Updated for 2020 and beyond
Ever since college graduation in 1999, I’ve had equity ownership in every single company I’ve worked for. When you get equity, no matter how small it is, you tend to pick up the litter in the hallway, champion your company outside of work, and work harder than the actual value of your total compensation. In short, having equity makes you care more!
Pride of ownership is important for maximizing employee production. There’s just one problem: sharing. If you’re a founder, you’ve got to have the generosity and foresight to let your employees share in your company’s equity. Giving up equity is one of the hardest things a founder can do because we are all naturally greedy. We want everything for ourselves despite the need for great people to make our company a raging success. Sometimes, we’d rather fail and hold onto everything than give up equity in order to succeed. Irrational.
As an owner of an online business and as a consultant/advisor for startups, I straddle both sides of the fence. And, for the first time in 16 years, I’m doing some work with no equity. Sure, it’s rare for consultants to gain stock options or RSUs, but that’s exactly what I got from my first client after 1.5 years of service. In this culture of moving around every 1-3 years, why shouldn’t a consultant who’s stuck around longer than some employees also deserve something similar?
Working with no equity feels off. It makes me want to do only 101% of what is expected, not 130%. I wonder if this is how much of the workforce feels where they don’t have any stake in the organization they are working for? Please let me know.
This post offers up some candid advice for people looking to join the startup world, either as an employee or as a founder. It’s the sexy thing to do nowadays given people want more excitement, more purpose, more control, more money (?!?) and more flexibility. Be forewarned. This post is a 2,700 word beast that will make you see the world a little differently by the end.
THE ALLURE OF STARTUPS
1) Joining a startup probably won’t make you rich. Most startups fail. Startups pay lower salaries than non-startup firms because there’s an equity component. But given most startups fail, your equity won’t be nearly worth as much as you think.
If you accept lower pay and don’t have enough equity, or any equity, you are losing. The only way you can earn “market wages” is by aggressively asking for enough equity that pays out. But in order to understand the value of your equity, you’ve got to ask a lot of questions.
Ask for the total shares outstanding. Ask what your strike price is. Ask about monthly burn and the amount of cash on the balance sheet. Ask about VC liquidity preferences. Ask what happens to your shares in multiple sale scenarios. Be aware of tax implications. Employees are too afraid to ask senior management the tough questions because they don’t want to seem like pests. This is unfortunate because employees have a right to know.
I’ve noticed that most employees have no idea what their options are really worth because they have no idea how to value companies. Valuing a company is what finance people like me do, and we still get valuations wrong all the time. If you’re joining an e-commerce startup as a designer, you probably have no clue about comparable company valuations!
Unless you join a startup like Uber, AirBnB, or Pinterest, where you know the company has massive funding for long-term survival and you know with high certainty there will be a liquidity event like an IPO, you’re probably going to be stuck for years with no windfall.
Let’s look at some more nitty gritty compensation details by a company called Buffer App, a social media startup here in San Francisco that allows you to schedule Tweets, Facebook posts, and so forth. I’m not sure how they are generating enough revenue to be profitable since there are so many free alternatives like HootSuite, but they are. They have a complete transparency model into how much they pay their employees.
Buffer’s Open Salaries For All To See
Let’s pick out Andy (#3), a senior SF Engineer who makes $124,000 a year and joined when the company was only 3-6 people. $124,000 is literally a 50% discount to what he can make elsewhere if he’s truly a senior SF engineer. Let’s say Andy ends up working at Buffer for five more years. He will have given up 5 X $124,000 = $620,000 in gross wages to work at Buffer.
I’m looking down the entire 24 person roster, and every single salary looks 50% light, except for the founders (CEO and COO) who are paying themselves a very healthy amount given the amount of equity they have (see next bullet point) and their ages (under 30).
2) Being one of the first employees is extremely risky. Let’s say there are two co-founders who each own 35% after raising a couple angel rounds with family, friends, and investors. They are looking to hire employees to make their product and generate revenue. If you look online, you’ll find that the most amount of equity being offered to early employees is around 2%. Meanwhile, the salaries are WAY below market e.g. $50,000 vs. $90,000, $75,000 vs. $150,000, $150,000 vs. $300,000 etc.
As a first employee, you are almost taking an equal amount of risk as the founders, yet you only get compensated 1/15th – 1/30th the amount of equity! To put it another way, every $1 you generate at the early stage helps the founders get $15 – $30 richer. It’s not like the company has been around for decades with tons of brand recognition, cash on hand, and profits. There’s probably a 90%+ chance the company will turn into a zombie or go under within five years.
Given these statistics, it’s much better to join a company after their Series A or Series B round. You don’t have to go through the high probability of failure, your base salary is going to be higher, and the company has probably established a scalable business model to potentially allow you to cash in on your equity. If you were one of the first few employees and got closer to 5% equity, that level would be much more aligned with the risk you are taking.
Here are the median salaries for 20 of the most popular billion dollar+ startups in 2015, with some updates. Notice how the median income levels are not that much for how much these employees have to risk and work.
Bay Area Rapid Transit janitors and elevator technicians make much more!
1. Cloudera: $142,240 (Valuation: $4.1 billion) – Valuation at $2.3 billion as of May 2020.
2. Jawbone: $130,000 ($3.0 billion) – Went bust in 2017!
3. Medallia: $121,920 ($1.25 billion) – A success! Valuation at $2.9 billion as of 2020.
4. Pinterest: $118,420 ($11.2 billion) – Raised new money in 2017 at a $12B valuation. Now public in 2020 but languishing at a $12 billion valuation. Basically dead money since 2015.
5. Dropbox: $116,840 ($10.35 billion) – Went public in 2019. Currently at a $8.5 billion valuation as of May 2020.
6. Airbnb: $116,840 ($25.5 billion) – Was supposed to go public in 2020, but missed the window. They raised money in 2017 at a $40 billion valuation, and in 2020, they raised money from Silver Lake at a reported $18 billion valuation while having to pay 10% a year in interest.
If you were to ask me in 2015 which company would do the best, I would have chosen Airbnb and willingly invested 90%+ of my net worth in the company. Nobody could have foreseen the impact of the coronavirus on the economy. On May 5, 2020, they announced they would be laying off 25% of its workforce.
7. Kabam: $116,840 ($1.02 billion) – Sold to Netmarble in 2017 for $800 million. Not bad.
8. AppDynamics: $114,218 ($1.0 billion) – Cisco bought them in 2017 for $3.7 billion. A success!
9. Credit Karma: $111,760 ($3.5 billion) – Got sold before the coronavirus pandemic to Intuit for $7 billion. Best sale ever.
10. Okta: $110,000 ($1.2 billion)
11. MongoDB: $109,728 ($1.35 billion)
12. Palantir Technologies:$105,000 ($20 billion)
13. Twilio: $105,000 ($1.03 billion) – The biggest success of them all. Valued at $22 billion as of May 2020! Stock up 40% after 1Q2020 results as more businesses move to the cloud.
14. AppNexus: $104,550 ($1.19 billion)
15. Uber: $101,600 ($51 billion) – Went public in 2019 at around a $65 billion valuation, went down to as low as a $20 billion valuation in 2020 and now is worth roughly $48 billion at $28/share as of May 6, 2020. Originally, bankers had floated the idea that Uber would be worth $100 billion in 2018.
16. Eventbrite: $101,600 ($1.06 billion)
17. Zuora: $96,736 ($1.12 billion)
18. Gilt Groupe: $95,000 ($1.15 billion)
19. DocuSign: $85,000 ($3 billion)
20. MediaMath: $80,264 ($1.07 billion)
Buffer’s Transparent Option Package
The co-founders own the lion’s share of the company (65.7%), as expected. The rest of the employees combined owned ~10% – 20% (unassigned options). The remaining 15-25% of the company is owned by investors. Engineers like Andy (1% equity) and Sunil (2%) are building the company and helping make their founders 20X richer with each minute that goes by, yet they are paid 50% below market salaries.
Founder’s exit: Let’s say Buffer sells for $100 million (a valuation 85% higher than their latest fund-raise in Oct, 2014) in 2020. After the fund-raising dilution, the founders still own about 55% of the company and will have windfalls of roughly $35 million for the CEO and $20 million for the COO gross. Not bad! That’s about $19.25 million and $11 million respectively after paying a 45% effective tax rate. If they can somehow pay a lower effective tax rate of 20%, then the windfall is closer to $26 million and $16 million, respectively.
Top employee’s exit: Engineer Sunil, with 2% equity, gets to cash in on $2 million gross (2% X $100M) in 2020. After paying a 40% effective total tax rate (remember, California is 13% at the top), he’s left with $1.2 million. Meanwhile, as a C-level executive, Sunil is making at least $100,000 less a year than he could have made elsewhere with his $163,000 salary. That’s $900,000+ in lost wages since he joined from 2010 to 2020. His $2 million gross windfall is more like $1.1 million gross ($2M – $900K in lost wages). After taxes, that $1.1 million is really only around $660,000, using a 40% effective tax rate. Even if you use a 30% effective tax rate, that’s $770,000.
$660,000 – $770,000 for Sunil vs. $11 – $26 million for the founders is a massive difference! Engineer Sunil is not living large if he stays in the SF Bay Area because the median home price here is $1.2 million. Chances are high that the cost of everything will be even higher by 2020 when he cashes out as well.
What is the windfall for other employees junior to Sunil if Buffer sells for $100 million? Their range is $179,0000 – $1 million gross, and only around $80,000 – $400,000 net after taxes and salary adjustments! We often hear about the mega billion dollar+ sales from the media, but a $100 million sale is a huge success if you compare the median $40 – $60 million exit by Y Combinator graduate companies, one of the best seed accelerator programs in the country.
In defense of the co-founders, if they never took a risk to start their company, the employees wouldn’t even have the opportunity to work at their company for any amount of equity!
Update 2H2017: Leo, the Co-Founder and Sunil, the CTO left. Their salaries were pretty good, but after 6 years and 4.5 years, respectively, it seems like their hearts were no longer into Buffer. Growth has slowed, and the equity may never amount to anything because who will buy Buffer? They are cash flow positive, which is great for surviving and earning. That’s more than many other companies can say! I asked Leo, Sunil, and Joel whether they bought their equity stakes and they didn’t respond. So much for “radical transparency.” Figuring out what to do with the equity stake when departing is a big deal.
3) Understand equity dilution. Most startups are loss-making by circumstance or by purpose (aggressive spend for growth). As a result, they must raise funds in order to survive. Each round of funding dilutes existing shareholders. You need to ask management whether your own shares are getting diluted as well with each fundraise, or whether you are getting “top-upped” from management’s pool, or an equity pool.
Have a look at this terrific equity dilution infographic. You’ll see that big exits might mean smaller payouts for investors, founders, and employees. Do NOT be seduced by huge exit sales. It’s highly likely you won’t get much of a windfall as an employee as I just explained in point #2. As a founder, you could be easily screwed as well!
4) Can you actually afford to buy your options? Now that you’ve digested the equity dilution infograph, let’s talk about whether you can actually benefit from your equity because remember, you’re getting underpaid! Let’s say you join Financial Samurai and I give you $200,000 in options vesting over four years. Your pay is $100,000 a year and you work with me for three years as a software engineer before you decide to desert me for another startup. You’ve got $150,000 in option available to you (3/4 X $200,000).
Guess what? You’ve actually got to pony up $150,000 within 90 days once you leave if you want to keep your options! Otherwise, you are SOL, much like if you spend 30 years of your life paying FICA tax and then die before you’re able to collect Social Security starting at age 62. Earning $100,000 a year is a nice salary, but how many $100,000 a year income earners have $150,000 liquid sitting around? Not many!
Not only do you have to come up with $150,000 in cash, you might have this massive tax bill based on the difference of the current value of the shares vs. your $150,000 value. Finally, even if you purchase your options, there is no guarantee the value of your options will ever be worth anything! What’s the solution? To stick around for as long as possible so you can save money and not face a 90 day deadline to buy your options.
If you see companies that are going IPO at a sub $1 billion market cap, and have been around for 10+ years, chances are high the main reason is to cash out early investors and founders instead of raise money. One piece of good news is that leading startup, Pinterest is giving ex-employees seven years to buy their options instead of the standard 60-90 days. Perhaps their announcement will result in similar changes at other startups.
5) Founders have asymmetric benefits. Zynga is one of the post IPO tech/gaming disappointments today. They IPOed in December, 2011 at $10, shot up to a high of around $14.50 within a couple months and now sits dead in the water at $2.50. In other words, practically every single employee who joined a couple years before IPO hasn’t been able to gain a significant windfall from their equity. After an IPO, there’s always at least a 6 month lockup period before being able to sell, by which time it was too late.
But guess what? In March, 2012, just four months after IPO, Zynga filed a secondary (selling existing shares, not raising new shares for the company like a primary) to sell 43 million shares worth $591 million at the time ($13.7/share, close to the all-time high). The sellers included the CEO, CFO, and COO. The CEO personally cashed out on $227 million. Did the rank and file get to sell any shares? Not at all! The common employee got to watch the stock crash from $13.7 all the way down to about $3.50 several months later!
Founders of Zynga dumped stock in March, 2012 in a secondary at $13 while employees were left holding the bag. Nice!
A more recent example is the closing of an anonymous social media app named Secret. The two co-founders raised $25 million in the first year, and were able to cash out $3 million EACH without showing any revenue. One founder even decided to buy a Ferrari with his proceeds to show off his wealth. Obviously, the founder isn’t a proponent of stealth wealth and now every single media publication points out his car.
But here’s the kicker. After cashing out $6 million for themselves, the founders then announced within a year they were closing down the company! This example is one of the best get rich quick startup scenarios I’ve ever read. “A bank heist,” as one Google Ventures partner put it.
Are the founders really to blame for cashing out when hungry investors can’t get enough? No. The founders were very smart to cash out, especially since they knew their company was going down the shitter. This is the free market at work. Nobody forced the VCs to shower them with money.
Who gets screwed again? The employees who took below market pay and now have equity worth nothing. Of course the employees weren’t able to cash out early like the founders. The employees didn’t even realize the founders cashed out $6 million worth of stock until they started reading about it in the media!
EVERYBODY CAN GET SCREWED
Let me tell you one last story. For the past 10 years I’ve been playing in this VC/PE/startup poker game for some relatively decent stakes (average buy-in is around $500, and ranges between $200 – $2,000). The host was a pretty outspoken guy who seemed to have struck gold after his advertising exchange company he started in 2005 pivoted from a regular ad exchange to do Facebook ad retargeting in 2011, just when Facebook’s mobile usage and advertising platform started to explode. He moved into an office 5X bigger, hired 40 employees, and things were going great.
Before his company’s pivot, the founder invited me to invest $50,000 – $100,000 in his company, but I declined because frankly, I had no understanding of his business model. I hadn’t even started Financial Samurai yet!
If I had invested, that stake would have been worth perhaps $500,000 – $1,000,000 by early 2014! At the high point, the founder was probably worth $10 – $20 million. I was kicking myself for not investing every time I saw him on Bloomberg TV until I woke up one day to read his company was taken under by some random startup whose founder beat his girlfriend 100+ times and didn’t even sit one night in jail. The acquisition amount? Definitely less than the millions he raised.
Word has it that common shareholders got nothing and the two founders might have walked away with $1 million each after 10 years of paying themselves below market rate salaries. The founders lost control of the board and were forced to sell so the VCs could exercise their liquidation preference and salvage some money back. The founders and employees were both screwed!
Still want to enter the startup arena? Maybe it’s best to gain some experience first and save a good chunk of change before making the leap. If all you’ve ever known is working for startups, then you’re probably wondering what all the fuss is about since you’re getting raises and promotions along the way. Ignore my post because it’s better you not know how much better you can do if you fly to another planet.
Here’s an amazing letter by Mattermark founders who sold themselves for only $500,000 in cash and stock to FullContact on 12/20/2017. They start with “great news” and then say your common equity is worthless.
“Dear Mattermark Common Shareholders,
I’m reaching out to share some great news: Mattermark is being acquired by FullContact! We are happy to have found an exit for our shareholders, and are working hard to close this deal immediately. Your help is kindly requested to keep an eye out for docs in Doscusign so we can get your signature today.
This is a private stock transaction, and unfortunately the consideration for the purchase of the company did not clear the preference of Preferred shareholders so Common stockholders will not be receiving anything in this deal (cash or stock). Though this is not the outcome we all dreamed of when we embarked on this journey nearly 6 years ago, we are super grateful to have worked with you to organize the world’s business information and would appreciate your signature so we can get the majority of common holder signatures needed to close this deal today.”
And here’s a quote I found from Tara Hunt on Quora:
startups are hard.
startups are really hard.
startups are really fucking hard.
startups are heartbreaking.
startups are soul-crushing.
startups are life-shortening.
you can do EVERYTHING right and still die broke.q. so why are we doing this again?
a. fuck if I know!
I know why we join promising startups or start companies of our own Tara. We do it because we love to dream. We think we can solve problems. We think we can take on the world! Until the numbers are called, there’s always hope that our lottery ticket might be worth something.
Recommendation
Start Your Own Website, Be Your Own Boss: Instead of being a startup employee, why don’t you just start your own website and be your own boss? Own your brand online and earn extra income on the side that might one day morph into full-time income. Why should LinkedIn, FB, and Twitter pop up when someone Google’s your name? With your own website you can connect with potentially millions of people online, sell a product, sell some else’s product, make passive income and find a lot of new consulting and FT work opportunities.
Financial Samurai started as a personal journal to make sense of the financial crisis in 2009. By early 2012, it started making a livable income stream so I decided to negotiate a severance package. Years later, FS now makes more than I did as an Executive Director at a major bulge bracket firm with 90% less work and 100% more fun. Learn how to start your own website today with my step-by-step tutorial guide. You never know where the journey will take you!
Here’s a real example of how much you can make blogging from a blogging friend. Be your own boss!
Updated for 2020 and beyond.
Ah good old Credit Karma. They offered me a job in Dec 2015. Base pay was $180K with a 15% bonus. It included a nice signing bonus and 10,000 RSUs.
I ended up going a different direction mostly because required relocation to SF but I wonder what could have been. I’m not sure what those 10K RSUs would have been worth as I didn’t get to that point in the process before turning down the offer.
Hi Sam,
What’s a good apples-to-apples comparison on salary + bonus + RSUs at Big Tech vs. salary and “magical” equity at a Series B startup? Trying to ascertain a good counter offer such that the startup salary is “risk-adjusted”
A startup company wants me on board as a core software engineer, at a very early stage (Seed funding stage) – there are currently 8 people in the company (Three co-founders included).
They offer me slightly less than market salary,
and 0.1% equity – Considering the high risk, and the amount of work I have to put in the products. this seems too low, doesn’t it??
Although, the technological challenges and the amount of new tech I will learn appeals to me, but I don’t want to be a slave.
What do you think I should do?
0.1% equity? Honestly, that’s an insult.
Every dollar you help make for their company makes them 1,000X richer.
Hi FS!
It sounds like the people who have it best here are the VC’s… Sure you can lose money, but lot’s of VC’s have enough where they I assume they spread their wealth and end up hitting it big with the likes of Facebook, Uber, Lyft, Tesla, etc.
Even better, are the VC’s who end up investing in a company LAST so that way their equity isn’t diluted AND they have a better understanding of whether the company will make it or not (and if the startup is a bust, they don’t have to wait years to see this…).
But in order to make more money, they must already have at least millions to invest :) It would be an interesting story to see how many VC’s made their money in the first place…
Other than the founders (who might not make a lot either), it seems that a VC is in the best place to capitalize on startups!
So true! This is why all my friends and I are leaving roles startups to be consultants to startups. The economics of being in a startup don’t make sense. At least as a consultant, you have the freedom and flexibility, and you usually get paid a lot more cash (and sometimes a mix of equity). Really interesting on the Mattermark note. I always wondered where they ended up as that sale to FullContact as it never quite made sense to me.
Great article!
I had pieced this all together after I did two starts-ups in the late 1990s early 2000s during the early part of my career.
I wish I had this article back then and didn’t have to spend 7 years figuring it out, but it’s so nice that FS sharing with the community.
Wish I’d seen this way back when in 199 when I took a VP job at a startup. It was just like this and we also crashed and burned and I lost everything. Oh well, long time ago.
After working for multiple fortune 500 companies as a senior software engineer, I’ve been thinking about a better way to ‘make it rich’ and have been interviewing with startups. As you pointed out the salary is significantly less but at least I get a % of the company! After running a series of numbers with possible exit values and what my equity would be, it didn’t sound so good! After a couple quick google searches I came across this post and it really opened up my eyes to working in the startup land. As you pointed out, starting your own platform/website/blog seems to be the most reasonable way to go. All sweat equity, own 100%, and put in as little or as much money as you want without having to worry about raising money, answering to investors/cofounders, and be 100% in control of your destiny. Thanks for sharing this post, ill be sure to sign up for your newsletter ! – Dan
So happy I found your blog!
I joined a startup about a month ago and equity was part of my compensation package.
Do you have any advice about understanding early exercise options, filing 83b and anything good reading material that will teach me more besides googling on the internet?
Thank you!
Early exercise and 83b election changes the tax situation significantly – the gain will be long-term, not short. This doesn’t affect CA taxes but it makes a difference on federal.
Early exercise makes sense when the price is very low, say $0.001/share. It’s not taxable if done before significant price appreciation, such as on grant.
I’m late on updating this so not sure if you’ll see it – but 83(b) is a scam just as stock options are. 83(b) is only available to very early employees. At this point you geniunely have no idea how the company will do (most startups fail esp at this stage) so you’re going to be paying to buy the stock that may very well be worth nothing (I learned this the hard way and lost $20,000 plus interest opportunities on that cash on early exercising stock – never again.) Maybe if your founders are serial startupers who have had multiple successful exits you can consider an 83(b) otherwise avoid avoid avoid!
Great article Sam
Let’s assume all you said is true of 95% of start-ups out there. How about here in Africa? Would it be better to replace the equity that will likely be liquidated with say education? As in, if the start up offers paying for one’s education and personal development, would it not be better to take that instead knowing in future you’d leave with some value?
Youth in need of advice.
I’ve been in the tech field for almost 30 years now….joined before the start-up/VC money was even flowing, but have been through and seen a lot of my co-workers join the fray. This is a great post for sure…one of the best I have seen on the financial side of the start-up world.
One other absolute musts for taking one of these jobs (or quite frankly, any E-VP/President/C-level job in the corporate world) is make sure your spouse/significant other is aligned with impact these jobs have on your lifestyle. I think the divorce rate for my buddies who made a decent payout is about 80%….. They did not have pre-nups…so on their first “windfall” they lost 50% in their separation agreement. Now, divorce happens to all income levels….but the rates are MUCH higher when you need to work 60-80 hours a week and you have a family (often a young family) with a spouse not aligned to that lifestyle and stress….
I had a great career coach say once to me…before I took the really big job….make sure you wife is part of the decision…and KNOWS that SHE NEEDS to play her role as well…. go into the deal with BOTH eyes open…..
Really good advice on getting your spouse on board. The hours needed for success are long, so I still wonder why people complain about their progress when they are only working 40 hours a week or less.
How do you feel you’ve done financially after 30 years? Is there anything you would have done differently?
I made the call not to go for the E-VP job…much to my bosses chagrin (I had already turned down a number of start-up gigs.) I was progressing in my job, had good pay, good stock options, good living location, an overall pretty good gig…. but, I was already working 60-70 hrs/wk, had 3 kids (one special needs….which is added family stress) and a 4th on the way, and a wife who gave me constant grief for not ever being home….or being present when I was home. She let me know that this was not what she bargained for when we said I do…..I was on conference calls in Europe at 6:00 AM, Asia at 10:00 PM, and the US all in between. For me…I could not make it sustainable. I applaud those who can…I never cracked the code when it came to balancing family and the large P&L responsibility
Even after 10 years….I really do not have significant regrets (once in a while, I get the what if thought…but it goes away soon) I knew I would have larger regrets losing my family (divorce or simply being a completely absent father) because I chose business success first. I have got to see my kids grow up (play sports, help with homework, etc) over the past 8 years. Got one in college now…..couple more progressing well. I missed most of that my first 15-16 years.
There are consequences…..we need to watch expenses much more closely. Can’t afford the beach house that my wife still wants…..When I was on the fast track, I was looser with the credit card…. Financially, I really can’t complain…. and I found a couple positions where I still have a “comparative advantage” in my company and the industry, which affords a decent wage (but not F You wage). If I had read a post like yours on stock options when I was 30, I could have retired by now! I lost a ton of paper wealth in the 2000 tech collapse! Oh well…..
Keep up the great work, Sam.
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Great post. I’ve been through the rodeo a few times and have learned a lot, and even though I know a great deal about stock options I still don’t know enough to make smart choices when it comes to my compensation and negotiation at startups! This post is a good overview on many of the realities of startup options. A few topics you didn’t mention:
1) Investor liquidation preferences — if the company sells for a little bit over what was raised, the investors get paid back at a different ratio then the employees. So employees may still get nothing, even if the investors get their money back and then some first. I don’t understand how this works exactly, as it seems to depend upon each unique round’s contract – but it’s another case-in-point where employees get screwed in the end.
2) Taxes. You did mention the whole if you have enough $ lying around when it’s time to cash out bit (unlikely as rank-in-file employee) but beyond this, you ALSO have to pay taxes. You have to pay taxes on the difference in what you were granted the stock at vs what it’s worth today, even though you can’t actually sell the stock. So you end up paying MORE on a very risky bet — which is supposed to be part of your compensation but really you’re just gambling. If your company is doing well and has a stable customer base, you may do ok. But clearly odds are against you.
3) Qualified stock options vs non-qualified – there are options for very early employees where as a “bonus” you are allowed to buy them early (i.e. if you have $100k in stock options you can buy these up front, possibly taking a loan from the company to pay for them and paying it back over your employment.) This is theoretically a benefit for early employees because then you get to pay long-term capital gains on your increases, and don’t have to worry about the 90 day rule for any stock you vested w/ additional taxes, because you’ve been buying the stock along the way. But what really happens most of the time is you’re locked into an investment that is going no where – slow. Usually companies prevent you from selling the stock, even at a loss. There are private markets but those are confusing and require expert financial planners to help navigate if you don’t know what you’re doing. Ie, you may hold $50k of stock from a company you no longer work at, which you purchased in order to get better tax rates once it was worth more than that – only the $50k is worth something less than that today (but you can’t know exactly what because you left the company so have no way to know) and you are just waiting for the company to go under so you can take a massive net loss. You don’t have any say in WHEN you will take the net loss — so you just have to wait… and wait… and wait.
4) Down rounds. They happen. They happen often. People come in and think their $1 stock is super cheap after a B or C round. But then the company doesn’t hockey stick grow and the stock is suddenly worth .50 cents a share. You have a bunch of people who have options under water and it hurts the company because they have to either re-up the employees or risk a lot of people leaving. You get people who are very upset as they felt they were lied to (which they weren’t, it’s just the nature of stock options) and the company has to deal with handling all the turnover and angst. It’s a downward spiral that few companies can recover from. And it happens very often. Companies that keep going up in value are the exception not the norm.
5) Stock splits. So you think you have 50 cent shares and wow even if the stock is worth $1 a share you’ll be filthy rich. Think again. Most companies do reverse stock splits before they IPO. So one share could actually be worth 1/4 a share, or 1/16th a share, in the IPO. There are no rules around this. Yes, it’s actually all “worth” the same (stock splits don’t change value) but the mindset of “well if we IPO for at least a dollar” doesn’t end up aligning to reality.
6) More stock. Say you are promised more options later on. If the company happens to be doing well then you may get more stock, but this will be more expensive and have a 4 year vesting period again for the grant. Maybe this is a good thing because the company is doing well and you want to stay… but it’s just more handcuffs to keep you loyal and not looking elsewhere.
Those are six of the main additional points that I think this post is missing. Ultimately I view stock options as the pyrite handcuffs of startups. Yes a few people do strike it rich but it’s a crapshoot/lottery ticket and worse even when a business seems to be doing well there are still so many reasons why your options can end up worth much less than you think they’re worth, or even bankrupt you due to tax issues and lock ups, as we say in the 2001 bubble burst. It’s actually quite scary and the startup employees don’t have the money to invest in a great financial planner to really hammer out the risks, even though companies always advise that you do before you buy the shares.
I’ve given up at the dream of getting somewhat rich by stock options and now negotiate straight up for salary. Seeing one too many CEOs walk away with millions while everyone else was left to hang out on a sinking ship, I’ve learned my lesson. Amen to Tara Hunt’s comment. :)
Good write-up Sam,
I know you are just warning and not taking a position against startups. I say that to say this.
Believing in yourself is the foundation for making a difference in this world. And yet that can be such a lonely and challenging path (re: entrepreneurs & depression). Your support , and that of more and more investors who have gone down this path themselves, is like a rallying war cry for innovation, courage, and daring to defy “business as usual.”
From a historical perspectivethe pioneering spirit of this country vastly predates Silicon Valley. Those who settled the American West were taking a risk. It’s what makes great people great, taking risks.
– Warren
Wow lots of fantastic insights in this post. I think anyone looking for a job in the Bay Area especially should read this post. Startups have this alluring sexy appeal, but there’s a lot more to it and it’s so true that even if you get in early you may not end up making a lot and the risk is very high.
I do find the open salary info at Buffer quite interesting. I’m not sure I would like that at all. If I was the CEO I would at least keep people’s names private. It’d still be possible for internal folks to figure out who is who, but I don’t think the public should be able to know which person’s identity is associated with each salary.
Startups are fascinating to me being on the outside. Not sure how I would feel actually working at one from the inside.
A nice overview. I often have realized this with many of the jobs that I have applied to in the past few months.
Hey Sam, were you talking about Triggit? An old ad agency buddy of mine used to work there. I’ve been at Millennial Media for three years, and previously spent time at other start ups, so this article hits close to home. Good post!
Of course he is.
I just want to know when the tshirts go on sale. Self submissions of pics would be a great organic marketing idea.
I’ve spent my entire career at large tech companies at this point. I interviewed with some startups in my last job hunt and ended up at another large tech company. One of my friends gave me a similar analysis of how startups aren’t necessarily worth the gamble. Sometimes it’s frustrating not having much control over what you’re working on and other times it’s freeing. Being part of a big company makes it easier to work 9-5 and then go home. All while making more money than at a startup? Sounds like a great plan! I have awesome benefits, good pay, and save 80% of my income. I’ll be able to retire early without too much hard work.
Hey Sam-
One of my best friends joined an early stage startup (6 months after founded and less than 10 employees) 1 year after graduating college. She received a 25% salary bump and some stock options. She had no clue what the value of the options were and considered them a “bonus” because she already got a nice salary bump. It has now been almost 2 years and she makes 30% more than when she started. The company has 100 employees and has raised money at a significant valuation. My friend still has no idea what her options are worth and still just considers them a bonus because she makes more salary than she could at other companies. This example definitely goes along with your comments about how people (esp younger ones) are fearful of asking senior management questions about the value of their equity.
Perhaps ignorance is bliss in this case? Sounds like she’s going to do well.
If all you’ve ever known is working for a startup, all is good if you’re getting raises and promotions.
Great article Sam. I left a secure publicly traded company for a midstage startup in its 4th round of funding. Loved the excitement and passion of the ceo and executive team but realized the lower pay was not worth the diluted equity. Now I’m back at another massive market encumbent making a hefty salary. Once I grow my financial nut big enough i’d love to jump back in the fray!
Dear readers & Sam,
Yes, Joining a start up that no One knows what it will be in future is very risky, So I think of below options: Join a matured start up that is in Final stages, or be well informed of the Bulk deals in Stock market when Founders sell the stake , or its okay to go for slightly lesser (5% lesser or may be 10%) salaries than market rate, But as everything has its price…this is the Risk-Premium value!
Everything has a price indeed. It is amazing that the Secretly founders sold $3 million worth of their equity each without telling their employees until later, and then shutting their company down. Smart of them to take advantage of the VCs. Just sucks to be an employee.
There are no 5-10% to market salaries in the startup world. $200,000 is about the cap, with the occasional $240,000 salary on Angelist. Folks should see for themselves.
“That’s $900,000+ in lost wages since he joined from 2010 to 2020” is incorrect. If that amount is invested in the stock market, then the return would be about ~$1.6Mil which is the real amount in lost wages. So the actual return is much lower !!
LOL, I guess if you put it that way, then you might be right! But let’s keep it simple and calculate only what we can save for sure. The money could have been invested in Zynga at $13 too.
True that it could have been invested in Zynga. But lets keep it safe and say that it is invested it in an index. Way more diversified and safer than any startup and even an established company.
Based in SF Bay Area. In my experience (and colleagues I talk to) software engineer compensation plateaus very fast. So the median salary seem to be around 140-180K. Majority of senior software engineers in SF Bay Area do not work on AdSense team, so I’m not sure I completely agree with your statement ‘$124,000 is literally a 50% discount to what he can make elsewhere if he’s truly a senior SF engineer.’ It may well be true for Andy at Buffer and your client, but not for a typical SSE in Bay Area.
If I was a senior software engineer (35+) making $124,000 without at least $500,000+ RSUs in a company that is at least doubling every year, I would seriously find another job.
As a landlord in the SF Bay Area, I’ve literally seen over 100 software engineer applications with their income, paystubs, etc. The 80% range is $80,000 – $400,000.
Have you been working at your company long? It might be time to go.
The upside is that you don’t believe a senior software engineer can make $200,000, and if you believe you can make it, there’s a much higher chance that you will.
I honestly believe a senior software engineer can make even more than 400K a year given the right company/project/year. It is more of a question of what a _median_ annual compensation for SSE is in SF Bay Area because the article is targeted at a wider audience.
By the way I think your readers would be very interested if you share the median number based on your rental applications.
I worked for a start-up company in industrial biotech for 5 years. I was the 20th employee, received 1000 shares of stock, and most importantly a 30% salary increase from my previous job. Over the years I got a few raises and more stock, ultimately exercising 10k shares after leaving.
What you need to be aware of is working directly for co-founders that have 1000X more equity in the company than you do. You’ll be working side-by-side these people and if the company actually succeeds they’ll be multi-millionaires, you’ll have $10k. For some reason they’ll be more excited to work on the weekends than you.
Amount of stock and company valuation really don’t matter because they are volatile. You can ask all the questions you want before you are hired but as the company chugs along and raises’ more money you likely won’t know how dilute your common shares are becoming. Just remember that when everybody is gathered in the lunch room popping open champagne celebrating your latest round of funding.
Massive funding means the co-founders are no longer in control. There’s big money in the game now and it’s time to bring in the experienced executives. “The goal for this year is to generate revenue and be cash flow positive in 3 years. We also have a new CFO that’s taken companies public before.” The IPO, and your millions, are always 3 years away. If you receive massive funding and don’t start generating profits, get acquired, or actually IPO the game is over.
I guess your example is even more extreme than my example of the founders having 30X more equity than you.
I’d be way more excited to work weekends as well with 1,000X more equity. But I’d also feel BAD making an employee w/ 1/1000th the amount of equity work as hard as me. Yet, so many employees do, like good soldiers. Free food and drinks anyone? We’d like to you stay back and work even longer!
no CEO i’ve worked for has felt bad about expecting employees to work as hard as they do – that’s part of startup life. it’s also why most CEOs at startups are on the sociopath spectrum.
THIS.
Not sure about your assessment of senior engineer salary in SF. 125K seems low but not like a 50% cut. I guess the definition of ‘truly senior’ may vary, but even 140K is considered OK in my experience. Median is 137K according to salary aggregators. Could you elaborate on this, thank you!
Craig – It depends on where you live. Given I’m using the Buffer app example they’ve so graciously shared, I’m using the SF Bay Area.
22-23 year olds right out of college make $100,000 – $110,000 + options at Google and Facebook. 28 year old engineers at the same company make much more than that. I know this not only from what I read online, but also b/c I’m a landlord in SF and see exactly what these engineers make.
Finally, I do the occasional personal finance consulting on the side. One client makes $200,000 and he’s 39, with a million+ in options. $125,000 is way low for a truly senior engineer.
Where are you based?
Your Facebook example reminds me of someone I road up the ski lift with winter who was in his late twenties and retired because he was one of the earliest Facebook engineers.
Great article! I learned a lot and it helped mitigate some of my regret for not taking a more daring career choice early on.
I was the 5th employee of a startup that peaked at about 80 people, and as such, I had approx. 200k in options. Pretty good for my first job out of school? At least, I thought so.
We were a supplier to automotive companies, one of which decided to both invest and put our product into production. Score! We even built a $50ish million dollar factory. Then our big customer decided not to put our tech into production after all. The startup had to declare strategic bankruptcy to kick our customer’s voting interest off the board.
The convenient side-effect? All the early employee equity was not renewed in the reformed startup company.
The only redeeming part of this story is that I actually made over market rate salary for a very early career engineer and learned a lot of technical skills that I leveraged into solid positions later.
How could the company keep their employees if NONE of the equity was not renewed in the new startup co? Is the company still around?
So, of course the founders and C-level management have equity in the reformed company. Just not the early scientists and engineers like myself who developed the product.
The engineering staff did mostly leave, which is fine because product development is over. The company is still hanging in there as a zombie, mostly because a few car companies want the finished product’s technology in their back pocket in case stricter government regulations come out that necessitate its use.
Gotcha.
Getting equity in a zombie company might as well be a zero. And in the Buffer example in this post, even getting 2% as a C-level management engineer….. I just don’t see how that is motivating enough? Have I got this all wrong? Someone give me the counter point!
Sam, here’s the “counter point” which I’m sure you’ve heard before being uttered by founders recruiting:
– So, how much is 2% equity worth in your company?
– Well, we just raised at $20m pre-money, so you’re already talking 200K. At the pace we’re going, this is a billion dollar play in 4 years, which gives you $20 million!
– Hmmm… ok sign me up!
Nobody understands dilution, vesting schedules, liquidation preferences and startup politics, for better or worse. If people did know these things, then founders would be forced to share more to get anyone onboard their ship.
Sidebar: is there an example you can think of that mixes the best of both worlds? ie. working within the context of a established company on a new concept but getting a potentially large multiple of your salary upside if your team pulls it off?
It’s pretty funny. I’ve heard that response before, and also
“This will be life-changing money.”
and
“You will never have to work again.”
I just smile and think, Wouldn’t it be nice not to ever have to work again?
It’s all about SELLING THE DREAM to get people to work for you. The bigger the dream you can sell, the less you have to pay.
The best example is being a CEO of a large company e.g. IBM, Yahoo. The CEOs are earning mega-millions, yet the stock performance for both have been dismal.
As for us regular folks, there’s a large correlation with income if you are in sales e.g. sell more, get paid more. But that’s only if the industry doesn’t turn into a communist structure with one department subsidizing another.
Great article and very well done in showing the wider story. It’s normal to focus on the successes, but this survivor bias leaves people ill-equipped for the realities of below market salaries and wiped-out equity.
Curious if you’ve ever read “How to Get Rich” by Felix Dennis (no, it’s not as cheesy as the title suggests). There’s a great section on fund raising and sharing (or not sharing, in Felix’s case) equity. He was very much in favor of sharing the annual pie (profit sharing), but he never sold a single share and even fired an entire senior management team when they issued an ultimatum. He may not have had the biggest publishing empire around, but he owned 100% of it, and he was never forced down a path he didn’t like as a result. It’s an interesting contrast to today’s world – feels like most companies feel like they must raise money even if they don’t really need it, and once you start scattering equity around like party favors you can end up with asymmetric information and perverse incentives.
Companies like Mojang show that you don’t always need financing or distributed ownership to achieve success (and when you sell, you get to eat the whole pie). Would like to see more entrepreneurs like them.
Haven’t read the book, and I like the idea of 100% ownership or majority ownership. But that goes back to my intro of this post. It’s important to recognize as a startup founder to SHARE in the equity of people who could do tremendous amounts for your company.
It’s just tough to share b/c we’re all greedy in some way.
Great write up.
20 years in Silicon Valley, startups, big companies and in between. I wish someone had explained these risks to me in year one of my career when I was blinded by the Valley glamour.
Calling out the dilution risk is very helpful. Most people don’t understand funding rounds and how they lose value at every round and wonder where the money went if they’re lucky enough to cash out.
There’s a reason we call startups “playing the IPO lottery” -the odds of winning are very low. If you want to get rich, work for a big company with a steady job and great benefits for a long time. Use your spare time from not busting your hump at work to do your own side gigs to build your passive income to retire on. You’ll be much happier and less stressed.
I was thinking, perhaps startups is like the highly educated person’s version of playing the lottery. You keep on playing b/c of the allure of striking it rich, but most end up losing on a relative basis.
Startups are much more exhilarating than old cos, that’s for sure!
Damn, great article! I think it is great you took the time to walk through the actual math behind this so people can understand what reality actually is. I am extremely old fashioned, and I just don’t get why companies have to go out and raise capital and sell their souls to the devil. If you truly have a great business what is wrong with taking it slow, building it the right way without debt and keeping all of the vultures out? Delayed gratification is what…people inherently feel they have to jump to the end to get the reward. Granted, 5-7 years may not seem like jumping to the end, but in the grand scheme of things it is. In China they have a different philosophy, they are trying to build and grow their businesses to last 100 years & don’t want to give them up…here it is all about the quick buck.
So many people forget about the tax side of the equation. If you build a real business with real profits and build up basis the company has paid taxes on, you can distribute the dollars tax free. That takes patience & discipline though, and also the one thing most of these start ups don’t have…actual profits. I can completely understand the allure though, get rich quick is the American motto.
Thanks man. I think if most people could bootstrap, they would. But all these businesses are incredibly loss-making in the beginning, hence the rising thoughts of a massive private equity bubble implosion. It’s all about striking when the iron is hot! I’ve got a fun post going through this exercise for FS.
Doing the math and analyzing various exist scenarios is key. Employees need NOT fear asking management the right questions about their equity component.
Dude. Poker Game. Classic.
Hi Sam,
I like the tattoo at the beginning of this piece, and liked the poker video.
I joined a startup in 2001 in the capacity of a Director, making $143K a year. It was a 50% jump over my previous comp and I got a bunch of stock options (NQ) that I exercised for $12K shortly after joining- I was greedy and thinking of minimizing my tax bill. Well within one year they folded, and not only was the value of my stock zero, but they actually bounced my last few expense checks which totaled $5K or so… not cool at all. So it was a valuable lesson.
Now I’m nervous about being a Series A investor in a start up. They are still viable and cash flow generating from organic revenue growth but anything can happen. Got my fingers crossed…
Well you know what they say- if you never play you never have a chance to win.
-Mike
Good luck with your investment! Investing in the Series A round seems like a sweet spot for risk/reward.
If working at a startup is all one knows, then I think the situation is much better, especially if you can keep getting below-market salary increases that don’t seem below-market.
Maybe an analogy is like always living on the East Coast. There is still this HUGE debate on my posts on which is better. If all you’ve ever known is the East Coast, then all is good. But, as soon as you discover California, the East Coast doesn’t seem as amazing anymore.
Same thing happened to me even to the 12k dollar amount. I felt the ” scared money doesn’t make money” mind set even though everyone knew that things weren’t up and to the right as we had expected. Still waiting on that place to sell for much less than expected. I would be happy for my money back.
I had one job with an ESPP. It was a Fortune 500 company so it was hard to see my work correlate with the overall success of the company. If I did something extremely well, the stock price didn’t bump up.
But for smaller organizations, give me a percentage and I’ll definitely champion our mission! I have to feel a part of something to care.
The impact is definitely different, and so will your motivation and mood for work. Startups or smaller companies are great because there’s so much each of us can do. We don’t want to feel like just a number or cog in the wheel.
I’m a fan, people just need to be aware of the industry and all that goes on. Knowledge is power and potentially lots of money in this scenario.
Left one of the largest companies in the world to join a late stage start-up. This article is spot on. Since there are no guarantees in regards to the value of the equity you receive, focus on getting a market rate salary.
Good luck and think twice or three times before making the leap….
Good luck on your leap! Joining a late stage start-up (Series C or greater) where the chances of survival, IPO, and continued growth is high is probably a good move, especially if you can get closer to market rate for your salary.
One of the main takeaways I’ve found is that if you are going to join a startup for below market pay and a lottery ticket, to make sure you love the mission and to HAVE FUN! Even if the worst happens, at least you had a great ride.
Sam, would you be willing to elaborate on post-series C companies? If they give you an option to move a slider between more salary and more more equity, how should one generally approach this? What framework would you apply?
Maybe joining at the Series B stage might be the best time from a risk and return perspective.
It really depends on the company’s future and what package they give.
They pay very large and competitive wages at Series C or later. And the chances of Series C being a donut is I would guess 50% lower than a Series B stage company.
Hence, another reason to be FI sooner. It allows you to take more risk to actually make more money.
Thanks Sam! Will help me understand the salary expectations as I’m interviewing with a series C company. Do you think the wealth front tool someone linked to is a decent starting point for a candidate to get a grasp of potential pay? The salaries seem a bit high
Yes, the tool is a great starting point. Just make sure to ASK all the tough questions I’ve written in this post to management. Ask them what happens in various scenarios!
Thanks for the well wishes. I made sure I got an uplift pay so I am at or above market wages.
I think the real risk is dealing with young and amateur business processes, resources and peers. This can make you feel like you took 2 steps back in your career.
Your point in having fun is spot on…make sure you have fun because there is very little quality of life at a startup (if there is…they aren’t growing)
Article is spot on. I made a big leap. After working at a decent sized investment bank with a very flexibile schedule and the ability to build up a side business, I joined a startup with my ‘friends’. May I add, on blind faith.
So far this has been one of the worst career moves of my life. I dread going into the workplace everyday. I left a chunk of change in deferred comp on the table at the old place. I was better protected at the old place. I was misled on the vesting period for the shares given to me. Oh and I moved from an affordable part of the country back to the bay area.
One positive is I have learned a lot more.
Will see how long I will be able to hang on.