I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
If you are "good" and do well in reviews, a company like Microsoft or Apple (from direct experience), or Facebook/Google/Adobe (I'm assuming, with a little data from people who have gone to these places) will do well by you, to the tune of millions.
Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.
If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.
Unless you are a sought-after C-level executive, hardly any legitimate companies are going to even consider your "clever hacks."
The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/development/whatever.
Yes, but that's just another asymmetry in the market. Some (many, actually, as far as I can tell) of these "legitimate companies" care very deeply about lower status employees thinking highly of their "clever hacks" regarding equity as part of a compensation package.
$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.
I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.
The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).
> counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
As a founder I wouldn't ever agree to that term as written. For starters, your options are common stock whereas investors have preferred. That just means you have to apply a discount though.
More importantly, I've seen first hand the change in team dynamics that happens when some "early" employees get a windfall. Not so much jealousy as this weird sense of complacency which permeates the entire co.
The truth is that at $100mm (heck, even at $1B valuation) the company hasn't "made" it yet. There is still tremendous risk on the table.
I think your idea is interesting, but I might add some step functions. At $100MM the co offers to buy back 1% of your shares, at $500MM up to 5% of your shares, at $1B up to 10% of your shares, and so on.
Realistically what happens is that in large, very late-stage rounds, the company gives employees the chance to sell some of their shares to the new investors at a discount (because of the common vs preferred situation).
The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.
The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.
Are you really going to be able to negotiate terms like that with a company that's at the stage where they are offering RSUs (I.e Airbnb)? I can imagine negotiating terms on options at earlyier stage companies.
Wouldn't you have to be going for a job in senior management to have a shot at doing something like this? Genuinely curious to hear if you have ever successfully done something like this?
Another option that I successfully negotiated for is purchasing shares outright at fair market value using a 51% recourse promissory note due in 10 years at the IRS minimum interest rate.
This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.
In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.
Instead of paying for the shares with cash now, I agree to pay for them in 10 years, paying interest at the minimum rate the IRS will allow (~2%). The 51% recourse means that the shares themselves are the only collateral for 49% of the loan amount (to limit my risk if the company goes bankrupt and a creditor tries to actually collect on the note).
> I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
This is addressed in the post:
> Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not the absolute value.
How different are startup salaries vs public company salaries? Is that $1m at Public Company the total salary over a certain period, or is it extra salary on top of the potential salary at Startup Company? The quote seems to say it is extra (relative).
If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?
A senior high performer[0] at a public BigCo can relatively easily make (in total comp) 2x-3x the cash compensation of someone working for a startup.
So if you’re the sort if person who’s likely to work hard at a BigCO long enough for most of your rolling RSU grants to vest, then yes, the comp difference is that big.
[0] note that MANY senior people at BigCos are NOT high performers. So beware of comparing to things like Glassdoor comp figures, which are highly likely to be coming from non-high-performers.
This is true, though I would also add "high performer" does not just refer to your primary job function, but also the secondary job of playing BigCO's internal political games.
small companies have internal politics as well. It's not like working with people disappears. I've worked at both big and small companies, I don't really have a preference but in a big company, you can move around and keep all the good stuff if it gets a little hot under the collar. With a small company lots of times you have to leave to get a new manager or role or move up or just get a change of pace.
The continuity of a big co. can be very helpful from a salary perspective.
Yes. Assume $300k total comp at Facebook/Google/Netflix for a Senior Engineer. Getting $200k at a non unicorn startup is very rare for a Senior Engineer. $180k is more often the cap and $160k is the norm.
And while $300k assumes fairly high performance at a top public company, it's certainly not the upper bound.
TIL. Those numbers are definitively higher than I would expect. Here in Norway the average for someone with a technical or scientific degree and 5-9 years of experience in private sector is 690 000 NOK [1], or about 80 000 USD. The 90th percentile for 10 years experience is 915 000 NOK or 107 000 USD. So for me the idea of making another 100 000 USD more at another company is quite foreign.
Throw in stock growth for companies like Google back in the day and FB more recently. FB stock has doubled in ~2 years increasing the liquid value of employee stock compensation by nearly the same amount.
While that's true, I could invest my own funds in Google or Facebook stock and reap similar growth (depending on my access to funds to invest).
Also, some companies will have target compensation bands (I know Yahoo did) where an increase in stock price will actually result in a smaller additional grant each year.
I see that no one points this out: Dan Luu and others in this post are using 'Public Company' to refer to only a small high-growth subset of all public companies, namely Google, FB, Netflix, etc. (and perhaps Apple and Microsoft). Most other public companies: track S&P 500 or you joined at a time when your company's growth slowed down to S&P 500 or if you work at a place like IBM that underperforms S&P 500. In these cases, you aren't necessarily assured millions.
The biggest difference may be the tax status of the way those two millions are earned. If you're earning $1m from a public company, you're likely finding yourself in a near-top tax bracket and running into AMT in most years. If you get that same $1m from options, you can be paying taxes like a rich person. If you've handled it right, you can mostly avoid AMT and pay the long-term cap gains rate.
Another difference could depend on the nature of the individual earning that money. If that individual is disciplined and reasonably good at investing their money, taking the corporate job, living frugally and investing everything that's left might make them come out ahead. But if they're like most people, earning more will make them spend more and they'll come out behind the start-up employee who will usually immediately invest most of the windfall (either in a home or the market).
Neither route is obviously better, but it's probably worthwhile to look at the post-tax, post-spending bank balances of both sets of employees to see who comes out ahead since it's not a simple as comparing $1m to $1m.
I'm not sure post-spending is the right thing to look at. One of the many reasons working at a startup is an awkward sell is that it means giving up money during your lowest-earning years in hope of getting more in your higher-earning years. That's the opposite of the smoothing function a rational person would prefer. That extra spending may well have provided a large amount of extra utility.
As far as taxes, a big difference you didn't mention is that startups most frequently exit in a single liquidity event that can't be deferred (i.e. acquisition). Getting that $1MM in one tax year is much worse than spreading it out over even 3-5. At least in my locality, the difference between taxes on a $1mm windfall in one tax year vs. a senior dev salary at a place like Google is ~5%.
> Getting that $1MM in one tax year is much worse than spreading it out over even 3-5
Not if it's long-term capital gains. The year that I banked most of my gains from my company's acquisition (sub-$1m, but just), my tax rate was substantially lower than in previous years. Paying taxes like a rich person has distinct advantages since the game is rigged in their favor.
That last idea about how to deal with illiquidity is very interesting. Never seen that suggestion before. Will definitely keep that in mind moving forward (both as an offer taker and an offer maker). Thanks!
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
Stay positive!