I've seen a ton of this on HN for the past couple of years, "Go work for FAANG, startups are worthless." As someone who has started a company, gotten it funded, and would like to hire high quality engineers, this is deeply disheartening. I've tried to hire a few people, offering them market rate or close to it for base salary (_very_ rough ballpark 150-200K for 2-5y experience) and a decent chunk of equity (highly variable, for VP level I've offered up to 2%, there's a salary equity tradeoff though).
These seem like fair offers, but often I'll get, "actually I'm really a cofounder so I should be getting double digit equity." That's fine, except
1.) I have 15% of the company in my option pool, so no I can't do that unless I effectively want to give nothing to everyone after that person.
2.) At the risk of sounding aggrieved: I spent all of my savings to get this off the ground and funded, am taking a far below market salary, and you want to get that sort of equity with none of that risk? When I'm pretty sure you wouldn't be talking to me if I didn't have a nice war chest?
What should someone in my position be doing to entice top notch people to join us? Yes it takes a leap of faith that what we're doing is interesting (please trust me that it is), and that someday stock worth 10s or 100s of K will be worth 100s or 1Ms.
But if nobody is willing to take that leap, then companies like mine and many others will die. If it's all about cash and comfort, then FAANG will have won and innovation will slow.
I'm really willing to listen, what can I do to solve this dilemma of a necessarily limited option pool AND inability to say, "yeah my stock is provably worth $100s a share and I can pay 75-90th percentile of market base."
To rephrase the dilemma you pose: "FAANG has more money than my startup and the employees I want are mainly motivated by money". There is probably not much you can do to beat FAANG on the money front. Some options include:
- Go for less top-notch people. Do you really need the very best or have you just convinced yourself that you do? How do you even measure quality? I've seen ex-FAANG people bomb more than once at a younger company because they couldn't handle the lack of structure and immediately went about imposing Google-scale solutions and processes for a 10-person company.
- Seek out people motivated by something else than money (ie autonomy, purpose, mastery, community) and offer them opportunities to chase those things.
- Finally, your post is very focused on YOUR perspective as entrepreneur. Things like "there will be no options left in the pool for other people" and "then companies like mine and many others will die" are not problems for the prospective employee. They are under no obligation to join your company just because you really want them to.
I can't handle the structure of a large company. There is more than pay influencing decisions. I like the nimble "family" atmosphere of a startup and the ability to make an impact. That sometimes propels people to greatness. I had zero credentials and was hired as app support to free up developer time at a startup. My freedom to impact the business infused me with passion and I ended up being a key person in the operations of the company and a major influencer of the technical direction. My salary went through the roof. Hire people who haven't been burnt down by big company culture and turn them loose. You can create top-notch people on the fly. The people they hired along side me who had credentials and tons of Corp experience were left standing.
As a FAANG engineer that used to work for start ups I’ll give my honest feedback on why I don’t consider working for a start up anymore.
A 15% options pool is insulting as you’ve decided to split off 85% for yourself and non-employees while leaving a measly 15% for the people who will actually build the company.
2% is just way to low to be of interest to me. And the sad part is, that is much higher that most offers. I have no idea what that two percent will be after being diluted x number of times, so the one thing that is supposed to incentivize me is just a black box with a theoretical ceiling of 2% and a very real possibility of 0 or close to it.
Other things I would like to see: actual vacation time (not unlimited vacation) and accounting/books shared with employees (these are not PowerPoints).
I appreciate the feedback, it's useful to hear this.
I'd be willing to boost the options pool, but I'm not sure I'd be willing to do so right now for a few reasons.
1.) I don't trust that someone isn't going to come in, get offered a large chunk of equity (lets say it's 10%), and leave after 2 years with 5% of the company. In many ways that would be unfair to a future employee who works with us for a longer period of time and gets dramatically less equity. This could be solved with highly backloaded option grants (I've been thinking about doing this), but I suspect you wouldn't be interested if 8 of the 10% vests over years 5 and 6 or years 5-8 either.
2.) At previous startups I've worked, there are often follow-on grants that mitigate dilution for employees upon fundraising events. As a founder, I definitely won't get such a grant until I'm close to fully vesting. If we take some of the sting out of dilution, then that effectively is growing the option pool over time.
3.) I currently have 50.1% of the company. Had I cofounders, we would together own 50.1% of the company. This is helpful because it allows me to make some decisions without relying on our investor (who's been lovely so far, but still). Later, that will change, but at that point we'll have more infrastructure.
On accounting/books, I don't know if I can do that. I've never seen it done across the org, though I'm happy to show senior management rough projections and our current burn.
Unlimited vacation is an accounting construct. The pain of having to deal with accrued days vacation is not worth the hassle for a small company. When we have better financial infrastructure, maybe we'll revisit.
A lot of this sounds like I need to foster some trust in my potential hires that I'm going to take care of them more than anything else.
Regarding the equity, how would a long or highly backloaded vesting schedule work for people in your shoes?
I'm glad to give feedback. I'd prefer to have start up jobs as an option, so I'm incentivized to help with this problem as well. Sorry you are being downvoted as you are at least thinking about the problem and possible solutions.
You say you don't trust someone to get a chunk of equity and then leave after two years, but you asking employees to trust that they won't get let go before vesting. I'm not saying you think of it that way, but that is how it comes across. You want to have your cake and it it too.
Re owning 50.1%: Do you not trust the 15% of employee votes to side with you over the investors? I really don't know much about corporate structures, but I'd love to see the collective employees represent a board vote as well. I have no idea if this is possible.
I would not join a start up without knowing the burn rate with existing revenue/investment (not sales about to close or an investor about to sign papers).
Re-unlimited vacation: What you say is a hassle sounds like offloading your burden as a founder to the employees in the form of a pay decrease. At least in California, PTO is debt owed to the employees, so 2 weeks at 200k is 8k being withheld because of a hassle. Again, does not feel good. Also, I believe in an "unlimited" pto situation employees will only take as much time off as their manager/leadership so in my interview I would be asking what time off my manager/founders have taken in the past year or what you are doing to ensure people take the time off they need to live a healthy and balanced life. I also ask this question at interviews for non-unlimited PTO jobs, but because at least that time will get paid out if unused it isn't as big of deal, although I still wouldn't accept a position if my direct manager hasn't taken at least one week off in the past year.
There are too many creative ways for options to go poorly for an employee. Even with founders with the greatest intentions, things change. Board control can change, divorces can affect shares and control, a co-founder could leave, market conditions could cause well intended founders to have to let people go when things get rocky. If there is medium-success acquisition will the investors/founders be paid before my shares?
Also with options... what am I expecting to be a good payout? $500k after 4-5 years maybe? Thats ~100k a year. With RSUs for actual public stock, sign on grants, ESPP, PTO, etc., the TCO at a FAANG company can be quite high, so it feels like I'm taking on a lot risk to maybe break even? Yes, there is the chance of a billion dollar startup, but those are outliers and aren't representative of most successful startups.
One thing that startups haven't yet started to utilize is the resource of time. Many FAANG engineers make more than enough. If a startup offered me half my FAANG salary for 3 days full time employment with benefits, this is an offer I would strongly consider. It also eases the pressure of PTO issue. Like the old saying goes... Time is money.
I may not be representative of everyone, but these are things have become important to me as I've grown as both an engineer and a person.
Thanks for engaging, this is really quite helpful and as you imply it's a kind of cancer on the ecosystem right now.
On the chunk of equity, I had a cofounder walk away early so I'm a little burned on the subject. You're right that the letting go before vesting is an issue, I think maybe rethinking the cliff to something like a 6 month rather than a year could do better there. Full disclosure, we do have a mildly backloaded vesting schedule (20-23-27-30) to encourage staying longer, but I think a crazy backload (like 10-15-25-50) creates toxic incentives on firing people before the equity hits.
I think essentially my (and the investor's) worries about that employee stem from a belief that a founder typically has a different level of emotional commitment than even very dedicated early employees. Obviously not always but often. Which means that even if it's a theoretical risk that the founder walks early with a hefty chunk, it's less likely.
On owning less than half, I actually tried to write a clause like that (I vote by proxy for employees who own less than a given percentage individually) into the term sheet. It was rejected by the investors. I'd love to have a board representative for the employees as we expand. I've actually considered a seat that has to be a non-exec employee that would rotate in every 6-12 months. Something to consider when we have more seats for sure.
With all hires I've been clear on how much we've raised, how many shares exist, who are the investors in rough proportion, rough estimate of runway, and milestones we have to hit to get the next round. I'll think about careful ways to share the information as we go down the road. One difficulty is that it's hard to judge how people react to these numbers. If I've got 6 months runway left, how many people look for the exits? And what does it say about me that I'm not sure about being honest about that? I'm honestly really torn.
On unlimited PTO and time I sense that there's a larger, "will you abuse my home life and time?" undercurrent. On the accounting, I don't know the details but I'm told it's more than just the price of the PTO, it's the way it complicates backend accounting. Maybe I should dig more.
One way I think I could mitigate the concerns and that I've considered are as follows:
- guaranteed 1 company holiday per month, if there's no official holiday in that month we'll designate one monday or friday as off.
- 1 week off in the winter 1 week off in the summer as scheduled company shutdowns. The nature of our business is not live, "keep the website running" so we have flexibility there.
I've also set a tone with all my employees that we don't burn out here, lets find schedules that work. We shouldn't be burning the midnight oil and weekends all the time. If we are, we need to rethink our objectives or staffing. Maybe setting the above two benchmarks would also set that tone. Maybe this is idealism, but I think we can do it. I guess we'll find out!
Your 3 day work week sounds interesting, will think on it a bit. We would need to have a good mutual understanding of what milestones we want to hit on what timeline, but could be doable with the right people.
I hear you on the many ways things go wrong. I can't predict that, and sadly layoffs can happen. I think you can do those humanely but it's awful and I hope we'll avoid it, though likely if we're around long enough we won't.
On the investor/founder vs employee split though, I have common stock, just like every other employee. We rise and fall together, though yes investors can have a liquidation preference. In those cases, my strike price was better but that's the only way I'd be treated differently than an employee. I see no reason to change that, and I think if secondaries happen (and my investors typically don't do those) they should be open to all in proportion to their ownership of the company.
The stock comp at FAANG is basically unbeatable and I'm convinced is designed to distort the startup ecosystem. The only thing I'd say as risk is this:
"We're going to pay you a decent base, you're not gonna struggle. If we go big, you'll have a nice upside, and you'll have done it building something cool from the core. If we go medium, you'll probably not make as much overall as a FAANG, but you'll get to build something cool that mattered and was more directly tied to you personally. If we fail after a few years, then worst case you've worked on something cool, and FAANG will take you right back."
It's strongly tied to us building something cool to work on AND that while building it we don't abuse you. It sounds like I have to find ways to convincingly make that promise.
Do you and/or your investors have preferred stock/liquidation preferences? If so, that dramatically reduces the value of employees' stock and creates a misalignment of incentives, and my impression is that that misalignment has been the biggest source of horror stories of employees getting screwed.
If a $250M exit will make you rich, your investors happy, and your employees nothing, and you and your investors are the ones who get to decide whether to take that exit, your employees are right to value their equity grants at approximately $0. (That's not a knock on you specifically, of course - it's a claim about the importance of incentives.) Or maybe less than $0 - if you work at an established company with all cash comp you don't have to deal with watching your boss become a multimillionaire based on your hard work.
I do not, the investors do. I sit in the same shoes as the employees and intend to keep it that way.
It's entirely possible for our investors to recover their money, and for me and the employees to make $0. However it's not possible for me to make something and the employees to make $0.
One small wrinkle is that my strike price was microscopic because of when the company was incorporated, whereas the strike price for an employee is merely very low, so there could be some outcome differences there.
> and that someday stock worth 10s or 100s of K will be worth 100s or 1Ms
This sounds a bit dodgy. I don't endorse paying someone with less than 5 years 250k/year but if you're looking at someone then the amount of options you give them should be worth at least the salary cut over the vesting period. So say you're looking at some VP potential that could get 400k per year working at Netflix or something and you're going to pay them $150k. Then you should offer them (imo) $750k in options vesting over 3 years. That's in now money, as in that should be whatever the investors in your last round paid for that same stock.
Not an exact art of course but if you do it that way, and you explain your logic in the offer, and they still don't agree, then they just don't want to work for you. If this calculation comes out to something that's untenable for you, then you're looking at too expensive engineers and imo you should move your company out of the valley.
Unless that employee would like to pay taxes on an illiquid, fungible asset, then you actually want the value of those options to be zero at the time of grant/employment.
In my experience, employees place much more emphasis on salary than options during negotiation. And that is find, it is the CEO's job to sell the vision of the business and acquire the resources necessary to execute. Just don't be disappointed if that means the company raises additional investment to pay your salary instead of granting more options.
Yeah of course the options should be set at 0 value, but they should represent the same future potential.
I agree that if you can't entice on options then you should raise for salary, whatever makes the most sense. From my personal experience, if the startup feels very promising to me I'll lean more towards options, and if it feels more risky I'll lean towards salary.
> Then you should offer them (imo) $750k in options vesting over 3 years. That's in now money, as in that should be whatever the investors in your last round paid for that same stock.
Except those investors got preferred stock whereas you are getting common stock which has less value. Thus, they are offering you the option to pay 750k for stock that is actually worth more like 600k losing you money. Now those options do have some value because of the expiration time and the fact that the price can rise but option pricing is complicated.
I highly recommend everyone considering startups to read up on the options greeks and go look at prices for deep out of the money (OTM) calls on public companies because that is effectively what startups are offering you and you can see what the public markets value options like that as.
Yeah, but their investment is a lump sum, while you can get out at any time. I do get what you mean, I'm just setting a sort of baseline standard, that you're off by 15% on way or the other doesn't really matter, it's about that you're getting an offer that's in the ballpark of being fair.
I don't think that the option greeks are very relevant, especially not in public companies as they have very different dynamics.
I understand the perspective, but from my view that sounds like the person wants to take zero risk. Essentially, they don't believe in the idea enough to believe that the stock is undervalued by virtue of the company being early on. We have to pay well, but as you imply if someone doesn't want to take a pretty small risk then they're not the right fit.
I say small risk, because the worst case scenario is that we fail in a year or two and then that person will likely have no trouble going back to the crazy high comp at FAANG. So the biggest downside is some opportunity cost and a few years of yes lower financial cost but without a devastating lifestyle change if we're paying decent base salary.
That is not zero risk, that is just aligning the risk with the rest of the company. Zero risk would be them working for FAANG. They would get their money and spend it however they like.
The idea that the stock is undervalued is ridiculous, if it really was it would mean you as the founder made a mistake raising money. Are you really suggesting your employees should pay more for the stock than your investors? Why?
Also realize that your employees are taking a bigger risk than the investors, as employees can only spend their salary once. There's only a 1/20 chance their stock will be worth anything, maybe even smaller. Investors invest in more than 20 companies so they have a smaller risk on their total portfolio.
In the Zoox case, the founders allegedly subverted the rightful 1Ms payout of the early employees. You sound like a trusthworthy person, but there are so many other cases of this happening besides Zoox, and it's very difficult to predict peoples' moral reactions to life-changing amounts of money ahead-of-time. At the end of the day, it's up to the CEO to make sure everyone gets treated fairly.
Good point. I hope I get the opportunity to test this hypothesis, but right now I can't imagine that mattering to me. I've made decisions recently where my thought process literally was, "Ok so if we win big, I'll have a slightly smaller yacht." It's not that hard to treat your people well.
I fully recognize it's easy to say now, and I hope I stick to it when given the chance.
More interesting than currently easy promises is: how do you interview the founders to maximize the chance that they're not greedy assholes?
Answered elsewhere but 1.) unsure about implications on corporate governance at this stage of the company. 2.) I didn't think very much about this initially and thought 15% would be fine, now it would take a fair amount of legal wrangling to get right 3.) honestly part of the reason I worry about double digit grants when people are earning near market base salary is that I don't feel they're committed in proportion to the equity that's vesting. Maybe could be solved with long vesting schedules.
* Options should not have a 3 month expiration after a person leaves the company. Anything vested should be exercisable 10
years after they were granted no matter what.
* Give people a starting bonus for early exercise
* Allow sales of exercised shares on secondary markets, or guarantee in writing X shares will be purchasable by your investor pool so some of the equity could be gained
While your story might be great and fair, there are far too many stories of useless stock options in the world for many people to take a huge risk like this. Between that and the average age of companies going public trending up, it feels like a bad trade off. Stock Options don't pay mortgages.
I've actually talked to our lawyers and investors about some of these.
1.) More than 3 months expiration gets tricky legally and I'm not sure it's actually fair. At that point I'm told we can't grant them as ISOs, they have to be NSOs or RSUs which could have poor tax profiles. Investors are also not keen, because you're basically giving free optionality that pretty much nobody else has. Essentially a 10 year exercise window means you get to just wait and see and only put in money when it's a sure thing. You don't even need to put in time if the option is vested. This while others who come later likely can't benefit from the same treatment (because the awards will be taxable as NSOs, and at that point more than trivial in paper value), and while investors and founders have put in cash to purchase the shares.
2.) Early exercise we have offered and will continue to offer. It's tricky because those have to be NSOs as well, but it's totally something we do. We have given signing bonuses (I hate doing this as a general rule, but it's what we have to do to get the talent), could look at making that more tied to the early exercise in some way. Again I'm not sure how the tax side plays out for the employee though. Generally this is something I support, glad to see it'd be helpful.
3.) I'm not sure what restrictions we have but I think we do restrict secondaries. For very early stage companies it's hard to write these promises of future purchases down, there's too much uncertainty on how they plays out over the long term. It can spook investors to have non-standard clauses like this, and the lawyers get very upset which means they charge us more money. That said, it's worth thinking about how to accomplish the same outcome.
Keep in mind we are paying a decent base salary. It's actually strange to me how the compensation market in the bay area essentially discounts base pay because FAANG have had insane stock trajectories. When we recruit in other markets base pay is the main negotiating point, not equity.
Make the company attractive by providing other advantages, such as an interesting problem to work on, interesting technology, being part of a great team, the excellent experience the engineer will receive (not just closing bug tickets), a closable door office for each engineer etc.
If you are going to compete on salary / options alone, you are also going to get candidates for whom that is also the only criteria evaluating a job.
What does this have to do with the question I asked? If this person is having a hard time attracting top notch people, maybe it's time to find out whether they even need top notch people.
You may need to hire people with less experience but the potential to grow into the role. I'd say the biggest advantage to working at a startup is the ability to advance up the career ladder faster than you can at a traditional company.
There are automated threads on or about the 1st of each month for folks looking for work. Lots of people looking for neat projects and that startup experience.
My contact info is in my profile as well, I might be interested!
Those aren't the only 2 options in our industry. There's tons of companies who are profitable from day 1 (they sell a product or service) and who pay developers market rate or better.
Go plug the numbers in for yourself on tldroptions.io and see what the return looks like.
That said, on the most rocketcorny of rocketcorns the growth curve continues and being an employee in series A or B can be a nice payday. But for the vast, vast majority of companies (VAST!), your share will be worth little, and more often than not, less than what you will make just going to work at a FAANG.
Startups have other innumerable benefits, but in terms of compensation, those benefits are (unfortunately) just that.
There’s nothing wrong with working in a startup, if the salary is decent. The only risk you’re taking is that it might go under, but then again, a well established company might lay you off too.
You’re only really taking a risk if you’re working for equity, with compensation that you wouldn’t have accepted if not for that equity.
