1. Get diluted with every VC round (oh, but value of our company is increased so you potentially own more in dollars!)
2. Left in a dark about preferred shares schedules and conditions that every VC gets. Preferred shares allows VC's to get paid first and in multiples of their original investments in case of an exit. This effectively can and most often will leave exactly $0 for employees with every exit regardless is employee owns 1% 5% or 25% of options.
Upon hiring - request disclosure of preferred shares schedules - before and during employment - and you'll quickly be given some excuse or shown the door if you insist.
If you're lucky and given equity right before IPO or given RSU (actual shares with vesting schedule) of publicly traded company - then it could make a world of difference.
That's a bit unfair. Just because those 2 things are true doesn't mean that you are left guessing. You can estimate dilution per round reasonably well. You can guess the options (common stock) allocation per round and you will KNOW the preferred allocation per round.
That doesn't make it meaningless. You can still calculate what your expected return will be based on a given valuation at exit.
Here, I can even make it easy for you: $0.
Don't take a job at an early stage startup based on financial reward! But also, the question is valid. Don't take less equity than you "deserve". The employers have a huge information advantage here. Does YC provide guidance on how to allocate equity to early employees?
What do you recommend an employee do to protect themselves before signing? Are there any special clauses you recommend be on there to maximize profits from an exit or any red flags to look out for? Is it typical to ask for additional options during every fundraising round?
>> Is it typical to ask for additional options during every fundraising round?
You may, and they may as well give you some extra paper options to keep you interested.
But what's the point? $0+$0 = $0 - in 99.9% of early stage startup cases.
Engineering force pretty much has no negotiation power in this.
Engineering (surprise!) is a liability, not an asset.
Sales is an asset. Anything that generates direct and immediate revenue is an asset.
Even if such clause would exist - VC's won't allow it - they won't invest in anything that jeopardize their lion's share of exit.
My take: for 99.9% of early stage startups (Non-pre-IPO, not publicly traded) - get as much cash as you can as compensation.
Don't get tricked into working for peanuts for the promise of future that has low probability of happening.
It just safer bet.
Invest the difference into real assets or save it for real estate or so.
"Engineering force pretty much has no negotiation power in this." Of course we do. We don't have to accept an offer unless it meets our terms.
"Engineering is a liability. Sales is an asset." This is ridiculous. In an early stage startup, most likely there is no product. Sales has nothing to sell if not for engineering's efforts.
"VC's won't allow it." If a startup can't hire, then VCs have exactly nothing.
This isn't to say that cash isn't a good thing. I personally agree that options need to be balanced with cash, especially when a startup is well funded, and options are fractions of a penny, but that decision is individual.
One major problem is also that many times engineers themselves are not concerned at all about compensation.
For example, at my current startup I work with a couple 10X engineers (seriously, they are brilliant and able to solve problems in an incredibly elegant way) who are paid 30% less of what I make in cash, and about 25X less equity, despite having joined just a few months after me in a similar role and with more years of experience than me (I know because as part of my due diligence I took a peek at the cap table). The difference is that I negotiated heavily before joining, and every ~12 months I express my discontent to my boss about my current compensation, and he tries to bring it up with new equity grant and/or salary raises and/or performance bonuses. In exchange for that, I try to do my very best on the job.
To those people, the pay simply doesn't matter, it’s the specific opportunity given by the startup what they are after (domain/tooling/authorship/etc.). They will never complain about the compensation, or even ask to get more equity, since, as software engineers, the "base" pay allows them to have a reasonable quality of life. If the company sells for $10B and they make $0, they'll be just as happy, they got to work on a for-profit project that became super successful! yay!
Empirically, I've seen way more people like them in the software engineering field than in other highly-skilled fields (e.g. law, medicine, accounting), and I'm sure those fields are just as rewarding as software engineering, for the person passionate about those aspects of human knowledge and creativity.
I've never raised these observations in a live setting, I am too scared I'd be taken for a cynic who doesn't love his craft and it's only after money, while in reality it couldn't be farther from the truth, I very much enjoy software engineering and spend a considerable portion of my free time reading up and improving my skills. It's just that for me both the compensation and the opportunity need to be good, I won't be happy with just one of the two (so I wouldn't take a very high paying job for a long period of time, if such job would mean stagnating my technical growth as an engineer).
None at first. I was hired by a client after the dev shop I worked for went under. We were so inexperienced/grateful for the job we didn’t think to ask for any equity. The salary is just below market average, which is fair considering my experience level.
Some background: this is my first startup, we’re a team of 5 (CEO, Android, iOS, Web/CTO, Customer support).
6 months after we were hired the runway began to get tight and we had to take some semi-drastic measures to stretch it: the CEO (who hadn’t been taking a salary for quite some time) asked us to stay on but work half-time until we were far enough along to raise the correct amount of funding. Because I believe in both the mission and the CEO I offered to stay on full-time for half-pay and half-equity. For the past 5 months half of my salary has been converted into shares. Instant vesting, shares are being given at our current valuation. Each month translates to roughly 0.1% of the company.
Lots of people will give you opinions of should you ask for more. My opinion is you should ask for what you think is fair. If you think the current split is fair, then you don’t need to ask for more.
Keep in mind that most cases equity turn out to have little monetary value.
> I offered to stay on full-time for half-pay and half-equity.
There's a lot of red flags here ... some random advice:
1) Ensure your deal is in writing.
2) To protect your equity, you need to be in the room when new investments are negotiated. Otherwise you will be diluted or new options pools created without you even knowing.
3) Business people think very little of programmers in general, until they need to hire one. To them, you're a secretary with an attitude.
4) a product launch costs about $1 million. If they have money for that, then they can also pay your salary
5) It's irrelevant to you whether the CEO is taking a salary or not. Unless you have access to the books, how do you even know? It seems that generally CEOs land on their feet.
6) The shares you think they gave you "clutter up the cap table" and make it more difficult to get investors later. Typically VCs try to wipe out the angel investors (who have lawyers.) Guess what they'll do to a programmer.
So let's say I am hired by a startup and I am getting half the industry salary rate for my role. What kind of "stock/share/esop/options" I should ask for that changes like a founder's would?
Of course it will be a lot less than the founder's (and it will be fulfilled in stages) but iff, let's assume, I want to get that "kind" of "share" of that startup what it would be? Is there a specific term for it? Or it varies from company to company? Unless it it's public where's it's the "share", right?
1.6%, third hire. Now the company is at series C, 4 years later. Significant dilution as expected (own roughly 0.5%), but clean terms for all rounds (liquidation preference 1X, non participating).
In my case, even if the company is still illiquid, I luckily was able to sell a good portion of my vested shares as part of a secondary transaction for a decent amount, so I was happy about that. I'll risk the rest.
Employee number 4 at a very small startup in the bay area. 1% equity slightly after seed. I have been at a few startups which are more commonly .1 - .5%. I was very appreciative of the amount and hope it will pay off in the long run.
If it makes you feel any better, I've worked at three startups. Two exited and one is still going. The net stock contribution to my bottom line was a $200 capital loss. The only actually money I got was retention cash and RSUs from the acquiring company.
Employees with "equity" options will:
1. Get diluted with every VC round (oh, but value of our company is increased so you potentially own more in dollars!)
2. Left in a dark about preferred shares schedules and conditions that every VC gets. Preferred shares allows VC's to get paid first and in multiples of their original investments in case of an exit. This effectively can and most often will leave exactly $0 for employees with every exit regardless is employee owns 1% 5% or 25% of options.
Upon hiring - request disclosure of preferred shares schedules - before and during employment - and you'll quickly be given some excuse or shown the door if you insist.
If you're lucky and given equity right before IPO or given RSU (actual shares with vesting schedule) of publicly traded company - then it could make a world of difference.
That doesn't make it meaningless. You can still calculate what your expected return will be based on a given valuation at exit.
Here, I can even make it easy for you: $0.
Don't take a job at an early stage startup based on financial reward! But also, the question is valid. Don't take less equity than you "deserve". The employers have a huge information advantage here. Does YC provide guidance on how to allocate equity to early employees?
You may, and they may as well give you some extra paper options to keep you interested. But what's the point? $0+$0 = $0 - in 99.9% of early stage startup cases.
Engineering force pretty much has no negotiation power in this.
Engineering (surprise!) is a liability, not an asset.
Sales is an asset. Anything that generates direct and immediate revenue is an asset.
Even if such clause would exist - VC's won't allow it - they won't invest in anything that jeopardize their lion's share of exit.
My take: for 99.9% of early stage startups (Non-pre-IPO, not publicly traded) - get as much cash as you can as compensation. Don't get tricked into working for peanuts for the promise of future that has low probability of happening.
It just safer bet.
Invest the difference into real assets or save it for real estate or so.
"Engineering force pretty much has no negotiation power in this." Of course we do. We don't have to accept an offer unless it meets our terms.
"Engineering is a liability. Sales is an asset." This is ridiculous. In an early stage startup, most likely there is no product. Sales has nothing to sell if not for engineering's efforts.
"VC's won't allow it." If a startup can't hire, then VCs have exactly nothing.
This isn't to say that cash isn't a good thing. I personally agree that options need to be balanced with cash, especially when a startup is well funded, and options are fractions of a penny, but that decision is individual.
For example, at my current startup I work with a couple 10X engineers (seriously, they are brilliant and able to solve problems in an incredibly elegant way) who are paid 30% less of what I make in cash, and about 25X less equity, despite having joined just a few months after me in a similar role and with more years of experience than me (I know because as part of my due diligence I took a peek at the cap table). The difference is that I negotiated heavily before joining, and every ~12 months I express my discontent to my boss about my current compensation, and he tries to bring it up with new equity grant and/or salary raises and/or performance bonuses. In exchange for that, I try to do my very best on the job.
To those people, the pay simply doesn't matter, it’s the specific opportunity given by the startup what they are after (domain/tooling/authorship/etc.). They will never complain about the compensation, or even ask to get more equity, since, as software engineers, the "base" pay allows them to have a reasonable quality of life. If the company sells for $10B and they make $0, they'll be just as happy, they got to work on a for-profit project that became super successful! yay!
Empirically, I've seen way more people like them in the software engineering field than in other highly-skilled fields (e.g. law, medicine, accounting), and I'm sure those fields are just as rewarding as software engineering, for the person passionate about those aspects of human knowledge and creativity.
I've never raised these observations in a live setting, I am too scared I'd be taken for a cynic who doesn't love his craft and it's only after money, while in reality it couldn't be farther from the truth, I very much enjoy software engineering and spend a considerable portion of my free time reading up and improving my skills. It's just that for me both the compensation and the opportunity need to be good, I won't be happy with just one of the two (so I wouldn't take a very high paying job for a long period of time, if such job would mean stagnating my technical growth as an engineer).
Why do you think that is?
6 months after we were hired the runway began to get tight and we had to take some semi-drastic measures to stretch it: the CEO (who hadn’t been taking a salary for quite some time) asked us to stay on but work half-time until we were far enough along to raise the correct amount of funding. Because I believe in both the mission and the CEO I offered to stay on full-time for half-pay and half-equity. For the past 5 months half of my salary has been converted into shares. Instant vesting, shares are being given at our current valuation. Each month translates to roughly 0.1% of the company.
Keep in mind that most cases equity turn out to have little monetary value.
There's a lot of red flags here ... some random advice:
1) Ensure your deal is in writing.
2) To protect your equity, you need to be in the room when new investments are negotiated. Otherwise you will be diluted or new options pools created without you even knowing.
3) Business people think very little of programmers in general, until they need to hire one. To them, you're a secretary with an attitude.
4) a product launch costs about $1 million. If they have money for that, then they can also pay your salary
5) It's irrelevant to you whether the CEO is taking a salary or not. Unless you have access to the books, how do you even know? It seems that generally CEOs land on their feet.
6) The shares you think they gave you "clutter up the cap table" and make it more difficult to get investors later. Typically VCs try to wipe out the angel investors (who have lawyers.) Guess what they'll do to a programmer.
Of course it will be a lot less than the founder's (and it will be fulfilled in stages) but iff, let's assume, I want to get that "kind" of "share" of that startup what it would be? Is there a specific term for it? Or it varies from company to company? Unless it it's public where's it's the "share", right?
edit: any recommended reading on this?
(Yeah, that was my last startup.)