<i>>And yet we treat it like something that is non negotiable, </i><p>Sometimes, it's non-negotiable because there's <i>no money</i> to pay Google-style $300k salaries + benefits.<p>Fred doesn't make it clear whether he's talking about young startups <i>with very little money in the bank</i> or a mature 8-year old "startup" like Uber that raised $22 billion from investors with $6 billion in revenue. If it's a young 2-person startup that just got a modest $120k investment from YCombinator, a "3rd employee" will not be able to get a $300k salary. The only monetary recruitment tool left is equity.<p>Fred is also leaving out the game theory aspects of the equity as a <i>deliberate filtering mechanism</i> to attract employees aligned with the founder's vision. Yes, many workers are definitely cynical of startups' self-aggrandizing <i>"we're going to change the world"</i> so they only see one (and only one) way to compensate employees:
pure 100% cash and fuck off with your options. An employee certainly has every right to stay rigid to that point of view. However, it still doesn't change the psychology of founders wanting to filter out the candidates with a "mercenary" mindset. They often have no money to pay the mercenaries anyway so they have no choice.
This is why we stopped giving employees equity pretty early on. We got to a pretty decent headcount before we sold (probably above the median for post-B-round YC companies). We just paid cash and bonus.<p>I don't often like Fred Wilson's compensation writing, but here I think he has the problem basically nailed down: employees (rationally) don't prize equity, and giving it to every employee is in the long run extremely expensive.<p>Two thoughts:<p>You don't have to give shares to every employee to give it to some of them. The first shares I ever got that were worth much (Secure Networks, back in 1998) were shares I had to opt in to, at the cost of some salary. I had coworkers who chose not to do that. We were all generally happy with the outcome.<p>People on this thread are making comparisons to 300k/yr Google salaries. For journeyman developers in SFBA, this is probably a reasonable comparison? (I mean, the median SFBA developer isn't making that, but you could argue that's because they're being underpriced in the market by the practice of issuing shares that will never be worth anything). But for employers, it's a pretty silly comparison. If you're a startup paying 300k/yr to someone who does work a CS graduate out of school can even theoretically do, you're doing it very wrong. You might have to adjust your hiring filters to get your cash compensation down to a reasonable numbers, but you should do that anyways, because filters that keep you stuck in the "competing with 300k/yr salaries" zone are, for almost every startup, a vanity.
Ehhh. A few interesting thoughts though not necessarily original, the "your equity is worth 0" mantra has been repeated enough that it's not ground-breaking.<p>It <i>maybe</i> makes sense for huge, publicly traded companies like Apple (who could easily afford to just pay their employees enough to offset the equity loss and then some), but of course there's the whole idea that equity compensation aligns incentives for employees and the business.<p>> “You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.”<p>This would be catastrophic for the startup industry:<p>* Why would I ever work for a company that has huge downsides (chance of failure, lack of resources, etc.) when I don't get to enjoy any of the potential upside<p>* How many startups can afford to pay their employees "handsomely" (relative to what they could be earning elsewhere)?<p>The only way I imagine a 0-equity world working is one where VCs cough up a ton more money to compensate startup employees handsomely. And to be fair to Fred, maybe that's what he's suggesting (spending more money now to retain more equity later). But I didn't see that stated anywhere.
When people talk about startups and equity, they often talk about the “risk” of joining a startup. For me, as a founder, the equity portion of a comp package isn’t about the risk. I’m curious to know what HNers (often with very passionate thoughts on the topic) think of my theory.<p>There is risk at companies of all sizes. Also, the idea of a single career in your lifetime isn’t a reality, so the “risk” of a losing a job is really the risk of losing it without notice. Compensation for that risk would be something like one month of pay, not illiquid certificates that might or might not become cash someday.<p>Employees can also change jobs voluntarily. But the idea that their employer should get a percent of their future earnings as compensation for that risk would be ridiculous.<p>I believe equity comp is because employees have two jobs: 1) execute on their day job, 2) build the systems, processes, culture, and institutional norms of the company. Basically, the equity component is added to the cash component because building a company takes long-term thinking and because it’s a ton of work.<p>I’m curious to know if others think about equity comp having a purpose other than to offset risk. Thanks!
Many of these comments seem to instinctively take the side of the VC. "I had to put in more money to avoid being diluted so why shouldn't everyone with shares have to do that in each round?"<p>I mean, as long as the employees are there, they are getting paid the same amount they started with, which has some non-zero discount due to that initial equity grant, so they are technically 'paying' by continuing at the old salary. Why wouldn't an early employee compensation package include being issued shares in each round to maintain their undiluted amount, in return for continuing to work there at a discounted salary?<p>Not everyone contributes with cash, and cash is not special these days.
What about ownership over value creation? If you're in a creative industry - and I consider software a creative industry - giving away your creations for a wage is psychically harmful. If you're genuinely creating something of value, you want to own some fraction of its value - its revenue-generating value, its future cash flow.<p>The other thing is that options suck. Options have so many conditions, vesting schedules, cliffs, expiry dates, negative tax repercussions... options are not equity. Options don't feel like ownership. Options are lottery tickets that might pay out, maybe. If you agree to be a wage slave for long enough, to give away all the value you create, see the big sales land and the annual recurring revenue build up, you might, one day, own a small slice of that cash stream. Maybe.
Equity in a startup for an employee is worthless. The only kind of equity that's worth anything are stock options for companies that are actually being traded on the stock market. However, those companies don't actually need to give you equity as part of a compensation package... they can pay you for your work. In that case, you can decide for yourself to purchase "equity" if you truly think it is that valuable.
I agree that it is very difficult to understand equity comp and probably only moves the needle for high level execs when you are recruiting but it's not all about recruiting it's about performance and retention. I want employees to feel ownership and the only way to do that is to give it to them. I want them to understand that they have this asset that their hard work directly affects, I want them to be aligned with the company not just their own career path.
If Fred’s companies want to compensate me without equity, I’m happy to consider it. At this stage of my career my annual compensation is approaching 7 figures, balanced however you want between bonus (with reasonable targets), equity (properly risk-adjusted) and cash twice a month. I’d even be willing to consider deferred compensation properly escrowed with the time value of money factored in.<p>Somehow, though, I don’t think Fred’s companies are going to be willing to pay me what I can demonstrate is my current income (via IRS filings if necessary) without equity being a component of the compensation, in fact without it being the majority of the overall package. I’m okay with that, because I only work for companies where I strongly believe in the product and the team.<p>This may all sound fairly entitled, but if you’re as lucky in your career as I’ve been, your job has an opportunity cost that is measured in things like spending less time on my own projects, my family, and general self-improvement —- and this opportunity cost is pretty high.
I wrote this very thing to an investor once. Norms aside, due to information asymmetry the only companies worth getting equity from are the ones not including equity in an offer. For every one Shopify there are a hundred weasels or failures. You get much better people by just offering higher cash and they can buy into your round if they really, really want to.
Personally, I'm not interested in working for a company who <i>doesn't</i> pay out some form of equity.<p>We live in a world which skews towards wealth - if you don't have wealth you're slowly falling behind those who do. So why the hell do I want to take my hard-earned skills to generate wealth for someone who doesn't want to share some of it?<p>What if the company goes down and my equity is worth 0? Well that's life, at least I threw in my lot someone I chose to back.<p>PS offering < 1% to a "senior" hire does not constitute sharing.
I took options in place of a jump in salary between jobs - took a 10% pay cut, was offered a few % in options, and I felt comfortable with that as the bargain. If you're contemplating a shift in salary that would change your lifestyle though, that seems like a bad deal.<p>The cash, at the end of the day, is a tool - if the bargain you're going for is a step backward in your quality of life, that seems like a poor decision unless you truly are drinking the Kool-Aid.<p>That being said, I left before any of mine vested, so I just had a pay cut and no real benefit from it other than the experience.
Alternative Minimum Tax on exercise on ISOs is 100% grade-A bullshit. Special incentive stock options with tax benefits negated almost completely by AMT? And the only real way to deal with this tax is to either hold til a liquidation event or sell it to one of these equity collector firms for pennies on the dollar?<p>The ONE good thing Trump & congress could have done this year was eliminate AMT, and they didn't.<p>For the average Joe equity isn't much better than a lottery ticket. Equity is a LIE. Give me $$$$$$$
Always be suspicious of someone telling you that something isn't worth very much, so they might as well just keep it for themselves.<p>Sorry, but that's all this boils down to.
“You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.”<p>Ha, yeah, I'll bet!<p>It's certainly not easy or risk free to deal with equity, but to me, some kind of stake in the company is the only morally justifiable way - if people help to build the business, they should share in the success, and even generous salary will never reflect that - you'll never get rich on a salary.
One thing worth thinking about: after a couple of years of issuing options, people start being able to vest, and their presence (or not) on the cap table is a pretty interesting signal about people's expectations of the business. Especially if you have a few people leaving, with their options lapsing: to me, that's a big red flag you wouldn't otherwise have.<p>I think we're going to start seeing fewer (and worse) options schemes in tech, but I don't think it's going to be anything to do with how attractive or not they are to potential employees. It's going to be because founders and investors find them less attractive to give out (for reasons like the above).
The big problem I have with startup equity compensation these days is the time it takes to get to get to liquidity.<p>Going from founding to an IPO takes what, 8-10 years? Even assuming things go that well if your equity doesn’t have terms like early excercise or a long time to decide if you want to exercise it’s not a good deal.
It’s easy to get locked into working with below market compensation in scenarios like that.<p>Also very few companies allow for things like secondary markets.<p>It’s going to be interesting to see how or rather if this gets addressed in the coming years.
The analogy that I use is this: equity is Bison dollars. You could trade in your equity for a princely sum <i>if</i> the founders' world-domination plans go off without a hitch, but a) that's a big if; b) in the meantime, you can't eat those stocks, nor will your landlord accept them as rent.<p>Which is why anyone who offers to pay me in equity instead of salary gets a polite fuck you, and I would only accept partial equity compensation if the salary part is sufficient to meet all my living expenses and then some.
Maybe the answer is more transparency on the market value of the options. For example, if I get X options (common stock), it'd be nice to know the market value of those options [as of last funding round].<p>I could then divide by 4 (vesting), and know this is an upper-cap on their worth (because preferred vs common, dilution, strike price, liquidation preferences, lockout period).<p>So to repeat, if you consider it a problem that engineers don't value options, perhaps give them all the relevant information they need to value those shares.
In India, startups pay a much higher salary than corporate jobs along with some equity.<p>Given the minisicule number of startups that make it, I think this is a much more sensible option for engineers. Especially ones who want to start their own companies - as they save much more in the process.
This is an odd post because Fred closes saying:<p>> I don’t have any specific recommendations to make on this topic except that Boards should be thinking way more deeply and creatively about this issue than we are.<p>Equity compensation came about as a way of paying employees when cash was tight. It also tends to (arguably) align incentives between the company and the employee in the long term.<p>Now equity compensation exists largely because the likes of FAAMG pay senior engineers $300k+ in total comp and, again, smaller startups just can't afford that kind of cash outlay.<p>So what "creative" way is going to "solve" that problem (from a VC's perspective)?<p>Consider if you had 50 engineers that you pay $100k + equity to and these are 60% of your costs. Your burn rate is just north of $8M/year. Now if those engineers were paid $300k/year instead and your other costs didn't change, your burn rate is now north of $18M/year.<p>Equity compensation is your way of lowering expenses and reducing your burn rate. That extra $10M/year will mean you'll need bigger funding rounds more often and then you end up diluting your stock to investors rather than employees. Is this better? How?<p>Another point: when it comes to mature companies (ie publicly listed), equity is a pretty tax effective way to pay someone.<p>Say an engineer joins an FAAMG company for $170k base salary, target bonus of $30k and $400k in RSUs (4 year vest, 1 year cliff). That's notional total comp of $300k. More when you consider annual refresh grants. Assuming $100k refresh grants, total comp is pushing $400k by year 4.<p>But there is risk attached to that, namely that the stock could go down in value. If that didn't interest you, that same engineer could go work for Netflix and just get a $300-350k salary with no equity (which is fine).<p>But if that stock goes up 20% before the cliff, you've made an extra $80k over 4 years without doing anything.<p>If you approach the problem from the other way, imagine you wanted to make a $400k investment in an FAAMG company. You have some options that include:<p>1. $400k in after-tax money invested<p>2. $150k after-tax plus $250k on margin<p>3. $400k in pre-tax money in a 401k<p>(1) is expensive, (2) is less expensive but riskier (ie margin calls) and (3) is really putting a lot of eggs in one basket plus you'd need a substantial amount of retirement savings even to consider that option.<p>I bring this up because in the all-cash case (eg Netflix), if you do want to invest in your employer's stock this way, it's really expensive to do. Those who say you can just take the cash and buy shares miss or gloss over the leverage you can obtain from an initial stock grant. If you plot even modest stock growth, you'll quickly find the $400k grant with $300k total comp will quickly outpace the guy whose earning $300k (or even $350k) per year as they have to pay taxes on that money then invest it.
With crypto I think the math becomes even worse for startup options...would be interesting to see numbers around employees leaving because of crypto.<p>Brightside is that if the trend continues then perhaps it will force the entire startup/VC ecosystem to rethink options and/or create more guarantees around liquidity that isn't so completely up in the air.
That’s fine, but then don’t expect your employees to act like they have a stake in your company’s future. Most will be doing what’s explicitly required of them but resist much more, whether you need it to be successful or not. When things get tough they’ll back off and start looking for a new job just when you need them to step up.
Some numbers (because who doesn't like numbers).<p>Let's say (VERY F'ING HYPOTHETICALLY) that I could walk into a $300k Google job. You as a startup can offer me $150k+equity, and let's say there's a 4 year vesting period on those options. Straight out of the gate we can see that the bare minimum those options have to be worth to make that transaction worthwhile is $600k (ignoring tax, 'cos I'm not looking that up). Time value of money increases that to, let's say, $666k.<p>So far, so good. Now, what are the odds of getting that payout? If you went round that cycle 10 times, how many times would it pay out? 1? 2? Let's be <i>very, extremely, remarkably, and irrationally charitable</i> and say that every other startup lasts 4 years and pays out, and the rest go pop. That means we need to double our baseline to $1.3M to compensate.<p>For going into any of these deals to be rational, to balance the risk each one needs to be credibly offering to make you a millionaire.
Most VCs think about equity compensation like this: "How can we complicate the process, and use the most opaque language in order to screw the lower level employees and avoid diluting our holdings?"