Open guide to equity compensation

Even if the company has a successful exit lots of times the founders have different stock class than employees which allows them to cook the books in creative ways where employee stocks are devalued without affecting founder stocks.

I personally went through a successful exit of a company where I was one of the early engineers and was privy to orchestrating the sale (working with potential buyers and consultants) and saw this happen.

I now am granted stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud.

I often had startups offer me a number of shares with no explanation for the percentage ownership or the number of total shares.

I said I have to value them at zero without more information and they would act all offended when I asked for more (happened at least 3 times).

This suggests to me that founders either don’t understand the mechanics themselves or are preying on lack of financial understanding.

> The vast majority of cases stock options end up worthless

My fav manager had a great way of phrasing this: "There are more ways for your options to be worthless than to make you rich"

But I also personally know plenty of people who made off great with their startup equity. They're def not worthless.

Ultimately I think you should never take an uncomfortable pay-cut to join a company and you should maximize your stock compensation on top of that. Don't forget other types of equity – brand, exposure to good problems, network.

So would you trade your founder equity for a fixed salary? My guess is probably not.

Equity is an extremely important factor for many candidates, especially more senior ones and executives.

I would not pitch it as future value, and instead pitch as % of company. If it's a minuscule amount that doesn't move the needle in offer conversations, than perhaps you are not offering enough, or you're identifying candidates who value more predictable income than investment in the company.

> In my experience, almost everyone prefers cash over startup stock options.

My experience has been a little different. We had a lot of people demanding both very high cash comp and then demanding very high equity packages on top.

Giving people a sliding scale option did put some of the control back in their hands, but it also produced an analysis paralysis for some where they couldn’t decide what to pick.

> And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.

Much of this is due to startups failing. Every random “startup” trying to pay people with options because the founders have no hope of success inflates this statistic.

However another driver of this statistic is the extremely short exercise window upon quitting. People may work somewhere for 1-3 years but the company could be 5-10 years away from acquisition. Employees have to give the company money at time of quitting to get any equity, which few want to do.

I know the common wisdom, but I also know that there are a couple local technology centered private Slack groups in my area where people will eagerly try to evaluate and possibly buy your options for local startups. They don’t buy everything, obviously, but there is demand for the few cases where contracts allow transfer of the resulting equity.

I would have ignored anything you said about the value of stock options anyway, having many years ago learned that they are practically always worthless, so making me a straightforward, honest, non-speculative offer would make me more interested in working for your company, not less. Kudos. Keep it up!

I was a hired early to a startup (my hiring manager was the CEO) that's now public and worth $10B+ that you've heard of. It took them over 10 years to go public, and I would have done just as well putting my money in FAANG, but with lower risk and more liquidity.

I'm not saying this is right or wrong. But, if you're ventured backed, then this strategy is usually at odds with your investors. The reason stock options were used in the past was because you were signaling to everyone (you, your family, your grandma, your early employees, your current investors, your advisors, your future investors, etc.) that you were strapping on to a rocket ship. By paying them more and giving less stock, this means your capital raises don't stretch as far (from a perspective of time). This in turn will be a signal to your investors that you may take the $1M and not the $3B deal (see Google/Yahoo), which they may not like.

The stock options are for common stock, right?

However investors that put money in get preferred shares (not common stock) right?

The tradeoff is not equal: taking less salary and receiving stock of less value seems risky to me. I can't imagine the employees discount is very good (those preferred shareholders don't want to be diluted).

Better sibling comment here with in depth opinion: https://news.ycombinator.com/item?id=43677084 : which answers my question:

  when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).

Is there some bonus given if you choose stock options? Otherwise, what would be the incentive of taking options over cash in any amount?

I know a few years ago spotify had a similar selector:

- cash bonus

- RSUs

- More OTE Options

You got to pick two and your ratio. IIRC, 80/20, 60/40, 50/50.

this is a bad comment for this subject. NFLX options are on a publicly traded stock. the terms are also different than a startup stock option. you've really just introduced confusion into this subject, judging from all the child comments.

in my experience, most startups do offer you a sliding scale of cash vs equity, just not 90% as NFLX does. they may not advertise it or be upfront about it, but i've never personally experienced a startup that wouldn't trade one for the other.

I worked at a startup where I joined as the second employee before they raised any money and I basically got 0.5% of the company. They went on to raise over $100 million in VC.

I got $0 for my equity. Start ups have SO many ways to screw employees out of their equity.

The most basic is that you have options that you are not allowed to sell during equity rounds. If you accept them then you need to pay the strike price and they count as taxable income even though you got shares instead of money so you just lose a lot of money.

Say what you will about Elon, but at Space X employees are allowed to sell their shares for actual money at regular intervals. Very few start ups that succeed allow their employees to do that.

90% of startups that succeed just want to grind down their employees rather than pay them the equity they earned.

This is excellent and illustrates that unless you have access to the cap table, you have no idea what your options are worth. Sometimes you can at least get a founder to tell you what the preference stack looks like, and what multiples were given to investors, and that might be enough to kind of sort of work out what an exit looks like.

RSUs aren't really that bad, unless your employer does sell to cover in annoying ways. Net share withholding works out super simple, the shares that weren't withheld are at the brokerage with the correct basis, and the income and withholding are reported accurately on your w-2.

Options do get pretty nasty if you exercise and hold, when the fair market value is higher than the fair market value; because then you have to have an AMT return and a regular return and reconcile them.

ESPP with a discount was pretty bad the last time I had it; the brokerage said they were specifically required by IRS rules to report the wrong cost basis, and you had to adjust it when you sold, or you'd have the discount reported on your w-2 and again as a capital gain. Maybe that changed, capital gains reporting has changed over time.

> Please just add it up and send me the bill. I don't want to pay more than what's due. And I don't want to cheat.

I have a hard time understanding this comment because this is exactly what employers do when paying out RSUs.

At the end of the year, you get a 1099 indicating the fair market value of shares you've received. There's no trickery here--this is literally the amount you owe income tax on.

I'm not sure what tax software you're using that requires you to guess inputs and numbers. TurboTax makes this trivially straightforward.

It's crazy how "founder friendly" and "investor friendly" (read: "employee unfriendly") the norm has gotten. I would never work for someone else's startup these days. No way, no how. Four orders of magnitude difference between the founders' exit and the early employees' exit is totally unacceptable.

I don't think your complaint/experience actually lines up with the numbers here.

In the Post-Series A numbers, the lowest numbers are in the ~0.5% range. This is at most 2 figures off what the founders could get together. In a world where founders together got 9 figures, a senior engineer would get 7 figures, not 5 figures like in your situation.

The majority of comments here seem to argue the ideal equity share for employees is zero, since it probably won't be worth anything. That seems like an even more founder friendly viewpoint, no? Mass inequality of ownership is how we end up normalizing the corrupt billionaire class. I agree with you we need an industry desire for better ownership terms, but instead I see people arguing employees should just take a salary, look the other way, and let owners hoard all the spoils.

Came to write this same comment. The first 10 employees of a company are so critical to success and they tend to be drastically underpaid. A founding engineer (often employee 3 or 4) would be lucky to get 1.5% at most places while the CTO has 30-50% and they probably have very equal impact on the company in the early days. And engineers do well by comparison. The first customer-facing roles often get barely any equity at all while they hustle to actually make an idea into a business.

The VCs have convinced the founders that they are special people and they deserve 10-100x the rewards of their best employees. They do this to create room in the cap table for themselves of course. They also give the founders early liquidation opportunities to keep them on their team.

It’s disgusting, and the founders wonder why some people don’t want to grind as hard as they do.

> I believe this entire document was written to anchor new employees with lowered expectations on equity. I think this entire document is a disingenuous scam to make new startup employees think that those percentages are okay.

Have to love the HN crowd. A guy goes out of his way to write a very detailed, high-quality guide demystifying a very complex and consequential topic, open sources it so it's free, and immediately people suspect the entire document is build just to make startup employees think lower percentages are OK?

Disclaimer: I know the author personally, so can definitely attest to the motivation behind this guide. I'll also say I've used this guide both as a founder and as a startup employee and it's been immensely helpful.

Also missing, any discussion of equity-like or profit-participatory structures from LPs (limited partnerships).

Technologists joining one of these should know the "business domain" "partners" are either buying into or awarded partnership interests, but structures can be available for non-business domain roles (in firms that think technology isn't in their business domain cough), such as "profits interests", "synthetic equity", "phantom equity", or etc.*

If the firm has a product and you're helping build it, look for equity-like that let you not only share in profits (if any, most starting things don't have profits) but have a stake in capital events (from asset sale to IPO).

Think of these two forms as something like dividends and something like a combination of options and RSUs. If the profit component is intended as part of annual comp, it should pay at 100% from the start even if you don't "own" it until you vest. Meanwhile if it's a future reward, then both it and the capital-like would have a "tail" that remains in effect if profits or a capital event happens after you leave.

These are very complicated and very bespoke per firm since they are 'made out of' the partnership interests of the LP where ownership is handled as "capital accounts" and may have no accounting method for "goodwill" value separate from partner capital accounts. In such cases, generally partners have shaved off some portion of their rights and allocated those rights to employees, and the mechanisms of this "waterfall" amount to where you stand in that line if at all.

Ideally (a) seek advice from someone experienced with these that (b) you don't have to spend $1200 an hour on.

* Partnerships that understand their business domain is in the technology business — since technology is just another word for tools, and business humans should be tool crafters too — will be using this and have told you about it during interview, and it will all go more smoothly.

clawbacks are not common, and no one should ever accept such a package. (maybe executives, since they may have other golden parachute provisions.)

repurchase rights are exceedingly common.

I've always evaluated it at 0, and that's all I got from the equity I got in my whole career. If I didn't think the salary was enough I wouldn't have accepted.

AKA fraud.

Basically none of it. RSUs at public companies are as good as cash that just happens to be pre-invested. The tax implications are very simple (they're just regular income like getting paid in cash), and so are your legal rights (you're not much different from anyone who bought a share on the stock exchange). You should risk-adjust their value like any investment, but there's are very few if any sneaky things that can happen to pull the rug entirely.

Would they be referring to that here?

https://github.com/jlevy/og-equity-compensation/blob/master/...

> Topics **not yet covered**:

> - Equity compensation programs, such as [ESPPs](https://www.investopedia.com/terms/e/espp.asp) in public companies. (We’d like to [see this improve](#please-help) in the future.)

Were they people you'd like to work with on a project you'd like to help build? Maybe it's worth it. Life is for living, after all, and we do a lot of our living at our jobs; there's more to consider than just what you get paid.

Isn't it just insane from your point of view. For somebody else couldn't the same offer be appealing?

This is strange and possibly illegal. If the stock falls, you should get more stock since they’re worth less. If they don’t have enough stock then they shouldn’t have offered you that as compensation.

In any case… $1- $5 is penny stock territory. I believe you get delisted from NYSE if ur stock stays at $1 for too long.

Oh that is bad! It is a 20k/y pay cut you weren't expecting.

If they were keen to make amends they should just bump your pay that much. Unless they are struggling.

By the way I have a similar RSU amount and schedule. So gar so good but cognizant that in the contract they can stop it at any time. I took the risk as I can also quit at any time!

All of the RSU offers I ever got stipulated the grant was "subject to the approval of the board", i.e., not guaranteed. That said, I'd be absolutely livid if something like this happened, and would be expecting my manager to either make it right, or I'd look for a new job at the first available opportunity.

You can't do good business with bad people.