super rich countries like the US there are a lot of people without savings, living paycheck to paycheck. Most/all software engineers outside the US can only dream of ever earning that much money. And yet here you are, worrying that you'll end up only slightly richer than people earning ~$1M per year.
>And yet here you are, worrying that you'll end up only slightly richer than people earning ~$1M per year.
onlyrealcuzzo is comparing 2 things:
* Being a founder and working mega hours and having no life (e.g. no spouse or kids) and having a decent chance of losing most of your money as the company fails.
* Working at FAANG and making a lot of money while not having to work too much.
onlyrealcuzzo is saying the second option is better.
Yeah I feel like successful founders natural ambition and optimism is sort of weaponized against them by the VC industry here. From a VC perspective it's worth playing the odds for moonshots. As a founder though, if you can create a $100M company that you own 30% of, you can probably create a $20M company you own 70% of with a much more realistic and sustainable growth targets.
I can't help but feel this would be better for the founders, the employees and the customers of the company. It just doesn't make as much sense for the investors.
"mostly profit someone else who did nothing but write you a check"
There is quite a bit of work involved in reaching the point where you write a check for a Series A round. Also, the better VCs spend significant time with their portfolio companies.
The average SUCCESSFUL founder is in their earlier 30s. At that point - you should be at least L4 (probably L5) at FAANG. Salaries are about ~$450k at that level and age.
In 5 years, if you work even a fraction of as hard as you need to be a successful founder, you should be L7 - salaries are usually >$800k at that point.
No, it is not like any average slacker straight out of college in 5 years can get to a $1M salary at FAANG. But if you're the type of person that could successfully grow a company to a multi hundred million valuation in 5 years - you can make $1M at FAANG.
2. Going from L5-L7 is _not_ trivial. It requires a somewhat miraculous combination of being on a productive team with a good boss, a lot of opportunities for showy work and your own gamesmanship around corporate politics.
Is it possible? Sure. But in my short stint at Amazon, I met a lot of people who should have been higher level and were simply not due to missing one of these factors.
A lot of the FAANG companies (all?) have promotion processes that are basically a combination of both peers and managers strongly pulling for your promotion. It often takes a few years just to end up on people’s radars, and that’s a few years of delivering lots of high visibility work and doing lots of tech talks and other sort of corpo-social tasks to get your name out. In a lot of ways, it’s like you’re constantly applying for a new job.
I meant say more about the gaming the politics part, not so much the showmanship and self-promotion part. Say there are several people who meet the criteria to get promoted, which ones tend to get it and which not, based on which political behavior?
Allies, not friends. In that sort of environment, what sort of things get you allies? other than what you mentioned. For example when you say gaming the process, how to approach reviews?
Allies/friends -- doesn't really matter what you call it. It's people in your corner. There's no gaming that I'm aware of. You just have to hope that you are able to get on peoples' good sides. Usually that works alright in the normal course of being a friendly and contributive coworker, but god forbid you have someone who has a chip on their shoulder about you.
Not saying I disagree with your conclusion, but if the question is about which is more likely from the perspective of an individual considering going either route, there’s also an implicit “given that an attempt was made”. You’re only comparing the absolute occurrence of each type of event rather than the occurrence relative to the number of attempts made.
Those aren't entirely overlapping skills. There are plenty of founders whose attitudes and generalist skill sets make them unhireable in the management ranks of FAANG.
The distribution of the ladder is logarithmic. Most never make L6. L5 is often terminal level IC without any “up or out” obligations. Lots of people spend a long time at L5 and retire.
Yes, people are mixing salaries and total comp in this discussion which is unfortunately both common and misleading. It also depends very heavily on the total economic outlook, if you happened to join Google in the fall 2021 cohort your equity was basically going down for the next 3 years and only recovered just now. To claim the average SWE is getting to $1M with that kind of deal is either engagement farming or pure delusion; it has absolutely nothing to do with the reality of most people.
You don't start there, but you can get there as you level up. A lot of that would be because the stock on your RSU grants goes up while you work there though. I don't think many SWE have 7 figure targeted comp (highest levels, yes). But plenty get there with refreshers and stock appreciation.
Many people top out at a lower level because they don't play corporate politics games or because the L7s aren't moving on, so there's no real room for promotion among the L5s and 6s.
Microsoft in the Ballmer years (early/mid 2000s) had this problem. Promising L65/L66/L67 (probably equiv to L5/6 at AMZN) would leave because the next step was full. All the "partners" were hanging around and not making room for the next gen of leaders.
While the median is much much lower, there are a couple of thousand individual contributor SWEs (non-managers) between Google, Meta and a few other big-ish tech companies who make >$1 million/year (steady state, does not depend upon recent run ups in stock prices), with a couple of hundred of those above $4 million/year even. The risk/reward for joining a startup is very skewed in terms of risk in these cases.
See levels.fyi. The pay levels for FAANG companies are fairly accurate. But you'd have to be something like L7/E7 level at a Meta/Google to break $1M.
Also note that some comp numbers get heavily inflated by people incorporating stock value increasing between the equity was first issued and the stock actually vested.
> Also note that some comp numbers get heavily inflated by people incorporating stock value increasing between the equity was first issued and the stock actually vested.
Yeah ever since COVID this has really muddied the water, partially both up and down. Depending on the year combined with the type of company (large cap vs growth SaaS vs finance) you can massively swing the same exact "offer comp" into many communicated effective comps.
Yes but that's still better than early employees who share a lot of the stress and responsibility of company building, with at best 10% of the upside, but more likely around 0.1% - 1% of the upside that the founder has.
I was under the impression we were talking about ICs here -- your link shows that an upper-middle IC that you'd expect to be choosing between early startup or FAANG will see something around 450 a year, which tracks much closer to what I'd expect.
Sir if you live in USA and do not take a dip into the VC money swimming pool, you are stupid, because crazy people with stupid ideas routinely get to $100 Million valuations, like no other place on earth.
Its like going to Disney Land and saying "Oh i'll just sit at the coffee shop". Some people are here for the ride. Some people like the 9 to 5. Like you, obviously. Why dont you go start corporate-drone-news.org, this board is for hackers and founders.
> Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!
Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque. If you fail you get acquired and get golden handcuffs.
If you start a real business you can expect to take on debt, and you'll be personally guaranteeing it because nobody cares about equity in your boutique ice cream parlour. Plus a 5-year lease (which you will also personally guarantee).
The most common endgame for a startup is slowly running into the ground until the money runs out and you eventually shut the doors. Failing your way into a happy acquisition isn’t really something to expect as a contingency, I don’t think.
The contingency isn't golden handcuffs its using one of the hundreds of C-level connections you made as a Founder doing sales and networking (and accelerator programs) to get you a cushy gig as a Product Lead, Operations Lead, or similar title with a strong paycheck and immediate authority.
Sure, if you magic up a startup with VC funds you suddenly have it easier than a small, bootstrapped business.
Startups almost never start with a round of VC though. There are almost always months or years of the same experience as a bootstrapped business (ie: extreme uncertainty, no money to pay yourself, etc).
Most startups don't manage to raise VC, and most startups that raise VC fail with no acquihire.
Running with VC funds? Oh god, that would be cakewalk compared to even just figuring out how to ensure there's food if you spend money on some necessities for prototype...
> Honestly VC-funded startups seem like a cake walk compared to actually starting a small business.
Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.
I don't know why you are trying to make this a me vs them situation. Both situations are difficult in different ways and they are all real businesses.
"Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque." - Sounds like you are trolling or alternatively incredibly naive.
"If you start a real business you can expect to take on debt". ... Real business? Come on.
No one in this thread is saying starting a business is easy - ice cream business is debt funded because you have a very definitive range of outcomes. Venture funding is completely different animal - failing to see that limits the value of your comment significantly.
> I don't know why you are trying to make this a me vs them situation.
In terms of economic disparity it _is_ very much an us vs them situation.
Consider the optics over the last 20+ years. The middle class and their small businesses have been decimated while former VC funded companies hoover up their futures on Wall Street.
The level of risk involved starting an average small business is much closer to home compared with a startup seeking VC funding. The former can literally lose his shirt, the latter has to settle for a high six figure salary somewhere else.
Failing to see that limits the value of your comment significantly.
This isn't a me vs them. Who is hoovering up the ice cream futures? Different business model, different businesses. Both are difficult. Being a founder of a VC based company is difficult and being a builder of a retail brick and mortar is difficult. It isn't zero sum and both can exist in the same economy trying to make this a Me Vs Them narrative is totally BS.
Making a wedge where there isn't one is disingenuous.
I often hear about these SEC rules that explain why individual contributors get fucked, as if that's a good excuse. Either the requirements and disclosures should be fulfilled and more than 10 sellers allowed, or the rules should change, or both.
I didn’t comment on whether it was a good reason or not. My comment was just highlighting some of the complexities in what the blog author was hoping to achieve.
Correct me if I’m wrong, but my perception of most startups at series A is that they’re not usually more than ten-ish employees, and even then, you’d expect more balanced comp packages for employee number 11+, no?
Where would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.
I tend to have large stress in startups, more than in established companies. I won't get into some of the occasional toxic-element sources that can happen anywhere, but some reasons that happen more in startups:
1. Caring about the mission -- the real-world positive impact -- and potentially able to make or break that. Not just taking a shot at making money, for some opportunity cost that I could evaluate quantitatively on a napkin, and walk away from as soon as an option with a higher expected dollars number came along.
2. Livelihoods and investments of time&effort by colleagues hinge to a large degree on decisions I make, ideas I have, and things I have to pull off, and not wanting to let them down. (A bit similar with money investors, but I care more about personal connections, and involvements where it's not just someone buying lots of lottery tickets.)
3. Low "paychecks" for my HCOLA, at that startup and earlier, so personally needing a big win financial exit, and the startup is what I decided to invest my time&energy into. If that fails, it's starting over, and a lot of wading through various startup ickiness to get another good opportunity (or doing FAANG interview BS, and then their promotion-chasing BS).
Hiring, firing, layoffs, making the wrong decisions with limited information and not finding out they were wrong until years later, huge shifts in the tech market around you undermining your business, competitor actions wrecking your business, pressure from investors, pressure from your family to earn more money, uncertainty about whether the business will ever succeed, and an endless list of other things.
> You don’t lose any money if your startup fails.
Except all the money you lost by not having a proper job along the way. Also it’s not uncommon for founders to float the company at early stage until investment is raised, and they don’t always get a refund for this.
Exactly. I quit Google in 2017 to work on a promising start-up idea (generative AI chatbot for coding, a tad early on that one) and ended up raising barely any money, running up massive CC debt to finance cost of living and GPUs, and taking a huge compounding opportunity cost to not continue growing as a FAANG SWE (not to mention missing out on the stock market run with the extra money I didn't have). I spent the last several years paying off that debt instead of buying a house or investing, etc. I'm massively behind in earnings and net worth compared to my colleagues who talk about their future startup idea but never struck out on their own.
But I'm finally debt free and ready to risk my future yet again on another startup.
Starting a company myself, I took 6 months with no salary. After we raised, my salary was massively cut from where it was (30-40% of what I made the year prior). Then you have the fact I gave up guaranteed raises & promotions (to the tune of hundreds of thousands in RSUs).
There’s a pretty large risk to family security. By year two of the startup I have made 15-20% the cash I could have made elsewhere. I have stock that I trust will be worth more in the future (so imo worth it). However, I can see liquidity events being useful if you’re tight on cash after that run
Investors do it so that the founder can better focus on increasing the value of the company. Having financial stress on top of everything else reduces the probability of liquidity events.
A lot of people (esp people that performed extremely well in school and in corporate environment) find "failing" and "losing reputation" very stressful.
I am sure enough that I would crumble under that specific kind of pressure that I don't put myself in situations where I would experience that specific kind of pressure. Works great!
Thank God someone said this. Of course it is stressfull, there is no free lunch. If you can't take the heat just dont enter into a such top-heavy game.
Landlords and supermarkets dgaf. There is no real risk, and if they stress over it, that’s more a founder’s own psychological failing than anything else.
If you care what other people think that much, you probably don’t have sufficient quantities of the oft-cited “grit” that founders supposedly require.
This isn't the founder's risk. It's the employee's risk. And it has the added bonus of, if there is a liquidity event, the employee's don't get the upside.
I was like engineer #3 at a company that eventually was acquired for ~$250MM. My payout was $60,000, after 5 years of employment there. I could have made more by going and contracting at megacorp for a single year. There was never any upside for me.
That was because you negotiated and accepted a shitty deal. Unless someone scammed you into believing something that isnt' true, which I doubt. Founders can be overly optimistic, but it isn't same as scamming.
Startups are a difficult game. Everyone gotta watch for themselves. Don't blame on others if you accepted a suckers deal.
This is not a real risk you're talking about, but small inconveniences. A risk is losing your house for example, or losing the ability to rent.
Inconveniences are part of life anyway. Being the first engineer means you get all these inconveniences (tell your wife and your kids) plus real risks as above (taking a loan to buy the options and losing it)
“Letting people go” is taking on the risk of all of those people being let go losing the ability to rent or pay their mortgages. That seems like more than an inconvenience to me if you take one of the responsibilities of being an employer at all seriously.
If you are working a tech job and know how to program computers and have no savings slash the loss of a job costs you your house, you have deep and fundamental problems far beyond the loss of one job and it isn’t your former employer’s fault that your life is mismanaged.
No employee should join a startup with the expectation that the company will be around forever.
Compare startups to restaurants- their failure rate is absolutely massive. Working for a new company is simply always a risk for everyone involved, there's no getting around that.
My primary motivation as an employee of a startup is fear of personal financial ruin. That the company won't be able to make payroll and I won't be able to pay my rent, that I'll be evicted eventually or that if the company goes under I won't be able to find a new job. There is no mission or any other soft carrot that I care about. I also don't have any faith in stock options.
I can't imagine caring about reputational damage with rich people unless that reputation is in service of not starving in the streets.
Perhaps you shouldn’t be working in a startup because your lifestyle is unaffordable, or your company is paying you peanuts.
I have worked in startups in Silicon Valley and have had many friends working for them. Most startups pay a base salary of around 200k$ I reckon (for new grads, perhaps 150k). This might come down to 9-10k after taxes per month. A good 2 bedroom house to rent in a location like San Jose would be 3k$ per month, which leaves you 6k for other expenses. Assuming 1k for car, you should still have 5k in savings per month, in a year of working you will have saved up 20 months of rent, maybe 12 months of living without a job. I find it hard to believe anyone in SV startups, is in risk of “personal financial ruin”, or “starving in the streets” just because they lost a few months of paychecks while searching for another job. That may be true in another country, in another market, but all tech workers in the Bay Area are living well above subsistence and acting like they are living paycheck to paycheck is a fantasy. There is a cost to working in startups, and it is an opportunity cost of not working in a big tech company and cashing out your 200k+ RSU over 4 years and instead receiving paper money stock options that can be worth 0.
I don't live in California, the startup I work for is remote. I don't fear financial ruin because I don't have money, I fear it because I catastrophize everything. There's no evidence to suggest I would be homeless if I lost my job, but that's just where my brain goes.
But I'd like to point out that in your math, you calculated the cost of a car and a rent, but no other living expenses. Also in what universe does a car cost $1000/month??
I mean if you don't care about the company mission (if it's mission based), you don't compare about your employees, your word, you don't care about your time or care that you sold people that you were going to take their money to build something... then yes there might be no "personal" downside.
Though if you don't care about anything in the first place what are you doing trying to build a company?
The best startups have a concept which is summed up thusly:
“We all go to the pay window at the same time.”
It’s ok for founders to take a little bit of money off of the table if they extend that to their employees as well. Asymmetry is where things get weird.
I’ve seen many founders who got deep into the fundraising cycles without ever realizing they could take a cent out. VCs will constantly tell you to let it all ride, and sometimes that works out, but for most people, having a little bit of financial security while you’re trying to change the world is necessary.
The best startups figure out how to manage liquidity through financing in a way that aligns incentives, keeps the goalposts at the mission, while allowing their teams to thrive.
It’s about alignment. If everyone is pulling in the same direction you’re going to execute the vision. Whether you win in the startup lottery is up to the threads of fate, but alignment is the straightest path towards a result.
I have seen a lot of companies, a lot of rounds. I have known zero founders who have turned down an option to take money off the table (and zero A raises that offered that to employees). I love the idea of your universe, though.
All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup. The VCs and founders have optimized away all the incentive. Eventually the message will reach even naive 22 year olds.
I'd tweak this slightly: "It's exceedingly foolish to be an employee at an early startup for the money."
I think there are a lot of us who struggle to fit the larger corporate mold who pretty much only thrive in the startup world. I can't speak for all of them, but I've been very willing to take the balance of lower cash compensation and a fistful of lottery tickets and not having 12 layers of middle management breathing down my neck over more liquidity.
I guess I'm also blessed with inexpensive tastes, which helps, but I'm still able to live somewhere I love and do all the things I care to do, so it works out.
Why does everyone thinks startups don’t pay well? I have worked for various startups all my life, most of them well funded, and competing for talent with faangs. Yes, I could probably make more at Google but I don’t feel like I’m underpaid. At the last 3 startups my base salary was above 250k. I work remotely and I rarely work more than 30 hours a week.
I’d say you’re uncommon. I’ve never seen anyone who is a typical engineer making $250k/yr at a startup that’s below $1B valuation. Same for the amount of work you’re doing and that it’s remote with that compensation.
It’s possible you’d be making $700k+/yr if you were at google. About triple what you are now.
I think one component of their point is that the marginal utility of money beyond $200k/year cash comp is quite small, especially if you (1) came to tech early in life (2) plan on staying in it for most of your working life.
With that perspective, $200k/year and $700k/year both reduce to "well-paid".
Also, a Staff title at a Seed or Series A startup can definitely ask for $250k/year, although they'd likely be trading off against equity grants.
Whoa, that doesn't even pass the smell test, let alone any kind of deeper analysis.
Certainly this depends on where you're going to live, but if you're in a place where startups are common (even considering the current remote work situation), $200k/yr will either be a stretch for you to meet your living expenses, or will require that you live fairly modestly, especially if you have dependents. If you are able to put any of that into savings/investments, it will be a fairly small amount.
With $700k/yr, you can live quite comfortably, while putting quite a bit away for retirement.
And I don't think your (1) & (2) points really make sense here. Investments compound over time; starting off in your early 20s putting $50k in your investment/retirement accounts every year vs $10k will give you a very different outcome once you reach retirement age. Hell, you'll reach a very different outcome in your 40s. (But honestly, if you decided to live a $200k/yr lifestyle at $700k/yr, you'll be saving so much money that you could easily retire in your 30s.)
It will also mean getting to put a down payment on that house much earlier, and/or being able to afford more of a house. And in the meantime, it will mean being able to dine at fancier restaurants, take more luxurious vacations, buy more expensive toys, etc., if that's the sort of thing you value. And I wouldn't even consider all this to be lifestyle creep (as you genuinely wisely advise against downthread of a sibling comment); this kind of lifestyle would be perfectly sustainable at $700k/yr, but not at $200k/yr.
(But really, though, who the hell is making $700k/yr in their early 20s? Very few, very exceptional people, that's who.)
I will happily die on the hill that the marginal utility at $200k vs $700k is a pure function of your lifestyle, even in high cost-of-living areas (I live in one of the highest!). Your choice of adjectives "modestly", "fairly small", "quite comfortably", and "quite a bit" that are ways for smuggling lifestyle choices into the equation, which might apply to you but are by no means universal.
This boils down to "if you have more money, you can spend more money and maybe retire early". This is not a line of reasoning I'm trying to refute.
Dependents are an interesting wrinkle that is worth discussing separately. But let's stay on the straight and narrow, we can talk about in another comment if you wish.
> And I don't think your (1) & (2) points really make sense here. Investments compound over time
The reason I invoked these points was not to compare "could you save $50k at age 22 or $10k at age 22?", it was to compare "could you save $10k at age 22 or $50k at age 32?"
If you're beginning a high-income career later in life, the time-value of money is different because you have less time.
If you start early, you actually need to earn less to hit the same comparatively "fixed" long-term savings goals, because you have more time to compound.
Again, be careful to avoid falling back on "if you have more money, you'll have more money, which is obviously good".
> And I wouldn't even consider all this to be lifestyle creep
Regularly dining at fancy restaurants (anything in the Michelin orbit), taking luxurious vacations (I'd define as anything north of $300/day), and purchasing expensive toys (I don't think this needs any qualification...) is indeed the definition of lifestyle creep, and it's A-OK that they aren't sustainable at $200k/yr.
You can live extremely comfortably without these things. Whether you perceive them as acceptable or not is a you thing, not an objective thing. We actually do get to choose our values and our hobbies!
I would revisit that calculation assuming you are drained at 45 instead of 60, including taxes and the opportunity cost of 500K x a few years at 3% rate for the next 15 years.
That's pretty much exactly the calculation I'm positing. But actually with an even earlier terminus (late 30s or 40 at most).
Assume an "effective" average pay (i.e. "net" pay + retirement and other deductions, inflation-adjusted to today's dollars and averaged over the course of your career) of $120k/year.
From age 22 to 40, you've earned $2.16mm in inflation-adjusted-to-today dollars as a single earner. With a not-unreasonable average savings rate of 30%, not accounting for tax-advantaged growth or any growth at all, you'll come out with $650k of inflation-adjusted-to-today capital in savings.
Realistically, this should end up invested in some kind of equity (housing, stocks, bonds, whatever). If you finance the purchase of a house at 30, you're only 10 years into a traditional 30-year mortgage at this point, for reference. So you're roughly 1/3rd of your way to owning all the equity in your home. That's fairly comfortably a $1mm home (home equity being 30% of your assets at 40).
Of course, if you're DCA-ing into something that yields a modest average of 5%/year in inflation-adjusted returns, that $650k is closer to $1mm inflation-adjusted-to-today capital. And you still have 25 years at that point for your retirement savings to compound. And you can work part-time in something more fulfilling until retirement to supplement your income.
YMMV, but the marginal utility of money beyond $1mm in equity at 40 and $6k/month in expendable (on rental housing, food, travel, social events) income during your 20s and 30s is pretty small for most people. If you add a partner with any kind of income to the mix, it makes the marginal stress of earning more money even less appealing.
Edit: the main thing you ought to avoid like the plague is lifestyle creep. Spending money on things with zero or vanishingly-small happiness ROI. Read this story every year or two, or whenever you get a raise at work. https://www.marxists.org/archive/tolstoy/1886/how-much-land-...
What many people don’t seem to realize is there are a lot of early stage but already well funded (10M+) startups who are desperately looking for top quality people. Once I was approached by a founder who offered 500k base salary (wasn’t a good fit for my area of expertise).
Well, in my experience, these are quite uncommon. Especially for being fully remote.
If someone's offering $500k/yr to an engineer plus stock, they're definitely trying to attain someone with very niche skills. Which begs the question: Just how applicable is this scenario for everyone else?
I haven't found many startup roles going past $200k for a fully remote engineer, almost regardless of level. I don't think they even try to get someone who would be Staff+ at FAANG because it's basically pointless.
Top quality in your scenario might mean niche skills like you've done specific computer vision work, have a PhD, and are going to a self-driving startup... Cool but not really applicable to most of us, is it?
Whereas compare as to how common it is to be a typical full stack or backend engineer with a decade of experience... join FAANG at Staff and make $600k+.
Eh, not quite your $250k number, but I was making (inflation adjusted) $200k/yr at a startup with ~$100M valuation back in 2010 (senior SWE level). Not sure if I'm typical, though.
> It’s possible you’d be making $700k+/yr if you were at google.
Possible, sure, but not likely. For a mid-tier SWE joining Google (or another FAANG) today, even $350k/yr salary+equity is probably above the median.
Also that feels like a specious comparison: most people (including those who would be otherwise joining a startup) are not joining a FAANG, and will not be getting paid as well.
It's a difficult trade off I've found. Large tech companies are boring and slow and you deal with a lot of red tape and BS, and you feel utterly powerless in the security of your own job as economic tidal waves direct the momentum of layoffs and not your personal contribution.
At a startup you have more autonomy and power over your personal position. I wrote 90% of the code that is generating company growth, released 2 months after a layoff. If I had taken longer to release that code or if my code didn't work the company would be in a worse financial position.
But that also means a lot of personal stress. There aren't 4 layers of middle management to catch flak for you. If you fuck something up, you are directly responsible and depending on the environment that can result in some heated conversations. I also work way harder at a startup than I ever did for a big company
Those are the factors that make the tradeoff easy for me. I would vastly prefer direct accountability for my own fuckups, because that means I have the agency to do something to fix it.
What makes me want to put my head through a wall is when I fuck up, and four layers of people above me are the only ones allowed to fix the thing, but they don't, so I keep catching flak for my fuckup without any way to stop it and fix the thing. I have many more heated conversations with those managers, which typically leads to the door.
When I fuck something up, rarely is anyone more upset about that than I am. Nobody's dumping more heat on me than I am on myself, so bring on the heat-- as long as I have the agency to fix the problem.
> All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup.
As a rule, it is and always has been. For every unicorn piñata stuffed with winning lottery tickets, there are hundreds/thousands? of others whose employees walk away with nothing or less (debt, strained relationships, mental health issues, etc.) at worst or a job at AcquiHireCo at best.
There was always very high risk, so it was only ever for certain people. But in earlier iterations of SV it was possible to become generationally rich as an early employee. The VCs and founders have fixed the glitch.
To put it another way: early employee equity was always a lotto but now the payout is like some lame scratch off instead of the powerball jackpot.
The startups where employees get really rich still exist. I'm pretty sure the early employees of OpenAI are generationally rich for example.
It's just that these companies very often are the darlings since their inception, get constantly talked about. Everyone wants to to invest in them and everyone wants to join them. So they have the ability to pick out the best talent, in other words, it's unlikely you'll be able to join that specific startup.
But even 20 years ago, try getting into early Google. From what I heard they had extremely high bars for hiring as well and only lowered them once they got so large that the pool was exhausted.
I'd argue that the total comp at the established companies for engineers has increased precisely because of competition from startups: to make the startup not be the better option.
Does that mean that VCs are not taking a bigger slice than they used to? Absolutely not, but I wouldn't put the blame solely on them.
We’ll see when it happens. If I had to name a company most likely to have massive landmines buried in front of common stock cashing out, it would be at the top of the list.
> All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup. The VCs and founders have optimized away all the incentive. Eventually the message will reach even naive 22 year olds.
My startup idea is a firm that uses generative AI to flood the internet with pro-startup, pro-VC, pro-founder propaganda, so that message will never reach the naive 22 year olds. Personally, I think it's like saving the environment, since naive 22 year olds are precious resource we cannot allow to be destroyed.
I wouldn't even say "contemporary"; people have been saying this (and I believe it's been true) for decades.
But overall that statement is making a lot of assumptions.
It's assuming money is the main priority for everyone. Sometimes the priority is to have a ton of autonomy and influence on product direction, not have to deal with 8 layers of management, and have an actual, large, often-measurable impact on the company's success.
It's assuming that the alternative is that anyone can work at a FAANG, and be in the higher tiers of salary they offer for their quite-above-average employees (hired today, not 10 or 20 years ago). Most competent, talented people won't pass an interview at a FAANG. Of those that do, many of them will not immediately be making $500k/yr. These points are especially true for 22 year olds, naive or otherwise.
I was going to make a comment about working your ass off at a startup vs. working 9-5 at a more established company, but I know plenty of people at FAANGs who work 50- or 60-hour weeks, every week, and often put in time on weekends. Granted, I would agree that pretty much everyone at a small/early startup is going to be working long hours, while a large number of people at a FAANG are going to enjoy a nice, relaxing life outside of work, so they're not at all equivalent in that regard.
> All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup.
As long as naive 22 year olds think have that one friend that stuck around long enough to cash out on an IPO, then yes. On a risk-adjusted basis, this has basically always been the case - you're better off working at FAANG.
I hear this a lot, but most people -- even otherwise-startup people, even if they interview -- don't get to work at a FAANG.
And I think starting now at a FAANG is a lot less lucrative than people seem to think for the average (or even above-average) employee. Certainly nowhere near as lucrative as it was 7-10 years ago or more.
If you only care about money, sure. I have plenty of friends working in FAANG. For some mysterious reason any time I ask them about work, they say something along the lines "ehh... it's fiiiine. Paycheck is pretty good though". Okay, not all, but perhaps 95%. And half of them work massive overtime on regular basis. I can get behind working weekends when you hope to change the world. They often say things like: "yeah, I have to work 60-70h per week because I don't want my boss to yell at me". Those who work normal hours say: "there is not much work to do really, we literally have meetings about meetings to fill the day. I wish I had some real work to do". I truly hope that higher TC compensates for that.
The Bay Area housing market is too competitive for this. If you’re renting a room in your early 20s then sure just have fun, any tech job should cover it. If you want to own a place to raise a family in by your 30s, and you don’t have some exogenous source of wealth, you’re going to need every dollar of liquid compensation you can possibly get.
I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount.
I more recently interviewed with a pre-series A company and they said that they'd include me in a liquidity event when I brought up compensation.
Doing this by tenure seems like a fairer way to distribute the liquidity. The founders still get preferential access to it, but because they really have taken more risk (bigger stake for a longer time period), not just because they have a better individual negotiating position.
> The founders still get preferential access to it, but because they really have taken more risk
It's not related to risk, at least not directly. It's related to the supply of entrepreneurship as a factor of production. Entrepreneurship is scarce, so founders have leverage in any bargaining situation against early employees, who are more numerous and therefore less valuable and less powerful. If 10x the number of people tried to become founders, then founders would hold less leverage and the equity terms would become more "fair" because they'd have no choice but to give generous terms if they wished to hire people.
Your comment is somewhat buried downthread, but I think this is a super valuable insight. Ultimately it's not about fairness, it's about who has negotiating power, and about what contract terms founders and investors can get away with and still have a pool of employee talent competent enough for their needs.
But this isn't a static situation. For example, the article author points out that his startup doesn't reduce the options-expiration clock to 90 days after leaving the company, and I've read of similar cases in the past 5 years or so. I wouldn't say this practice is common now, but I feel like this was unheard of around, say, 2010.
After the company I worked at went public in 2016, they did another public offering 2 or 3 months later, before the 6-month lockup period ended. Nonetheless, they allowed employees to participate and sell up to 10% of their shares in this offering. I feel like this sort of thing is more common these days, and absolutely wasn't 20 years ago.
Established still-private companies like Stripe, and even newer ones like OpenAI, have given employees the opportunity to sell some of their equity to new investors during funding rounds, giving them some pre-IPO/pre-exit liquidity. There are certainly other examples of this in recent years. That surely was rare in the past.
I'm not sure what's driving these changes. Employees have been gaining more negotiating power somehow. Maybe that's a function of labor supply. Maybe that's a function of employees being better educated now about corporate finance and the things that are possible but historically not offered. Not sure.
Tenure/cliffs/etc should already take care of that by gating access to shares/options/etc in the first place. No need to add an extra tenure complication to liquidity as well.
How would you negotiate that in practice? Would it be reasonable to ask for it to be in your contract? How would you suggest wording it roughly? Sorry I'm inexperienced with this kind of thing and have no idea how I would go about negotiating for it.
I think for the most part you can't negotiate for this sort of thing, because most companies are not going to work up a one-off, custom equity comp agreement. Not just for you, someone they've just finished interviewing, seem to have some enthusiasm about, but ultimately they have only a vague idea of how you're going to perform or how long you're going to stick around. Either the company offers it, or they don't.
I think more companies offering it is maybe driven by feedback loops around recruiting (prospective employees asking for more and varied opportunities for compensation, and rejecting offers that don't include them). And also perhaps by employees just simply becoming educated about and talking about this stuff, with the sometimes-tacit understanding that they're going to be looking elsewhere for other employment opportunities if their employers don't give them more than just salary bumps and occasional equity grant refreshes.
Great, thanks for the response. That seems like a realistic perspective on what is achievable in most cases. I guess it's good to have it in mind as something to raise on the offchance it might be something a particular company is willing to be flexible on.
> I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount.f
Oh wow, how many companies have a series A after 3 years? How did your company survive without any raises for 3 years and what made your company finally decide to raise money after going 3 year without doing so?
That policy was actually one of the major reasons I liked that company and stuck with them for so long. Their goal early on was to avoid raising money if at all possible, and they managed that for a long time by mostly being cash-flow positive/profitable. The trade off is slower, but sustainable growth.
We hit an inflection point in the early pandemic where money was cheap and we had a ton of new customers coming in, so we were able to secure very favorable terms for the Series A and used that money to expand the business. Things continued to go in the right direction for the next ~2 years and we ended up doing a Series B round, and that in retrospect was a mistake. We over-hired in 2022 and couldn't back that up with increased business. And because we had given up so much control to investors in the previous rounds, we were unable to return to the sustainable-growth strategy that had worked for us in the past, and had to adopt faster growth strategies, none of which panned out and ultimately hurt the company and led to many rounds of lay-offs.
As someone inside the tech industry, I absolutely agree.
The problem is that new startups often don't have options here. Unless you're in a market where VCs are shy about funding new companies, if you don't take the VC cash and go into high-growth mode, someone else will, and they'll end up out-competing you, at least in the short term. (Long enough that you won't be able to remain solvent, at least.) So you either fail, or take the money and often get into a situation of doing not-particularly-sustainable things.
If you have 200 million "of your own money" to spare, you are no longer just a person for the purposes of this conversation, you're a walking VC fund, and you're not really risking a substantial change to your quality of life going from 250M to 50M net worth. Your living expenses are already generously compensated for by the large salary that you, the VC fund pays you, the person, out of your personal bank account, and they will be paying you those expenses until the end of your natural life. This isn't "risk" in the same sense as somebody who jumps to supplement their $150k salary with $450k of founder liquidity because it dramatically changes the material security of their life.
> If you have 200 million "of your own money" to spare, you are no longer just a person for the purposes of this conversation, you're a walking VC fund, and you're not really risking a substantial change to your quality of life going from 250M to 50M net worth.
Is that what happened? I thought he had $200m, and put in $200m.
It's true that that's what I thought, which is my statement. And it's better caveated than the previous one, which implied uncaveated that he still had $50m, but hasn't attracted the eye of any budding skeptics.
Did this guy just literally ask an AI chatbot for insight on SpaceX's classified military plans?
> "It is unlikely that these gaps can be closed until the end of the decade."
I actually worked out my own BFR plan over the couple years of teasers we had leading up to the 2016 IAC presentation. It was based on a 3-part vehicle a bit like Soyuz (separate hab and capsule) of 15m diameter for the launcher and 12m diameter for the upper stage, payload, and capsule, which seemed to offer more options than a 2-part vehicle.
Musk makes some very optimistic plans, some of them clearly without doing the math, and each numerically extraordinary aspect renders the other numerically extraordinary aspects more difficult to believe. Even if you can class 80 or 90% of his ideas as "Audacious but feasible", there are frequent areas where he gets ahead of himself and projects unlikely extremes that become numerical impossibilities in conjunction with each other.
What is clear is that you can launch a colony on Mars based around Starship-like vehicles, but the number of launches per human Mars resident to sustain and switch them out is large ("100 colonists per launch vehicle" is wildly overshooting; Keeping 100 colonists alive for a return mission will require hundreds of Starship-sized launches, some of them years in advance), the risks are large, and that the missions are at minimum conjunction-class (a 3 year round trip) rather than opposition class. A colony that attempts to grow until it approaches self sufficiency demands lots and lots of automation, an expansive ISRU, mining, and agricultural industry, and a population of maybe ~10^4 people; Getting there is going to demand literally 10^5 to 10^6 launches, decades of work, and 10^4 to 10^5 reusable launch vehicles in play for decades.
But it's got to start somewhere; Hyper-timid incrementalist bullshit like "Flags and footprints" and "We can save some cost by using a once-in-a-decade Venus orbital assist" and "We can fit a manned Mars program into a 20 billion dollar NASA budget in theory" does not colonize other planets at all.
Musk & Griffin had a relationship around establishing a Mars colony even before SpaceX foundation. Musk even tried to recruit Griffin when assembling SpaceX founding team.
It depends on the kind of lifestyle you want to live, I guess. If you want to live in a $30M mansion estate with 24/7 domestic staff and have several vacation homes around the world, $50M might not cut it, while $250M should cover it just fine.
If you have a philanthropic bent and want to be able to fund various charities to the tune of $5M or $10M per year (in addition to a reasonably luxurious lifestyle, though considerably less than the above hypothetical), $50M might not be enough to sustain that over time, but $250M probably will.
I think it's fair to say that there's not much difference between net worths of $25M and $50M, or between $50M and $75M. But jumping an order of magnitude from $50M to $250M will let you live a very different kind of life, if you so choose.
Also, that may have kept tesla and spacex 'afloat' but what really saved both companies was billions upon billions of dollars in government contracts, subsidies, preferential loans, and tax breaks. Nevada alone gave nearly two billion dollars to Tesla.
The government is not monolithic and politicians might except other things than what their constituents want. It's a bad test of the value of an investment.
For sure, and it may well have been a terrible investment with terrible returns, but selling to the government and responding to government incentives is an entirely legitimate thing to do, rather than some kind of inherent weakness in a company’s model. A company being “saved” by a government contract is a company being saved by making sales to its largest customer.
This assumes that the founders are aware of, or offered, the option. If anything this is an argument for why founders should be represented by a banker or lawyer at the closing of every investment round. Let the founders do the negotiating, but once it comes time to sign the papers, bring in the sharks.
Honestly if a founder isn't pulling in finance or legal experts prior to signing a funding round they really have no business being in position to begin with. They have to know VCs are leaning on their own financial experts and lawyers, why would you not have your own to protect your own interests?
A: I’ve seen many founders who got deep into the fundraising cycles without ever realizing they could take a cent out.
B: I have known zero founders who have turned down an option to take money off the table [...] I love the idea of your universe, though.
Fortunately, our universe is massive with varied different views. Even OP implied that they have experienced both sides firsthand.
> I have known zero founders who have turned down an option to take money off the table (and zero A raises that offered that to employees).
Have seen companies offer this to employee's
And companies that let employee's take money off the table at series A are also likely to be generous with meaningless titles; that is they will let early employee's call themselves founders.
Why is it insane? Some founders take zero salary since the start, and part of the reason for raising funds is that they have to eat too. Anyone who is an "early employee" usually get lower salary than market, and some stock. It's only fair they get to cash out a little early on, or hold on if they're liquid and think it's worth a lot more.
It also works well for everyone involved if they're selling their shares to the investors for Series A - investors get shares for cheaper, founders get paid based around the value of those shares, more cash & runway in the bank.
In my industry the series A occurs in the first year of operation, and before the company has really achieved anything. A founder taking money off the table then is ludicrous.
Founders who have no need for money in the first year or two are fortunate people who are either already wealthy or have a spouse or family supporting them. Surely those aren't the only types of people worth backing.
I see. Here, the first stage is seed, which is around the level of YC and then Series A, which is around the level of getting money from YC's Demo Day investors.
We also see pre-seed, where the goal is to get into an accelerator. It's like $2000 for 3%. Enough for a domain name, a laptop, a babysitter, something that gives you the space to do a proof of concept, but not a full MVP.
Here where VC funding is dry, we also have some stage between seed and Series A, where the startup raises from friends, angels, crowdfunding. It's not really given a name because it's a signal that the company has already burned through seed and yet hasn't done enough to raise Series A from proper "professionals".
But here, by the time you've raised Series A, you're expected to be #1 in a market - best language app, best tax app, etc. And Series A is just to prove it works in other markets. Worst case I've seen was a guy raising US$500k seed (not Series A), but they had to prove they could be #1 in five countries.
US is a market of 300M people and even top companies like Amazon don't have to go far, but many countries have both low population and low spending, and investment is still US-centric.
In SV-style tech companies it's common for the first round of funding to be considered a "seed" round; it usually comes from angel investors and/or friends and family, though it's not unheard of for larger institutions to get involved at this point.
By the time they're ready for a series A (VCs/larger institutional investors, though sometimes angel investors from the seed round participate as well) they'll very often have something to show for it, and may even have paying customers. The A round can come during the first year of operation, or later.
Given this, it's not uncommon for founders to be able to have some liquidity during their series A. Granted, it's usually not going to be a ton of money, but it can be a nice bonus that allows the founders to pay off debt they might have accrued during the first stages of the company, or perhaps move out of their 1BR apartment and put a down payment on a larger house, etc.
I have witnessed small liquidity events at Series A and Series B that allowed for some small percentage of all total equity vested (around 3-5% ish, depending on the terms of your specific options grant) to be cashed out at some multiple of the FMV price. AFAIK the founders held themselves to the same restrictions (5% total, I believe?) to keep it relatively "fair".
Pre-Seed, Seed, and some really really early Series A employees got to cash out fairly significant chunks of equity. Not as much as a founders' 1-2 million, enough for downpayments on homes or slick new cars all cash. The founders apparently were incredibly generous to Seed stage employees.
Still doesn't compare to a Founders' equity, as this article implies.
VCs will go along with or sometimes even encourage founders to take a little bit out, but employees rarely don’t have the same level of bargaining power.
I’m sorry, I think the era of “change the world” motivation in tech was eclipsed by “make 42 tons of money” about a decade ago.
Along that line, I would be very surprised that there are founders who don’t seek an opportunity to set aside their nest egg to “de-risk”.
You say you have seen such guileless dedication to the founding first hand, can you share what industry or type of company? Perhaps I’m just exposed to the wrong crowd.
It's not in the interest of the VC that the founders have financial security. Well at least the type of VC's that have come up in since the dot com boom where it was not about building viable businesses but getting sold to the highest bidder when the founder is under financial pressure to sell they can strong arm him into easily compared to a founder that is financially secure and interested in building and running a business
It’s not binary. Enough financial security that they don’t care what their investors think, no. Enough that they’re thinking of how to grow the company rather than how they’re going to pay their mortgage, yes.
> It's not in the interest of the VC that the founders have financial security.
It's also not in the interest of the VC that the founders are worried about making their rent or mortgage payments, or paying off the credit cards they maxed out paying their AWS bills in the early stages of their company.
The VCs want their founders to be hungry for more, and see their company's growth as a vehicle for that. But they don't want founders to be stressing over basic human needs, either.
Any VC that would refuse to let you take some liquidity in these situations is not a VC you want to make a deal with. And if you can only find VCs like that, your company is probably doing poorly enough that you might want to rethink what you're doing.
Assymetry makes a certain amount of sense. Employees don’t take $0 for a long time and generally aren’t having as large a pay cut as founders afterwards. Most of the founders I’ve worked with have had the seniority to justify the top salary in the company and have typically had pay at or near the bottom. Someone operating at that extreme getting to trade equity doesn’t necessarily mean that everyone should get to.
Asymmetry is common in startups, though. Consider one of the complaints from the article, and discussed here: founders get to keep several tens of percent ownership of their companies (at least initially), while early employees get a small fraction of a percent. Founders are generally not taking two orders of magnitude more risk, or doing two orders of magnitude more work.
I think giving founders liquidity but not employees is maybe ok for series A: the founders may have been working for $0 for a couple years at that point, and may have taken out a second mortgage or ran up a bunch of credit card debt to keep things going. An early employee is not going to do any of that once they join, even if they're getting paid a below market rate salary. That is definitely an asymmetry! Getting some liquidity at the series A allows the founders to pay down debt and replenish their savings, financial issues that are probably directly related to their time working on their company.
But after the series A, founders should be able to pay themselves a livable salary. The founders and employees should be on much more equal (or at least comparable) footing when it comes to their regular income. By the time the series B comes along, if the founders are going to get some (more) liquidity, the employees should get some too. That only seems fair.
>>It’s ok for founders to take a little bit of money off of the table if they extend that to their employees as well. Asymmetry is where things get weird.
Yeah, if the founders don't do this I wouldn't want to work for them (not that I'm the target demographic anyway).
That's not quite how it works. Certain people are required (or strongly encouraged) to sell on a 10b5-1 plan. These plans can trade outside of open trading windows, but they have a meaningful cooldown period before they go into effect and can only be entered into during open trading windows. So it's not necessarily "better."
That’s really about not falling foul of insider trading laws. Regular employees are free to set up limit orders within their trading windows (eg sell if stock hits $200) if they want. Can’t subsequently cancel it though! It makes way more sense to just sell on the day of vesting and then trade shares that you’re not restricted from trading. No tax or other reason not to do this.
We couldn't at Twitter, which is the only company I've worked at that had a blanket trading blackout policy. The closest we could do was elect to sell all RSUs as soon as they vested (even if outside an open window).
(1) The opportunity cost to the founder of taking early liquidity:
If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time.
(2) Meaningful vs. not-meaningful amounts:
From my prev example, the founder sells 10% of their position for $500k. Well, if all employees were allowed to sell up to 10% of their positions too, would that even matter to them? If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. Not really enough to de-risk your life although still might be welcome (and employees would appreciate having the choice).
(3) Sellers need buyers:
In order for there to be a seller of shares, there needs to be a buyer. The founder is effectively choosing his buyer and future business partner by taking investment and choosing to give that buyer more control over the corp by selling him even more shares (his personal shares). The buyer wants to make the founder happy and de-risk their downside so they can be more aggressive or big-picture or whatever, plus is happy to own more of the company assuming it's a hot round.
But what does the buyer want to achieve by purchasing the employees shares? Just to own a little bit more % of the corp? For amounts that might not even matter for the employees and may de-incentivize them?
It's all very complicated and perhaps there are nuances that make every situation unique.
> If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time.
IMHO, it's very easynot to regret, with those particular numbers.
I'd take $500K now plus possibly $45M later -- over $0 now and possibly $50M later.
I'd take that deal even if "possibly" were "guaranteed".
(Who might regret that is a founder who was otherwise already wealthy.)
Exactly. About 15 years ago I was offering equity in a good little startup. I didn't take it because I just wanted to go somewhere with a higher salary.
When they finally sold about a decade later I ran the numbers and determined it would have been about $40,000 based on the actual sale price.
Hear, hear. My one-time $10M (early employee) eventually cashed out at a low/mid 6-figures. Take the salary I earned multiplied by the years I spent there, add to it the IPO, and then divide by number of years I was there. I could've trivially surpassed that annual salary elsewhere. Lesson learned.
Exactly. As a former founder who dealt with hospitalization and thousands of dollars a year in medical bills on the sh!t insurance startups can afford, I too would rather have 500K now than 50M later. There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.
Plus, setting 100K aside for medical bills and even throwing the 400K into Bitcoin is a far less risky investment than me NOT being in a FAANG and accumulating 401K money which is absolutely critical if you want to keep up with the rising cost of life through retirement. When everyone else who joined Google or Meta out of college and now has a 10 million net worth at 40, that defines the cost of living in the area, and that's the bar you have to keep up with if you want to still live here at 40, 50, 60. Chipotle will cost $50 in a few years. A 1 bedroom apartment will cost $5000 in a few years. UberEats was $15 when it started, already costs $50 for lunch in my area, and at this rate, it will be $200 in a few years. Because those people can afford it, so greedy owners and greedy landlords will up their prices, so I will have to pay not just my $5000 rent, but also the Chipotle worker's rent, and the Chipotle franchise's rent, in order for their prices to stay profitable. The cost of living in the bay has tracked the S&P500, not the CPI. YOU will be priced out if you didn't have liquidity at a younger age to throw into some investments.
I'm at a large company right now. Being compensated enough to be able to afford life in the bay area now, having enough income to afford a mold-free modern apartment in a place where I don't need to worry about getting mugged, and hedge the risks of all the crap that's going on in the world was a big part of my reason to join one. If I had enough saved to "feel safe", I would absolutely be doing a startup again.
> There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.
I would very much like to know where you can find low-risk investments that are likely to net you 10x-40x returns in the span of 10 years.
(But overall I very much agree with your point that $500k now and $45M later can be a much much much better deal for someone than $0 now and $50M later. I would likely take that deal every single time.)
By doing homework and research every day and investing only in things you personally deeply understand.
But if you don't want to do that ... passively investing in QQQ would have given you a 5.4X return in the past 10 years.
If you just throw your money across some large, too-big-to-fail companies, you could have 10X'ed easily.
AAPL, NVDA, MSFT, TSLA, NFLX have all >10X in the past 10 years.
GOOG, META have come close.
You could have split your money evenly across the biggest 5-10 companies in tech and 10X'ed.
And if you actively invest and do day-to-day research it's fairly easy to beat 10X in 10 years.
By the way my definition of "low risk" is calibrated to the risk of founding your own startup and making 100K/year hoping for a big payout later in the future vs. joining a big company and making 500K/year.
My "startup founder calibrated" low risk stock investment means:
- Reasonably high probability to 10X in 10 years
- Some probability of losing money, but very low probability of losing most of your money
- If you lose money, it's because of a major world situation, and holding for another 10 years will probably get you out of that
- You also have skills and are hireable so you can hold the stocks
AAPL, NVDA (even without the recent events), MSFT, TSLA, NFLX, yeah sure. But out of those, only Apple and Microsoft were reasonable companies to put that kind of money into. I think you're not realizing that you're cherry-picking.
I mean I think your point still stands with just looking at QQQ, but I'm just saying over embellishing hurts your argument, not helps.
Meh, this isn't a me vs. you situation. If you take value from my overall comment, great. If you think my whole comment is invalidated by one statement that you do not believe, I'm not interested in defending it.
I meant low risk in the sense of doing some basic homework and investing, and investing in large publicly-traded companies, I consider it low risk compared to everything in startup land. I'm pretty confident I could 10X in 10 years with ~80% probability by investing actively and doing homework.
Joining a startup is extremely high risk from an opportunity cost standpoint. Literally any profitable company's stock is low-risk in comparison.
But ... if you don't want to do homework, you could just buy a smattering an equal distribution of the biggest names in tech (MSFT, NVDA, AAPL, GOOG, META, TSLA, etc.) and you would have easily gotten 25-37% pa averaged over the past 10 years. It's highly unlikely all these companies suddenly fail, all together.
And if you want to protect yourself against that, write covered calls at ~15-20% per week and use the proceeds to buy protective puts on all of your stocks.
(Disclaimer: not investment advice blah blah blah)
Just to clarify about taking the $500K rather than even guaranteed additional $5M ($50M vs. $45M) years later...
$500K is an immediate big quality of life boost for most people.
For example: a condo/house downpayment, which lets you move out of cruddy ramen apartment, to routinely get a good night's sleep. And/or that relieves some of the various other startup salary level money stresses on your family.
I think this can also be aligned with the goals of the startup. You don't want people so "hungry" that the stress is hurting their health and their home lives. You want them motivated by the mission, the work, the environment, and the possible big liquidity windfall in the future -- but not by desperation.
Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are.
Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.
Maybe it depends on the area and kinds of properties one is looking at?
Only a little anecdata, but the few times I've looked (affluent university town, once recommended as a place to do a tech startup)... if one could swing a downpayment on certain places, the monthly costs were lower than rent one would otherwise have to pay, on places not as nice.
Not to mention that in reality there is no guarantee you'd end up selling for $250m. $500k now would look pretty damm good if the whole thing tanks and the other 90% of your shares become worthless.
Yep; for the vast majority of people, the difference between $45M and $50M is not going to change their lives in any meaningful way. With that amount, you can live a fairly lavish lifestyle and still see the number in your brokerage account go up every year.
I actually kinda think a founder that was otherwise already wealthy wouldn't mind this too much, either: say they already have $50M in the bank; the difference between $95M and $100M feels even less of a big deal than $45M and $50M. Granted, the founder with $50M already in the bank probably wouldn't bother with the $500k in the first place, though, especially if they believed in the likelihood (or guarantee, in your hypothetical) of a future larger exit.
When you sell your stocks before 5 years of holding period has passed, you pay significantly higher taxes. So you don't get 500k net, you get 500k gross, or probably 300k net. Which makes the de-risking less compelling.
The numbers are made up anyway, adjust up by a few hundred thousand and the point that securing one’s shelter is worth foregoing winning the lottery still stands.
This is when you immediately liquidate your stock position, instead of taking a loan using it as a collateral, which would likely cost you 10%-15% in interest, not 30%.
No, in this example the person sold equity in order to get the 500K. They can't use the equity as collateral for the loan because they dont own it anymore
But then they’re paying interest and very few startups are going to have stock that a someone will lend against. I cannot imagine someone taking Series A stock as collateral for a loan.
Not sure why you are getting downvoted. There are multiple ways of structuring what is effectively selling the shares early that are not tax disadvantaged.
Regret is perhaps too strong of a word. But $5M is $5M even if you have $45M. Sure, it won't change your life since you have the $45M, but the incremental investing / philanthropy / estate / family help etc that it allows you is real in absolute terms.
The other thing I've noticed is that for people on the other side of this transaction, it's not like "smaller numbers" all of a sudden become immaterial. $1M is still $1M. $5M is still $5M.
Again, I'm with you, I don't think it's regret exactly. But post hoc you might choose differently, even if it's the rationale choice at the time.
Your argument is treating the future as knowable and certain, while not accounting for the value of risk.
I guess you'll feel pretty bad if you pay for car insurance for 40 years, and never have a crash.
If the 100% upside is guaranteed, then sure, you should hang on.
But if "anything can happen" then cashing out 10% now, and providing a "can't fail" safety net, is well worth it. The reduction of risk of "losing it all" is well worth the 10% premium. And if the (somewhat unlikely) big exit ever happens you still have 90%.
> If the 100% upside is guaranteed, then sure, you should hang on.
Overall agreed, but that's not even always true! If you're -- for example -- under crushing levels of debt today, you very well may want to take that $500k now, even if that $50M is 100% guaranteed in 5 or 7 or 10 years.
Or even if you aren't in debt, but would find it a huge quality of life improvement to be able to have a down payment for the house you'd really like to live in now, and not have to wait 5 or 7 or 10 years.
If you can't handle "regret" in these cases, then you probably shouldn't be in a position where you're deriving the vast majority of your income/weatlh from investments (which is fundamentally what a CEO does).
It's astounding how many ICs can't wrap their heads around the concept that holding onto your RSUs make absolutely no financial sense. With rare exceptions, this doesn't make sense for anyone. And yet, fear for "regret" keeps people holding.
But it's not shocking that even in tech many ICs are not good at reasoning financially. But if you want to be a co-founder, and hold a lot of your wealth in investments it's essentially that you learn to reason, plan and accept outcomes accordingly. Otherwise you're more-or-less a professional gambler.
I’m going to rebound on that and explain why it doesn’t make sense to hold on to RSUs.
Disclaimer: I’m an IC myself.
I worked for my 1st company for 15 years. Held to their RSUs most of the time. Then moved to another (public) company and stayed there for a year before leaving. Now in a startup with a lower salary and no immediate liquidity on my stock options.
When you work at a public company, you have multiple exposures to the company’s growth: the RSUs that have already vested, the RSUs that haven’t vested yet and through your own career growth and salary increase that goes with a successful company. If you were early enough, you also get market cred for having made the company successful. If the companies goes under (or shrinks, or lays people off), all those assets are at risk.
Usually, one has more in granted stocks than in vested stocks. If your company just went public, you might have a lote more sellable than in your pipeline, but even that is unusual. Usually, you’ll still have more in the pipeline than you’ve already vested.
If your company has been public for a while, you should get frequent refreshes, which means you still have a significant numbers of unvested shares.
Regardless, you should sell as soon as you can, because of the remaining exposure through unvested equity. Use the proceeds to place in an ETF, or in a high-yield savings account, or some more aggressive investment strategy. Or use it for the downpayment on your house, or fund your kid’s college funds, whatever floats your boat.
Anyways, keep in mind that you still have a significant exposure to the growth of the company through your unvested equities. If you’re worried about short-term cap gain, don’t be. If you sell immediately, there’s no growth between cost basis and selling price, so no cap gain. Another upside to selling is that you’re not bound by the blackout periods, so your assets are much more liquid. And remember you still have exposure
That's the incorrect belief that causes so many people to hold their RSUs. The day you vest the RSU is the day someone decided to:
(1) give you the amount in cash (as regular income)
(2) take that cash and buy that stock on your behalf
(3) turn around and give you the stock
and somehow you decide to let (2) and (3) happen without returning to the cash position in (1) and buying whatever else you would prefer to hold. The LTCG clock starts on that day, and all you're doing by holding your vested RSU is let someone else decide to buy stuff on your behalf and make the decision for you.
(that's assuming that there's an ability to liquidate the RSU on the vest date)
At vesting time you are taxed (immediately) at ordinary income rates on the fair market value the day that it vests, and that's what the cost basis is set to. If you sell on that day, your capital gains from the sale will be (near) $0.
The only reason to wait for LTCG on RSUs is if you decided to hold it for some non-zero amount of time after vesting and then the stock price shot up. But then you're also taking on the risk that the stock price will drop again before the year has passed, and end up with less post-tax money than if you'd sold at short-term tax rates.
Some companies might make you hold for a few months until the next earnings report and trading window. After that it depends on your tolerance for risk and your attitude about the IRS.
Earnings reports happen once a quarter between the company and the public. A couple of business days after that, employees (without material nonpublic info) may trade company shares for the next month or so. Maybe you can't sell April shares until mid-July, and then you have to decide whether to wait until next July to minimize tax on gain.
Sometimes you can elect to sell every released share in a quarter, or file a 10b5-1 plan with a schedule, but you have to do that during a trading window.
Most (all?) public tech companies have policies that prohibit employees from trading the company's stock outside designated windows following a quarterly earnings release.
I believe in diversification and index funds for most people, but this seems overdone.
The issue here is that sometimes if you procrastinate about diversifying, it pays off very well. As a Google employee (who joined after IPO), it was by far my best investment and funded my retirement.
I guess that's accidental gambling. I did have other investments.
The way you can test if it's accidental gambling is by answering the following:
If you had worked at a different company with pure cash comp equivalent to your RSUs, would you have invested the same $$ in Google stock? Or would you have invested it instead in an aggressive but diversified portfolio (e.g. 100% S&P 500 or even just a bucket of blue-chip tech stocks).
I am confident that for the vast majority of tech employees they would choose the latter if they were operating in a pure cash regime.
No, I definitely wouldn't have invested so much in Google. However, I'm not sure how much to attribute to it being a default choice, versus the differences between an inside versus an outside view.
It's easier to be comfortable investing long-term in something you know well. While there's a lot I'll never know about Google, I think I understand the company somewhat better than others. For example, I can discount a lot of news articles as being written by people who don't really understand the culture. If I hadn't worked there, I might worry more.
That's less and less true, though, as much has changed since I left. And for investment purposes, maybe that bias only seemed to be helpful, versus an outside view?
Mostly agreed, but as an employee you do have some semblance of material non-public information that gives you a structural edge in assessing the stock. (This probably works better at a 1k-5k company than a Google/FB, but I can't say because I haven't worked at the big faangs).
I've benefited financially from having a good sense of how well things are going and holding/selling accordingly (within the confines of the law and blackout periods, of course).
> non-public information that gives you a structural edge in assessing the stock
This can also cut the other direction too. I had a slightly negative sentiment about Google during my tenure there due to the organization I was in. When earnings call season rolled around it didn't matter since the ads revenue line always dominated everything else.
I'll agree that it's not super common that holding onto RSUs makes sense, but I think it's more common than "rare exceptions".
Ultimately it's an investing decision. If you believe the stock price is going up at a rate faster than the rest of the market, and are willing to accept the risk that a concentrated position like that entails, then that can make financial sense.
For people who want to hold their RSUs but still want to diversify to some extent, my usual recommendation is to pick some percent of the shares that vest every quarter to sell immediately, and hold the rest. And -- critically -- to stick with that commitment every single quarter, and not fall into the trap of thinking "oh, the stock seems to be doing so well, I'll skip the sale this quarter". (Of course, a measured re-evaluation of the plan is a reasonable and good thing to do every so often.)
I think the most interesting part of the discussion is that the early employees almost always get the worst end of the deal:
Going in they have a lower salary than if they work for a more established company.
Then, either their shares end up being worthless, or at the final exit, they make less money than if they worked for a more established company the entire time. IE: Being an early employee in a startup is a lose-lose situation.
This is something founders need to understand when recruit their early employees: These are often the most critical hires for the business, and therefore it needs a high probability of upside.
IMO: A series of retention bonuses, and/or guaranteed bonuses at acquisition / funding events is a good solution. It's how I've sidestepped the equity issue when I was employed during an exit event.
I'm curious why you think these employees -- who are getting the worst end of the deal -- are working for startups in the first place?
Either they have the skills to be a founder themselves or to work at BigTech... or they are financially ignorant/disinterested enough to not understand how equity in corporations work? Or is the charming and misleading founder who is to blame?
My point is that considering the high avg intelligence of the typical startup employee, there must be something else going on.
Clearly, people like working at smaller companies that have potential to grow - maybe that's because there's more interesting work, less bureaucracy, smaller teams, more of a sense of a journey, etc. Easy to devalue these things, but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?
I think the other thing to realize is that the change in this "startup calculus" has happened only relatively recently.
The "old" calculus was that, being an early employee in a startup, you'd make less cash money than at a "big corp", but if the company "hit" you'd end up doing much better. Just look at the stories of early Microsoft employees, or the Google chef whose stock options ended up being worth tens of millions. Obviously those are outliers, but it was still common that early employees of "home run" startups would be doing great.
But the thing that really changed the calculus is that the FAANGs started paying extremely well, especially as the value of their RSUs skyrocketed. So the new problem was that even if your startup hit, you'd be doing about as well as a senior engineer who was at Google for 5 years.
I know in the past YC itself has commented about this dynamic, basically arguing that early startup employees deserve more equity.
This is absolutely true. I remember Dan Luu [1] and patio11's [2] blog posts from 9 years ago and 13 years ago respectively, which were widely shared, arguing essentially that you should always prefer to join a FAANG. With FAANGs all downsizing to varying degrees, or at the very least not in growth mode, this advice seems less clear-cut. For better or worse, I think we're starting to see the pendulum swing a bit towards startups with the AI gold rush.
(This is not to imply that compensation is now fair for early startup employees; it's not.)
For me I understand perfectly well that my EV cash-wise is lower working for a startup. I just don’t care past a certain income and working at a startup is more rewarding in other ways.
I'm in that position right now, and have done it a few times in the past (my entire career is switching between startups and public companies).
I work for startups because I get a ton of responsibility for things I would never get at a big company. I get a chance to learn a ton of new stuff.
Through my career, I've made all my money at the public companies, and had most of my skill growth from the startups (Netflix being the big exception, where I both made money and leveled up my skills).
I did not get any stock in reddit when I worked there. I worked there between when they were first acquired and when they were spun back out. The guys I hired got f-u money and I couldn't be happier for them, they deserve it for how hard they worked and how long they waited!
> they are financially ignorant/disinterested enough to not understand how equity in corporations work
Yes, definitely, I think we live in a bit of a bubble here where we actively read and think about these things. I think most early employees will see a 0.5% or even 0.1% equity offer and think that's incredible. It barely even registers that the founder sitting across the interview table from them holds 40% or whatever, and that while, yes, the founder has taken on more risk than they are about to take on, they certainly have not taken on 80x the risk or are putting in 80x the work.
Or they want to work at a small startup and have the technical skills, but don't necessarily want to manage people, work insane hours, and meet with customers and potential hires instead of building the product.
Maybe its the "romance" and "excitement" of it? I worked for a startup in Seattle, 20+ yrs ago. It had a fun exciting buzz, and... something special about it... the possibility of being part of something big... and having interesting, excitingly intelligent coworkers, that you can learn a lot from, but then of course , it all went to s** (less customers due to market bust). Ultimately we were all laid off, the options I'd bought at 5c each were worth nothing. I didn't expect any riches, it was just an adventure. And importantly, 30 mins drive to the ski hill which was open at night after work.. so.. not a bad time ;). Some of the early employees were bitter. Some had tried being early employees several times in a row, tried to make it big. To me, they were intelligent people so why they didn't they see it as just a gamble which is largely out of their control? Maybe people like to kid themselves? Its the dream of America to make your fortune out of something new and exciting. Why am I even reading this discussion and commenting here? ;) Becos' there's something intangible but exciting about it all. But a lot of it is fantasy. Maybe people like to work for startups for the same reason they like a good book or movie, you can suspend your disbelief and escape from the boring hum-drum where you do a 9-5 that can be similar year after year?
> but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?
That's the wrong question to ask.
The right question to ask is: "How does an early stage startup attract the people it needs to be successful."
Money isn't the only metric, and there are good reasons to say "if you want top dollar, go work for a FAANG."
On the other hand, I was once approached to be employee #1 of a rather interesting startup, and the risk/reward ratio just wasn't there. The company was more likely to fail, and I was more likely to find myself unemployed after 24 months. Now that I have children and a mortgage, I can not do this.
In contrast, the company severely needed someone like me: Significant experience and knowledge; AND active interest in their product, with a mildly personal stake. Relying on someone young and cheap would be risky for them.
I find that it sometimes easier to accept this as this is just how life is when I read people with experience write about this. If this is true for you as well:
> Whether or not you make money, you have regrets! If you profited, you could have made more. If you lost money, you shouldn’t have made the trade at all. Like death and taxes, you can’t avoid adverse selection.
The simplest strategy is to buy index funds and hold. I never look at the price of any stock every day. I don't plan to sell any index funds either until I retire.
None of this is very good justification for founders being the only employee that have the option to sell part of their stake.
> If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k.
It obviously depends on your financial situation, but having the option vs not will certainly matter to some employees. Not to mention that the stake could well be worth $0 in the future.
I don't think it needs any justification, really. The investor decides, whom to sell to and how much. If the founder doesn't want to organize a sale for employees, then he doesn't do that. He would probably have to pitch it and include it in to an already complicated funding round.
I totally understand why a typical founder doesn't want to do that. If for you as an employee it is a deal breaker, then you can complain about it, change company or whatever. It is not like the founder owes anything to the employees (unless he has promised that). Everyone in the equation are adults and have to decide themselves, if the position they are in makes sense for them with the terms they have.
> I don't think it needs any justification, really
From a founder's perspective sure, you can do what's best for you.
That's not what this article is about. This article is highlighting that there's a tendency in SV for founders to cash out early, and secretly. And along with that, there's a tendency to paint a narrative that the founders haven't sold a share. It's hard to see that as anything other than deceptive.
It's one thing to join a startup that you know may not succeed in the long run. It's another to join a startup that has a founder whose been secretly cashing out along the way.
Justification does seem necessary in that second scenario, at least from a morality perspective.
Lying to the employees is scammy and wrong. However regarding that we would need more information what has exactly happened. Not telling or not highlighting something is not the same as lying.
Personally I'm not in the SV scene but from Europe, and I don't know much cases of these early cashouts.
I mean I think it depends, why is it needed, the founder is not working for his employees, it's the other way around and he has the most risk involved, founders don't make a lot of money in cash anyway and this is not pre COVID, investment rounds r smaller, so u r basically saying that a founder should only think about making company and his team rich and if he fails he can die poor while his employees can always jump ship with the cash incentives they got
Also bake in the fact in your calculations that 9/10 startups will not see the kind of success you are talking about. And the authors point still stands.. the founder made some money at liquidity event at round A vs … making even more money later if he doesnt sell?
The strongly diminishing marginal utility of money after $10M for most people makes that first $500k much more impactful than $5M would be after you have $45M.
> If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. Not really enough to de-risk your life although still might be welcome (and employees would appreciate having the choice).
$20k would be a life changing amount of money for me right now
People often forget how financially limited they were when they were young. There are even college freshmen reading your comment for whom $1k would change their lives. Such as this one who is currently contributing to Textadept on school machines from 2013 on NixOS installed on a USB drive (don't recommend, CPU I/O wait time is frequently >%50) because he spilled coffee on his laptop last semester.
Regarding your point (1), there's more to it than just the dollar amounts now and later. If we believe the over-leveraged founder story where that founder has mortgaged their home and maxed out their credit cards, being able to sell that equity at series A for $500k could mean the founder is able to pay those debts, and doesn't end up losing their home and being hounded by creditors. (Even if it doesn't get that bad, having that debt over your head is stressful, and running a small startup is already stressful enough.)
If we also believe that founders are important to a company's success as it grows from a small startup into something more mature, I'm pretty sure that unfortunate financial (and housing) situation would drastically reduce the chances that the company would make it to that $250M exit later.
So taking that $500k may increase the chances that the startup later gets sold for $250M, rather than, say, $50M... or just failing entirely, returning whatever small amount of money is left to investors.
Another consideration is that employees are much less conscious of the real value of their stock than founders, and you don’t want to make the (lack of) value of their shares too obvious in the early stages.
If you tell them the value of their stock is $200k, and 90% of that is imaginary, then they might start thinking about that job offer with a 500k stock grant at a listed company.
This is basically arguing "It's good to deceive your early employees about the value of their compensation"
This is morally repugnant to me, and I hope you're not an executive at a company. If you are, I would not work for you.
Great points... as to #3, investors are often happy to be buyers. They are buying shares anyways that would otherwise have to be created. Allowing founders and employees to sell shares lowers dilution vs. creation of new shares... usually this is not a large effect, but still not bad for current & future investors.
I mean it effectively means that the amount of cash going into the business is less than it otherwise would have been. The company wanted $5M of cash. With the owner selling $500k worth of shares it means they had to find $5.5M to be invested.
The only reason it happens is that the founder is negotiating both on behalf of the business and a bit for themselves.
I mean it basically means that the founder is not some dude in early 20s who can crash on a couch and work off coffee shops, they r going thru life as well and they r the one's who drove success so they rightfully expect a piece of that success
to put it bluntly asf, you're being poor (and I'm being insensitive). what's $500k going to do for you if you come from a rich family? you already have your rent paid for until you die, and vacations paid for. all you have to do to do is put up with your annoying family, which isn't the worst if you've been through therapy. your mom or dad's abusive? if you've been through enough family therapy, that's not a problem.
if you ask you mom or dad, whichever believes in you, they have enough money to fund your dreams (if you care enough to ask) of joining or starting a startup to become an (x) CEO/salesman/builder/marketer/whatever for whatever you want to build, and that includes signing onto some startup that won't pay you a living wage until it fail-exists for $5 million and everyone goes to burning man/Berlin/ibiza on the founders dime (including rent for everyone N months).
Yes, if $500k doesn't move the needle on your life then the question is moot anyways. Most first-time founders will be closer to the poor end of the spectrum than the wealthy side.
There are people reading this for which $20k will change their life (which in my example was the 'shouldn't matter' amount instead of the $500k).
Would be interesting to see average founder who can fundraise large amounts and family income. I’d imagine they tend to come from higher income backgrounds, though could be wrong.
I'm sure the wealthy are overrepresented, whether or not they got financial help from their families while starting/building the business. But there's a long gap between "being rich makes it more likely to succeed" and "most people who succeed are rich."
my goal isn't that someone who is in that position reads this. as you said, they're a small minority. they already know this. but people who aren't in that position might want to know how the world is shaped for other people
Elon Musk's father owned an emerald mine, Bill Gate's father was a high-powered lawyer and his mother was on the board of directors for United Way, Mark Zuckerberg's parents are a dentist and a psychiatrist. I don't know the numbers of "even most", but I think it'd be interesting to get some numbers.
Many companies don’t get to Series A and very few companies get to Series B. Even if they do get to Series A or B, they won’t be able to raise the amounts you see in the news and have heavy dilution.
Very few founders have double digits percent ownership by Series B and Series C.
Liquidity of $400k or more is a lot and isn’t available for many founders.
All of this after 7 to 10 years of working 80+ hours week, no social life, loosing family, sacrificing health, taking less than $100k/year salary, constant worry of failure, dealing with ups and downs of employees, being a support system of everyone in the company while not being one for their own families, and no guarantee of success. All of this for seeing their dream come true because failure would be worse.
I think the OP should work on his company for more than 4 months and have more than 10 employees for at least a year to truly understand what it is to be a founder.
Also 20% option pool and exercising options up to 10 years are not uncommon.
> All of this after 7 to 10 years of working 80+ hours week, no social life, loosing family, sacrificing health, taking less than $100k/year salary
If you are taking less than $100k/year salary for 7 to 10 years while also absolutely no-lifing then that’s on you.
It’s true that early on you prob take ramen salary, but that’s for one or two years. You can prob scale to 200k by year 3 if your thing is viable. No-lifing when your startup is in year 5 is just a personal choice. If by year 5 you aren’t on a path of unicorn then prob it’s time to evaluate if it’s worth so much sacrifice or if you should run it as a lifestyle business (or just go do something else).
> I think the OP should work on his company for more than 4 months and have more than 10 employees for at least a year to truly understand what it is to be a founder.
Have you been an employee in a startup? Because in my experience it has a lot of the downs of the founder, but none of the ups.
> Have you been an employee in a startup? Because in my experience it has a lot of the downs of the founder, but none of the ups.
Have you been a founder? If not, I'm not sure you fully realize what goes into the job. Everyone wants to be a founder, but nobody wants to _be_ a founder.
> I'm not sure you fully realize what goes into the job.
Can it be a lot worse than working as many hours as possible and burning out? Because startup employees do that, without the compensation the founders get.
My advice would be not to do that. Set firm boundaries when you discuss the role and then enforce them. No employee will ever care as deeply about a company as its founder, and good founders understand that.
To be fair, most startups fail, and the founders of these companies can end up with similar or worse compensation than their employees. Maybe they've volunteered to take a lower salary than their early employee. Maybe because by the time they've started hiring employees, they've been working without any salary at all, burning through their savings and credit cards for a year or more before getting any meaningful funding.
Maybe I should, so that I could abuse from the employees and then explain how I deserve to get rich if MY startup succeeds but my employees don't (because it is MY startup, you see? I don't need them).
Where I come from, that's an ultra-liberal point of view. "Instead of saying that Elon Musk does not deserve 68b as a salary (because no human does), then maybe you should become ultra-rich yourself".
I mean, you could certainly start your own company, and then be more generous with your employees around these sorts of things. Sadly, you might have more trouble attracting investment, but you could probably still pull it off.
I often think about how if more people understood the median cap table life cycle from Seed to Acquisition/Shut-down/IPO, there'd be half as many VC-funded companies and twice as many bootstrapped companies every year. Thank you for sharing your experience towards that goal.
Unless you're doing some niche b2b thing where you have no personal connections (in which case, why are you doing it at all?), the differential financial returns of going with VC are often negative, if not neutral. The main diff is you can "fail up" into the investor class if you prove your worth but the business goes sideways. But even that is a dissatisfying career for most founder-type people.
To whoever needs to read this: start your own company, avoid raising money.
I think a part of the problem is that if you've chosen a market where VCs do want to invest, and you decide not to take their money, someone else is going to take it, build and grow faster than you, and out-compete you into the ground.
Sure, maybe their longer-term trajectory is unsustainable growth and disappointing surprises for founders and employees, but by that point your bootstrapped company has already shut down.
But, by all means, find a market where there's scant VC money to be found, and you can probably bootstrap for quite some time without funding. And maybe you will eventually decide to take on funding, but instead of giving 60% of your company away to get it, you only have to give away 30%. Or you decide that giving away 60% is fine, in return for 10x as much investment as you might otherwise get at an earlier stage.
I know a non-zero number of people who have gone that route, and it's worked for them. If I were to start a company, I'd aim for this model myself. But I would have to be very careful choosing my product and market.
> I think a part of the problem is that if you've chosen a market where VCs do want to invest, and you decide not to take their money, someone else is going to take it, build and grow faster than you, and out-compete you into the ground.
This is in the talking points for the VC value prop, but to be honest when you get to the bottom of all the qualifiers and explore all the examples in depth, it's a flimsy defense.
Of course you're not going to bootstrap a company with large, up-front capital requirements. That removes the risk factor "choose a market where (smart) VCs invest". It means you're fishing in $100mm up to maybe $1B markets.
Now you're left competing against the (dumb) VCs who are spinning their wheels trying to win in a market where capital doesn't actually help you grow.
That means all you have to do is survive and grow YoY – which is the default state of a sensibly-run company – until the VC-funded people give up and move on, (which they are contractually bound to do within 10 years). And even if they stick around, there are very few markets that are winner-take-all.
I think sometimes we fall prey to the mentality of thinking that things are harder than they are. The investor-funded universe completely dominates tech media, so it's perhaps not surprising. But yeah, if you think critically about each of these steps, we aren't as dependent on them as meets the eye. 100x more the case if you have good technical and business skills on your founding team.
Er... that is essentially the entire premise of the article, so I'm not sure how you can make that assertion.
To be a little more generous, the author is perhaps not saying it's sketchy, but is at least saying it's odd and unnecessary to keep this knowledge from employees.
After the Series B for my last company the three founders owned something like 45% of the outstanding shares, and when they sold took out something like 40% of the price. What were the rounds like that led to less than 10% after 3ish rounds?
> exercising options up to 10 years are not uncommon
10 year expiration is the standard, yes, but only if you stay with the company. Most still kill your options 90 days after you quit or are laid off or fired. There's been a small but noticeable trend of companies not pulling this garbage, including the article author.
> I think the OP should work on his company for more than 4 months and have more than 10 employees
Yeah, I thought it was funny that the author seemed to be speaking so authoritatively after so little experience as a founder. I've never been a founder myself, but I would put much more weight behind the words of founders who have been doing it for years and decades.
Look, I've worked for 5 companies, 1 of which I knew would never sell and I had inklings that one other probably wasn't going to sell and instead was a lifestyle business for the founders, and the other 3 had successful exits. I won the lottery 3 times but I quit the game because I was tired of making VCs and founders rich while taking home breadcrumbs, comparatively.
My first startup I walked with a paltry sum and the owners suddenly went from being doctors with a side hustle to private investors. That was my first warning sign and really drove home the need to invest in myself because it certainly wasn't going to be someone else doing it, despite the talk of changing the world. It was really, really obvious that the payouts were stacked in one direction and it certainly wasn't on the side of employees, early or not. I still enjoy working for small companies, but the hype and bullshit are really tiring and so very cultish. I'd really suggest treating the startup life like a scratch lottery ticket, because that is all it is. If you win, you're gonna get paid but it won't be life altering money, just like a scratch lottery ticket. Plan around it being worth zero and go in eyes wide open.
I've joined two startups now as the 2nd and 4th engineer. I went into both expecting nothing from options or shares, and knowingly accepted a lower than market salary because I liked the teams and projects.
I couldn't be happier. Neither panned out for me with regards to stocks, and I definitely didn't get rich in the process, but I very much enjoyed the jobs and when I decided to leave it was only because the business direction wasn't a fit for what I wanted to spend my time on.
It sure sounds like a privledged position, but it more came down to us living cheaply compared to our income and having the breathing room to trade a higher salary for work that I really enjoyed. I hope more people can make that tradeoff, it's much more fulfilling in my opinion
I've seen it repeated multiple times, and in the past have even repeated it myself. But these days I'm not so sure. I think you should go into it being ok with the possibility that it'll be worth zero, but I don't think you should plan for it to be worth zero. Put another way, I don't think you should evaluate competing startup offers completely discounting the equity comp. A company that offers $200k and 0.05% of itself is not automatically worse than a company that offers $250k and 0.01% of itself. Hell, that's still true even if they're both offering the same equity ownership percent.
> the owners suddenly went from being doctors with a side hustle to private investors.
Did the owners sell the company or get some sort of payout? I'd imagine if they were making decent money they'd have kept the business alive, right? Would you be okay sharing the name of the place?
I think that was the entire point the GP was trying to make. The founders were doctors that decided to start a side hustle, and then one day, boom, they got a huge payout and suddenly stopped "working" and became private investors. (And meanwhile, their employees didn't get all that much out of that "boom".)
Yeah, this. The doctors sold the company for an undisclosed amount and the employees were left to reapply for their new jobs at the new company while they quit and walked away with enough money to suddenly become private investors.
I've worked for six companies, won the lottery once, and it was life-changing. I'm not bringing this up to brag or to suggest that it's common, but to point out that it is possible.
And frankly I think as time goes on it has become and will become more possible for more people. In part because of people like you who bring up all-too-common stories of how their founders got big payouts, but their employees only saw breadcrumbs. As more and more employees become educated on this stuff, the more pressure it puts on companies to offer better deals to their employees. We have a loooong way to go before my experience is common -- if we do ever get there -- but I do think it's possible that we could get there.
In my 20s I joined a couple startups as "early engineer" or "founding engineer".
I quickly realized those are the absolute worst positions to be in. You take almost as much risk as the founders but almost none of the upside. One startup died, the other one sold for 100m$. Out of that I saw 400k$ as an exit. Not too bad but even with that exit I ended up making way less than if I joined a FAANG. In both cases the founders made millions (through the exit or through liquidity)
Now I'm a realist. Either you create/found a startup or it's not worth joining one as an employee. You have way more upside at a FAANG/pre-IPO mid-life startup that already found a great product market fit.
Essentially, founders are pushing a crazy narrative of Startups being worth it to early employees because they need them. It was sometimes fun but I wish I just joined a FAANG like most of my friends, I would have a couple millions by now if I did.
I second this. I took a large salary cut to be 1/2 of an engineering team at a seed stage startup for ~1.25%. After 2 years of pretty grueling work I left to go back to big tech for 3x the pay. I wouldn't call it a total waste of time in the sense that it made me a better engineer, but it certainly wasn't worth it financially. The company still exists and has had a relatively successful series A and "A extension" but I don't think my equity will ever be worth anything.
I really wouldn't recommend anyone work as an engineer at an early stage startup unless you're getting ~5% or more (this would be unprecedented) because the risk is barely less than the founders and the pay is generally terrible. Series B or later (growth stage) may be a sweet spot where the salaries are decent and there is still significant equity upside without the insane hours.
Founding engineers are so underpaid relative to founders. I’ve seen it be founding CTO with 40% and founding engineer with 1%. It’s ridiculous and we should not accept it as the standard.
A few good early hires can be just as valuable as good founders.
Is it? If founders were getting only 10% of ownership which would be further diluted in following funding rounds, how many of them would take the risk of starting a company? On the other hand, if early employees were not getting any equity, how many of them would apply anyway because they need the job / or want to gain experience and build their network with limited risk? (not saying that they should not be getting equity). If 1% seems unfair, they can start their own company, then they would quickly find out that the difficulty / risk / stress / responsibility is an order of magnitude larger and equity reflects that.
> Either you create/found a startup or it's not worth joining one as an employee. You have way more upside at a FAANG/pre-IPO mid-life startup that already found a great product market fit.
I'm glad you mention the pre-IPO mid-life startup and not solely trot out the usual "work for a FAANG instead and make $600k/yr out the gate" nonsense. There are quite a few pre-IPO mid-life (or even vaguely-but-not-super-early) startups out there that are doing well, growing more or less sustainably, will pay you a market-rate (or even above) base salary, and give you a solid equity package that has a much higher likelihood of being worth something than those early-stage startup options have. You might not make $600k/yr at a FAANG, but most people at a FAANG aren't making that, and many smart, talented people won't pass a FAANG interview anyway.
I worked at a preseed company recently. Here's my experience:
- Work 9 to 7 everyday. 6 days a week.
- People are working 9 am - 5 am in crunch time. Then joining again at 10 am.
- Monetary Comp is exactly market average.
- Equity Comp is even more paltry since founders raised at a huge valuation.
- Founders make unrealistic promises. Eg: It took a competitor with 7 people, 3 months to make a product. The founder told us Saturday that he wanted it built by Monday (with 3 total devs).
- Founders message you 24 x 7. If you don't reply, there's a "serious discussion" to be had next time.
- Non Accomodating of anything because "It's a startup".
I left the place after 10 weeks. I saw 3 people leaving the 6 person company in these 10 weeks. The ones who stayed were under heavy financial stress or had drank the kool aid.
it's important to figure out where to set your own boundaries. people out to exploit you will seek to see how far they can push. congratulations for leaving.
one thing that catches out some junior folks is that they may believe this kind of behaviour from bosses is normal and unavoidable as they have only worked for exploitative bosses at places with toxic cultures. you can do better, you're worth it. get out. find a more mature company with professional managers, where it's normal to leave the office on time and turn off all your work comms and leave all work-related messages unanswered until you're back in the office and getting paid to think about work again.
People don't like to say "no" or "can't do it in that timeline" and other permutations of these statements. If you can't even challenge or disagree with anything, then you're doing something wrong, or you're in the wrong environment, or both.
20 years into my career and still practicing this.
One hack: I can't respond when I'm asleep! So, I head to bed pretty early (9:30-10 EST).
> Founders message you 24 x 7. If you don't reply, there's a "serious discussion" to be had next time.
You drop them a bunch of messages to get signoff for the thing that absolutely had to go live on Thrusday and dont hear from them till Sunday because they are tripping on Ayahuasca in the desert.
There's a "serious discussion" to be had next time about your work ethic.
Honest question: do people with young kids do these jobs well, or at all?
I'm sure the answer is sometimes, yes. But, as a 41-yr-old father of two kids (6, 2) and a wife in PE, the pace and stress strike me as contradictory to being present in a marriage, being present with my kids, managing my health, etc.
I'd love to hear how the people with families manage (or fail) this pace?
Yeah - financial risks aside. It just seems difficult to do this without major disruptions to family life as I am a part of it. Of course, you can hire as many people as you need (if you have the means) to resolve the logistical problem. But my absense isn’t replaceable like that.
I expect not really? I'm 42, married, but no kids. I can't imagine joining an early stage startup. Not just for the kinds of reasons you mention (being present in a marriage), but just because it sounds so exhausting. When I was 30 I could pull an all-nighter and still have a somewhat productive next full day at work until I could finally get some sleep that evening. But these days I'll be a passed-out wreck by 10am, at best, assuming I even make it through the night, and will feel like shit for a couple days afterward.
There's a reason why people in their 20s or early 30s, and/or without a partner or kids, are over-represented in early startups. When I was deepest in my startup work as an employee, I had no time to date, and didn't bother to try. My friends barely saw me; most of the little socializing I did was with my co-workers, and that socializing often felt more like work than play, as we were usually discussing (or complaining about) work.
I do know people our (current) age, with families, who have done it, but I frankly have no idea how, and I'm sure it put a strain on their marriage and on their relationship with their kids.
On the flip side, as someone who has no kids (and doesn't intend to have any), I have noticed a lot more tolerance for missing work / missing meetings / ducking out for a while when it's for childcare than for any other reason. But a childless employee is seen as having no excuse for needing time out of the office here and there for whatever reason. (I suppose this is true to some degree of both startups and established companies, though.)
I've worked for a startup similar to that, though it was series A when I joined. It was gross. I stayed there for nearly a year and a half because I did genuinely enjoy the work and my peers, but ultimately the founders ruined the experience for me with their evasiveness and lies, and their creepy later-on focus on "loyalty" when the company's prospects started to go downhill. The last straw was when I was told by another often-in-the-know employee (whom I trusted) that one of the founders had found out I was interviewing at another company, and he called someone he knew there and told them not to hire me. Obviously I don't know for a fact that's what happened, but it sounded believable based on the founder's other behavior, coupled with the seemingly-fantastic interview experience I had.
That hurt, but I realized I had to do a better job of treating interviews as a two-way street. The company was interviewing me, sure, but I also needed to interview them, and learn what I could about the kind of people the founders and my peers were. I also needed to understand up-front what would be expected of me, and how flexible they could be with my time. The next startups I worked for were much better, and I never felt exploited.
Sorry if founders already raised a huge valuation, why didn't they hire more devs?
I'm sure what can be done with 996 style slave labor with 3 devs can be done with 6 devs working 9 to 5. It's not like they couldn't afford the salaries (and you mentioned they weren't paying that much anyways).
because they are cheap ass people. Pivoted 3 times since 2021 to the latest hype, currently building another generic AI app. They still have 5-6 years of runway left with current burn-rate.
If they go all out in 12 months, they would actually be considered a winner/failure. Purgatory is comfortable.
I recently left a long career in FANG to roll the dice on an early startup. I was pretty surprised by the uneven terms between founders and early employees. From what I could tell the early employees takes more risk than the founders because they don't get that magic token dollar turning into their share of the founding equity event and have to pay the fictional valuation of the seed to convert their options. Depending on how hot your startup is that can be a lot of money.
Anyway that ended in tears, but I got what I was looking for from it. A look under the covers of the hot VC backed startup roller coaster. I may be getting old and cynical, but it looked considerably more exploitative than what I saw at Google. Obviously depends on the character of the founders and leaders, but the structure seems to be setup for toxicity.
I worked at a Series A startup as an employee, and wont be doing that anymore. Early engineers have all the risk (lose job the second things go bad) but little upside. They would offer 500 options, or 1000 options, or 30,000 options -- but when you look at the prices, that was worth $100-$10,000. Why would anyone take all this risk, and lower base salaries for that lottery ticket?!
Secondly, they wont share the cap table, so you dont know what the denominator is. 30,000 shares of What!? No one would tell you. You should run.
Third, the VCs installed a buddy from SV as CEO who was creative with revenue. Great -- so they make their bonuses based on creative revenue, but the company gets saddled with VC rounds they have to dig out of w/o showing real revenue growth. Once you get SV insiders being placed into the company, often with their entourage of cousins and neighbors' kids as Director of HR or Director of Finance -- RUN FAST. The company is being strip-mined for cash, while Engineers slave away trying to code their way out of the wreckage left by locusts.
The C-Suite operated in a separate tier of the company with a heads-i-win-tails-you-lose setup. You could tell -- no way you are all driving Tesla Plaid on a "startup salary" -- the "startup salary" was for suckers, engineers, and those not in the VC-back-scratch loop.
My advice to everyone -- if you want risk, be a founder. Not Engineer #1 or #10. If you want balanced risk, go to a Series C or D company where you dont have the risk of fake accounting. If you want money, go to a public company with real accounting rules, visible revenue, visible liabilities, and more accountability.
Even if you don’t see the cap table, any company you talk to should be clear and consistent in disclosure of facts like number of shares outstanding, including viewing it in tools like Carta. You are basically describing the abusive version of a startup and then saying all startups are bad.
I actually think going to a Series C or D is not the ideal play. It’s better to join an early company, with good leadership, reasonable if not mind blowing salary and cheap shares. Then, work hard, but not brutally hard. Somewhere that you enjoy the people, the work/product, and you can level up a lot. The options are cheap, and you can bail to FAANG at any time if you burn out. Realistically, that’s your shot at making 1% of $Xmm without completely hating your life. It will be a rare company so, yeah- be picky. I don’t know why all startups get lumped into one when there’s a lot out there for the discerning employee.
My experience was similar, right down to the $10,000 worth of options. Eventually the company went public and those options would have been worth $5M if I'd had the foresight (and cash) to exercise them (which I didn't). The co-founders did not have exercise costs or AMT of course. It is an unfair system indeed. I'd encourage those seeking to be early engineers to go work at a FAANG for a few years before joining a startup so that you have the cash reserves to take the risk.
AMT rules requiring you to report exercised options as income are damn-near criminal, IMO. If you can early-exercise at grant time, file your 83b election, and avoid taxes, great. But if you can't afford it, and want to see anything from that equity, you are stuck staying at that company at least as long as the first liquidity event.
I think the takeaway here is that you should probably not work at a startup if you don't have the cash to early-exercise your option grants (or work there, but value the equity portion of your comp at $0 and be ok with that). Obviously you didn't know or consider that at the time, which is a pretty common level of understanding, I think, one that I shared when I was first dipping my toes into the startup pool myself.
On the plus side, I think financial education and knowledge around startups has gotten leaps and bounds more prevalent over the past dozen years or so. Fewer people will experience the same situation you do, because they'll know not to get into it in the first place. And once enough people understand the implications of these unfair practices, they will have to change if startup founders and investors want to continue to attract talent.
The options were likely 10k when he was issued them at hiring. When leaving the company, he would need to purchase those options (likely within 90 days if it's a shitty policy). Then, the real kicker is that he would have to pay taxes on the on-paper gains between the 10k and the current valuation. So lets say the company was worth half of what it was at IPO, he would now own 2.5m of stock, owe taxes on 2.49m of income, and have to pay that off with early engineer salary and no liquidity on his equity.
>> No liquidity? He said the company went public…
>> I know people don’t get the best deals on startup equity but something doesn’t add up here
Many startups stay private for 7-10 years. Most go broke, shut down, or have face-saving acqui-hires with no economic gain. If you leave at year 1,2,3,4,5, or 6 you have to pay UPFRONT to exercise the options and pay taxes UPFRONT. But you are stuck with private stock you cannot sell. In 95% of cases, the private stock can never be sold because the company goes broke. You dont know if your company, in year 7, 8, 9, 10, or beyond MIGHT be one of the lucky 5%
If you are going to spend $100k or $500k exercising options and paying taxes, you might as well buy QQQQ or NVDA or something with better odds of success.
No company I've worked at has showed me their cap table, so I don't think that's a red flag (though I also didn't ask, so maybe they would have). But it's definitely a red flag if they don't answer questions about the cap table that are material to your decision to accept or reject the offer, such as asking them to tell you the number of shares outstanding.
> but when you look at the prices, that was worth $100-$10,000. Why would anyone take all this risk, and lower base salaries for that lottery ticket?!
I was in a company when my options were "purchased" from me at the strike price, when the company itself was sold. We never made it to IPO. I've learned to not overvalue options and phantom stock, and just chalk it up to another bonus down the road. The real money is, or already has been, made elsewhere.
What really steams my biscuits is when I figured out how the payout was worth less than the unpaid overtime (never more than 50 hours a week), weekend support time, and travel time spent in my years there.
The big bummer about acquisitions is that they can change the terms of the deal however they want, including devaluing or even outright cancelling all the common stock. IPOs seem much safer in that regard, but obviously a rank-and-file employee has no say in which direction the company goes.
To be fair, though, the bad deals the employees see at acquisition aren't necessarily always due to sketchy exploitation bullshit. Sometimes a bad deal for employees is the only one the board can make, with the alternative being bankruptcy and everyone losing their jobs. It does sting that institutional investors and founders will sometimes get a decent return on their investment/time in those cases, while employees get table scraps, though.
My early engineer story is a lot different than this. 0.7% sold shares for ~1M at the end of 4 years. There is a bit of luck, and a bit of picking the right one to join. Don't join the ones that don't tell you what your equity share is and what the last valuation was to start with.
Spot on, and I say this as a founder of a company that didn’t fuck over the employees. 40 years and still going, and most people have been with us for more than 25 years.
I didn’t get rich because I wanted to sleep at night, but people in my orbit (probably me in theirs?) advised me very differently.
I did a similar thing to you. However, I do feel like cutting your teeth as a "founding engineer" at an early startup has 2 major benefits:
1. You get to see what it's like under the covers, as you said. It's not nearly as glamorous as it looks from the outside. And yes, as an early engineer, you share in a lot of the downside without nearly an equal share of the upside.
2. You get to leave. Unfortunately, the startup I joined entered a tailspin. But, my name wasn't attached to the company, and I didn't have a fiduciary obligation to our investors. I had a lot of "stake" myself after putting in years of 12-hour days, nights and weekends, but at a certain point I saw that my career was actively being harmed by staying. That "founding engineer" role on my resume got me the job I'm at now, at a level that skews higher than my YOE.
Do those two points mean you should get a fraction of the equity (or rather, a fraction of the options) as the founder? Honestly... maybe. I've now seen a few founders fail. It can really be a career-killer.
> Do those two points mean you should get a fraction of the equity (or rather, a fraction of the options) as the founder? Honestly... maybe. I've now seen a few founders fail. It can really be a career-killer.
And I have seen a few founders fail and enter bigger companies at a pretty high position. Not sure I would relate that to how much money they should get in case their startup is one of the lucky ones.
Getting to leave is so underrated. Nothing keeps your head above the doom and gloom like knowing you aren’t shackled to the thing, and the world’s your oyster if you need to move on. We live in a weird world if people don’t think a gig with $160K salary, 2% of the company, where you can work hard but not 24/7, and _leave any time you want_ is a bad gig. That 0.25-0.5% after one year that you get is PERMANENTLY gone for them even if you just fuck off after a year. Years later it could be worth millions.
But anyway, as founding engineer you get to set the systems, culture, language etc. maybe some people don’t want the responsibility but for others it’s an opportunity to build things out in our own image and learn a lot.
There was an oft-repeated response back in the day (but gladly rarer now) when you dig too deep into employee benefits at startups: "If you're offered a seat on a rocket ship, don't ask what seat!"
To this, I usually reply "Unless the seat happens to be in a stage that gets jettisoned before reaching orbit".
As an engineer you really have a finite amount of good working years, and accepting startup salary vs big tech compensation is a bigger risk than founders are willing to generally admit.
I almost left for an ultra early startup, still running on seed money.
They offered a typical SDE2-Senior salary + 1%. I was kind of offended. I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them.
Even IF they achieved a 100-300M exit, after dilution I would be compensated at best par with a FANG Senior over about 5-7y.
I was pretty excited about joining and would have been all-in. So I asked for 2-3% and was denied. Looking back, I'm glad because even 3% isn't worth it. Not when the founders are taking 10x.
Oof. The CTO not having the chops to build the core technology would have been a huge red flag for me. At a 75-person startup the CTO should transition to be more of a manager and strategy person than a builder, but at time of founding they should be doing 100% of the building. Hiring the first engineer should be a way to increase the pace of tech work, not start it.
If none of the founders are technical enough to build the MVP, none of them should take the CTO title.
It was my opinion, but yes. Highly technical founder CTO, but to me there's a chasm between "can write the code for a b+tree" and "can build and then operate a data platform service". They can build an MVP and impress an investor, but that's not a sellable product - not even remotely close.
> . I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them.
I see this a lot in failing startups:
The CTO is a pure manager who can't do any actual engineering. The result is that the shares and salary that could have been traded for getting product to market faster & better ends up being burnt on an empty chair.
I did early employee several times because I didn't know any better, didn't have anyone around to tell me not to. I won't do that again. All the risk, none of the reward. 1% of $10-20M after 4+ years of 80hrs/wk is less than the difference between a startup salary and a good salary over that same time.
most i know who work as eng #1 (non founder), are new grads who couldn't get into FANG. So mainly just looking for experience/inflated job title to boost their resume.
So not like these startups are getting top senior talent who obv will want to get PAID.
I went this route and now have a resume of inflated titles. I learned a lot and believe I can do some things in the top 10 percentile, just not the things many companies are currently hiring for (top 10 percentile in a narrow development skillset such as ML, or a specific language, or algorithms).
Im cynical and ultimately an rebuilding my dev career around a platform that will give me opportunities for entrepreneurship AND individual contributor work as an employee (Apple Ecosystem - iOS client development + product dev/mgn).
If I were to do it over again I 100% would've avoided startups early in my career when I could lean on junior positions to grow in a more mainstream manner. I'd have more money in my pocket, less stress, and less cynicism.
--
The problem is there is objectively zero way for fresh grads to learn these lessons. Even with prominent threads like these being available to some, the bearish attitude in every other thread will be more appealing to a fresh grad.
I've worked at seed, series A, and series B startups, and I think... it just depends. Only one time (a series A) did I feel exploited. That wasn't because I was an early employee at a startup; it was because the founders were sketchy and lied to us about what was going on with the company's fundamentals.
I frankly don't mind the idea that a founder is going to see orders of magnitudes more cash from a successful exit than I will, though I do think it would be great if that gap were closed a bunch.
Ultimately I worked at startups because I thought the work would be interesting, challenging, and educational (it was), because I wanted autonomy, influence, and impact (I got those), and because didn't want to deal with bureaucracy and many layers of management (I mostly didn't have to). In contrast, working at a FAANG sounds not particularly enjoyable to me. But I've never done that, so maybe it would be more ok than I think. Then again, I did join a 50-person startup and stay until it became a 10,000-person public company, and was pretty unhappy there for the last few years of my tenure, so I think it's pretty reasonable to expect I wouldn't be happy at a FAANG.
I say this to point out that not everyone is looking for the same things out of their employment experience, and that's totally fine.
You have the current unicorns, basically anything from about the time YC started, and then you have the old school unicorns.
For comparison, Microsoft IPOed in 1986:
> The company's 1986 initial public offering (IPO) and subsequent rise in its share price created three billionaires and an estimated 12,000 millionaires among Microsoft employees.
I completely disagree on the risk. What was the opportunity cost for you in founding? Are you taking a salary comparable to your FANG comp? Usually the early employees are getting paid a lot closer to their market rate than the founders are.
This and my own experience with employee stock options led me to reject any work for startups that offer stock options. It is a way to make you work hard and allow to be treated like dirt for less money. The lowest point was having to walk across town to the office to eat energy bars from the office kitchenette, because I could not afford a bus fare or food as my pay was delayed by a week over Christmas. Meanwhile, the founder was holidaying in Dubai, driving a BMW X7 to work, and showing off a house with a small park and a pond bought in leafy Berkshire. Employee #1 treated the rest of us like dirt. I got laid off in a round of cuts just before my options kicked in and thought it was unjust, but a year later the company was sold to a competitor and the investors got a nice return, the founder got another pot of gold, and the employees with stock options got nothing, because it was a private sale and not an IPO. Employee # 1 was in a bit of a shock allegedly.
For IPO sales, all options can eventually be converted into common shares then sold (often after various lockup periods giving other investors chances to cash out first).
For private sales, which can be structured in a variety of ways, there's a bucket order that can vary depending on the share structure (remember options aren't shares until converted). Most VCs have terms that they get paid out first to recoup their investment (and often then some) before common or option holders get paid out.
So for a simple example (I'm making these numbers and percentages up):
Say if VCs invested $10m for 30% of a startup with a guarantee of first rights to get that back and 50%, then a founder class of shares owns a percentage, say 50%, and then there's a class of common shares/options that are in theory 20% of the company. So in thoery, the investors own 30%, employees on 20%, and founder(s) 50%.
Let's say then that the company then sells for $20m. The investors get their $10m back, plus $5m for their 50% return guarantee. The founder class of shares has rights to 50% of the company, but all that's remaining is the $5m left over which is 25%; they get it all. Everybody else gets shit unless the buyers want to retain any employees and give them anything extra (this can happen).
Things like this happen a lot. I knew people that worked at 500px (the photo site) and eventually the investors forced a sale after the business stagnated that even the founders got nothing in the end.
Maybe if the founder has a majority they can sell their shares to someone and the company keeps on running. If the new owners don't intend to ever do an IPO I guess the existing employees end up with options to buy stock in a company that they will never be able to sell. Only upside would be if new owners take out a dividend, since that would assumably be a fixed amount per stock regardless of who owns the stock, unless of course the new owners are able to circumvent that by doing an unequal dividend payout that only goes to certain owners.
I was mentally, physically and emotionally worn out when I left my previous startup after being an early employee. Despite that I really wanted to stay and be part of what my friends and I were building. Had I had the chance to 'de-risk my life' with some equity to replenish my empty bank account, which was empty from taking an early employee salary, I may have been able to stay but in the end I had to get out.
Getting out for an early employee after funding rounds is expensive because buying options can hit you with massive tax bills on top of the cost of buying the options. Worse, the stats aren't great for a chance on return. Your lotto ticket gets expensive and risky as soon as you decide to leave.
Articles like this one hammer home more and more to me how little VCs actually value early employees. Paying out founders to stay is a strategic move. Keeping them is worth it because they are the face of the company and turmoil at that level hurts their payout. Burning out early employees is not a concern because you can just swap them without drama. In fact, with the way options are structured and the 'industry wisdom' to hold off purchasing, it feels like a strategic move to burn out early employees since many employees that are forced out often can't even buy their options. They are left with nothing after all that work and risk. From a purely cynical view this is a great thing for VCs since now the company got all the benefit of an early employee and just lost all the costs.
I don't know about the other three points, but I can guarantee you point 1 of 'right sizing perceptions' is wrong.
This is the model, you can see a lot of early stage founders looking for a "founding engineer" which is really just an excuse to pay founder salaries for 1% of the company rather than 50%. If the founding engineer quits without buying their options, then the founding team recoups the 1% equity. Its a recipe for the founding engineer to be burned out and pushed out.
This reminds me of how I have seen a few asks lately for roles where a company is looking for a CTO for their “AI startup”. How an “AI startup” (whatever that might actually mean) can _start up_ without a CTO is beyond me, and raises some very big red flags about what that company might be up to.
Mostly someone has a Phd and convinced people to give them money to 'change the world', then need someone who has actually built things beyond a script in a python notebook.
Gosh. So much this! The difference between the "average" PhD graduate in data science and the "average" software engineer with genuine experience delivering production software that people use at scale is quite something. I have nothing against data scientists, but in the same way that I wouldn't get a software engineer to build a complex model (above a certain level of complexity), neither would I get a data scientist to build a production app (above a certain level of scale). Both of these things are specialist activities that require a lot of experience, wisdom, and nuance to get right. Being good at one does not (necessarily) mean you will be good at the other.
It’s not necessarily a red flag. Sometimes the founder/CEO is technical and decides to solo it with hired engineers until not having a real CTO is a flight risk, or until they’re too busy to be contributing code anymore, or both.
That is fair, assuming the CEO is technical, or technical _enough_. However, I see a lot of non-tech CEOs trying this on and in those cases, it is a red flag for me.
There are a lot of "tech businesses" that are actually using pretty pedestrian tech. What they are _actually_ doing is business model innovation with an underlying tech platform. Often, that tech platform can be commodity or relatively simple tech. There are other startup propositions, though, where the tech _is_ the thing, and if you get the tech right, then some of those other things end up being secondary (not irrelevant, of course) just not primary. This is assuming that you really have punched a hole thru the door with some amazing deep tech breakthrough, which not every company is doing, contrary to what they may claim.
There is a YouTube video [0] (which goes back to 2019) that does a pretty good job of making this point. Well, much better than I can.
To be fair to your original point: you're right that marketing and sales are hard. I'm just adding the subtlety that there are some tech businesses where the tech is _also_ hard, and perhaps even harder.
I don't think we disagree. There are definitely deep tech businesses that are very hard to pull off.
My point is - asking "how did they do it without a CTO" is weird, they are hiring a CTO to do it, and they're bringing their business experience and funding - valuable stuff that a tech guy probably finds annoying. The number one suggestion on this forum is to sell before building and when somebody does it, users get wide eyes?
I guess it comes down to what "it" is. My sense (and this is just a personal orientation) is that if a CEO came to me and said, "Hey, I need a CTO for this new business I'm building", the very _next_ thing they say is really important.
If it is a) "Right, I've had this braingasm, and you need to build it, and for the privilege, you get 5% of the company!" versus b) "Right, I've had this idea, done some market validation, lined up our first 3 customers, and now we need to do some technical feasibility and put a team together to build this, and as CTO, I need a 50/50 founder, what do you say?" then I will pick b) over a) every time.
To be fair, those scenarios are cartoons on purpose, but I just wanted to make the point by highlighting the extreme cases.
As far as "sell before you build" goes, I think that really does depend on the problem you're solving. If it's a tech-powered business model innovation (where the tech is a commodity), then we are in 100% agreement. If the tech is a bit trickier and you need to show something special before funding (let alone clients), then I take a slightly different tack.
I'm not sure I get the last point about wide eyes, but I suspect it's immaterial to the bigger point.
Interesting... My initial reaction about the startup looking for a CTO was the same as yours. I was a founder and CTO, so it seems odd that you would not already have that in the mix... however I can see how there could be an idea, a market, a sales strategy, and a tech idea without the actual tech. In that case you would need to find a CTO to build that tech.
Of course the real gotcha is that there is no 'idea, market, sales strategy' that will be perfect, and the work is finding out where those ideas are wrong and fixing them. The lessons from my successes and failures says it is only worth doing that as a founder, because the failure risks are both high and unpredictable. Time is expensive, so spend it where there is both risk and reward, not just risk.
The most successful startups that haven't been founded by technical people I have seen usually didn't even have much of an idea - but they had customers and kept talking to them and created a product vision out of that. All startups should be doing that.
I recently applied to a seed stage YC company that was offering me 1.5% equity for a founding eng role which they felt was generous. So basically I get to do all the work for like 1/50th of what the founder has? Get real lol. I even pointed this out to them and they said "it's totally normal, that's the way it's done". Like oh okay, as long as everyone else is getting ripped off too.
I went through exactly the same discussion in my last job search, and was assured that the offer was in line with industry standards. Even if this tiny company somehow became worth a billion dollars, I’d still make less money than if I’d worked as a senior engineer at Google or wherever. I liked the team and I think it would have been a fun job, but not quite fun enough to work nearly for free. I don’t think I’ll ever work for an early startup as an employee.
I recall a discussion where a founder kept insisting that a 10% offer for a pre-funding startup was beyond standard and that I should be lucky to get such an offer.. the experience left a bad taste in my mouth.
Ultimately, this individual needed someone to shape and build the core of their product and the net of a series B would have been at most a wash compared to current employment.
> Even if this tiny company somehow became worth a billion dollars, I’d still make less money than if I’d worked as a senior engineer at Google or wherever
this is why they don’t belong in start up land
running and working in a start up requires a certain type of insanity
The OPs complaint is not that the risk is high, the OPs complaint is that the risk relative to their market rate is not balanced. Often you can end up working for junior founders and would be better off as a founder yourself.
If the founder views you as replaceable, then why not work at a big tech which would pay you dramatically more? Successful startups are not often populated by the irrational.
> So basically I get to do all the work for like 1/50th of what the founder has?
Who raised the money that the company is using to pay salaries? When investors put money into a seed company, they're largely betting on the founders' perceived skillset and previous experience (or other bona fides like education).
One thing that most people don't realize is that being a founder means that you're inextricably tied to the company for its lifespan. Losing a founder is terrible optics and can be a death sentence for a startup. Regardless of the actual reason, every subsequent investor conversation will involve an explanation of what happened.
If you want more equity, you should ask for it! And you definitely shouldn't take a job where you'd feel under-compensated! But realistically, if you want a "founder-level" equity, you have to start your own company.
In my opinion, you should take the difference between their market salary and the salary they're being offered, and consider that an investment by the employee at the upcoming (not past) valuation.
For example if they're in SF and they're hiring a senior first engineer that would maybe make 250k elsewhere, and they're offering them 125k, and they would take the classic 7% for 125k, then 7% is a good starting point. (Of course if they already have the YC investment, then that would go down dramatically)
If that equity vests over 4 years, then frankly maybe 28% is a better starting point.
But what's fair isn't really relevant. What's relevant is what the market demand and supply is. If there's some dolt who would happily take 1.5% as a first engineer ("founding engineer") for a $125k salary cut, then the founders would be idiots not to take that deal. And frankly, if that $125k salary cut gets them their dream job, then maybe they're not even dumb for doing it.
I think what you are actually describing is that you should value equity at zero. If to work at a startup you would need 28% equity you are describing a founder. That's fine but there is an enormous difference between these two things. There is also the question of where the $125k comes from to pay your base.
Value equity at zero? I am not sure what you mean by that. If an employee sacrifices $500k to work at your company, then it would make sense to compensate them with $500k worth of equity is my point. The 28% is tongue in cheek, if you're so early that the amount of equity needed to compensate your first hire adequately is 28%, your company hasn't really started yet, and maybe you should just consider them a founder.
Bingo - if you need the kind of person whose market rate would be 28% of your company. They are a founder, if your don’t need that person… fine, but the “this is the industry standard” line is bogus.
In my experience, "fair" is almost irrelevant within a capitalist business.
Good capitalist businesses buy at the cheapest price they can, and they owners focus on balancing competing resources (control, dividends, ownership, status, information, etcetera...). However: people run businesses and people are not rational economic actors.
A good question is: what amount of equity can you negotiate? What do you have that will convince owners to share their ownership with you?
If you are negotiating with VC, then I think the game board and the rules of the game are already rigged against founders and employees. VC sets the rules and the mileau to play the long game, and employees are lucky to get a few leftovers.
You can be a founder or join a self-funded startup, that will give you a better chance of "fair" treatment, especially if you have the skills to join people that have high integrity.
In theory if you can marginally add 10% to the business value you should be able to argue to get some amount of that. However measuring an individuals effect on a business is usually really difficult (even consultants or businesses that specialise in increasing value usually only capture a tiny percentage of the value they add).
Also different people bring different resources to a business, and anyone with a monopoly on a resource can negotiate for more shareholding. There are idealistic economic theories for how people should bid in multi-party negotiations. Note that even though multiple people may each increase the value of a business by more than 50%, that doesn't mean each should get 50% of the shares (and obviously can't if more than two want >50%).
Generally if you need to ask for shares then you have already lost the game. Either found a business and put yourself in charge, or have something the owners want and demand ownership.
Disclosure: made small amounts of money as part of a self-funded startup joining high integrity co-founders. I've had little experience of VC funded companies or employee shares. Our SaaS business was doing something we'd done before and it was started decades ago when things were "easier".
> a lot of early stage founders looking for a "founding engineer"
I always just assumed that the Entrepreneur, Founder & CEO had come up with an amazing idea like "build an startup (Ai probably) that makes a lot of money" and got some funding - but don't know what software is, don't know how to code and isn't really sure what Ai is does or can be used for; so need someone to put the pieces together to execute their vision with (for) them.
Opportunity to get in the ground floor with a future Unicorn - must have 25 years experience, Salary $25,000, 2% equity with 5 year lock-in.
Having been in this exact position multiple times now (once quite successful, others not), you should probably consider it a wash.
Unless the company hits unicorn AND your shares become liquid (secondaries don't count—you generally won't be able to sell enough shares to make a meaningful dent), you'd make just as much or more at a FAANG firm with way less risk.
Of course, I say this while not at a FAANG firm, because I prefer startup type work.
> So you would get paid like at another company but get equity on top and it's not a good deal? How comes?
If it were truly market rate (total comp not just base salary) then sure, it's a good deal. How likely are you to find that in an early startup? It must be pretty close to zero percent chance. But if you find it, sure, it's good.
You'll still work harder and be more stressed but it'll be a different learning experience which is always nice.
A lot of it comes down to management/team quality. Do you want to spend an awful lot of time with these folks? Do you think you'll learn from each other? Do these folks seem to know what they're doing and are the building a product that interests you? If you can say yes to most (all?) of those questions, then all-in-all, it's probably a wash. If not, run.
Depends on the options available to the candidate. Typically someone joining a startup very early probably has the skill to get FAANG salaries with less stress and more free time. There are also hundreds or thousands of mid size companies that pay very well nowadays, its not just FAANG.
Yeah but smaller startups might be more open to non-US applicants, FAANG and other more established companies don't seem to be interested in hiring abroad.
That's what makes the early startup scene the only thing available for some.
How come? Most large companies have big legal/HR departments that are very efficient at the whole visa application process. A small company won't have that expertise/staff. I mostly see startups being more concerned about the visa status of applicants.
Remote + non-US is not as welcoming, so the hurdles are way higher as it's not fitting the usual way. While startups have no prior experience anyway, so it's easier to convince 1-2 people instead of changing a whole system (I believe).
Most early stage companies turn out to be poor companies for employees. Long hours, toxic leadership, unclear roadmaps etc. Working at a small firm doesn't guarantee high quality.
I was recently faced with this exact offer at seed stage vs a series B with a similar salary. YMMV but what I found when I ran the numbers is the series B offer had a lottery ticket with a similar risk/reward profile to the seed stage. Of course I got less total equity, but it was way more likely to ever actually materialize. Plus being employee 80 at a Series B is a lot easier.
Leveling up seems like a good reason for someone who’s stagnating at a bigger company. My experience is startup people want to recruit their most respected former colleagues, who by virtue of being respected are also getting promoted in place.
Titles obviously don’t transfer back to big companies, we had plenty of ex-cofounders and CTOs hired into the same junior roles as anyone else who could LeetCode.
It depends on the role and company, if you want to get paid 200k per year for the opportunity to do X - then sure. In practice, you may end up doing basic work at a lower quality than a large firm. Such experience doesn't translate the up-leveled title to a more standard position.
And at a large corp you can get laid off just as easily. Any business can toss you out at a moments notice. It's not unique to startups.
At least with a startup you are going into it knowing that you have a higher probability of thing going south financially. With a big company, you might not get any warning at all.
If the salary is market rate for that person, I suppose it's by definition a fair deal. I've seen startups hire "founding xyz" two years after they started. Looks to be a vanity title in many cases.
Total comp needs to be market rate, not just salary. And non-preferred shares should be valued lower than preferred stock. Lumping non-preferred shares with prefereed shares is one of the bigger lies startups tell employees.
>> What if they give 1-2% and good market rate salary (~200k/y) to a founding engineer? Is that still a bad deal?
OR....you could just become a founding engineer by actually founding and keep 90% of the equity. You can get that salary with an equity raise, its worth not being the low-person on the totem pole.
But you're getting paid a good salary for many while they probably might not. Also I'd be sleeping well at night as I can jump ship the second I'm not happy, my reputation won't be tarnished by that.
So I am not sure it's that easy.
Of course, the idea is to keep the same work/life balance one would have at a more established company.
It is that easy. Employee 1 is getting paid below market. That’s why they offer 0.9% equity. Meanwhile, the founders are also getting paid. No one is working for free. One of the first things VCs tell you is to make yourself comfortable so you can concentrate on the company. That’s literally one of the reasons why VCs tell founders to sell equity early, to make up for lost income, while Employees 1+ has to ride the rocket into the ground.
the lottery ticket analogy doesn't quite hit the mark imho.
I've been seeing really shitty vesting schedules more often these days. a year in an early stage startup is often more intense than years in larger companies, yet they feel the need to push vesting schedules like 5/15/30/50 on people.
even if you do stick it out and exercise those options and eat the tax burden, those shares can still be ignored in an acquisition or diluted into oblivion in an IPO if the agreements are structured to allow that.
with a fat carrot dangling at the end of year four and the promise of an IPO Soon™, a lot of people will be more than happy to ignore important parts of their lives and financial well being for the chance of maybe, just maybe, getting access to that lottery ticket.
I think a better analogy might be like gambling in a casino. investors get to write the rules and hold all the leverage. the worst places are mobbed up, the rest might be legit but either they have every incentive to keep selling you the dream of winning big. in all likelihood, if you keep making that bet you'll walk out worse off than you were when you walked in.
if a startup or VC truly gave a shit about anyone outside the c-suite, they'd have an employee ownership program of some form and assign actual equity, not just options. I've yet to see many of them do this though because founders are the most likely ones to be gambling in those kinds of casinos.
What would you suggest to someone who wants to work at interesting (non-evil) companies, wants a decent comp ($200k+) and doesn't mind being one of the first to lay the foundation with the possibility of upward mobility in the future?
be a founder or a consultant, not a founding engineer. build up a set of specialized skills in something you love doing, network your face off, keep lifestyle inflation under control, and keep a large amount of your savings liquid(ish). if the right people and opportunity comes along, be ready to tap those savings and live off them for at least a year while you build the company or be selective about your next consulting job. like the old cliche says, luck is where opportunity meets preparation.
if you're not that ambitious and simply want to live comfortably, then go to those early stage startups and negotiate for higher cash comp and a smaller slice of the options.
you can make great money as a SWE, but there's a massive leap between that rung on the income ladder and the ones above it. it takes a dedicated effort to get there.
Sorry I'm a total dumbo when it comes to startups, but what do you 'vest'? I thought vesting is for stock options (maybe stake?).
And your startup is not on the stock market, and won't ever be unless it gets a billion-dollar valuation.
Even stake might be worthless, if the company fails, despite you building a kickass backend for it.
most startups don't offer actual equity even though that's what everyone calls it. they offer options. the idea is that the options you'll receive will have a strike price much lower than what the stock will be worth in future funding rounds or when the company is acquired or IPOs. the vesting schedule defines when you can start to exercise those. typically you'll receive 25% of your options after the first year, then the other 75% will vest every month after.
and yes, liquidity in a private company is always going to be an issue.
all of this is why I tell everyone that their options are worthless right up until they're not. anyone who's burned out or looking at a new opportunity shouldn't include them in their decision making process.
Yes, you vest stock options, and given that risk for startups is very much front-loaded, vesting schedules that are back-loaded are a big red flag for incentive misalignment. And that's ignoring all of the problems with stock options as opposed to RSU's.
The baseline is something like a 4-year vesting schedule with a 1 year cliff and monthly after that, uniform distribution. Anything more back-loaded or worse than that is a red flag.
> Getting out for an early employee after funding rounds is expensive
Early exercise and 83(b) is a must, or forget about it.
When considering joining an early startup ask if they will allow you to early exercise as soon as you start (well, it'll be after board approval but as soon as that happens).
If they don't allow that or if the price is too high for your comfort level, don't join that startup.
Every startup CEO must demystify 83(b) for their employees.
If you don't have cash on hand to pay for early taxes, the company can pay a signing bonus or something for those who elect 83(b) to pay for the upfront taxes.
OR
Just pay market salaries and leave the choice to employees to do whatever they want with cash. You want to buy our company stock great here's the grant. You want to put your money in S&P index go ahead.
The employee equity part needs a lot more simplification. I don't know why it is not as simple as
Here are 2 options for you
Salary 200K
OR
Salary 100K Equity 100K
If equity 100K
exercise 83(b) - pay taxes at 200K income
OR
defer taxes for the subsequent exercise dates. (Could land a huge tax bill)
OR
defer the exercise date for a liquidity event/secondary sale.
Those who value risk will take the last option and those who don't will stick to full salary.
83(b) exercise, when presented like this, doesn't seem all that rosy.
There could be some legalities that I am unaware of, but broadly this should work.
The irony of being an early engineering employee (and any engineer really) is that the better job you do the easier it is to replace you with someone who can maintain what you built. Accepting a below market salary and then doing a great job is a huge risk.
In startups that experience internet growth, you find yourself trying to build systems so fast and hire people that you aren't so worried about someone replacing the job you used to have because the nature of your job is changing as the company scales.
And if the startup is not growing, you can stop worrying about the equity package
> Accepting a below market salary and then doing a great job is a huge risk.
By doing bad quality work on purpose will not make you learn anything. Better idea is to leave your underpaid position, start your own startup or join another that has better salary and compensation.
I’m really sorry to hear about your burnout, I hope you’ve made a recovery and are at a better place now.
I thought it was the prevailing wisdom here on HN that being the first employee almost always is bad for the employee. You’re right, the cards are stacked against them
In my experience there has never been a good time to be a founding engineer even in companies that have later made it. It's much better to join the company 1-3 years prior to IPO/Sale where you get many of the benefits but significantly less stress. If I had worked at startups I would have been taking a 30-40% pay cut compared to the roles I did work and none of those startups have gone anywhere with most crashing and burning.
I’ve heard this a few times. Could you elaborate why? Surely at that point, less you are hired to a very senior role, you are going to get a very small equity % and a lot of the capitalisation growth has already been priced in? In exchange it is far less risky.
Do you just go for the market salary and treat the equity as a minor plus?
I can also guarantee you points 2 & 3 are pretty wrong as well. Funny (and also sad) how different peoples realities can be. I have been worn out sitting on both sides of the table to tell you the truth. (One thing I will say is that within VC, the vast majority of the folks actually doing the work are sympathetic and helpful to companies, working with early/senior employees, but it gets lost up the food chain so to speak and there's usually just one or two people making decisions at the end of the day about a particular deal or a whole portfolio- and these people are generally very self-interested.)
I'm not the GP but was one of the first engineering hires in a startup. In my case I got caught in the cross-fire of one of the co-founders backstabbing the other which meant that by the time we closed the series A I had been diluted by 80%. To 'make this up to me' the company gave me a new grant that would counter the dilution. The downsides were that this restarted the vesting clock and the new options would cost a year worth of savings to exercise - this was much more than the few hundred dollars my original grant cost.
Fast forward four years of toil with multiple cycles of doubling and then halving headcount as well as endless leadership changes. We are now on our fourth CTO in as many years. On the upside things are starting to look up! The newest sales team have worked out how to sell the original product we built, not the bells and whistles we pivoted to on the wisdom of the overpaid CPO. We can now celebrate as we have about a year's worth of runway and can confidently project being cash flow positive in about six months.
The new ex-FAANG CTO earning three times as much as anyone in the original team has great news! As a result of the positive development we are now able to hire an extra development team in South America! This shouldn't cost us too much and they can start on the next greenfield effort. The existing developers need not worry about being replaced as the existing team has all of the experience with the money making side of the business, and besides the new devs will be working on a parallel offering anyway.
Four weeks later and we've onboarded two offshore devs. The VCs have demanded we cut our burn rate and my position is being made redundant. I have 90 days to exercise but my options are underwater, both when compared to the funds we raised a few months ago and also the FMV. Essentially to buy them now I would be worse off than someone walking straight off the street.
requires having cash to tie up indefinitely, privilege alert
we did this on our crypto token grants though. once we realized we can play with the prices much more than with securities and that vesting isn’t standardized by any law, we granted ourselves deeply discounted tokens in a vesting schedule of like 3 months, the whole grant being a couple hundred dollars and launched the token the next day. mailing the IRS the election was beautiful.
Do they even pretend that they care about anything other than money? Like... ever? Maybe to family and friends (not even sure), but I mean professionally?
I joined a YC startup as engineer #1 with close to $200k salary and 2% options vesting at the usual 4 years, with a 10 year window.
I feel like this was bettern than usual, and for a while felt like I struck an awesome deal, but as time went on I realised I was building everything single-handedly, while getting (at best) 2%, which started to annoy me deep down.
Over two years in I'm considering quitting, for multiple reasons. I still believe there is a good chance of getting to an exit at some point, but I don't like the vibe and culture here, and honestly between cashing out 1.X% and cashing out 2% I don't see the point.
If I had been given a much higher chunk (>5%) there is a good chance I would've stayed, so we'll see if they value me enough with a counteroffer when I give my notice.
All in all, and reading through all of this I would never join a startup under these terms again, if I'm engineer #1 then I'm getting at least 10% and essentially being a cofounder. Otherwise I want a salary that's on par to a bigger company.
10% to a founding engineer almost never happens. You’re in cofounder territory. There really are 2 reasons to stay in the startup,
1. The startups reaches a great valuation. If it reaches a 1B valuation, then even assuming 50% dilution, you have 10M for 2+ years of work, almost 3-5M per year TC! Yes your founders are earning much more but comparison is the thief of joy, you just got a salary that no big tech company could match (unless you’re in C suite)
2. The startup doesn’t reach a large valuation but grows rapidly making you in charge of a large group. This too is useful, promotions in big tech have a very standard time schedule, it takes 8-9 years to reach staff (or never) and then 4-5 years for every subsequent promotion if it happens. With a startup, if as a founding engineer you gain experience leading a team of 50 people, you’re scoped for staff and above in your next job hop. Of course you need to sell this in your interviews but I’ve seen this happen and it can be worth it, if you played your cards right.
TC isn't TC if it will remain illiquid for a number of years. That is the issue described in the blog post. Founders get great secondary liquidation in each round which helps realize some of those gains. For you as the early employee you get stuck with a now more valuable potential lottery ticket, but no clarity on when it can be cashed in.
> 10% to a founding engineer almost never happens. You’re in cofounder territory.
Morally/ethically, if you're building everything single-handedly from the start, you are a cofounder. Obviously the original founders have no legal obligation to compensate you as such, of course.
What seems weird/odd to me is (assuming I got it correct) OP seemed quite important/essential to the working of the company, if not the most important technical person. 10M is nothing to laugh at, but I'd much rather get 500k from a company valued at 5M than 10M from a 1B corp if I was the largest contributor.
What I don't get is that you are engineer #1 but you say the vibe and culture are bad.
Why didn't you build a better culture? I very much doubt that the management team took all the hiring decisions on their own after they got you on board. I'd say the most important part of my job as #1 was to hire and build the team.
throwaway acct here. I left a flagship tech company with $500k total comp and joined a startup as engineer #1 with 5% options over 4 years. My salary is current $120k and I'm losing money each month, although I've been promised that will changed as soon as we raise more.
We are going to raise a Series A in the next few months. I know a little bit about this stuff, but not enough that I'm confident in exactly what to expect over the next few years, nor enough to know that I've negotiated properly (thought I did lol) and are protecting myself enough. This thread is scaring the shit out of me. I have a good relationship with the two founders and not afraid of being candid with them. Would appreciate any advice.
You should be candid with them that you're uncomfortable with the cash portion of your comp.
5% is an unusually high % of equity, the founders likely assumed you were happy to trade-off cash for equity. Series A is usually a dilutive round and it's normal to grant people like yourself more options to compensate for the dilution (i.e. to keep you at 5% of the new cap table).
My 2¢: I know people in your position who have ~$200k cash comp in addition to meaningful equity. Don't feel bad about asking for more cash, if your founders have a good relationship with you and you're providing value for the company, they'd rather invest the marginal cash in you and keep you happy + comfortable.
Thanks, I feel a little better about the situation. I pushed pretty hard for the equity. One of the founders knew me and sought me out, so I leveraged that a bit. When I signed on, the plan was to raise a new round within a 2 months, which would be accompanied by a bump. But for reasons not worth getting into, we waited about 9 months. I padded my bank account in preparation, and I'm just about to tap into savings, which I really want to avoid.
I just told them I need around 200 to be comfortable. And that's the truth. Response was good, and they can't match that now, but they will. I'm working for good people I trust. And we are building some pretty awesome tech that are much needed in our industry.
5% is insanely high based on the founders I surveyed personally (probably around 50 at this point) and generally available info from hiring pros. They must really value you. Cash comp is probably low (depending on the locale ofc) but i dont know how much money you raised.
This sounds like a bad job and you should find another.
At some point you were happy with $200k and 2%. Now you aren't. I don't think there's a bump that they could give you at this point that would make you want to tolerate the shit that's bad about the job.
Note that this is a bad job. Startups are more prone to creating bad jobs.
The math for employee #1 at a startup is almost never ideal if you're being completely rational about expected value. That is, I think, a separate problem than you're dealing with.
The ideal reason to be engineer number one tbh is if you want a playground (for lack of a better way of putting it) to build the system out the way you want. That will be of high value to specific people (Architects, not the LinkedIn kind) and low value to most of the population who just sees a job as a means to an end.
But for some people, direct access to an AWS account and license to build as they please is intoxicating.
Compensation wise, that’s a great startup job, especially with such an insanely generous exercise window. Where I think you maybe went wrong is, if you are building everything, it’s not a collaboration with the founders, which is half of the fun of everything.
I suspect it’s more about the culture than the numbers. You say on one hand, oh I’d probably stay for 3% more, yet, you don’t see the point to earn another 1%. Your salary is pretty good man. Meanwhile they are burning $250K every month into smoke
10% is not realistic. That’s the whole employee options pool. I mean imagine if at your current job, someone worked there for a year before you, then walked away with more than your entire current equity grant, never to be heard from again. That’s what you’re describing.
It's normally considered a bad salary in comparison to what you could be making. I won't speak for the poster but I left a ~$1m / year TC job ($300k base the rest RSUs) to join a startup. I have a good salary compared to the population at large but it's a fraction of what I could be making on the hope that my equity turns into something meaningful that makes up for it.
The easiest way is to move to the SF area. However, you'll end up spending most of the after-tax pay on housing, food, etc. For example, rent on a 1 bedroom apartment in the suburbs is going to be $30-60K per year:
If you live in the US and work as a software engineer at a top tech company it’s very straightforward to make more than 200k. Otherwise, it’s much harder.
It's not just a matter of place, but what you can have if you work for Google instead. I can make $200k as a freelancer in France, but much more as a Google employee.
Today I'm giving a training to 3 people, each paying 2600 for this training. It means this week they get billed 7800 in total. If you do that for 30 weeks (not even a full year), you get to 234000.
15 years ago, my team leader was already doing $15K month as salary, and it was a startup in Sophia, not Google, and a long time ago.
So it's all possible, but indeed, not the average situation. The median dev is underpaid in France:
I'm in a really similar position to you. I'm currently engineer #1 at a seed stage startup making $155k with 1.5% equity. But a year in I'm realizing I've built their entire product from scratch while they do sales and outreach. Obviously those things are important but I'm a leg of a tripod holding the whole thing up and yet I have a fraction of the equity they have. Makes no sense.
I've been thinking about the equity split amongst early employees. Our startup is reserving 20% of equity for early employees. How about a division by 2 every time? First employee gets 0.5 x 20%, second employee gets 0.25 * 20%, etc.
Early employees are better rewarded for the risk, but later employees (e.g. #10) will get basically nothing. It's all about tradeoffs
people already do a variant of “earlier gets more, later gets less” that’s a lot smoother/linear than your scheme and can be customized and adjusted to roles (engineers get more than salespeople as an example). With what you describe, offering some exec down the line 0.5% or whatever is impossible.
You need flexibility because at any moment some killer candidate might come along that you need to juice the grant for. Just being earlier doesn’t mean they contribute more to the company
But you can leave easily. and in 2024 I think people should insist on getting a decent salary (FAANG is impossible, but for most of the country, “even just” $170K is eye watering), and work life balance (sure, you will have to put in extra hours sometimes, but if it’s a 12 hours a day shop, don’t join). Founder should work a lot more aggressively, live a lot more spartan, and obviously is shackled to the damn thing with no optionality.
I'd say take a startup. Those early companies don't have a lot of staff so you can try lots of things, wear lots of hats. Good experience. Take cash, don't get played by options/equity. When you find the hat you like move into a more stable role.
i joined as founding engineer as my second job, 2 years after college. The founders were the same age which I think let them consider a young founding engineer. It worked out for me and I think if you have the opportunity then it is a great time to take the plunge. Knowing what I know now I would likely not take the same role at 30 due to lifestyle requirements (have wife and house now, back then I was paying very little for rent with roomates and had no issue with 12 hour days. I think the risk can make sense early in your career but most founders probably dont want to risk it on an untested dev with sub 3 YoE.
This post has managed to piss off everyone: employees who didn't realize founders were getting liquidity events while they're still sitting on their more-often-than-not valueless equity, and founders who feel they've earned it and don't like the implication they haven't.
Good point. Its interesting to see the comment thread here.
The part to me that I see as surprising is dismissal of the stress of taking VC money and being a founder. It is a job thats incredibly demanding. Which is eye opening to me that that's how people see it.
If it was so easy why aren't there more of them and more companies?
Early employee is tough - unless the company is on a significant trajectory the options should be valued at zero. That said being an early employee has other benefits such as being part of an interesting team and work problem. Definitely not a cushy job though (and nor is a founder) - both are significantly hard and for a certain personality type.
Everyone else go join a FANGG and get paid if thats what you are looking for comfy life benefits.
The main advantage of being an early employee is that you can leave.
Founders generally need to go down with the ship, early employees do not. If the growth trajectory starts to falter after 1.5-3 years, just get out of there and try another company. Let the founders clean it up (and you have equity in case they do).
Its a different risk profile and a different level set of responsibility. Founder has the entirety of the company on their shoulders. Early employee has a lot - but they can leave and join another firm if they want.
However my original comment was pushback about how easy it is to take VC money (comments I have seen) and how low-risk being a founder is - which is patently false.
It also reminded me about another post I read here, probably a few years ago, that outlined how stuff works. And my takeaway from that one, was yet another way that early employees get shafted, as they get diluted a lot, and other employees being brought on later end up with a better exit in the end. But I can't remember the details or find it.
This is the reason I didn't check the comments until a couple of days later - I didn't expect anyone to read this and I also figured everyone would be pissed haha - the response is more mellow than I expected for a semi-controversial HN thread though!
It also pissed off some investors, so everyone is pissed off - I might write about something a bit more positive next time :D
The founders I've known were already wealthy when they decided to do a startup. They aren't at risk because even if the startup falls through without making a cent they have enough money in their bank account to withdraw $200k/year for thirty years. There's no risk there.
Most can even file for personal bankruptcy and then lounge around in their parent's home for a bit. (Or a house in the name of their spouse-with-a-prenup.)
My parents didn't have a garage for me to found a business in.
When people helpfully suggest, why don't you start your own business, they usually have a substantially bigger than average support network and liquidity to begin with. I never get those suggestions from people who've actually experienced hardship due to job loss or financial stress.
Founder liquidity is wrong -- and not because employees don't get the same deal.
It's wrong because it is NOT uncommon for a founder to take chips off the table sometimes enriching themselves to the tune of millions only for the startup to then "fail" -- either go bankrupt, sell for peanuts, or sell for only a modest multiple.
You're not done until you're done. But founder liquidity has now become a path to getting rich when the outcome of the company is still unknown and up in the air. If venture backed founders don't want that risk, they should start bootstrapped companies.
At a minimum, there should be a cap on it (not % but $), and yes, it should be extended to early employees too.
I always thought there was another reason for VCs encouraging founders to sell shares: giving them a taste of wealth. If you're a founder that sold 2M in stock a year ago and a 200M acquisition offer comes along, you'd be less tempted now that you appreciate the difference between small millions and big millions.
If you thought you had a real chance of going much bigger, having cash already makes you more willing to take that risk. And since VCs tend to make most of their money off a couple very big wins, it's worth it to have founders that won't settle for less than billions.
> another reason for VCs encouraging founders to sell shares: giving them a taste of wealth
VCs are wealthy. Some of them weren't born wealthy. The best among them recognise that removing the worry about e.g. paying rent will make a better CEO.
It is about aligning risk preferences. Being "all-in" is not likely a good thing for a founder. The founder prefers to take less risk which results to mediocre exit for the investor. The investor would rather have bigger exit or nothing, and giving the founder some money is helping to aling the risk preferences a bit towards the same direction.
As for employees? They are typically not calling the shots about company direction. I don't see a reason why investors would care about employees.
> As for employees? They are typically not calling the shots about company direction.
They can be motivated or not, knowing that the founder made big bucks and they made nothing is bound to lower motivation. Thus the title of the article, founder's liquidity is a well guarded secret.
Nice article, but it is wrong about liquidity events at WeWork. The author only discusses a tender offer that fell through at the end of 2019 after the failed IPO and collapse, implying there was nothing ever before.
There was a tender offer in 2017 with the first SoftBank investment, and again in early 2019 (pre IPO attempt, closed in April) associated with the second investment by SoftBank. It is possible there were earlier events, but I had joined in 2015.
That isn't to say things were roses; I know many early employees who, in the lead up to IPO, exercised their options and took enormous loans to pay AMT and were left in a terrible situation.
Thank you for letting me know about this - I searched for other tender offers or liquidity for employees of WeWork and couldn't find anything (and the 2 former WeWork employees I know joined in late 2019 / 2020 - so they had a pretty terrible experience)
I will re-work that section so that it's factually correct
I was aware something along these lines was going on when a profitless not-quite-unicorn (and still private & profitless 6 years later) startup founder bought the nicest penthouse apartment in my building some years ago... and then spent more money gut renovating it.
It wasn't Adam Neumann sized liquidity but certainly mid single digit millions at least. His company meanwhile has floundered with wave after wave of layoffs post ZIRP era.
I wish I had known so much more about this before joining a hot AI startup a few years ago. It raised its Series C at $850MM valuation. The business was doing terribly; investment was exclusively speculative with no business success to speak of.
The founders made tons of cash. Layoffs ensued. They're still kicking; they've pivoted to Gen AI which has given them new life. I had no idea how terrible the deal was. I regret so much about that time and the opportunity cost of joining that place.
It's also wrong because it's not the founders work in isolation that is providing the liquidity opportunity in the first place. The entire purpose of a joint-stock company is to align incentives for all shareholders to benefit from the value creation of the company. Founder secondaries are a work-around that hack money into the pockets of a couple people off the back of other's labor instead of collectively enriching the group performing the labor.
I don’t understand the framing here, where they need to justify why they get paid. They created and secured a thing and sell off chunks of it along the way when it suits them. What’s strange about that? If you buy a cheap stretch of land in the middle of nowhere and develop it and sell pieces of it off, that’s just understandable.
When you come on board as an employee, you’re just not in the same situation.
There's nothing wrong with getting paid. But there is something wrong with pretending like you aren't getting paid in order to play on people's sympathy, so that they will accept getting paid less.
Using your analogy, this is Alice bought a cheap stretch of land in the middle of nowhere, and wanted to develop it, but she couldn't afford to pay Bob to develop it. Alice then offers to pay Bob a smaller portion of money and some of her land in exchange for developing it. Bob has other clients looking to pay him more money, but he decides to take Alice's contract because he wants the land.
Why is Bob not in the same situation? They both are taking a financial loss in the hopes of having more valuable land to sell. Why shouldn't Bob have the same right to sell his portion of the land that Alice has?
There's a moral justification, and a desire to change the social norm, versus the terms of an agreement. This is where educational articles like this are important to improve the understanding throughout the industry so that employees can make informed choices.
>>Why is Bob not in the same situation?
In this specific circumstance, Bob agreed to an arrangement that contractually doesn't put him in the same situation. Hopefully Bob will learn from this experience and, if possible, negotiate better (or equivalent rights) instead of willingly agreeing to unequal rights.
Pragmatically, unless and until more workers are willing to take the risk to become founders themselves, the balance of power usually is in the founders' and investors' favour (i.e. capital).
It's hard to make this point without a normative argument, but by analogy to land, a company is not only the land but also the workers laboring on it. It's reminiscent of serfdom. The serfs are attached to the land, and they own very little of it (if at all, and with many strings attached), even though their continued work is a large reason why the land would be considered valuable in the market in the first place.
But this analogy fails, too, because in Silicon Valley, the serfs aren't attached to the land. Generally, someone who's an early employee at a tech startup has the option to go be an early employee at a different tech startup, without too much hardship. They aren't tied to the company the same way a serf is, where uprooting one's life to go work a different stretch of land was absurdly difficult, if not impossible.
what happens if the founders subsequently run the company into the ground, having personally enriched themselves off their employees work, who they then destroyed the upside for?
should the employees have a legal claim against the money that was taken in the secondary transaction?
One under appreciated dynamic that has changed is that companies with limited revenue/PMF are raising more money at higher valuations. This mean that more early employees are being hired into less certain, less profitable situations, and the equity they are getting is a smaller percentage behind more liquidity preferences.
E.g. There are numerous AI startups I’ve spoken to in the past year with negative gross margins, 8 figure raises, and >100x ARR multiples. $1mln in paper equity in such a company is probably intrinsically worth <$100k.
Being an early employee at a startup right now is a really bad financial decision imo
> Founders often feel guilty that they are getting liquidity (they shouldn’t)
Well they should not feel guilty that they are getting liquidity, but I think they should feel guilty that their employees get pretty much nothing in comparison.
> Investors, founders, and employees all believe that founders are taking more risk than early employees (this isn’t true once founders have exclusive access to liquidity)
As an employee in multiple startups, I can tell you that I never thought that. One startup went well, the founders got rich and I did not even compensate the salary compared to being in an established company (and I'm not even talking FAANG). When the startup goes bad, then the employees are screwed as well.
Employees actually have the risk of getting fired, of being lied about the finances of the company, etc.
I've read that Sam Altman's net worth has ballooned from hundreds of millions (mostly tied up in Helion) while at OpenAI to billions, and that despite all his protestations of not making a penny from OpenAI, he also has/had a $10M investment in the (~100x profit capped) for-profit part of OpenAI...
Given Altman's slippery relationship with the truth, I have to wonder if his sudden significant increase in wealth, if true, is due to having participated in an early "liquidity event" as the article describes. Did he sell part of his shares to Microsoft, perhaps ?
The situation I recently went through reads like a horror story:
> was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground.
> company is a breakout success, raises a large growth round.
> founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity.
> founders start thinking about early employees as "problems" because they have too much equity and could easily hire multiple FAANG engineers for the equity comp they're paying the early team. push all early employees out of the company.
> horrible ego-based decision making such as this kills the company culture and runs the company into the ground. company is a mess, stock is now worth significantly less.
---
> early employees have to pay money to exercise their stock options which are worth millions on paper. early employees have to front money to pay taxes on the capital gains on the stock.
> founders have pocketed millions, off the backs of other people's work, while the employees who built the company all owe huge tax bills and have no path whatsoever to ever seeing liquidity with the floundering company.
> all of this is because the employees did their jobs too well, the company grew too fast, and the founders egos got completely out of control.
To be blunt, situations like this should be illegal. joint-stock companies aren't slush funds for three people to personally enrich themselves off the labor and capital investment of others, they're supposed to be entities where all shareholders participate in the upside of the value creation together. Until there's some sort of legal framework for pursuing class-action lawsuits against founders who defraud their employees like this I don't think this situation will ever get better. There are already laws against self-dealing transactions by company executives, I don't see what is different in cases of extreme founder liquidity off the backs of other people's work.
This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one.
I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us.
Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales).
I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth.
One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop.
I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX).
I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations.
Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.
I don't think it's an ordinary path. The founder had success before, and the company I was a part of skipped seed and started with a series A before raising more pretty quickly.
edit:
From the looks of it, they have 500+ employees now.
Seems like you would have had a good case to a lawsuit, at least enough to give them a headache settle in court. Strange that they dumped you if you were valuable to the effort. Did they just squeeze you for what you were worth and decided they could get by with other engineers or did they not see your work as valuable?
> Strange that they dumped you if you were valuable to the effort. Did they just squeeze you for what you were worth and decided they could get by with other engineers or did they not see your work as valuable?
Yes and no? I was certainly brought on as a valuable asset to the company.
I was introduced to the founder via a mutual acquaintance. I had other job offers at the time and had no intentions of joining, but the acquaintance asked me to speak with the founder and hear him out. I was basically tossed an offer that was silly to refuse.
I provided a lot of value and was responsible for building the most successful product the company offered.
I think things went a bit south when they wanted to raise even more money and bring in more investors. I think I was a bit of a black sheep in the company (I didn't have the phd+company pedigree as the other founding members). I felt like maybe I didn't look so good when they presented to investors. They certainly pitched the company as being built by the elites of AI and machine learning... and yet there I was ;p
If we talk about stock options, the company is still private, and no stock was issued.
Paying taxes on options for stock that may never materialize, or never be worth much, sucks.
I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.
The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.
Let's say you have the opportunity to sell your shares in the private market for $2/share a few years after you've vested.
Exercise earlier:
Strike price: $0.10
FMV at exercise: $0.20
Taxes: AMT on $0.10 gain (might be $0 in taxes) + Long term capital gains on $2.00-$0.10
Exercise at sale:
Strike price: $0.10
Taxes: short term capital gains on $2.00-$0.10
Assuming a decently sized transaction:
If your marginal rate is 35%, your long term capital gains rate might be 20%, saving you 15% of the sale price in taxes.
There is a risk that the money you pay to exercise ends up buying you worthless shares.
It all depends on the specific numbers. The longer you wait to exercise, the more likely you will have to pay significant AMT taxes (assuming increasing valuations) to the point where it no longer makes sense to exercise because you'd have to pay so much in AMT taxes for shares that may become worthless.
I gladly paid $10k to exercise so I could save $150k in taxes because I thought the odds were high that I would later be able to sell my shares for more than I paid.
I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.
personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!)
and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!
Because that’s the racket! They can’t pay you top dollar because they’re a lean startup, so they make up for it by adding “equity” to remuneration. But that equity is in the form of options which you have to buy with your not-top-dollar salary, so it’s unlikely you will. Then you leave the company before an event and those options expire after a month or so, going back into the pool for another engineer to do the same. The house always wins!
its not done this way because the founders want to screw you, its done this way because of a bunch of arcane tax laws. Its complicated to explain, but the origin of all of these weird "options not equity" and "90 days to expire" type things are because of US tax law. If the startup could give you shares without putting the employee and the company both in a very puntantive tax situation they would.
This isn't true. Company executives don't owe a fiduciary duty to employees or holders of stock options in a company, they only owe a fiduciary duty to concrete shareholders. There are a lot of founders of less than high moral character who want to keep it this way.
I sent a Section 220 demand letter to the founders of this company to get transparency on the money that was taken during the secondary stock sale and they're currently fighting me on it because I wasn't a shareholder at the time the secondary sale took place, I only held options in the company at the time.
This anecdote is illustrating a real world situation in which it is being used as a way for founders to try to screw their employees, not because their hands are tied by some arcane tax law.
I'm pretty unknowledgeable when it comes to tax law but... If you're an employee at a series A start-up valued at $50 million and part of your annual salary pay package is being issued equity worth $100,000 do you have to pay tax on that immediately? If you can't cash out because there hasn't been a liquidity event how do you pay the tax?
you are issued equity in the form of stock options. Stock options give you the opportunity to buy stock in the company at a specific "strike price" enshrined as the fair market value of the company when you sign your offer letter.
you aren't actually vesting stock month to month you are vesting your stock options. when you "exercise" your stock options you pay the company the strike price * number of options you want to exercise in order to purchase the actual stock in the company.
If the company has grown in value since you joined then you would have a taxable event upon exercising your stock options because you are buying the stock at the strike price, but the fair market value of the stock is significantly higher, so that is a taxable capital gain that you have to deal with.
Any sane company will give you a 10-year exercise window after leaving the company to actually pull the trigger and "exercise" your stock options so that you don't incur a tax liability but some companies only give you three months. Which means not only do you have to front the cash to "exercise" the options, but you also have to pay the tax liability on the capital gain of stock for that year.
If you're asking how you can possibly be expected to pay the tax on a million dollar+ capital gain, without ever even having access to cash or a guarantee you even will have access to cash in the future, then welcome to the scam that is being an employee at a Silicon Valley startup and the fucked up logic of the US tax code.
my comment was a response to the comment above, complaining about options and exercise windows offering options, not what you're talking about WRT secondary sales and corporate privacy. The reason we have options and all this weird stuff is indeed tax law. Private companies do not grant equity because it is generally extremely tax disadvantaged to both the employee and the company itself. For instance, the 90 day window is a consequence of ISOs to NQOs, which has a direct tax consequence. I'm not arguing that 90 day exercise window is absolutely better than 10 year exercise window, im just saying that everything is downstream from tax and corporate law.
That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment.
Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.
There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket.
There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.
Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify.
However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.).
So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.
If you have almost no net worth than put it in a bank savings account. If you have more than almost nothing put it in 401k or IRA plans - a house is sometimes a good option too (but only if you will live there for a decade, and of course location location location). Only when you have the above in great shape should you thinking about anything else more risky.
Actual equity is hard cash, options are a potentiality of cash.
As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook.
Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.
First of all, we're talking about pre-IPO startups, so you can't just sell the stock.
Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors".
You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).
>First of all, we're talking about pre-IPO startups, so you can't just sell the stock
This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1]
>company loses money because it gave equity to employees is nonsensical
You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans.
> You're not giving away equity
I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants
I have received equity as an employee. When I started, the company was very early and their evaluation was still very low. The way it worked was that I had to pay for the equity grant upfront. I forget exactly how much but it was<$200. This is also how it worked for me as a founder of a company.
That same company eventually raised a sizeable equity round and then began issuing options for new employees. If they were to continue issuing equity grants, the cost to purchase the grant would be much more than $200 (likely tens or hundreds of thousands of dollars). Alternatively, if the company were to give employees equity grants directly instead of having to buy them then that would count as income and the employees would owe taxes on the equity gained. The tax bill could also easily be tens or hundreds of thousands of dollars.
Options avoid all of that and defer the upfront costs that come with an equity grant.
Imo, the real problem is that options can be clawed back once you no longer work for the company.
IMO, the real problem with options seems to be that you have no idea what they are truly worth. You have the option for 10k shares and you know the company is worth $200 million, but you have no idea how many shares are outstanding. Meanwhile, shares are being diluted, or maybe they aren't. You're just kept in the dark as to what is happening. At least that was my experience.
I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal.
I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?
I'm not sure if you even need the same class of stock as it is needing some assurance of the same liquidity rights as founders. If the company charter ensured that any secondary liquidity event would have equal participation between shareholders (including employee stock options) it would be a lot healthier and prevent this class of fraud.
It's such a garbage situation right now for employees, because even if you find product-market fit, you do the work and your company is successful you can still get dumped on by your founders taking secondaries and subsequently checking out of the company.
Isn't "some assurance of the same liquidity rights" just a way of saying "the same class of stock". The same class of stock will have the same liquidity rights.
> Why is it a secret that founders get liquidity in many venture rounds? Because it undermines the narrative of the founder who is "all-in." The story of the founder who mortgaged their house and lived on ramen noodles for years is compelling.
A lot of startup compensation seems to rely on people not having transparency and honesty. The founders, investors, etc. all have very different risk and reward situations compared to typical employees and even non-founder executives. But for most it seems like a raw deal compared to working at a big tech company, unless you’re lucky and strike gold at a place like OpenAI or whatever.
Another area where there is a lot of obscure but important detail is in the cap table, stock plan documents, and so forth. If company financials and cap tables were transparent, and if it was clear the various ways in which a company could screw over employees through various clauses deep in their documents, no one would take those jobs.
I must be an idiot, I've been a cofounder or first hire in 6 startups (2 successful) over the last 25 years and have literally never been offered secondary during a Seed or Series A or B.
You don’t necessarily get offered it, you demand it as a term. If it’s a “hot startup” you pick and choose your investors so if some don’t like it they can walk.
It depends a lot on the startup. I have similar number of startup experiences, and only one had early stage secondary sales ( but those were even for non founders ). Mainly money comes from IPO or other exit.
100%. The one thing you get at a bigco is bigness -- you can release a product to potentially millions of customers on day 1. When you call on a possible customer or partner, they return your call immediately because BigCo is on the line.
On the other hand, I can't stand how corporate politics corrupt a product's vision. Even low-level politics like "strategy taxes" are infuriating.
I think most employees are mostly well aware that founders take a money off the table in every round, and I think that it absolutely does negatively affect morale.
Only a small percentage of tech companies raise a series A or beyond.
To me, this just seems like a capital-efficient alternative to the founder increasing their salary that could be negotiated. I had no such perception that this was some “secret” thing, I assumed it happened since you can do whatever you want if the investors and founders agree that it makes sense.
This whole thread is leaving me very confused. Series A is the first priced round. You're saying only a small percentage of tech companies raise a priced round?
But for software, and my impression is that it is even more like this in most other industries, a huge amount of tech ventures never receive any funding. Many of these are never even properly incorporated and may not be included in datasets. Then, for the ones that do raise seed money, usually with SAFEs, 50-60% of them would fail before raising a significant priced round (series A).
The overall point being, there’s a lot of risk between starting a company and raising a sizeable priced round for most people.
Are we talking about just YC-style internet/app startups? Two of my startups have been deep tech where you can't do shit without a Series A, and the third was crypto in the start of that boom where VCs were begging to lead your Series A. So maybe I just work in a vastly different field.
Yeah deep-tech (which I am also in) plays on a different scale when it comes to funding rounds, simply because of how expensive hardware is and how big the headcount gets to just make MVPs.
My friends in software startups balk at the sheer burn rate and funding rounds at mine. $100mm for a Series A is unheard of in software.
Thank you Thiel for setting the bar so high (the famous, "you need $1billion in total capital to successfully pull off hardware startups" quote).
As a founder with multiple years of experience I can say that this post and a lot of other comments are coming from people who don't understand the life of a founder. It's not so much about risk. My peers earn 5-10x my salary. I'm paying my employees more than myself. I have to provide for 3 kids and we have a lot of debt on the house. I'm working day and night, 24/7. I don't like the phrase "taking money off the table". If I can sell some equity, this is none of your business. I started this company with my co-founders. Start your own company and try reaching Series A. It's almost impossible. Most people are not capable of getting there.
Aren't most early employees also working very long hours for 1/4th the pay and maybe 1% equity? A lot of them also have kids and debt. The life of a "founder" is not really that different from how most people in the world make ends meet. Heck most small businesses run on loans not VC money and are a ton more stressful.
To be frank that's your call to work 24/7 with 3 kids and not the business of your employees. They are free to negotiate how they please and we are free to take issue with certain founder behaviors. It's all business and it's a free world.
My point is that he is not working 24/7 as he says. He just have a business to run, that does not mean they work all the time, as they try the rest to convince us.
Neither working all the time should be rewarded with a status in which they can't be critised, but even if such reward shall exist, he aint working that much.
Wait wtf founders are taking liquidity in second rounds?!
Had I known this was possible I would have totally changed my strategy years ago.
I've founded 3 startups and always thought I could only take out whatever ramen salary I could defend to the most scrutinizing investors. I've given a heck of a lot more in employee bonuses than I've ever taken directly out of the investor pot, where was this "de-risk your own life" essay all those years ago!
I think it’s entirely reasonable for a founder to take money off the table.
The founder possibly walks away from a 6-7 figure opportunity cost working for a big corporate or FAANG. In return they take zero salary.
All of the money that begins to come in is then used to pay employees.
Maybe they raise some funds and pay themselves a below market salary for years.
A few years later they are over $1 million in opportunity cost and still owning a lottery ticket.
By this time they are a bit older, have a family, want to buy a house etc.
They are also massively wedded to the project for as long as it takes, so strapped in for the long haul.
The founder should be able de-risk at the next funding round and not continuing to roll it all for the benefit of VCs.
The same is probably true of early employees, but a lot of the factors above are dialled down. They didn’t work for zero, salary wasn’t under market by such a degree and they haven’t had such a high opportunity cost.
In what world 6-7 figures at FAANG is something a founder is actually "walking away" from?
First of all, it assumes everyone wants to work for those companies and assumes all founders could get such high paying jobs with a snap of the finger.
Getting out of the SV bubble this is an insane amount of money. I boostrap my business and I make 40k a year. Most senior SWE around here make less than 100k.
Obviously everything is local. 40k is about $20/hr, which where I live is just a tad above what new fast food workers make. Fresh CS grads make more than $100k (or at least they did, obviously the past year and a half has been brutal). This is not in SV.
In most of the world (even just considering developed nations) fresh CS grads do not make more than $100k. Senior software engineers don't even make that much anywhere in Europe or most of Canada.
Senior software developers definitely can make that much in parts of Europe, and not just at banks or the big 5. But also 100k USD isn't what it was 5 years ago.
Why the disparity? Especially with Canada - no language barrier and no time zone differences. Why doesn’t the free market equalize Canadian dev wages with American ones?
This is not speculation, it is what multiple Canadians I've tried to poach have told me: they don't want to move to a country where one medical emergency can put them in 6 figures of debt
Not that our health care system is going that well these days but true.
Also being called a freaking non-resident "alien" is so demeaning, sorry I am human.
None of those reasons make any sense to me. The US health care system is truly fucked, but nearly all the companies paying well for SWEs also provide good health care plans. It sucks that things are so complicated (deductibles, copays, coinsurance, in-network, out-of-network, etc.), but people with good health insurance aren't getting bankrupted by health care costs. And I've seen plenty of colleagues with super-expensive conditions in my lifetime ("million-dollar babies", cancer, losing limbs in car accidents, etc.)
And bitching about bureaucratic terms like non-resident alien? All countries have silly bureaucratic language and words can have multiple meanings. Nobody thinks "alien" in this context means you're a little green man from Mars.
Sure until you lose your job, I think having your health insurance tied to employment is really scary for a lot of people (me included). Not everybody has the same tolerance to risk. Our safety net isn't what they have in europe, but it is still better than the US.
No offense but it is spoken like a true American. I have dealt with European immigration and it was pleasant/painless for the most part. In the US they make you feel unwelcome and they drown you in paperwork. Not that Canada is much better these days, but I am a citizen so don't need to deal with it.
> Sure until you lose your job, I think having your health insurance tied to employment is really scary for a lot of people (me included)... Our safety net isn't what they have in europe, but it is still better than the US.
100% agree, but we weren't talking about which system is better, we were talking about why Canadians may be reluctant to relocate to the US. It's not like Canadians who come to work in the US give up their citizenship. Worse comes to worst and you lose your job and health care and have a major medical issue, the Canadian safety net is still there for you.
Yes and no, you lose access to it 6 months after you leave and to have access to it again to need to wait another 6 months while being in the Province. But I get your point, when you are a fresh grad it makes sense to spend a few years in the US. Though less relevant now with remote work, you can get a US salary here its just a bit harder.
I am convinced that the WFH movement is responsible for the recent offshoring trend.
Before 2020, it was fairly uncommon to work remotely and most employees were expected to physically come to the office. You would relocate if you got a job in another state, and employers had to go through a painful visa process to access foreign workers or set up expensive international satellite offices.
The great WFH experiment kicked off by the pandemic concluded that no productivity was lost, so many employers realized that they did not actually need to hire domestically at all. Everyone can be remote and work from wherever. LCOL in the US is still extravagant compared to many other regions, so a top engineer can now be hired for pennies on the dollar. I think there's a very good chance that tech salaries in the US have begun to and will continue to equalize with the rest of the world as a result.
I definitely agree with this. In addition to WFH, consumer-grade Zoom/Meet/etc. got good enough right around the pandemic (just before really) where it made off shoring really feasible. I've especially seen an explosion of offshoring to Latin American and Eastern Europe. The time zones make things much more workable than, say, India or China.
Yep. My previous company almost exclusively hires in Latin and South America now. The interesting thing to me is that it hasn't affected the executives themselves yet. If employees from one region work just as well as employees from another for other roles (or at least cost to performance is favorable), then it seems hypocritical and counterproductive for them to insist on US-based execs. The vindictive part of me hopes that it catches up with them next.
That will change once legislation gets passed requiring remote workers who are not located in the same country to need to go through the work visa process. The outsourcers are shooting themselves in the foot. Once the law drops and they cannot bring over the cheap remote labor due to visa limits, they will end up with skeleton crew teams that cannot maintain the spaghetti systems that are being built.
Legislation could easily be crafted to block even contractor firms from circumventing the requirement. Either way, someone remoting in from abroad would have to get a visa. This will solve the problem. It's definitely coming, because to work domestically they'd need a visa...so doing the work remotely is not an exemption to that.
In my experience the best Canadian devs came to the US specifically because they could make so much more. Not sure if that's changed much over the past 5 years given the explosion of remote work.
The better question is why doesn't the free market lower Silicon Valley pay to be comparable to the rest of the world. SV is the outlier. Even other forms of engineering don't pay compensation anywhere near what SV software devs get.
This assumes how much of the founders' shares they sell and the size of the raise. The $400k figure is just arbitrary here. I imagine when companies are raising Series B or later, founders are walking away with millions.
$1-$2M after 6 years of working at $100k isn’t really much either in the Bay. (Which is the only place you’d get that.)
Even that averages to a senior Eng salary for the very very few founders who get there.
This has to be tempered by other realities
- no social life
- working 80 hours a week easily
- risking personal finances
- health problems
- good chance of divorce
/ no deep relationships
That may be true, but it is also true of early employees who stick it out for similar amounts of time and get nothing. $1-2 million may be the total amount they would get after a billion dollar exit.
I’ve got a job as a ML Researcher without a degree. I have experience building multimodal generative products. Because I was able to learn on the job at startups. I get to work on the problems of my dreams for the rest of my life now.
10 years ago the only jobs for machine learning were for PhDs at big companies. If you want to join a nascent industry and you’re not a top college graduate you have to find a way in the back door.
Don’t do startups for the money do it for the career growth.
10 years in startups out of college.
Even with two good exits. I didn’t make much money as an early employee, even in success, compared to FAANG peers.
If I went to big companies I most likely end up doing a lot of web development and Im rich off the stock market.
The other aspect that's not factored in here is that often founders can spend years in search mode, living on savings or some early stage pre-seed VC, with zero guarantee of success or ever even finding something to work on.
Took you 5 years to get to a concept that finally justified
hiring someone to help you grow it? Equity is the only form of compensation you have for all that work, and it might still be worth $0 another 5 years later. In the meantime the ICs are getting paid, are getting benefits, are having a life beyond the company.
The rewards have to be deeply asymmetric for this system to work, otherwise nobody in their right mind would even consider it.
At least in my personal experience of doing this, you're often many years of living on savings and are in a bunch of debt and being able to get some cash from a funding event really helps with relieving the stress of barely making ends meet. Investors expect you to stay hungry for as long as possible, so even your salary is complete garbage, and the funding secondary is an absolute life saver that lets you sleep a little bit better at night after many years of dipping into the piggy bank.
Bad founder behavior is quite prevalent and should be called out for sure.
I disagree though with the general notion that employees are taking similar or even greater levels of risk. If you get a stable monthly paycheck, and the reasonable worst case is you're laid off because the company runs out of money (or downsizes), then the risk is in finding a new job.
That situation exists in a job at a large company too. Founders however are so tied to their ventures, that getting a new job is effectively out of the question, because it very likely means the death of the company.
And starting a company is an exceedingly difficult, stressful, and sacrificial thing to do. There is a clear and significant asymmetry in risk, and frequently in blood, sweat, and tears. So the nonlinear rewards should be commensurate too.
> How do people even get funding (or in other words: Who gets funding)
Second question first, early employees are from anywhere, just make sure they are hungry to ship. You want devs able to self-organize and self-manage amid ambiguity and pivots, and filled with an urgency to get working software in the hands of users to get feedback to iterate, and you want sales/product able to listen and drive focus on product that users believe could be 10x better than however they meet their need today.
Answering your first question, this answer sounds cynical, but this is how the math usually has to work for VC to give outsized returns to pools of investors in VC funds:
You need to have a 20% to 5% chance at 2x - 10x annualized growth generating high cash flow and high margins reinvestable in the business with ability to switch modes and cash out or IPO in 5 years to let investors exit by year 7.
In other words, don't aim for a solid dependable low risk business plan. Aim for a unicorn business plan. To get funding, your business plan should be so compelling that in a funding round of 10 startups, yours is the one delivering returns that make up for the other 9 blowing up, and still giving the investors in the venture fund returns that are a multiple of the stock market.
Remember VC have customers too, their investors. Their investors want a basket of startups that handily beat just parking their money in a market-beating ETF of Apple, Meta, Tesla, Nvidia, Netflix, Alphabet, Microsoft ...
In practical terms, your business plan must convincingly show that the startup can grow exponentially (not just "up and to the right" but a curve) and overcome inherent risks (show you're risk aware, and already planning to beat the risks). Investors are looking for ideas that can stand out in a portfolio where the rare successes can de-risk returns that far outweigh the more common failures, for their portfolio to generate overall profitable returns.
To get funding, position your startup as a standout gem for a portfolio.
The title of the article is mostly clickbait. Anyone who's lived in SV for a decade or so knows this well. Startups are a scam unless you are a founder. They are a meat grinder that runs on naive young new college grads who buy into the bullshit that their options are worth anything.
Founders cashing out early may be more of an "open secret" but it warrants more discussion. I don't find the title overly clickbait-y.
And a counterpoint to your perspective, I joined a startup a couple years out of college, had the most fun of my career, and the options were very much worth something. Working for a well-funded start-up is something I'd especially recommend early in your career when you can take more risk even if the equity doesn't always work out.
If anything, I'd discourage becoming a founder as a new grad more than SV typically discusses. I really appreciated taking time to build up my savings and get experience before taking a shot at that.
Even founders get shafted in later rounds where they are diluted out of their voting rights because they can't raise the capital to maintain their share. The only people not getting scammed regularly are the VC.
Founders have control of how things go, and have many ways to make money along the way (one such way documented by this article). How often do the first 2-5 engineers get any such chances?
> The only people not getting scammed regularly are the VC.
Not to want to sound like I'm standing up for Vulture Capital, but while it's not "getting scammed" as such - I suspect most VCs lose money on most startups they invest in. And not all VCs land enough 100x exits to make up for all those losses. (The "successful" VCs are the ones who make all the losses end up in pension fund balance sheets, while ensuring most of the profits land in their friends and their own pockets.)
> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)
It would. Knowing that founders are cashing out and I’m not able to would be a very good reason to walk away, in my rather old, maybe slightly cynical opinion.
I get the need to hedge your bets, but employees should be able to that too.
The single data point here is Adam Neuman, so I have a hard time taking this seriously.
I have raised 6 equity rounds as a founder of 2 companies. Never took a dime off the table, was never offered it, never asked for it. We actually did have early employees ask about it, and we encouraged them to not sell.
Why would you, especially at early stage valuations? You're either bad at math, or you know you're about to fail. And who is buying these secondary shares? I don't know a VC or angel who would "de-risk" an early founder like this; it's not aligned with their model. It also complicates QSBS status if I recall correctly.
> The founder in this scenario was offered $400,000 of liquidity at Series A and $750,000 at Series B and encouraged to do so by their board of investors to de-risk their own life.
This is from the article. I would tend to agree with you.
I straight up don't believe the article. (Edit: not saying author is lying, but that they're extrapolating from bad data.) I've worked as employee #3 at one startup, co-founded another which achieved >$3bn valuation, and am now solo-founding a third. I've networked with lots of other founders. I've never, ever heard of a secondary liquidity offer in a Series A.
I think the paragraph above that quote explains it. They're talking about founders that "mortgaged their house and lived on ramen noodles for years." It actually sounds like they got screwed out of some equity. Rather than pay themselves a reasonable salary to support their lifestyle as they build the company, they instead traded equity for a one-time payment. That's a shitty deal, and I want to know who this predatory VC is so I make sure I never take money from them.
This so much. So many folks in this thread are talking about series B+ and only paying themselves under 100k/yr and that’s just a scam. Once you have institutional money you can just start paying yourself enough to live ~comfortably.
I think founders generally have 20 to 50x what the first employee has, in my experience. Employees rarely have more than 1%. Founders tend to start out with about 20-40% depending on number of cofounders.
> Ask most venture-backed founders why they get 10x more equity than employee #1
Employee #1 typically gets 1%. Sometimes could be up to 2%, but 1% is standard. So then the founder gets 10%? No way.
I posit that very, very few early non-founding employees in SV startups have a true notion of how cheap they're working compared to the founders. Founders do founder-y stuff, the early engineers build and launch the full product, and if all goes well, the founders fly private the rest of their lives while early engineers make good progress towards a down payment.
I was being generous - if there are 3 cofounders and you let one of your early employees get in the 2-3% range - it might be closer to 10x - but you're right that the majority of the time it's between 20x and 50x, sometimes even more dramatic than that for solo founder scenarios
If startup goes to zero, then everyone goes home with nothing. The founders typically don't lose any money of their own -- that cost is shouldered by angel and series-A investors.
Often though, the startup has a "soft landing" where it's acquihired by a larger company, and then the founders typically get executive or very senior roles (with large bonuses, etc) meanwhile the non-founders get standard employee packages.
Yes, I'm glad I'm not the only one who thinks the economics of it are a little bit broken. I will never join another start up as employee #1. I'd much rather come into a larger start up with a high cash comp + equity, than very low cash comp, worked to the bone.
The other thing no one talks about is founders tend not to dilute themselves, but often early employees are diluted heavily.
I did it not caring about money and got burned so badly I was still mad. It's ok though, it is nice to return to work with good people earning more than 2x a founding engineer salary.
This is another reason why American companies beat out Canadian and many other companies by so much.
In Canada even at Series A Canadian VCs will not offer you liquidity while at the same time allotting pennies in the first place. Absolutely conservative poor people.
If things are working, derisking the founder so that they can focus all in on the problem is the best thing you can do as a VC.
I'd be very careful with a 20% option pool and a 3 month cliff.
My assumption is this means the founder is providing double the equity, meaning that at 3 months the potential of not insignificant amounts of equity can be walking out the door.
We've had the experience where we had a contractor who we thought was a good fit. We decided to hire them as an employee, and back-date the cliff to when they started. We had a very big somewhat bet the company deadline which their work was key to, and this deadline was about 3 weeks past the cliff date. They walked 2 weeks before, and didn't deliver. Literally waiting until they could claim some equity.
Of course, this is what bad leaver clauses are for, but there is a reason why some of the terms exist.
I agree with the long exercise options. Vesting timelines have arguments for longer and shorter, which is why I think the standard 4-years is settled on.
It is too bad it is up to the founders themselves to offer liquidity to employees. Founders are financially incentivized to not offer anything, so you're counting on their sense of justice and morals to overcome their sense of personal gain. This should be regulated.
(Yes, this is a political opinion. No, I am not American.)
Having only worked for larger companies (RSU stage), I'm curious what the typical breakdown of founder to early employee to investor to later employee equity looks like. I'm sure it differs pretty wildly, but I'd love to know what a 'typical' case for mid-to-late-stage start up looks like.
This always seems like a huge scam to me. Employee 1 gets 1%? It seems unfair from multiple perspectives.
One is just a straight up naive sense of fairness. If I'm going to be in the trenches with you, I had better be able to see my ownership % in a pie chart with my glasses off. If we're out here both making chairs and when we sell a chair for $100, you get $85 (assuming someone took one of the standard-ish seed rounds that are usually 10-20%?) and I get $1? No thanks.
The other sense is aware that the founder is taking various risks and blah blah blah. Ok whatever. Let's pretend somehow 1% is a fair number and just look at it from a payoff perspective. 1% of stripe? Yeah I'll take that. 1% of the other 1000 startups who had mediocre exits or just muddle along to finally do some kind of tender? I'm barely breaking even. 1% of the other 10000 startups that just folded? At least I can mop the sweat off my brow with the paper I signed.
It seems like the only reasonable way to look at this is you either join a company for a competitive wage and get WLB, or you join a rocket ship in the hopes of becoming genuinely wealthy while pouring your blood, sweat and tears into it. So taking 1% and a shitty salary and having terrible WLB sounds like a huge suckers game.
This isn't a terrible take, but there doesn't seem to be a shortage of people for whom this doesn't feel like a scam.
I'm not particularly fond of the founder hype train, and the typical line is indeed "various risks and blah blah blah" but what's often left out is that employee #1 at a post-funding startup is a pretty different job/profile than co-founder.
Most employee #1's don't have relationships with investors, might not be as employable outside the startup world, and they don't sit on the board, don't have the same formal responsibilities, and rarely are able to raise money to found their own startup -- in fact, this is the often the key reason they're even interested in being employee #1.
It's a market, and as a market I'm not sure it's that skewed.
Want 25%+ of the company? Start it. There's no cabal preventing you from doing that. Have better options than 1% of a likely-dead startup, that pay more and have better WLB? Take them.
After all, few industries give any employees equity. First employee at an ice cream parlor? 0%. First employee of a hedge fund? 0%. First employee of a medical practice? 0%.
Equity grants can be motivating and aligning, and frankly more industries should probably consider them. But not that many people are in a position to found a startup that can raise money (larger equity grants are much more common for pre-external-funding employees) and this differential reflects that.
Btw, "1% of the other 10000 startups that folded" is worth about the same as a founder's 40%: $0. The issue is the middle ground, but there the equity grant is often not worth the paper it's written on: typically the acquirers dictate who gets the money. 1% or 5%, unless the acquirer is trying to retain you, chances are you'll see nothing even if the nominal payout is large.
Anyway, the upshot is what people have been saying for decades: don't do a startup for the money. Do it because you want to be part of that kind of thing, and treat any exit money as a bonus.
Are you talking about 1% and no pay or 1% and a pay?
If I'm getting no pay, I'm definitely a co-founder, but I'm getting a pretty good salary from day 0, I don't think that's too bad.
Say you get offered $200k/y +1%, if things go well, in 4 years you got $800k in cash and your 1%. If things go south, you still got $800k, a cool title, worked on a hopefully interesting product with a nice team. Doesn't sound awful to me. No?
Glad to see someone else say this. I feel like I'm crazy reading these replies about being ripped off. I've been working startups my whole career, earning salaries, working with good people and having fun at times. Sometimes the equity even pays out, but that's not my only financial "egg".
Only after they managed to raise any money, which is not as common as many people assume. And whatever you pay yourself as a founder initially eats into your runway, so that's always a tradeoff.
If you don’t believe a startup can be the next Stripe, then you definitely shouldn’t take 1% and work as one of the first employees.
Also, the risk profile and expectations are vastly different between founders and first employees. E.g. founders are expected to not quit unless the company collapses completely, first employees can quit whenever they wish. Also, if the runway is short, founders work for free and can even go into debt, whereas employees have a stable salary.
Outside US but I never regret getting equity/options and usually it went hand in hand with the higher paying jobs (paltry compared to US standards!) rather than being a salary/equity tradeoff. Atlassian is a great example though I have not worked for them.
I think companies here tend to have less fuck you over terms in employment share schemes but OTOH are less likely to get rich but one company made several employees rich (does 8 figures count?) here.
It's not even remotely fair, but it does follow the golden rule: he who has the gold makes the rules. The founders were the ones who investors were willing to trust their money with. Employee #1 was not.
Unicorn or bust is the name of the game. Once you understand that it’s not so bad.
It’s also possible to level-up pretty well from an acquisition, where maybe the equity was not life changing but you’re now in a bigco at a higher level than you’d otherwise be. The trap there is that many startup folks are not cut out for bigco life.
But yeah if you were dreaming of sailing off into the sunset you need to be a founder (or remarkably lucky). That’s one reason why there’s so many startups.
Background: I work in technical diligence and talk to a lot of companies just before they do exits to PE firms (i.e., usually the first big cash-in). One of the things I see over and over again is just how much great people matter. Not only do they matter for getting you there, but they matter for how much you get when you get there. Our work is used at the negotiation table: piles of tech debt and stuff that needs to be seriously fixed up comes off the top... a "hair-cut" as they put it. Your pile of tech debt and ignored security issues and so on could be millions off the deal.
So... I agree with this writer that it there is likely more value to early founders than they think in doing that which motivates star-level early employees to join and stay.
As someone who has worked in startup environments for 20 years, its rather offensive that anyone in 2024 would claim that employees arent taking risks.
In todays salary brackets, one could be comfortably making 220k as a staff dev some huge healthcare/pharma tech firm. One may also feel the job is boring, soulless, and mostly uncomfortable. Then one may choose to work at an exciting AI startup for ~160k, and suddenly find themselves way happier, growing more, and engaged. One just took ~60k worth of risk right there, not to mention that it could be come $0 tomorrow, and one likely now has crap healthcare benefits, given the startup status.
That 60k could be a million dollars in ~15 years if invested wisely.
Startups are far more founder-friendly than they used to be (thanks in part to YC’s contributions) but we have a ways to go to make them more employee-friendly too.
To call out the employee-friendly equity policies that OP has instituted at his new startup:
> Our employee option pool is 20% which is double the average
> We have a 3-month equity cliff which is 9 months sooner than the average.
> We allow employees to exercise options up to 10 years after they leave instead of 90 days.
> Our equity packages vest over 3 years instead of the industry standard 4-year period.
> … only taking liquidity if I can also offer it to employees as well.
The 10-year exercise window is especially noteworthy since the cost to exercise options can be substantial.
"Silicon Valley's [worst] kept secret: [Loyalty will not be rewarded]"
The fact remains that sweat-equity deals rarely work out in a founding employees favor.
i. IP selloff to umbrella firm for $10
ii. contract restructuring or share dilution
iii. jettisoned from a company months before an IPO
Most techs have seen all of these events unfold... if you are around long enough.
People always have their own strategic truths once significant money is on the table. Even moderate success can destroy peoples memory, and anything not legally watertight is just hot air.
I don’t agree with this sentiment: Investors, founders, and employees all believe that founders are taking more risk than early employees (this isn’t true once founders have exclusive access to liquidity)
This completely discounts how much risk and stress go into the early stages before money is raised, or before enough money is raised to pay founders properly. They often go into debt, put many aspects of their lives on hold, and undergo outsized stress that is largely alleviated by the liquidity event, enabling them to plow forward and shoot for the moon. There are outliers that are insane, but you can’t throw the baby out with the bath water.
I have always taken a lower salary than early employees. And had periods before raising money and after the money dried up where I was taking no salary. I think it is way way way more common for founders to do this than early employees.
I joined a startup as an engineer about 30 years ago. I was one of the first employees and one of the last to get some 'founder stock'. I took a big risk (low initial salary and even lent them money to make payroll) but it paid off. When the company was purchased 8 years later I did fairly well. Not enough to retire wealthy, but well worth the risk I took. I am glad I did it, but it could have turned out to be a big mistake.
Everyone working for a startup might have a different story to tell. Some good. Some bad. Tread lightly if you wade into the startup waters. It CAN be very rewarding but it can also lead to nowhere.
Making less money isn't really the risky part about founding a startup. The risky part is missing out on years of other life experiences, stressing (or losing) your closest personal relationships, failing and feeling personally responsible for disappointing everyone you convinced to believe in you, and developing an anxiety disorder (or worse) from chronic long-term stress.
Author's suggestion that they could have taken a "similar level of risk" as an early employee by taking secondaries as a founder is way off, IME.
Having been employee #10 a couple times now, there is a lot of that even when you aren't a founder. It would be nice if the 'de-risk your life' stuff this article describes for founders was also available for early employees.
Work a high salary job and buy lottery tickets or 0DTE options instead. Half joking. Look at the success rate of outlier comp through liquidity as an early startup employee. If professional stock pickers can’t pick better than index funds, what makes you think you can do better picking startups, spending non renewable time, working for years vesting common shares that you might get liquidity for eventually, assuming they have any positive value.
If you want to get wealthy, there are more efficient, less effort ways. If you want to suffer with low chances of success based on all available data, well, help yourself to the firehose of startup jobs.
You're not just "picking a startup". That early, you're also a big factor in whether it succeeds. Betting on yourself is different than buying a lottery ticket. (Maybe just as irrational for a lot of people, but still.)
Advanced sports stats have the notion of "contribution above replacement value", the idea being it isn't just what you do, it's what you do relative to whoever they could (relatively easily) replace you with.
The startup failure/success rate already have some level of "smart, motivated staff" baked in. So you're really making a bet on how much better you are than the average early stage startup employee.
You (not “you”, but the persona for this discussion) are not special and will likely fail, based on startup failure rates. Certainly, you will put effort forth, but that is only tangential to odds of success. If you enjoy the experience and don’t need monetary resources, sure, knock yourself out. Just recognize the opportunity cost, that the odds are stacked against you, and if you succeed, you were as lucky as you were skilled.
I’ll take the lottery ticket over me any day, not because I suck, but because I am human. Even exceptional humans fail. I don’t drink the exceptionalism koolaid.
People, especially sw devs, love this narative but it's just not true. It's not all luck like the lottery but the combination of things outside your control might as well make it so for early employees at a startup. But hey, you did get that vp of whatever title...
When you work for a startup you have a ton of insider information not available to outsiders, even investors. If you think your startup won’t be successful then obviously just find a different job.
> I have been an early or first engineer at five different companies and have had three liquidity events in a 9-year career.
A "big" success is a 10+ year journey. For an early employee, it is perfectly acceptable to give a few weeks' notice and move on to the next lotto ticket. This doesn't work for a key founder-exec -- they're likely going to commit to a decade working on one big problem, and investors want to incentivize them to shoot for the moon & stick with it for the long haul.
It's definitively not the same for an early employee.
Having been a key early employee at a failed startup, horseshit.
The employees bear the burden too, if they're working their asses off at an early stage startup they believe in the cause just as much. Viewing founders as somehow magically special is a symptom of the broader misguided hero worship the US has right now.
I'm sorry this isn't true. Your name wasn't on the line when you took the investment, and the OP pointed out with his "5 startups in 10 years" line, it's very easy for early employees to walk away. That isn't as available to founders.
There is much more burden (reputational, financial, emotional) on the founders.
I've been a founder, and I've been a key early employee. It is very different.
We allow early-exercise too but I (possibly, incorrectly) assumed that this was the standard for newly incorporated startups - at least within the last 2-3 years it has become significantly more common.
"secondary sales restricted only by a short right-of-first-refusal period"
I really like this as well, I've always found it confusing when private companies are anti-secondary for former employees especially. I'll look into adding something like this to our stock plan, ROFR protects against any hostile take over weirdness and I'm confident we could add something like this to make it relatively easy to sell on secondary under a certain % threshold.
Early exercise is purchasing shares before your options vest, making you a shareholder sooner and solving a bunch of tax issues. The company retains the right (basically the obligation) to repurchase any unvested shares should you leave the company before fully vesting.
Not a restriction of the 83b election but a restriction of when you can exercise. Without early exercise you are stuck exercising as you vest so there’s more likely to be a taxable spread between your option strike price and the value of the stock. With early exercise you are exercising and making the 83b election when there’s no taxable spread.
What would this even look like? An 83b election is something I file with the IRS. Are you suggesting a company might have me sign a contract committing me to not file an 83b election?
How would they ever find out if I did file, and why would they care?
My understanding is that 83b applies to stock, not options, so you have to first exercise the options and hold unvested stock. That requires early exercise.
It's been a possibility in my options contracts. However, the company must agree to it, cash your exercise check, and send the necessary paperwork to the IRS. If they choose not to cooperate, you're out of luck.
I think there's a confusion between the related events. Filing the 83(b) form with the IRS is between you and the IRS. Company isn't involved so not something they can restrict.
However, filing that 83(b) only makes any sense if you are allowed to early exercise and that is indeed entirely up to the company. So if they don't let you early exercise you also won't be filing the 83(b).
Pro tip: Never join a startup that does not let you early exercise!!
Yes i assumed parent was referring to early exercise but maybe i misread. Imo early exercise doesn’t make a ton of sense when the company no longer qualifies for qsbs especially if long exercise window is offered so probably why it’s not offered - to avoid a ton of drama later on
> Imo early exercise doesn’t make a ton of sense when the company no longer qualifies for qsbs
I strongly disagree, early exercise is always optimal if the cost makes sense to you.
The primary reason it is so valuable is so that you don't lose everything if you have to change jobs for whatever reason before a liquidity event. If you join a startup and don't early exercise, now you are going to have to work there for however long it takes for liquidity, which could be many many years. Maybe your life changes and you have to change jobs, but you're trapped, or lose everything you worked for.
Always early exercise! If the startup doesn't allow it, find a different startup.
Edit: I should add that by not early exercising you can still lose a lot even if there is a liquidity event while you're still there! I lost a staggering amount of money on my first startup due to not early exercising even though it went through an IPO while I was there. But later I left (lured to another startup) so I had to excercise (same day sell) all the option in the typical 90 day window after quitting. Had I early exercised years before when I joined, I could've held those shares for 15x returns.
See my point about long exercise window - 5-10y is not uncommon now. I’d rather have that even though it converts to PSOs than gamble ~50k + amt on early exercise. Unless you’re super early ofc which changes the math
I'd be curious on survey data on that if something is available.
Personally I've never encountered a startup that had anything other than the standard 90 day after you quit exercise window. I know these long exercise windows exist but as far as I knew they are pretty rare.
> gamble ~50k
That's a huge number though, I'd never gamble that much either.
I'm talking about very early in the startup. If the strike price is above a few pennies, it's too late (although of course depends on the number of options and your personal budget).
Anecdotally, i've received more offers in the last ~5 years with extended window. I think it's just natural evolution due to increased competition for talent with high-paying public companies. Here's an incomplete list btw[0]. There are usually some strings attached - e.g additional cliff to qualify (like 2-3 years with the company) and you need to sign a separation agreement when leaving, etc
> That's a huge number though, I'd never gamble that much either.
I've been offered early exercise of 25k options with a $2 strike price. Series B startup. So yeah...
No idea how complete that is, but it lists roughly ~160 companies. Which is nice, but according to [1] there are about 71K startups in the US. (Of course both of these counts might be wrong but let's go with these numbers.)
So about 0.2% of startups have extended exercise windows. Not a lot ;-(
Sorry, separate concepts executed at separate times.
Early exercise (yep, 83b in the US) when options are issued then allowing employees to sell shares down the road, outside of fundraising events (Forge, EquityZen, sales to angel SPVs, etc.).
We are talking SV here, and that's very different from my European experience. I've known of founders in Scandinavia who walked out from startups that weren't doing so bad and that could have gone for another round of investment because they were earning as much as a bus driver, had zero savings, and were experiencing burn out after almost a decade of work. Maybe that bit of SV culture that lets founders be on par with a highly paid engineer at a big company is up to something. Maybe if it were more of a thing in other parts of the world, we would be more competitive.
Having cofounded both bootstrapped and funded startups, I can say that in each case there was a deadline associated with success: for bootstrapped, we set hard targets in terms of maximum spending and time in order to test our hypothesis. This allowed us to fail fast in our own way and go back to a better paying day job.
For funded startups - at least with a healthy seed round, the investors expected us to burn fast and hard in order to prove our hypothesis or fail trying as quickly as possible, but they also expected us to not pay ourselves very much. As we found product-market fit and raised Series rounds, it was understood that we would pay ourselves competitive salaries.
Being stuck at the seed stage for 10 years is not healthy - neither in Europe, nor in Silicon Valley.
It's fairly arbitrary, but there is at least one constraint on how much you can liquidate: You cannot liquidate much more than 10%, because you're taking money from the company and investors would not appreciate that.
I just got off the ride (at a small startup) after ~9 years. Not much to show for it economically, but I did gain a lot of confidence and experience around how to actually run a business. I've picked up a lot of lessons, most in what not to do. I'd say it was absolutely worth it compared to alternative paths that I was previously on.
My biggest takeaway is to focus on compelling problems, rather than delusions of financial grandeur. I've learned that solving a hard thing and hearing the feedback from the customer brings me a lot more joy than hypothetical promises of extra cash in the bank. The money is a mind killer for me, especially when it's not real yet. Stock options are no longer something that interest me. I'll negotiate additional salary instead. The only company with stock options I am interested in would be a company that I personally found and retain control over.
One other lesson is to pull the rip cord the microsecond you think something doesn't feel right with management/leadership. I started thinking things like "does anyone care about the sales funnel?", "Why are we only talking to one prospect at a time!?", etc... The chances you will be able to "fix" some other person in this setting are pretty much zero, unless they actively want to be helped. I feel like I could have jumped off this ride at the ~7 year mark and walked away with 99% of the wisdom I have right now.
The only fair way to analyze this is by looking at opportunity cost, which isn’t what TFA does.
Founders often have slightly higher market value (though not always) than first employees, so they are giving up more to go the startup route.
Separately, TFA further underestimates founder risk as they are typically not taking salary during pre-seed, and no or low salary during seed. However employees 1-5 typically get mostly cash, often much closer to market.
Thirdly, there is also often a lot more stress in being the founder. It is a complex, all day job. You have the weight of keeping things going for all employees, and when cash is low it’s your paycheck that gets delayed/cut first, not your employees.
That said I am all for reasonable early stage liquidity where it makes sense, but as many other commenters have mentioned, it tends to not be life changing super early for most early employees. Most employees would rather keep the bet on the table. Also, I am strongly against large founder secondaries. I think it’s helpful for founder to remain feeling “not financially successful”, especially first time founders, so that they keep their heart in the game. I followed this practice with my companies.
> Thirdly, there is also often a lot more stress in being the founder. It is a complex, all day job. You have the weight of keeping things going for all employees, and when cash is low it’s your paycheck that gets delayed/cut first, not your employees.
I've seen startups from a founder perspective and from an employee perspective (VC style startups). I agree there is more stress as a founder, but people really underestimate the toll as an early employee - the gap is smaller than many people think. Particularly those ideal missionary-type early employees, they take on just as much mental ownership burden as the founders. It is also an all-day job. Let me tell you, when the money runs low, it is immensely stressful as an early employee - it is both hard to be the one making the decisions and it is hard to not be the one making the decisions. The ability to walk away isn't a benefit, it's a burden.
Their jobs can be different (or can be very much the same - depends on people and every startup is its own beast) with founders needing to deal with fundraising, board management, and ultimately having the impossible problems land at their feet which is often out-of-scope (and out-of-sight) for early employees. But the same core problem exists for both - your actions will dictate the success of the company.
And there is a huge amount of understanding of the founder burden and support for them, from financial to emotional to reputational. Where are the support networks for early employees? People will say the founders, but this is a load of crap for the same reason that founders rely on relationships with other founders rather than talking to their board or teammates.
Early employee is probably the worst engineering gig in Silicon Valley on most dimensions. Unless you just want to 0 to 1 build things. Then I haven't seen a job that can compare.
This is a great post and I am glad it is getting high visibility. Everyone involved in a startup should understand this and consider it as part of their 'do I join' calculation. Additionally, founders shouldn't try to hide it nor should they horde the returns.
Clearly founders are the reason the business exists, but the whole team is the reason it succeeds, everyone deserves a piece of the reward. Mark Cuban is a famous founder that understands this and distributing gains well before his big win. [1]
One piece of feedback on the terms, 3 month w/ 10 yr window is pretty rough for the company. You will end up with a bunch of random people on the cap table... people that didn't really contribute much in the overall picture. That is annoying as you raise and downright frustrating when you exit. I would suggest you go back to a 12 month cliff w quarterly going forward and maybe set the window at years served, rounding down. My 2 cents.
I don't know if I agree - but I'm open to being wrong. I can't recall many scenarios where I thought someone was a strong fit at 3 months but a terrible fit at 12 months. I can probably think of a couple of scenarios for 3 months and 6 months, especially with slower time to value roles like leadership positions.
Right now 3 months is within my risk tolerance - and there is another side to the cliff that folks don't talk about too often, pre-cliff people will generally be less transparent with negative feedback for fear of being fired before the cliff hits. I'm ok with giving up a bit of equity and polluting the cap table if it increases transparency faster. Maybe the lower risk bet would be a 6 month cliff but I believe 12 months is too long to hold the equity hostage.
You get Founder Liquidity because you managed to convince people who do just as much work that they couldn’t do just as much work without you. LOL
I am so cynical.
To be fair, there is a skill in getting people to believe your vision and to take the risk to work for you. They also need to convince VC's of that vision to get the money to pay you in the first place.
Generally they make more decisions that directly effect the odds of the company existing 6 months or a year down the line than the average employee does (with some exceptions obviously).
You can still be cynical, I think all employees should be given the ability to get liquidity early, but it's not like it's totally unjustifiable.
People are talking about angry founders and angry employees, but there is another side to this post:
Prospective founders who work in big tech companies and have a family which depend on them. I include myself in that group, and I thought I needed 10 years worth of savings to venture on creating my own startup. But from the discussion, in about four years it is possible to match big tech compensation.
> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)
Not sure I agree there. If employees widely knew founders were getting liquidity but the rank-and-file aren't, I think there would be a hit to morale.
Of course, the solution there isn't secrecy, it's giving employees some liquidity.
Founder risk is total myth. I was at a startup where, when it was apparent there would be no more funding, the vc’s permitted principal founder to essentially embezzle the remaining few $M. He and his cronies then lived off the proceeds for the better part of a decade in a kind of “brown dwarf” of a company of the same name.
And it was the SECOND time he had done this in his career!
> We allow employees to exercise options up to 10 years after they leave instead of 90 days.
This always struck me as completely unethical. Your vested options are part of your pay; you should be able to exercise them years after leaving. I would never work for a startup that evaporates my vested options 90 days after leaving. That’s like clawing back cash comp, in my view.
I could not agree more - I still have no idea why 90 days is the standard. It also exploits people who are ignorant about equity compensation more than people who are not - which I think is even worse.
While I agree that employees should get more equity and liquidity, I think it comes down to supply and demand:
- If the founders are de-risking appropriately it will take years of no pay/low pay work before they can even consider taking on employees. Building a valuable asset is not done overnight and takes extreme commitment - plus reputational & financial risk, opportunity costs etc.
- It's very rare for companies to get past the Series B stage. When they do, the founders have accumulated non trivial and non replicable knowledge about the market and the customers. The liquidity they get should be worth much more down the road.
Now of course if you are an early employee that is expected to 'make the startup work' like a founder and get none of the benefits there's a problem. On the other hand employees are replaceable & 'swappable' in a way that founders are not.
The entire system seems like a scam. Thankfully, the COVID-19 pandemic and the Ukraine war have deflated startup valuations a bit. I believe another crisis is looming in the near future, and once it passes, we should be in a better place for the next 5-10 years.
Love the movement and glad there are founders out there pushing the envelope for their team.
(aside: 51 points but only 1 comment? It's a front-page worthy article, but sort of feels like there's some vote gaming happening. I've never seen 50 points w/ 1 comment.)
That's actually a lot more common than people assume it is, and comments like "I can't believe there are X points but only Y comments" are more common than you'd think they'd be as well!
My theory is that it's a sign of a good article, because more energy is going into reading it than into posting quick comments (which are usually less valuable comments). But I don't have the data.
Edit: well... we have the data (to test this), but it would be enough of a pain to do the analysis that other things will probably take precedence forever.
I'm one of those people who upvoted without commenting. I think it's just a way of saying, "I found this article interesting / I agree with the content, but I don't have anything of value to add".
The usual problem of late on HN is people commenting without upvoting, even if they like the article.
On this post, I started reading, then paused to hurry back and upvote on HN, to do my part to keep it from falling off the front page, before I returned to finish reading.
I wonder if that's something the algorithm can detect?
Measure the time between when someone clicks a link to the article and when they upvote it, compare that to one of the "estimated reading time" metrics of the linked page...
(Which, of course won't work, because at least some people (ie me) open a bunch of tabs for everything that looks interesting on the homepage, then spend a few minutes at a time over the entire morning choosing a tab and reading/voting...)
I had no intention of posting this to HN (someone I don't know posted it!) and also didn't expect more than the 10 people I shared it with to actually read it - no vote bait intended! I'm happy to take your feedback on a better title that is less baity and more apt.
But the reason for founder equity -- as with anything in a free market system -- has nothing to do with deserve and everything to do with demand/supply.
There are many more we early employees willing to take 1% equity than founders willing to offer it.
I think its less about more risk etc, and its more like, they are the ones starting the company lol.
1. They are providing jobs
2. They are responsible for growing business
3. They are accountable to not only the employees but to board and investors, etc.
They take money off the table because they are in a much different position than say an engineer. It might be bad to say, but the engineer is responsible for one part of the business, the founders and CEO etc are responsible for all aspects of the business, and should be compensated appropriately for it, whether secondaries or higher salaries etc.
Also, secondaries at seed and A are not as common as they were during the 2020-2022 run up.
Are founding engineers not also taking on risk? They're typically taking a much lower salary in exchange for their shares. They're avoiding vacations, nice cars, fancy houses, and other expenses that they could purchase if they worked for a larger, public company. In the example from the article WeWork founding engineers would've gone 9 years without seeing any value from their shares while the CEO was cashing out billions.
The difference in responsibilities is already accounted for in their disparate salaries and ownership stakes. I don't think it's very relevant to whether or not they should have the option of cashing out some of their stake during funding rounds.
I'd be asking the same question, it's a fair criticism. I wrote this expecting 10 people to read it and I wrote it as a part of a writer's feedback group. I'm just a random guy who has worked at a lot of startups, nothing special!
It’s all relative. Founders that actually make it to series A levels have options to take money off the table (usually) and often what most Americans would consider a great salary, but if you do the math vs getting a massively overpaid FAANG job and include the odds of the startup imploding founder is actually a tougher gig.
I refer to dilemmas like this as "zeroeth world problems."
Of course like I said… relative. It is nowhere near as tough a gig as schoolteacher or service industry worker, at least financially, though there can be a lot of stress and some mental health risks.
Hmm, I’ll be controversial. Twinned secondaries, i.e. secondaries tied to a primary, are almost always a give away to senior management and the buyer. (They’re frequently syndicated at double-digit spreads.)
If the company sucks, senior management gets cash back first while the investor gets top-of-stack liquidation preferences. If the company is doing great, the investor gets to buy stock at a price almost always lower than market.
They’re common in Silicon Valley, because they’re good for founders and the Board members. But they’re rare in public markets. The closest thing I can come up with is the current clusterfuck with Shari Redstone.
Fund buys stock at X and simultaneously solicits LPs at 1.2X (whether by straight mark-up or, more commonly, by adding management fees, research fees, expense reserves and carry.)
It’s why tenders have a few weeks between end of sellers submitting requests, confirmation of quantities and finally funding.
Interesting, thanks! Not to get too far off on this tangent, but how is that different from the way VCs / investment funds work in general (taking fees from the LPs in exchange for their services)?
> how is that different from the way VCs / investment funds work in general (taking fees from the LPs in exchange for their services)?
VCs usually raise a fund, i.e. a basket of commitments from LPs, before finding the investments. That means they negotiate the investment terms from a position of strength, commitments in hand.
With tenders, the investor starts by commiting to the issuer and then finds LPs. To the degree they have leverage, it's in their access to the issuer.
For the former, the fees are in exchange for risk. For the latter, they're for access.
What shines better in a resume? ex-founder or ex-founding engineer? If ex-founder is a better role for next job, I think founders are taking much less risk than founding engineers. They get all the exposure to talking to rich people, VCs, learning how financial game works, which i regard much more rewarding career-wise.
My guess would be that it has to do with the amounts involved. In a typical series A/B only the founders have enough equity (they have larger share, plus they've been at the company the longest so they've vested the most) to be worth the transaction cost of a secondary sale.
I thought "founder liquidity" would refer to the supply and fungibility of founders. I've heard that, although ZIRP is over, there is still a large supply of capital, which implies that there's not enough good idead / founders to go around?
When I was younger, I worked for multiple startups and received stock in each one. How much is that stock worth now? $0. I no longer will put that much time and effort into something, unless I am the founder.
dunno why the writer opted for this: "Our equity packages vest over 3 years instead of the industry standard 4-year period."
given it takes a long time to build companies; so on the contrary, many startups are instead opting for like 6 year windows.
"We allow employees to exercise options up to 10 years after they leave instead of 90 days." - the reason that 90 days is more standard is that it's more tax effective than having options exercisable for 10 years, though many companies are making a compromise on this recently
At this point, you have to be colossally stupid to work for a startup. Assume options are worth $0, demand market salaries, and close-to-market benefits.
This is a wonderful article and kudos to the author for his moral sensibility here. The lack of liquidity and anti-dilution rights for any except a handful of key persons is a dirty secret of Silicon Valley. Most startup employees do not end up better compensated than they would at a larger company on a net present value basis even when their startup is successful -- and they don't as easily get liquidity along the way although there are more private secondary market brokers than there used to be.
The other angle worth observing here is the tax angle. In many cases, the founders are taking liquidity at valuations that are only loosely tied to tax valuations of the company. These valuations are fine for the founders and preferred by the buyers/investors, but undercut the premise of the tax system that was redesigned after the options backdating scandals of the early 2000s, in part, to ensure that taxes were getting paid in accordance with the actual capital gains.
Delaware allows for employee shareholders to demand some transparency, but it doesn't apply to options holders.
VCs and Founders should be far more forthcoming to sweat equity participants. Delaware could mandate that too.
I've been on both sides, where leadership gaslights candidates and employees about why their tiny stock grant is so generous, diluted in the best case scenario. And on the other side where leadership is confused why someone with prior financial success would want to be an employee at all since its so obviously shit. That's sad to me that they can put on two faces, and its enabled in a way that securities laws were made to mitigate.
If employees realize they are taking more risk than the founders, maybe they'll ask for more compensation, maybe they'll congratulate the founders and move on with their day, maybe they'll start yelling: "I'M TAKING SO MUCH RISK, IT'S SO HARD TO BUILD A COMPANY, I DON'T EVEN HAVE ACCESS TO LIQUIDITY!!!". And maybe they're right.
This is why I think the term "Founding Engineer" is often just a fancy way of saying 'sucker.'
Founder here who turned down an offer to secondary in our B round.
It would have brought ~$5M before tax. This would have been a material change in my financial security. I live in a high-cost US city and have been putting off starting a family. It would have removed many concerns that are holding us back from feeling like it's the right time for us.
My thinking has evolved, but is roughly:
(1) The argument from VCs in favor of a secondary is often: If the founders take some money off the table, they have downside protection and are more strongly incentivized towards only a massive outcome. This aligns their risk profile more closely to their (Seed/A/B stage) VCs who model their portfolios based on bimodal (boom or bust) outcomes. It helps prevent scenarios where the founders safely exit for $Xm leaving the Series B VC with a 1x'ish return that's against their profile.
(2) I didn't take the offer because I felt it would be unfair to our early employees who took a big risk leaving FAANG compensation to come build with us. I ruminate on this often. It would have changed my life, and the only difference to them would be some numbers in our cap table being 10% different. In retrospect, doing it pro-rata for everyone would have solved this, but I'm not sure the VC making the offer would have gone for it. Who knows.
(3) I do not think founders and early employees deserve exactly the same treatment. While early folks took a similar financial risk as I did, they aren't chained to the company in the same way. They can quit tomorrow and go back to FAANG jobs. A founder has to either find their own replacement, sell the company, or run a long and painful wind-down process and return money to the VCs. All of these options take months-to-quarters of work, create reputational risk, suck emotionally, etc. And that's in addition to still losing all your money like the employee did. I don't think it's the same.
(4) You don't get nice-guy points for turning down the offer. Nobody on my team knows that my cofounder and I turned it down, so we get no credit for doing right by them. Telling them about it feels somewhere between a humble brag and guilt tripping them into working harder. The motivation to do "the right thing" has to be purely internal.
(5) If you're starting a company I strongly suggest you give your employees the option to early-exercise / 43b their shares. Few folks seem to know enough about their options to take advantage of this but it prevents the lock-in scenario where someone wants to quit but can't because the AMT bill would devastate them. We have had this since the seed round but sadly only a few people pay attention to it, and I can only suggest it so much without creating a financial-advice legal risk.
While I feel like I did right by my team, I can put an exact price on the cost of that positive moral sensation. My team might even think I'm stupid for not taking it when they would have.
It's pretty easy to say what's obviously right and wrong in HN comments, but when all you have to do to pocket a life changing amount of money is say "ok", the decision feels much heavier.
I'll give you nice-guy points for turning it down - that's a very principled position to take when that much money is sitting in front of you and all you have to do is say "yes"
I think your intuition on #2 is right - pro-rata across the board or even if the amounts are small enough, offering to do it as a "series B bonus" line item in payroll is not out of the question. 10% seems on the high side but sub 5% it's probably do-able.
I agree with a lot of what you've written - I understand if you want to stay anonymous but would love to talk to you about this more if you are open to it!
It's clear that the author is first time founder. The article is disingenuous in that it talks about secondary availability, but the solution is longer exercise and shorter vesting? That wouldn't solve WeWork situation at all. Also, the risk of founders and employees is not comparable. A good analogy of the relationship is Landlord vs. Tenant. Founder burdens statutory obligations, is responsible with their personal belongings, has to lay the groundworks, and get the investors. Employee has to pass a job interview. If company fails, both lose a job, so that part is shared. First employees are sometimes special, but they are not founders. Musk was not even an employee and he became founder of Tesla.
I feel like the article contradicts itself in this point:
> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)
> If employees realize they are taking more risk than the founders, [...] maybe they'll start yelling: "I'M TAKING SO MUCH RISK, IT'S SO HARD TO BUILD A COMPANY, I DON'T EVEN HAVE ACCESS TO LIQUIDITY!!!". And maybe they're right.
How is "not impact morale" and giving an example of employees shouting as a possible outcome when they find out not contradict each other?
As an early stage engineer that was bought out by a FAANG, I can assure you that most of the hype surrounding buyouts is mostly an exaggeration.
Sure some people get millions, but most people do not, even early stage engineers.
Think about it, you as an engineer, have deliberately avoided working at $bigCorp, and are about to be given $5m in shares. Would you continue working at $bigCorp? no, you'd take the money and fuck right off.
Ok Ok you say, but look at the headline buyout figures Google buys a company for "450 million" that startup having raised 65m in capital for a valuation of x.
so, you as an employee have an option for 0.1%. Awesome, you're gonna get 450k right?
No.
The 450M is the headline figure, The PR figure. Its not actually how much the company is bought for (well it rarely is)
Google will pay off the 65M from investors, plus some amount, maybe give some shares. This will value the company at say 85-100M in terms of cash paid for actual shares.
oh sweet, so you'll get 0.1% of 100M right? well not always. There is debt seniority and weird structures that mean that certain investors are paid more per share than others.
So it might mean that the pool of employee money would be 10M or 1M. or even none. The structure is normally bespoke and deliberately opaque.
Ok, so fuck, not that much money.
If you are lucky, you'll get a job offer from google. This is where the head line figure comes in. Say Google pays 100M for the actual company, in actual cash, the rest of that headline figure comes from share offerings.
That is, if you join google, you'll get the standard level of pay, plus the normal share offer. However you'll then get an additional share offer from the headline figure. This could be double, or many multiples of the normal share offering.
TL;DR:
The headline buyout figure for startups is mostly fiction. You'll only get lots of money, if you are part of the 0.01% that IPO and stay long enough to get the full offering, even then thats not a given. The second best outcome is getting bought out and serving your golden handcuff period.
Yeah. This misses the point that founders often go unpaid for long periods of time.
Those payments catch founders up to being able to have a “normal” lifestyle - which enables them to perform their CEO or CTO jobs better.
A CEO having issues with making ends meet at home, having personal debt, and eating ramen can sustain that additional pressure forever.
It’s in the interest of VCs to arrange things so that founders can focus 100% on the success of the company.
Do something meaningful. The people I know who make the most money, do absolutely asinine stuff that they don't even bother explaining to other developers. They just hide behind the phrase 'I work at X.' A lot of the best people I know are not web developers. A lot of people making the world meaningfully better in scalable ways, are not developers.
Accumulating capital becomes easier as you gain more capital, which is exactly why we need to abolish stock option pay packages and tax these people. Film at 11.
On pro-rata basis most of these secondary liquidity events as apart of raises are not "retirement" level of liquidity - it's just "safety net" level of liquidity. So I think they would probably not be considered "sizable".
> As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR in two years) to become a founder and that is when it clicked - I expected to feel stressed, pressured, and the weight of all of the risk I was taking.
Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!