I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice.
The fastest way to wealth is through equity.
Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it.
Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.
If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options.
Far more information is available about those companies than any privately held ones.
The lack of public information about startups means that the value is uncertain, and that’s a reason for a candidate with no special insight to discount the stock heavily. On the other hand, in the job seeking/networking process you may be able to find out important nonpublic information, which could provide an opportunity to legally “insider trade” by joining a company with a lot of upside that hasn’t yet been reflected in the valuation.
Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside.
Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
> Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside.
I don't know. To me, wasting my time (AKA - my life) seems more risky than anything. On top of that - when you do exercise your options that you earn, you have to pay $$$ for them anyway. (Along with paying AMT - yay!) I'm pissing away a third of my net income on my options + tax right now. Who knows if I'll get jack shit. At least with the stock market I can usually get SOME of my money back unless you're doing something super risky like playing with options.
IMO - playing the market is less risky than playing the startup game. Especially if you're joining early startups or ones that haven't just been straight up rockets.
Have you seen the bloodshed in the NASDAQ lately? It's wiped out quite a bit of wealth... although it was fairly overheated and tech was due for a major correction, but damn watching those gains come down was painful. :/
We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
> We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
I'd take FAANG over most any startup and would've if they had given me an offer. I speak as someone who has been in 3 startups before they were 30 (seed stage to unicorn). I think startups (startups that have high chance of no exit - <$500 mil valuation, less than 100 employees, <50 engineers) are better suited for people who have significant experience. If you join a startup - it is frequently filled full to the brim of FAANG rejects, young people who don't realize what FAANG offers, and people from different industries trying to break into tech... which means it's almost always the blind leading the blind. You will not learn best practices, you will inevitably find it very hard to switch into a big company, and your resume will look like shit (meaning you will always get subpar offers/interviews) until that startup either becomes a rocket ship OR you join a big co.
Risking your 20's in hopes you get ultra rich is a fools errand when you could reliably get $350K+/yr by 30 when joining FAANG when you're in your early 20's. No startup is going to give you an offer that will even be good anyway! There's no way you're going to join a startup as a entry level engineer and get an option package that will be worth anything.
I think the advice of valuing it as $0 in most cases makes sense, except if you happen to board the likes of Stripe, Spotify at a time point when they have fairly matured.
Only few companies make it to the much vaunted IPO/acquisition stage. Even in acquisitions, esop holders can end up getting a raw deal.
It is very hard for one to gauge companies which are going to succeed, I joined a newly Series B startup, a leader in its space with huge market opportunity with a very good product that went nowhere. While I love my initial days building stuff there, I do rue the missed opportunity of not just minting FAANG stocks.
Also, even public company equity appreciates. Among the already big FAANG, equity price has increased between 3-6x in the last five years; that is very good considering the amount of equity you get.
It’s not equity though. The investors get to revalue your common stock whenever they feel like it. They have equity. You have a good selection of table scraps.
Except for a very small number of people who essentially exist to make the rest of us think that could be us soon.
Counted on no, but you should try to value it and try to pick winners if you can.
Just pretending it’s $0 is a mistake.
I live in Palo Alto and I’ve seen many people get rich through equity, people who just read HN outside of startups don’t think it’s possible, but it is.
I didn’t realize how possible until I moved out here. FAANG salaries have tempered that a bit since you can just get rich on that income, but even a lot of that comp is equity too (and most of the people I know got most of their wealth from that equity).
I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
> I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
The vast majority of those people who you are giving that advice to will be played for suckers. It is good advice only for a tiny fraction that have the capacity, the opportunity, and the resources to negotiate a non-exploitative equity package. It is terrible advice for all the rest.
I mean it might be rude to say "if you're able to get hired at top startups of a certain kind the equity might be nonzero" but for the people that applies to, it's not terrible advice. Like, high school kids in general should not assume they can count on a career in the NBA, but if you're a 7' tall human male you have a >10% chance of playing in the NBA in your lifetime, so for them knowing that they have greater odds of success could be valuable information.
> for the people that applies to, it's not terrible advice.
The advice being dispensed is superficially applicable to everybody who gets offered an equity package, and it is terrible advice for most of those people.
It's like giving high school basketball players advice which assumes they'll make it to the NBA.
Maybe he only talks to people going to Stanford - he lives in Palo Alto after all. The people going to Stanford tend to have such incredible privilege that they might just be the right people for his advice.
This is kind of true. I went to a not-quite Stanford college and knew a good number of people who went to work at startups while I worked at big companies. Some of the smartest people I knew were going to startups. Those people by and large did better than me financially, although there were exceptions. I used to believe that they were making a statistically worse decision but from the data points I have now, I am beginning to doubt it.
I think a lot of it just depends on intangible, hard to define things like how good of a candidate you are (are you going to a startup that competes with top tech companies for talent, or one that isn't) and what type of companies you want to work for (for example, a boring ecommerce or enterprise SAAS company with revenue very early on is probably more likely to pan out than a self driving car startup or anything long-time-prerevenue). So while it might be true that in general startup equity and options are going to end up being worth little to nothing, it might be the case that for you and the companies you're trying to work at, you have much better odds.
Public companies are completely different from private companies though (by definition). In public companies, employees can liquidate vested shares immediately to cover any tax liability.
With RSUs in public companies, it's essentially (if not entirely) impossible to lose money. With RSUs in private companies, it's very much possible to be worse off than if you didn't have those RSUs to start with. Namely, if you pay the taxes out of pocket and the shares end up being worth less than what you paid in taxes (or are even completely worthless).
Options make the math even more complex regarding taxes/potential upside or downside.
FAANG equity - like RSUs at any other stable public company - is almost as reliable as getting paid in cash. There is some risk, as with all market-based compensation, but the risk of $FB or $APPL going down by a few percent in a bad year is nothing like the risk of a startup being worthless, or the risk that strange fine print or tax trreatment makes your private equity end up literally worthless (or worse) even if the company succeeds.
The most important thing is that, with public equity, you can tell when it's happening. If you work for a public company and the stock price goes down, that's public information, and you can readjust your valuation of your future compensation and react accordingly. If you're getting paid in funny-money private options, that doesn't work for two reasons. First, the value of your future compensation can change without your knowledge (e.g., with the introduction of preferred investor classes). Second, the value of past compensation can effectively change post-facto if you're forced to hold options for a significant amount of time.
Most companies don't have a liquidity event therefore most equity isn't really worth anything. Yes, in the Valley many companies have IPOd or been bought out but many more haven't and never will.
I think there's a difference between thinking options are worth zero, and not buying them or going to companies you expect to be worthless.
I doubt most people go to a company they expect will literally have no value. If you're going to a private company it's either because you think it will be valuable, you think the work is interesting which could possibly make it valuable, you get an insane salary offer or because you can't find another job.
In basically every case, you understand the company has possible value, which could translate into increased wealth.
The idea is simply that its not worth anything until it is. Once you're in the company and can feel out the actual trajectory and faith in the business, you can decide if you want to buy the shares.
Nearly everyone I've worked with across multiple companies have purchased up most or all their shares, even when they expressed how little faith they had in the company. If you're doing that, what does it matter if you sat down and crunched the numbers? You still got the lottery ticket.
FAANG income certainly isn't "rich". Maybe you recognize this and I'm just picking semantics, but I've noticed this annoying trend of FAANG engineers who crack $1m at 29 acting like they are a member of the rich when their just a person with a great job. To get rich comes from investments over time, or an impressive startup exit, or starting a business, or getting lucky. Nobody gets rich on the standard FAANG salary until they've been there for 20 years.
You and I have very different perspectives on what rich is. If you're 29 years old with >$1M in personal wealth, you're rich. That net worth would put you firmly in the top 1% of net worth at that age.
Apparently so. I don't disagree that you'd be well-off, but you couldn't never work again without a very frugal life, you couldn't vacation every month, you're entire subsistence is still tied to your job you must work to survive, and so on. Certainly in a great position, but being rich is very different
It sounds like your definition of "rich" is actually "independently wealthy". To me those are different. You can still have a job (and need a job to sustain your lifestyle) and still be rich.
Living in a 5000 sq ft luxury apartment in Manhattan makes you rich whether you rent it, own it and regardless if you need to work to afford it.
What the flying fuck. I've never had more than $10k in my life, and that's a recent accomplishment -- most of my life was a single missed-paycheck away from financial insolvency, and for a brief period, I was actually homeless.
For 14 months I lived on a $2,250/mo salary in downtown Boulder, CO. That meant trying to scrounge free meals from meetups or wherever else would feed me.
The idea of having a million dollars, or even making 200-300k a year is so insane to me. If that isn't rich maybe I missed a memo somewhere.
virtually no one feels rich. for the simple fact that you achieving it also normalizes it in your own brain. and the more wealthy you are the more wealthy(-er than you) people you tend to know, so your position relative to your peer group stays largely the same.
i'm not arguing these people aren't rich. just trying to help illuminate why they never feel rich (and therefore don't seem to acknowledge that very obvious fact about themselves).
That's only a small part of it. Most of the people are the richest in their extended family, and tons of friends from HS, college, etc. so they do know people who are not in their income bracket.
I'd say it's more related to the imposter syndrome. IE if I got here and I'm just ok, clearly this wasn't too hard a level to reach.
That and "well I used to work with so-and-so, and we're about equal, but they're making $800k while I'm stuck making $400k, so I'm clearly failing". Or even $2M vs $10M, etc.
Again, it's crazy, because both people are clearly actually "rich", I'm just trying to explain the mechanics of why so few actually feel that way.
Since it's so similar in expected behavior to a lottery ticket, I'd value it like a lottery ticket. Mega Millions costs $2 per ticket, so I'd value an equity package at a startup at $2 instead of $0.
I agree and on a related note, I often see startup employees valuing their equity at either $0 or #retirementmoney. In reality the expected value is pretty much always in between those two, and really warrants critical attention.
There's a takeaway for hiring managers in this as well – you need to do a lot of education and trust-building to hire well if equity is a meaningful part of the compensation story (and you need to really show integrity in the long run because people talk).
Because with a higher cash salary one can invest in "diversified" liquid equity that has a much higher future value than the uncertainties in many startups.
Who are you assuming is getting multi million dollar equity packages? To get that you either need to join really early stage or be relatively senior, the first is a lottery ticket, and the second is making your second million, which is much, much easier.
If you were at Amazon, Facebook, or Google for part of the last ten years and held your equity comp you probably did very well even though the grants at the time were “only” 100-150k or something.
I started working in 2012, people I know that joined snap chat around then and the next year or so after made seven figures (some eight) easily in that IPO.
I can't tell what your point is. A Google new grad employee who joined Google in 2012 would also have a decent chance of being a liquid millionare in 2017, and it was never illiquid).
And snapchat is an extreme outlier. Even among unicorns it had a high valuation. There are currently 3 us software companies with similar pre ipo valuations: stripe, airbnb and palantir.
Which is to say, if your company is the next snapchat, you're break even. Anything less, and a large tech company is a better investment. Betting that your company is the next snapchat, even if it's already a unicorn, is probably a losing proposition, and it's almost certainly losing of you're not already a unicorn.
Keep in mind that if you joined airbnb, or palantir in 2012, instead of snap (and both were hot companies) you'd be stuck at the company even now, since if you leave you'd forfeit your options unless you were independently wealthy.
That's 8 years forced to stay at the same employer or your options are worth nothing.
And again, those companies were already unicorns. And the stock will still be worth $0 to many. Now imagine a non-unicorn where you don't even know if you'll go public eventually.
There are also companies that will help you exercise your options for a cut (you don't need to be independently wealthy).
I don't disagree though - this is part of the risk to factor into the price. I'm not saying it's easy I'm saying it's worth thinking about and not reflexively assigning a value of $0.
It should be a non-zero factor in evaluating a comp package and evaluating the company.
Can you though? Your thesis has been that the majority of your income will be due to equity + appreciation. If you are able to save half your after tax income, which is feasible but requires some frugality, you can't actually afford to exercise + taxes on a stock grant whose EV is equal to your base salary.
Many people complain about how difficult affording a house is in the bay. The tax cost on an equity event is larger than the down payment on an equivalently valued house, and you're casually suggesting to save for it, on a much lower income (since you can't use your equity).
> There are also companies that will help you exercise your options for a cut
As far as I can tell, the terms of these deals mean that unless the price of the stock increases well beyond the strike price when you exercise, you'll get nothing, and even then you're going to end up losing 50%+ of the returns.
I'm not saying that you can't ever come out ahead, obviously some people do. But if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Startup incomes are still 100-180k in the bay area, this is enough to save up (if you're single out of college, no dependents).
> Many people complain about how difficult affording a house is in the bay.
Yeah bay area housing is stupid, most of us live with a few roommates in a shared house and rent. Most of us are not buying housing here.
> if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Sure, I was including Amazon/Microsoft in equity comp considerations and if you have a strong offer from them it's harder choice to make. In most cases FAANG (FAANMG?) is the safer option, but you're still valuing the equity it's just a lot lower risk than private company equity.
The initial point was that equity should be considered worthless. All I'm saying is that it's more complicated than that. I don't know why this is such a controversial position?
Is there risk? Yes. Does that mean you should simplify this to $0 equity value? No.
We should accept the complexity and factor that into the decision.
And if you worked at Apple or Amazon in 2012 and still are working there today & holding that stock, your stock went up almost 20x - an original $100k grant would be worth about $2m, and that's not even counting any of the follow on refresh stock grants.
Even having joined a company like Snap then would've been a raw deal compared to working for the tech giants.
It's reasonable to indicate big wealth only comes with the leverage of equity, but it has to be put in the context of the risks involved, and especially the opportunity cost of forgoing a lower salary otherwise.
Thank you. I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout
> I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout
Then it's _excellent_ advice.
In Canada we have endless amounts of kids who bust their butts to get themselves into the NHL, and only a fraction of a fraction make it, and only a fraction of _those_ get a jaw-dropping contract. From your own admission, and from what seems to be generally accepted, this is also the case for winning the equity lottery in Tech Startups.
For those trying to make a living, buy a house, and have a family then valuing your equity at $0 is the only rational option.
>>Canada taxes capital gains at 50% anyway so it’s probably not a great idea to value it as much there.
Can you elaborate on this a bit more? I thought that Canada only taxes half of the capital gains which is then added to your taxable income.[1] So the amount of tax paid on the capital gains might be 50% or more but only if your taxable income for that year places you in the highest tax bracket.
In the US, you're generally on the hook to pay tax on 100% of any capital gains, compared to Canada where you're only paying tax on half of any capital gains.
Ah interesting - I’m not Canadian so don’t know much about their tax law.
You’re probably right and I had a confused misunderstanding. I only looked briefly to see what it’d be like if the election goes south and things get worse in the US.
US long term capital gains is only 15% up to 400k and 20% after that which is really good.
[Edit] Reading that turbo tax article it seems like only 50% of the gain is taxed at all and of that gain the maximum tax is under 15%? Is this just Ontario tax and there’s more federal or something else?
I'm pretty sure you misunderstood. I believe canada taxes half your capital gains as regular income. Frankly, seeing the number of wealthy folks in the US paying lower tax rates than the plumber that fixes their toilet, maybe it's a better system.
Well, no. Most of those companies have special terms which end up screwing most employees out of any upside. That goes anything from shares people can't exercise without a 10-year commitment to tiers of options, to simply offering 0.0000001% of the company, to many others.
Equity is worth $0 unless the company is fully transparent on this stuff. I've never run into one which was.
Even that 'relatively high chance' is really low. Even companies funded by the top VCs only have a success rate of about 7.5% (success means generating ANY positive return).
Absolutely agree. It’s a numbers game but the first 9 may not hit but the 10th makes you wealthy. So if you’re on your 6th then you will feel the equity value is worth $0
The fastest way to wealth is through equity.
Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it.
Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.