> I tend to think of options as worthless, until they vest
This is a good idea, but I'm not sure it takes things far enough.
For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by going out and getting new job offers every year or two, assuming reasonable negotiation skills.
Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary.
That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.
I got a huge windfall from a year and a half I worked for just 50bp, as employee #5 and a principal contributor.
Do the math. Cut 30MM in half, and give half to investors. That leaves 15MM. Divide that 24 ways and nobody's getting 7 figures. But of course, that's not how it works; at 30MM, even an extremely egalitarian division of what's left after investors recoup is still going to get you into low 6 figures.
The problem for this person isn't that 30bp is a stingy allocation. It's that for a company with 24 employees - or, very conservatively, a 4-5MM annual burn - 30MM simply isn't a very good exit, no matter how big that number sounds.
Which is why I will only work with unicorn chasers at this point. I can't stomach working for large, established companies any more, but there needs to be enough cheese to go around.
Sure, $30m isn't a great exit from a VC fast growth point of view, but with burn rates as you stated (if their revenue is about their burn) it's at or better than the traditional 5 x Static Revenue figure used for more established buyouts.
Of course in crazy VC world this is probably supposed to be $12billion valuation or some nonsense to be worth it.
For the fee of taking half the company, in this situation the VCs:
-- Cut the valuation by %90. If we had been allowed to execute the founders vision (which could have been done bootstrapped) we would have exited close to $300M. (A competitor went that route, they started after us, exited before us for > $300M
-- Set us back by 6-18 months. One of the decisions forced on us by the VCs was to build on top of [another one of their portfolio companies technologies, we'll call it FOO], but FOO didn't have the performance or features we needed. Literally lost at least half a year on the product because of this (And a whole lot of money paid to FOO and their consulting arm.)
-- Forced us to sell before we were ready. When the economy looked like it was turning the VCs needed to raise cash to make their funds look successful, and decided that we weren't going to get 5 years after investment, since they could offload us now for a nice multiple they did so.
It happens this company could have gone without the VC round and bootstrapped its way. If it had done so, it probably would have exited for around $1B, maybe much more given that it was kicking google's ass.
Usually, the problem is the opposite. A 30MM acquisition is a limping outcome for a VC. Usually, the problem is that the team wants to sell, so that equity will be worth something, and VC wants the company to shoot the moon, because a 1.5x outcome doesn't move the dials, and the model is that the 10x's pay for the 0x's.
There's not a lot you can do as an employee about mismanagement that results in crappy outcomes. But it's an orthogonal concern to how equity is allocated. The commenter upthread was right when they said: part of your job as an employee is to pick the right company to work for.
That's the theoretical view of the VCs that they propagandize and that is accepted pretty widely.
The reality is, VCs are herd animals, and when the herd is spooked they make a lot of stupid decisions.
I've seen this more than once-- a later company was forced to sell for $10M, by the VCs, during another "oh the money spigot might be turning off!"
It is not an orthogonal concern-- how was I to know the VCs were going to screw us over? The return would have been dramatically better if that hadn't happened.
So the lesson learned is-- the right company to work for is one where the founders either don't take VC money or are very distrustful of VCs and only take it on favorable terms.
Once again, these aren't so much opinions as they are mathematical facts. The modal outcome for a portfolio of startup A rounds is a 0% return on investment. If fully half the companies in a portfolio exit in the money --- which seems wildly optimistic --- and their average return is 150%, the portfolio loses money.
Nobody is entitled to venture capital. Plenty of people start companies without it.
Yep, but I couldn't care less about the portfolio, and the founders shouldn't either. You're pointing out why VCs need big exits, and even a profitable one like this one may not be profitable "enough", but that "enough" is their portfolio view.
From a founder view, we shouldn't be carrying the weight of the effective cost of the fact that the VCs can't pick companies worth a damn and want to make it up on us, if we happen to be good.
Nobody is entitled to venture capital, and starting a company without it is a good idea.
And VCs are not entitled to more equity & control than makes economic sense for the founders. That's what I'm opposing, but I don't think you disagree.
You very much do care about the economics of VC if you need their money to build your company. No professional investor will give you terms that will lead to them losing money; that's irrational.
People don't sell equity to VCs because they've been snake-charmed by them. They do it because if you need 2MM+ for your company, they're the only realistic option. Ever talk to a bank about a line of credit against receivables? That's a fun conversation.
Yeah, I agree. For VC funded, the investors won't be getting a good return (if any) on their investment. They'll probably lose money after all the venture banking fees are out of the way.
I think the question of what is a good return these days is a bit crazy. For this size company VC's should be looking at wanting a $150-300m exit on the low end. But unicorns are polluting this kind of idea.
For non-VC funded (bootstrapped, etc.) it's about an expected sale price for an established minimally growing company.
Here's the ground truth: if you build a company with someone else's money, they're going to get a huge chunk of the upside, and the original management is going to retain control only as long as they hit their numbers.
Hopefully, nobody is saying employees shouldn't be wary of VC funded companies. They definitely should.
No, that's not the ground truth. That's the rationalization that founders tell themselves to justify being screwed over.
If you take someone else's money, they should get ownership proportional to their investment, yes. Their impact on whether original management retains control should be proportional to their ownership.
The problem is, the crazy ideology of VC worship that has taken hold allows VCs to get disproportional control and chunk of the proceeds.
People are saying that founders shouldn't be wary of VCs. VC blogs are full of propaganda and rationalizations for giving them more control and more upside than is proportional to their investment. When the blogs make it to HN, the commentary is universally in support wit the rationalization that "they're taking risk, they need to protect it". They are taking a lot less risk than the founders who can only work for one company, nota portfolio... and the risk VCs are taking is covered by their equity. They don't need second and third helpings of control and equity to cover the risk.
I'm getting downvoted for saying VCs are idiots. (elsewhere people are getting upvoted for saying "Deniers are morons", so it's not the name calling. Its' the "if I can just get thur YC and get VC funding I'll have it made!" ideology that pervades HN.
> I'm getting downvoted for saying VCs are idiots. (elsewhere people are getting upvoted for saying "Deniers are morons", so it's not the name calling. Its' the "if I can just get thur YC and get VC funding I'll have it made!" ideology that pervades HN.
No, there's a critical difference between your statement and that one: VCs are an identifiable class of people. Saying they're all idiots (something you don't know, couldn't possibly know, and indeed is not only false but obviously so) is attacking a specific group of people. "Deniers are morons", while obviously not a high-quality thing to say, is closer to a tautology. Both break the HN guidelines, but the former is worse.
This is not ideological. One needn't agree with everything every VC ever did to insist that calling them all idiots is wrong, breaks the site rules, and is correctly downvoted.
Sam once wondered whether we should make it explicitly against the HN guidelines to attack whole classes of people. At the time I said that sounded too legalistic. But it stuck in my head, and I have to say that every example I've seen come up in practice since then has suggested the value of such a rule. This is a good example.
I'm certainly not here saying "if I can just get thur YC and get VC funding I'll have it made!". I bootstrapped my last company and am bootstrapping this one. The mathematics of VC are a big part of why.
I don't understand the question. If the money isn't very valuable, it buys less equity. Companies who raise money typically talk to tens of firms looking for the best terms.
This isn't even good snark. It doesn't make sense. Venture capitalists aren't investing their own money. They're taking money from other people's pension funds. They can't just give people's retirement funds to software developers to be nice.
You're certainly not paying for 24 people's salaries for 3 years with a $3m investment unless the company hits profitability very quickly (within the first year).
True, but I think lots of folks here have no idea how much revenue you have to bring in to cover 20+ employees. Lots of people think it's just salary*20.
Well in a software company salary is generally the dominating factor, so it is on the order of what you mentioned (times a multiple depending on how cushy the amenities). In my unqualified estimation, the multiple can kill you... seems like about 2x salary for SF, 1.6x for NYC, though my company prides ourselves on keeping it a lot leaner than many of our compatriots.
I think that multiplier is what bane was alluding to. Incidentally, your numbers seem low for software devs - I'm fairly certain I cost well over 2x salary (NYC). Although my company prides itself on compensating well, so maybe most startups run a lot leaner than that.
What % of the company do you think the 24th employee should get?
Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).
The percentage really doesn't matter. Assume that you could get a $150K cash/stock at a public company (meaning concrete valuation). A startup offers you $80K and says "here is equity to make up the difference". If you assume three years and a 10% chance of them being worth something that means you need RSUs worth at least $2.1M to meet expected loss of salary. I highly doubt you are getting that.
Here's what 20 years of experience working for startups has taught me:
-- Either be a founder if you want to be there in the early days.
-- Or join a "sure thing". EG: Google, Twitter, Facebook about a couple years before they went public were already household names and really well known.
I don't know how much upside you get joining a sure thing like that, but that's how you make sure your options will come into money.
Being employee number 5-100 of the average Silicon Valley startups is a losing proposition because the risk adjusted value of your options will never compensate you for your lost salary. (especially if you have to live in California- you're better off working for a startup in Austin than California due to the cost of living and tax situation. The higher salaries in California don't cover the difference.)
And yes, blame me, I turned down being employee number 13 at what became a $6B enterprise software company. Would have been CTO or way up in the executive team because they were a bunch of biz guys who needed a hacker. Instead I worked for just a year for a small business (not really a startup this was before "startups")
But it's damn hard to tell the difference at those early stages.
And when questions like "what's the total number of shares outstanding on a fully diluted basis?" (back when companies would say "You'll get 10,000 shares!!!!111!!") are met with "sorry that's confidential" during the hiring process, it is a bit difficult to do proper due diligence.
When you think about that $6B company, which if you are human you will do from time to time, don't forget to remind yourself of the other companies you turned down in the same timeframe. You know, the ones that went out of business. :)
This seems like good advice. There's definitely a "valley" where low (but not "Founder-low") employee numbers get all the risk and disproportional reward. But, I wonder, really how much someone hired at Google, Twitter or Facebook a couple of years before IPO _really_ got. We're still probably talking "nice bonus" money rather than "life changing windfall" money. And, for "nice bonus" money, it makes more sense to go for the security of a public BigCorp.
If you were at Google as a mid level engineer in 2002 (2 years before the IPO) you DEFINITELY made life changing windfall money. DEFINITELY. Take whatever guess you seem have in your head and multiply it by 10. Probably more than that.
(I started at Google in 2004 and did pretty well.)
There is another facet to your second point, I think. Even if the upside from the "sure thing" two years before they IPO is not great from a financial perspective, the career growth is much faster than joining a mature mega-corp. For example, many people who joined Google/FB/Twitter a year or two before the IPO are very senior at those companies now. Granted, not everyone who joined Google in 2004 is a VP, but the probability of rapidly growing your career as the company grows is much higher than for someone joining Microsoft in 2004.
That fast career growth leads to either 1) High compensation ten years later as a director/VP or 2) Exec roles at sure-thing unicorns with meaningful equity, should they choose to leave Google/FB/Twitter.
I think there are two justifications to go early stage if you care about the financial aspects:
1) Be the founder, as you said
OR
2) You have concrete reasons to believe that the company has a meaningful competitive advantage in a large market.
These examples are far and few. For example, Google in 1998 had a meaningful competitive advantage, but Facebook in 2004 certainly did not. WhatsApp in 2010 did not, but I'd argue with Carmack, Oculus might have had (although unsure in this case). As you said, it's really hard to say at such an early stage.
Of course, if financial upside is not a major concern, then impact, agility, working on interesting stuff, avoiding mega-corp red tape, are all valid reasons to go early stage.
The biggest downward ticks to my personal net worth have been due to me relying on skills that I dont exercise often. Over time I have calibrated my judgement to mark the value of infrequently exercised skills to zero even though I might think I am a natural at them.
VCs are terrible at this. I can't tell you how many times in the past 20 years I've heard VCs say things like "you should move into [tangentially related area that we can't add value to that just had a big exit]"
For instance, when youtube got bought, VCs were all interested in investing in online video companies. At that point, though, Youtube had already been bought! They were like 5 years too late.
That might well be true, the point I was trying to make was that as an employee its dangerous to make decisions based on the belief that you are great at picking winning teams / companies. Sure VC's are bad it too, but theyre sensible enough to do it with other peoples money.
It's not a simply "$100k/$30M = Equity" situation, and I wasn't expecting people to go into this much detail.
My equity at hiring time was probably %1.5, I think. But there was vesting, of course, and also a whole lot of unsavory business, mostly perpetrated by the VCs.
Trying to go into the detail and tangle out exactly why I got what I got would be just airing a lot of drama from the past and not really applicable to others.
I only presented those numbers because they're two objective facts from the best payout I got working for a startup.
Assume we're talking about a senior developer and come up with math that reasonably gets #24 above 100 basis points. It's not impossible, but it's pretty tricky.
Remember, in a lot of companies, the founders are diluted way back below 10%.
To put this in perspective that's a lot less than last years share options (5 year plan) at BT. The last sharesave to vest returned >£100,000 Tax free if you had the max amount.
BT is a multi billion dollar company, not to mention that sharesave isn't the same as an equity compensation.
Share As You Earn SAYE is a savings plan in the UK which allows employees to save money from their salary in company shares.
The UK has really weird schemes because people have historically had no pension or savings plans from their employees (most PAYE workers still do not have pension as the date mandated by law is always being deferred).
With SAYE as far as i know the employer is not allowed to grant you equity, what they can do is give a fixed yearly rate (usually heavily discounted) for share purchases, but it's not as sweet as it seems.
The dividends and the equity rights from the shares belong to the employer not the employee, this is basically a way to allow employers issue shares (in large volumes) without losing control over the company, having to do payouts, and decreasing the market value of their normal shares as SAYE shares are not tradeable.
It also allows employers to bypass various laws preventing normal employees from having too high of a share of the company, and ties employees to their employer since not only do they rely on it for their salary but also as their investment/savings provider and since SAYE plans are either 5 or 3 years long it pretty much means that invested employees will not living the company during the SAYE period unless they want to lose their investment (and yes they will lose it).
BT's Sharesave is also a "unicorn" and from the current buy-in value it will probably won't repeat it self, yes a few people who saved up the max amount (225 GBP a month) gotten about 80K in return. But and this is a big but those were the 1st shares issues at 80p per share, when they matured the shares closed at over 300pp/s the last round of the SAYE program had a buyin of 250pp/s so pretty much no one will see these returns again.
P.S.
The money you gain for SAYE Isn't tax free you pay capital gains tax on it if you sell them once they are matured.
Also since SAYE with all of it's bells and whistles is a company options plan (with heavy tax incentives to the employer) it's still a risk, some people got huge returns others didn't since the share price was lower than the option price.
Err no the UK used to have very good pensions schemes.
BT has a FS scheme unfortunetly now closed to new entrants and its DC pension matches up to 8 or 10%
The shares you get from share saves are real shares none of this multiple share lasses with different voting powers.
And I certainly get the divi from mine. And yes this years BT is a v good one. And I did 400% roi from my REL shares a couple of years back and you can normaly mitigate any tax by sensible use of ISAs and using your CGT Alowance.
And there are share schemes for high performers on top of that I know people that got some the share save is what everyone gets.
I think you are confusing state pension with employer pensions, employer pension contribution are only now being mandated by law, and most companies which use PAYE and are under 50 employees still do not have to do it, the dead line now is 2018 but it's been pushed back all the time.
The shares you got from Sharesave would be "real" shares only if you bought them at the end of the maturation period if you cashed out you wouldn't get to keep any shares, and you don't have voting rights or dividends for those shares while they are in Sharesave.
What does the base rate have to do with it now you don't have to buy an annuity.
And saving tax now at 40-50% and only paying standard rate later is a no brainer and if you can do it via salary sacrifice and get some or all of the NI added to the pensions
If the base rate was higher then property would be a lesser investment.
It's entirely crazy. I just asked for more cash and chucked the money on the commodities market. My portfolio is worth 178% what it was 12 months ago. Sod tax. Sod pensions.
That cash goes into house. That house I live in. Better interest rate. Sell when the kids have moved out. Live off cash, dumping bits of it in various other investments to avoid inheritance tax in the future.
Yes. I work in the finance sector and deal directly with the providers that sell this shit ironically.
The tax relief was nullified instantly by the discussion with my employers that sort of went "give me another £10k or I go work somewhere else".
Meh.
I don't actually have a problem paying tax. I've learned to consider my income after tax, not before. Maximising the difference is easier through getting the initial captial larger than it is reducing the difference and doing the associated paperwork (and periodically getting buggered by HMRC). I can still move up another £30k if I want to but the current place is convenient.
how is it not? you get options that you can exercise at some point in the future - you have to pay to exercise options in the USA.
The main differences are that for approved schemes HMRC doesn't screw you like the IRS does and if you leave early you can exercise your options and the is far less chance of being diluted.
The UK has an allowance for a company option plan which allows employees to buy stock also.
Save As You Earn is different, you get options, but you don't buy in for them directly.
SAYE allows the employer to deduct upto 225 GBP a month (pre tax) from the employees salary and put it into an investment scheme that ties that money into a share options plan.
The shares have a set value at the entry into the scheme and the company "allocates" an amount of shares based on the end savings projects for that period.
At the end of the period when the options mature you can decide to cash out get your "deposit" + a proportional revenue from the shares maturation value, or to buy out the option at the set price and own the shares fully.
The payout out, the control over the stock, and some other factors are quite different than just a simply option scheme when a company allows employees to buy option/shares or gives it to them as pure compensation.
Basically the best way to describe SAYE is like an ISA/401K but one which the employer controls, and also greatly benefits from.
Now don't get me wrong SAYE schemes especially for low paid employees in freshly privatized organizations can yield good payouts, not always, but they usually do especially when the organizations are too big to fail like BT.
It also allows companies in industries which are barred from regular employee share/options like banks for example to grant employees a share investment plan.
But it's not some magic nifty employee empowerment plan, it's much more beneficial to most employers than it is to employees.
How are unvested and unexercised options in the USA any different to share save? you don't get the dividends until you vest and you cant vote them until they vest.
And BT does have other share schemes I know as my PM got some as a bonus for his work for the millennium dome - these tend to be kept quiet in fact my pm though it was a joke by some of v senior mates
That you actually don't buy anything?
Until the Sharesave contract ends the money you "save" is just a normal savings account with a fixed interest rate set by HMRC/Treasury.
Basically BT gave you a very wierd option, the strike price is granted when you enter the SAYE contract e.g. 2010, but the actual share option is given when the contract matures 2013/2015.
To put it in a more simple term, SAYE is a fancy "ISA", basically some one in the British government figured it out that most employees cannot buy into stock options at any reasonable strike price, SAYE only allows you to give a discount of 20% from the stock price on contract entry.
After 3/5 years you get a lump sum which you saved + the interest rate and a bonus which is derived from the tax allowance SAYE savings. You can use that bonus to exercise the option you got based on the strike price you had 3 or 5 years ago if the difference is good enough and you buy the stocks and sell them you might get a very nice amount which you pay capital gain tax on, if there's not much difference or the stock price is lower than the option strike price well then you pretty much saved about as much as you would in your minimal interest cash ISA.
What you'r PM got i think is SIP, Share Incentive Plan it's another approved scheme that allows companies to grant company stock to employees, it's works very differently than SAYE.
No fixed rate, no tax free bonus, it's taxed as income tax yada yada.
Factor in taxes and that would be way less. More like six months salary. Factor in inflation on top of it and that would be more like four months salary.
This is a good idea, but I'm not sure it takes things far enough.
For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by going out and getting new job offers every year or two, assuming reasonable negotiation skills.