HACKER Q&A
📣 volkk

Founders of startups, do you expect equity to be enticing?


I've worked at a plethora of startups by now, and even the one that went public, I've still made almost no money on given my equity. It's sort of what I expected, but even the companies that I really truly believed would do well, still didn't because of some random other issue (usually incompetent upper management/founders).

I ask, why do you expect a potential hire to appreciate X% of nothing when it's well known that most VC's that invest in your company know that you have a 99% chance of failing anyway, and thus diversify their portfolios with many startups to increase the risk of success. Why are employees expected to pretend anything otherwise? I'm so beyond the eyerolling phase of hearing that they'll pay you .75X of your current salary but give you equity to make up for that, it's just exhausting at this point, to be honest.

  👤 uberman Accepted Answer ✓
From my experience, options for employees have NO VALUE at all. This is not because VCs and C-Suite don't think that the company will make it, but because they arrange things that way to maximize payouts for themselves.

Here is how this happens. Let's say for argument sake, there are 20 million shares or options floating about. Let's say you own 500k of them. Now Mega_Company and your company New_and_Cool announce a 20 million dollar purchase. You think your might be in for a $300k windfall (or more), but here is what is likely going to happen.

VCs will have a preferred stake that must be satisfied as part of any buyout. Usually this preferred stake will require satisfaction that is a significant multiple of the at risk position. The VC put up a million bucks but now requires the first ten million as part of any buyout.

Next, C-Suite will arrange direct compensation and retention packages outside of the context of common shares/options as part of the buyout. The CEO will get a five million dollar direct payout while the rest of the C-Suite and Board split an addition 5 million.

Then low and behold, your shares/options are worth... Nothing. Imagine that.

An equity position in New_and_Cool is snake oil and should be evaluated as such. Yes, I know there are counter examples and "so and so's secretary" is now living on a private island someplace thanks to their options. In my opinion, these gilded accounts only serve to make the gullible more susceptible.

👤 muzani
Simply put, startups don't have the budget to match higher salaries.

I did a startup setting aside a large portion of shares for employees, but nobody asked for it. It was easier to just pay more - large businesses were paying $1000/month for an mid level programmer. So it was just easier to offer $1000/month to juniors.

However early stage VCs offered a rate of about 1% for 2 months salary. So sometimes it's easier to offer that early stage employee the 1%. Some have enough money in the bank that they'd like to invest in something.

👤 JMTQp8lwXL
It's an exhausting proposition to you, but not to others, probably folks new to our industry, who haven't carefully considered the tradeoffs.