I think more and more people know about equity. We should focus on making that said equity more liquid for private companies.<p>So many founders get rich early by selling their stocks to investors when raising money. Most of the time, employees just can't because the board won't let them.<p>If we allow employees to sell their stocks after they are vested you reduce the amount of risk they take when accepting a lower salary for higher equity. It would also stop the mentality of considering equity as zero when evaluating offers and give more financial flexibility to employees.<p>There is so much money circulating in private markets, but employees just can't access it. This seems pretty unfair to me.
Startup equity is like a shitty lottery ticket that you most likely won't be able to cash out even if you get lucky.<p>I passed up on google to be one of the first employees at a promising startup that ended up raising high 8 figures and is now at nearly 100 employees. I took a pay cut for that equity and worked 12 hour days alongside the founders. With liquidation preferences and dilution I won't even be able to take a vacation with that equity if there's ever an exit.<p>My college friends who picked Google are now making >$300K and have enough money in the bank to have a diversified portfolio and acquire the right type of equity.<p>So unless you're a founder or an investor ignore the equity. You can still go for a startup but do it for the experience and potential to have a real impact on an organization.
In order for equity to be worth it for employees at a Startup you need to be within the first 10 people and the company needs to be north of the $500,000,000 range.<p>To illustrate, give the best odds. You join within the first 10 people, get 0.7%, after 6 years of dilution you might be down to ~0.2%.<p>If a company runs a tender offer with a valuation of $200m, your stock is $400,000. Is that a lot? Well considering you probably make 50k-100k less per year in salary at a startup vs a "big company", for 6 years time and considering that you also get other compensation at a big company, that isn't really that rewarding.<p>Now at $500m, your stock is worth $1m. Its now something worth 6 years of paycuts.<p>But this is such a narrow window. You have to get lucky to be one of the first 10 and join a company that will be worth half a billion dollars.<p>If you are not one of the first 10, you need the company to be worth ~$5billion to have your stock be worth it. How many of those are out there?
> If you go to work for a big established company, they won't give you part of it.<p>On the contrary! Just yesterday I got an email from an Amazon recruiter that says:<p>> We also offer:<p>> - Stock Package, free shares given to you (no purchasing required)<p>It seems like it's pretty normal for people to get equity from big companies. Not even just tech companies: people I know working at Nike get stock every year too.<p>Also I question this:<p>> The fifth employee will get much more than the hundredth.<p>Maybe, but the thousandth will get "more" than the hundredth if you measure it in dollars times probability-of-cashing-it-out. VCs talk about how the size of the pie matters more than the percentage of your share, and I think that applies here too.
It has been drilled into me that the #1 rule of investing is proper diversification. If that is true, startup equity kind of goes against that grain? It's asking to place all the eggs (your productive time) into one basket. That's not much different than a salary except much higher risk without diversification.<p>Even ycombinator does not fall for that, they invest in thousands of companies and they have a lot less to lose than many employees.
The real truth is that equity is primarily used as a way for startups to pay lower salaries. 3 and 4 year vests further reduce the likelihood you will ever see the equity offered. Let alone that you will have usually a one month period to put up the purchase price of your options. So if you don’t have an extra 2-10 grand lying around (because you were given equity instead of salary, for instance) you will forfeit your equity. Founders and execs also get waay more equity than than the code monkeys, and exercise priority.<p>I’m not saying don’t think about equity, but don’t let someone sell you a bill of goods either.
Another way to frame this is that it's easier to get rich via your investments than your direct labor. Working at a company that is willing to give you equity is a funny sort of investing: you're investing your time rather than your money.<p>That the world pays off equity in a company orders of magnitude better than labor for a company is the real thing that will complicate a young person's worldview.
I exercised my options for $500 when I left a startup in 2005. They finally got bought by a large company this year. The amount that I'll be getting: 48 cents. Total.<p>Early investment is virtually worthless without subsequent investment. Dilution means the last shark gets the spoils. If you're still there when the shark has done eating you might get some scraps.
In support of the article, and in contrast to the “assume equity is worthless” HN conventional wisdom, at my current job I’m vesting seven figures of equity every year at our current valuation, and have been since the day I started. What worked for me in my latest job search was focusing on companies that had a very small headcount relative to their valuation, although there are other filters you can use like those Jessica mentioned.<p>The nice thing about working for a company that has raised a bunch of money but is still quite small is that you don’t necessarily have to sacrifice salary either. When I joined I got a 50% raise from my previous base salary at a big 5 tech co without negotiating.
I’ll just say this. There are a lot more stories of equity not working out than there are of equity making folks rich... so be sure to do deep research about this subject and also on the co. you are getting involved with.
Be extremely careful if somebody offers you a share in LLC first, but later presses to convert to C-Corp, giving you Class B/non-voting/non-privileged shares. Even with the same % as you had with LLC, it's a highway robbery for multitude of reasons. Some large companies, loved over here, are surprisingly doing this with their spin-offs, threatening non-compliant employees with legal action if they don't sign the transfer. Stories I was told...
Think of equity like buying a call option for pennies and having them explode to dollars or tens of dollars per contract. It may (and likely will) expire worthless, or the leverage from it is so great that you exit with a great return. As the post alluded to, starting a startup has gone from extremely rare to rare. And the number of startups that succeed in a significant way are less than that.
I have a slightly different take on this.<p>While I agree with the general idea that there are more ways than wages to earn wealth, I think the advice is more general: focus on ownership. Figure out how to buy or create an asset and work on improving its value through your labor, capital, or other real (non-financial) forms of investment: time, attention, promotion, whatever. This advice is surprisingly general and has made a lot of fortunes. Think in terms of the business being an economic machine, and you as its tuner (devs will be surprisingly used to this view of things).<p>House flippers focus on ownership by buying a house, improving it, and then selling it.<p>Private equity acquires companies, "fixes" them, and then sells them, often back to the public markets.<p>Venture capital acquires promising stakes in young companies. They put in a lot of sweat equity in board meetings, advice, introductions, and follow-on fundraising to make their portfolios worth more.<p>Anyone who owns a house gets rich if their house appreciates. Especially if they use leverage.<p>You can do this all sorts of ways. Build vs. buy is an important dimension.<p>Where I disagree with JL is the general idea that investing heavily into a single company with high uncertainty and little control rights is a great idea. The main reason YC took off is largely Jessica in my opinion, marketing the program exceptionally well to talented people who knew no other way than to work for wages at a company. It worked great for them (the YC partners) because they became investors in 1000+ companies, so it's virtually certain that, given the caliber of people they're able to convince to apply, that they'll have a few billion dollar "hits". The situation of an individual employee with only one company's (startup's) stock is quite different, and in my opinion, much worse. So maybe not such great advice at face value.
> A lot of people who get rich these days do it via equity, not salary.<p>Yes, true.... but many more take pay cuts for equity that ends up being worthless. Equity is the way to get stinkin' rich, if you are lucky. But a salary, alongside proper savings and investments, still gets you rich enough to not have to worry too much about money later in life.
> Another way to predict which startups will succeed is to look at where your peers are going. Have several of the smartest people in your graduating class ended up at the same startup? That's probably a company worth investigating.<p>So which is the hot company these days where all the smart folks are going? Asking for a friend.
I think this article is wrong wrong wrong. because it’s putting equity first.<p>options are a lottery. do what most inspires you. it will give you the most satisfaction and also the most skill (doing what you love and being really good at it go hand in hand). <i>Then</i> figure out if a startup is right for you for all other reasons.
How to think about equity for me: either believe in what you are doing as a founder or get market rates while getting equity anytime else. Unless you are a founder you probably will be outmanuvered on your ability to exercise your option .