I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuation grew. It also meant that my gains became long-term capital gains, and thus taxed lower, as soon as possible after I vested each month.

- You are a cofounder.

- You have little experience and you are using this to break into the industry, and get experience on many different technologies ("wear many hats").

- They are working on a very specific problem or using a specific technology that you strongly desire to work on and it's difficult to do it anywhere else.

- You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route.

Invalid reasons for working at a startup:

- Getting rich off stock options.

- Making a lot of money in salary.

- Work / life balance.

- Stability.

Two years later, one founder forced out his two other cofounders, started a new company in the exact same space, and poached his best employees, essentially jettisoning the cap table in the process.

The small frys who exercised their options were totally screwed. That was a real lesson for me on how crazy this stuff can be.

Offer internal Dutch auctions on a regular basis to provide an opportunity for investors/the company/etc to buy stock from employees at a reasonable price. This makes the value of the company, from the point of view of the employee, not "funny money" but something very tangible. With an opportunity to cash out long before it is public.

If you're an engineer sitting on $5m of vested stock in a decacorn, it makes financial sense to sell some of it. Today, companies make that really hard to do.

If employees could easily sell their stock while the startup is still private, this would solve a lot of the problems.

> The first big idea is that unlike in the 20th century when there were two phases of funding startups–Seed capital and Venture capital–today there is a new, third phase. It’s called Growth capital.

It used to be that The Public would provide the "Growth capital" via an IPO; Now the public is providing, I suppose, post-Growth capital via the IPO. In an current era where the market believes P/E ratios of 24 make sense [1], that has so far been viable.

If more historically normal valuations return to public companies, or if the latest crop of unicorns fail to provide great returns for the IPO investors, I strongly suspect this new division of funding phases will come to an end.

[1] https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-ea...

I don't understand this part of the post. When do "investors" grant stock options? When I did a startup back in the 90's the founders owned all the equity the day after the company was incorporated and a stockholder agreement signed specifying what each of us owned. We then sold equity to angel and venture investors by carving out a piece of the common in the former case, and issuing new preferred shares in the latter. Later the company granted ISOs to employees by an act of management, ratified by the board which did of course include investors. But at no time would I have said that the investors "shared their ownership" with employees. All current owners were diluted by the issuance of new shares or rights to new shares, but it was never a flat-out decision by the investors to share what they owned. It was a management decision.

[1] https://en.wikipedia.org/wiki/Greater_fool_theory

[2] https://www.investopedia.com/terms/f/fullratchet.asp

[3] https://www.cnbc.com/2019/04/06/lyft-is-threatening-litigati...

If you get a 100,000 shares at 0.10 each...they are likely over multiple trials going to be worth around 10K. Act accordingly.

Do startups commonly offer RSUs? I suppose my follow-up is whether it's easy to do, using Carta or something similar.

Meanwhile, (b) options do a much poorer job of motivating/recruiting employees, (c) an even worse job of aligning interests and (d) the risk/downsides aren't reduced at all.

If stock "values" start to drop, it can really make a company feel like a sinking ship. That's the risk of equity sharing. They can make bad times worse. This happens no matter how distant/unlikely a liquidity event is.

The solution has been mentioned all over this thread: make them liquid somehow.

Alternatively, stop doing options and do something else instead. Aren't startups supposed to be breaking conventions and being creative?

I agree this Steve B's implication, the average stock option scheme is a vestigial artefact. Unless you're in a position (and of a mind) to negotiate terms, it's a checkbox.

Options are a bit like lottery tickets. All other things being equal, it's marginally better to have them than not, but their existence has never affected my decisions about where to work.

I made zero (well, negative, really) from startup stock options, even before things got really shifty in the 2000s. One startup that I left, that is now a billion dollar company, simply decided to "extinguish" the shares I bought a few years after I resigned. I was probably cheated, but it's not worth the effort to go after them and they know it.

Treat startup options as wastepaper. You might get lucky, but it's really, really unlikely.

Curious if others have seen a drop in hours expected from your average startup (separate discussion if longer hours is a key ingredient and overall a good thing).

What was ethically shady was shortly after I left with 4yrs vested they decided to restructure the entire company so they could attract investment. They took all the debt from the original company and put that in a shell company that then owned a portion of the new company. Guess where early employees’ stock went? The debt vehicle.

I actually did make some money on the eventual exit, but probably 1 or 2 orders of magnitude off of what it would have been if my stock was in NewCo. Consider the tech we built was a major driver of the acquisition, it was frustrating.

People are greedy, no matter how nice they are to your face.

About a year later, we were sold, and the payout from the stock did not justify the salary difference. In order to justify the difference, the payout needed to be about 20x.

When I confronted the CEO she just changed the subject, and didn't understand why I stopped keeping it a secret that I was looking for another job.

- You leave the company after 4 years and have 30-90 days to exercise. The exercise will cost you $20,000. The company is nowhere near an exit. Do you do it?

- When you exercise you are either immediately hit with a tax bill for NSOs or you get screwed on AMT with ISOs. You suddenly owe money to the IRS simply because the company received a very high 409A valuation just before you left. A liquidity event is nowhere in sight.

You've taken a huge gamble by joining a fledgling company that pays little with a low probability of success. You toil for years an overcome tremendous odds to just keep the company alive. But now when you leave the IRS and the company itself wants you to take a final gamble with your hard earned cash.

I used to be an attorney who drafted option agreements. Now I've been at two startups as early employees. The reason why this never comes up is because employees do not know what they are getting themselves into. The options are worth very little BY DESIGN. Unless you are among the first 5 hires, you will have no leverage to negotiate a better deal.

Stock options are never a reason to join a company. They are potentially an added bonus. But they should never be valued in that initial "should I work here?" Not when first taking the job, and not when considering whether you should leave or not (barring an imminent IPO that would delay your leaving by a bearable month or two)

The fact that some people win at startup roulette doesn't mean that it's a good financial decision to join a startup, especially considering that you can make the same sort of money without the risk elsewhere.

Not sure if going back to a startup would be nearly as beneficial in terms of "levelling up." Seems like the game now is to grind whiteboard before I get too old for Google.

A friend grew from junior developer to director of IT at that startup, so there's that aspect as well, though I have also seen a number of startups hire leadership outside.

This is me. I quit my well paid job and took a massive pay hit so that I could work from home and so be able to spend more time with my daughters.

Absolutely worth it.

Your shares are likely going to get hugely diluted exactly because of growth investing like in the article. Investors and founders will essentially trade away your share of the company in new rounds, while they get huge payouts for it, your shares may grow a small amount, again realized over some long time horizon.

Let’s take an extreme example and say your shares double in value (not likely) through the remaining funding rounds, and eventually in another ~7 years you can actually sell them in some liquidity event.

So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in equity compensation.

Certainly very high. But not any kind of crazy number. Definitely there are rank and file engineers in FAANG companies, Wall Street, and other industries getting annual RSUs or bonuses well beyond that without having to wait 10 years to realize it or have the risk that it folds or you get laid off and lose a bunch of future value, and have a high base salary, good benefits, and good work/life balance the whole time.

Given that even a crazy outcome like $3 MM annualized over 10 years isn’t significantly better than other reasonable total comp opportunities, this overall paints a really bad picture for start-ups.

Your case, which is nearly about the best lottery ticket someone could get, is only slightly better than a competitive position at many public companies, finance shops, etc.

Meanwhile, almost all start-up outcomes would be far worse.

Great tax advantages. For ex one startup I worked for did it the other way resulting in recognizable tax income and everyone got hit with a tax bill. Fortunately when it was brought to leadership's attention they were enlightened enough to offset the tax bill with cash but don't expect that, ever.

Options are better up front because there is no outlay for the employee. They are a hassle down the road. However, if you exercise during a liquidation event your tax liability is probably covered.

Stock is a pain upfront unless granted before the first round of funding or any real revenue when the stock value is very little. They are easier down the road, though.

Just my two cents. HackerNews, please correct any errors in logic or how this stuff works.

1. https://www.investopedia.com/terms/i/iso.asp

I think a bit of perspective is in order. When the bar for comparison is technical principles at FAANG, yes.

If you want to own a house, have paid-for cars, put your kid through school, put away savings, and otherwise be completely comfortable then you can do just fine. That is "wealthy" for a lot of people in this country.

I know someone that delivered food to restaurants. He woke up at 4am, and periodically did double shifts. His work life balance was worse than almost any developer I know. And he had to carry stuff. [That was a bad work/life balance].

Seriously, count you blessing if you're in software now. I have been doing this 20 years and this is the best it's been since before the .com bubble ended.

Something you might not be aware of: If you joined the company before they had $50M in assets, your stock would also qualify as QSBS [1], which means you don't have to pay any tax on gains of up to $10 million.

[1] https://www.andersentax.com/services/for-private-clients/bus...

> And finally, in many high valued startups where there are hungry investors, the founders get to sell parts of their vested shares at each round of funding. (At times this opportunity is offered to all employees in a “secondary” offering.) A “secondary” usually (though not always) happens when the startup has achieved significant revenue or traction and is seen as a “leader” in their market space, on the way to an IPO or a major sale.

Then all the problems go away.

Granted, these were small shops ~30 people and the exits were small ~$100M, but the effects were devastating. Everyone who could quit, did. People for whom an extra few $100k would have been a big deal would throw drinks at founders in a bar. The code became an unmaintainable worthless mess and they basically failed to live up to the value they existed at.

Why would someone give the founders such a deal? If they don't care about their employees to share 10%, they probably don't care about even medium term success.

You get a 409A valuation to establish the Fair Market Value of your stock. That valuation isn't based on the same criteria that investors use, it is much more rigorous and based on income, cash in the bank, etc. You could very well have a company raise money at at $10MM cap and be "worth" less than $1MM. If you grant someone stock at that price, their taxable income will be negligible - usually only a few hundred to a few thousand dollars, and then they don't have a giant tax bill at the end.

You still have to pay capital gains, but that only applies when you sell the stock, so you have the money to pay it.

Without early liquidity, a pre-ipo zuck/kalanick/etc. would be a paper billionaire with $0 in the bank and >$1bn "invested" in a risky tech startup. That's not financially or mentally sound, even by their risk lovin standards.

If investors demanded every penny go towards growing the business, those CEOs would just IPO earlier to get liquidity.

It's a necessary alignment of interests, if investors' interest is delaying the IPO.

Employee options holders can't just decide to take a company public, so their interests can stay misaligned.

When I pointed this out to people they didn't believe me. So it turned into a bit of a troll for me to say "yeah I'm going to go consult for a while to build up my skillset" and then watch their eyebrows do gymnastics.

You might assume, as I did, that they hire contractors who already know everything. They hire people with a reasonable skill in a couple areas they don't possess. But to actually contribute you have to drink from the firehose, going deep into the tech you were hired for and the constellation of technologies they use that interact with those things in any way. As soon as you start discovering XY Problems you find they were trying to get you to make X happen because they don't know how to do Y (or didn't know Y was possible) and the clock is ticking.

Employees are also not usually invited to the investor meetings where these types of negotiations would take place. They would probably need the founders to vouch for them to make this happen.

I would understand if that happened when the company is in trouble (e.g. valuation dropping below the last preferred valuation, so preferences kick in, or as a result of the company having to honor very high liquidation preferences), but otherwise?

The only couple very shady cases I know about where Facebook with the Brazilian cofounder (with a complicated legal process where they reincorporated the company into a new one or something like that) and Skype with the employees (who naively signed a clawback clause in their agreement stating that the company could repurchase shares in the future at the original grant value even if their price skyrocketed, or something similar).

In all the other cases I know about where employees got screwed, it was because the company saw its valuation plummet and the investors preferences kicked in, in one way or another, so "extinguishing" common shares in that case is "expected" and more similar to a public company declaring bankruptcy and seeing the shareholders being wiped out while the bond holders can generally recoup something, since they have "preferred" terms inherent in the nature of the bonds.

- way less big company type politics

- you won't get lost among the crowd at the big company

- if you join early enough you get to define how work is done, instead of just going with whatever process already exists at the big co

- you will know the CEO personally and have chances to discuss ideas and concerns with them in person, at big co there is zero chance of that

Also, the stability argument is interesting. I've actually experience more stability at the start-ups I've worked at than I have at the big companies. Big companies re-organize often and your manager, manager's manager, etc. might change several times in a single year. Lay-offs happen seemingly willy-nilly for reasons peons will never be told. Start-ups don't have any organization to re-organize, and don't have the people to be continually shifting things around and laying people off.

Big companies have multiple projects running in parallel, waiting to see which one will pan out. If you are working on one that doesn't pan out, it will be cancelled without a second thought (often with lay-offs involved). Start-ups have one project and it better work out or the company dies. It will not be cancelled lightly.

They sold all the products to another company, paid all of the proceeds out as a bonus to the execs and big investors, and left the holders of the common stock (ie, employees who had bought their options) with a worthless, empty shell. Thanks for working hard and buying shares in the company!

I have a similar story. I've been a part of three startups (two exited, one still going) and the options in all were only worth an eventual capital loss. For my last company, I owned nearly a percent of shares, but they were still worth zero. The only money I got was a cash bonus and stock from the acquiring company as a retention mechanism (I was an executive of the company, rank and file got much smaller amounts). Startups are good for experience, being a big fish in a small pond, etc. but it's marginally better than a lottery ticket if you're looking for a big financial reward.