Serious question: if you value equity at 0, then (ceteris paribus) given a choice between (1) an offer at $150,000 and 50 basis points and (2) an offer at $150,100 and 0 basis points, you should choose option (2). Given that: why should any employer offer equity?
To the parent to your post: look, when you're picking a job, you're essentially buying the stock with your time, if not with part of your comp. Unless you're a true W2 mercenary, you should accept upside at a discount like tptacek's hypothetical.
So the GP got burned in 2001? That's a dumb reason to swear off all exposure to life-changing upside, forever, no matter what the expected return.
Unless you are a mercenary or shark who has to keep moving, think like a savvy investor first. Then indulge your preference for the type of work. And only after all of that worry about the W2 money.
Successful companies will breed opportunity to do the kind of work you want. Successful companies will also build your equity and increase your base rate to eventually catch up to market. Growth will create professional opportunities. Pick based on the prospects of the company first.
ITT people are too focused on the salary negotiations that patio11 brought up, and not enough on the aspects that build true wealth. Don't get trapped in local optimizations...you have to create exposure to outsized upside. If not through equity, then through side-projects and entrepreneurial activity.
Your choice of words is telling: "mercenary" and "shark" are overwhelmingly negative. By characterising people who disagree with your assessment of equity that way, you risk being perceived as a confidence man. Con men sell hope to the greedy at a steep markup; they are perfectly willing to use guilt if that's what it takes to reel in the mark. Anything to get someone to buy into their schemes for their own profit; in this case, by accepting worthless scrip in lieu of proper compensation. If you don't want to be perceived as unscrupulous, you should reconsider how you characterise people with different values.
I didn't get burned in 2001. I watched a bunch of people who thought they were rich suddenly realise that not only were they not rich, they were also out of a job with no prospects, through no fault of their own. I wasn't personally harmed; I rather enjoyed paying 40% less rent and spending half as much time commuting. Nevertheless, it was a magnificent learning opportunity for a young engineer, just as the bursting of this bubble will be for others. For anyone who prefers to learn the easy way, the takeaways were:
1. The market price of your equity is determined by almost every conceivable factor except the merits of your own work.
2. So few companies succeed in a way that makes your equity of life-altering market value that you should approximate the probability as zero.
3. You will not live long enough to accumulate enough wisdom to beat the market; that is, you are not better than average at identifying early-stage companies that are much more likely than average to be successful as in (2).
4. More generally, humans don't live long enough for buying variance to be a good strategy unless you are desperately poor. Otherwise, sell variance any time you can do so ev-neutrally. If you simply must buy variance, pay as little ev as possible for it. Flips and roulette are good; the lottery and buying stock on margin are bad.
"Life-changing upside" changes very few lives, even fewer deservedly so. If we lived 100,000 years, it might make sense to take a few thousand gambles on early-stage startups; the variance would mostly work itself out, and after a while you might even be able to tell who's likely to succeed so that your choice of employers would be +ev. In one 40-year career, forget it. The path to true wealth consists first of an inexpensive lifestyle and second of salary maximisation. Higher ev, lower variance.
There's a way to make an argument without calling your counterparty a "con man". I'm more on your side than the parent's side (though the idea of valuing equity at zero is illogical). I think your comment would be stronger without its first paragraph.
There's a way to make his case without calling anyone who disagrees a "shark" or a "mercenary". In fact, I think his choice of language was quite revealing of the true origins of his position; if it is not, he would do well to reconsider how it is perceived by others.
He didn't call you a mercenary. You did imply he was a con man. I know the difference seems subtle, but one is much worse than the other. Even if you disagree, two wrongs don't make a right.
I don't know about should, but an employer would offer equity because employees will often overvalue it.
IMO, equity is a great benefit. You might not get the most comprehensive benefits package, or you might work more hours at early stage company. Instead, you get equity.
In addition to relative value, equity has other benefits. It increases the "One team" spirit, where everyone rises and falls together. It also puts in a sense of fairness. If the firm thrives, it's not just the CEO and VCs who get rich.
There are downsides (lack of control of share price, and some freeloading) but for startups it's a great tool. The effectiveness shrinks a bit for large firms.
The effects you describe are probably specific to the individual. Having worked for several companies from tiny startups to gigantic megaliths, I can tell you that I never felt any of those things regardless of my equity package. I may be cynical, you may be naive, or both.
Companies succeed by being in the right place at the right time, being lucky, having good connections, and having leaders who make the right decisions. If any of those is missing, failure is certain. If they're all present, failure is merely likely. As a rank and file employee, you can sometimes cause a very small company to fail but you can never make any company successful. You're just there to execute; execution is at least somewhat necessary but never anywhere near sufficient.
The idea that making my economic outcome dependent on so many factors over which I have no control whatever is not merely expedient or regrettably unavoidable but explicitly fair would be silly if it were not so abhorrent.
On the last point, it's about fairness in the other direction.
If an organization like Youtube/PickYourUnicorn sells for a billion plus dollars with only a small handful of employees, all of which are talented and have put in long hours, would it be fair for only the VCs and founders to see the upside?
I do think it's fair. Is it fair that I'm not going to return any of my pay if things go poorly? The investors took the risk of paying me a market salary (no discounts, sorry) to make something there was no assurance anyone would want. They deserve the rewards or the losses as the case may be. That their profits in bubbles like this will be silly relative to the value they've created does not justify greed on my part.
If you still think there's a problem here, pay market wages and let anyone who chooses come along on their own dime on any subsequent funding round at fair value. No vesting/expiring options, no stock grants, no look-back, no discount, no limits, just the opportunity to be an investor -- in the moment -- on the same terms as everyone else. Just make sure (non-)participation is 100% confidential. I think very few of your employees genuinely want to be capitalists, but those who do should have to put cash on the barrelhead like everyone else.
You're correct. I think the issue is that most employees overvalue the equity, and undervalue the volatility. People think "I have 10,000 shares, and they could be worth 100 each someday - that's a million dollars!" rather than "I have 0.1% of a company that's currently worth $100 million based on the recent funding round. That's worth $100,000 in today's dollars if I stick around for 4 years, but probably will be either a lot more or less by the time that comes around."
But the to larger point above - what I meant in Glassdoor is they only capture base salaries. Not that they're not inherently invaluable. Otherwise you'd see a lot more outsize #s for banks.
Utility functions and such? Or, even without trying to cram behavioral economics into a more traditional framework. At some level, it may be rational to trade off some measure of certain income into a big (but very hard to define percentages of) bet in terms on money/being in at ground floor of something great.
It may be a sucker bet in a lot of cases. But expected value (given how hard that may be to compute for unicorns) isn't always the best bet either given vast uncertainties.
I know that this is a popular jab at state-funded gambling, but the reality is - at least for the people I've encountered - that they don't expect to win. They are paying a dollar to dream about "what if?".
Probably not the smartest use of money, but they see it as paying for entertainment - not a retirement plan. I thought that was an interesting insight.
I agree. I've just seen people who can't afford it spend a lot more than the entertainment value.
At my most selfish, I'd say, "At least this is one tax not paid by me." The downside is it does seem to use gamification to put the burden on those who can bear it the least.
I don't think they should. There are few circumstances in which any employee is genuinely going to have a major impact on the company's success, and in those circumstances it's appropriate to offer equity. If you're employee number 2, it's probably appropriate. If you're an EVP with total P&L and strategic control of a major business unit, it's probably appropriate. Generally, it isn't.
There's no reason for the owners of the company to give up any economic interest to people who can't directly influence outcomes. There are too many things that have to go right between a rank-and-file employee doing something right/well and their equity being valuable to them: the entire chain of command, whether the company has the resources to execute well, whether the company's suppliers and partners come through, whether the sales force is compensated properly, whether fads and trends in the market are favourable, macroeconomic conditions (both natural and man-made) and when all's said and done and the quarter's numbers come in, whether Wall Street analysts are in the mood to drive up the company's stock price (if the company is private, add in whether the investors want to go public and the market for IPOs). Conversely, the company can be lucky even if most of its employees are deadweight; you end up rewarding a lot of people for nothing, and those who actually did something will resent how much wealth was transferred to noncontributors. People aren't stupid; they know all this. Having equity doesn't make them feel more empowered, it makes them feel less so: it's just one more part of their economic lives they can't control. And for that reason, equity doesn't operate as an effective incentive, doesn't make people feel valued, and I would challenge anyone to prove that it improves outcomes for the company's owners.
With a few fairly obvious exceptions, the overwhelming majority of your employees are much more worried about (1) keeping their jobs and (2) bringing home more cash than about some pie in the sky payday that will almost certainly never come. If you want to reward someone for a job well done, give them a bonus or a raise. If you want your company to be seen as a great place to work, don't do layoffs; you're the capitalist, you take the risks. When things go well, you pay a market wage for labour and keep the rest; when things go badly, you should pay a market wage for labour and take the loss. You're the one making the decisions that led to things going badly; if you don't like taking the loss, make better decisions. If your employees wanted to live or die based on whether a company succeeds, they'd be founders. They're not; you are. Offering equity helps no one; it costs you money and control if things go well but, again with a few obvious exceptions, doesn't help you attract or retain better people. If you want to offer people something they'll appreciate, offer them a secure job for satisfactory performance and above-market pay for above-market work. Those who so desire can use that pay to buy their own stock or lotto tickets.
