[tptacek]

I think Michelle's methodology here is great, except for the fact that she applied it without a goal number; in other words, she took the offer number and tried to "reconcile" it to the model. The mechanic of running your offer through a model to justify a counteroffer is a great one that more nerds should adopt, but she's missing an input: what does she want the model to say? Your goal as a prospective employee is to maximize the number.

The offer side of this post makes my head hurt though.

    70k with .5% equity or
    60k with 1% equity or
    50k with 1.5% equity or
    40k with 2% equity

This offer says that 1% of the company is worth $20k. The company is worth $2MM. Late note: this analysis is silly, see comments below.

Later:

    Inputs:
    -        Employee’s market salary 
    (I used my current salary, plus bonuses)
    -        Salary offered by the startup 
    (I used my offer, plus benefits like rent subsidy)
    -        Company’s valuation 
    (I used $5M, the cap for Keen’s seed note)

No, it's $2MM, the CEO just told you so, right?

Frankly, an offer with a .5%->2% spread between possible equity stakes is a red flag. Those are wildly different equity grants for the exact same role.

Also:

Our expected net worth after a few years in our existing management positions was, by any practical estimation, the most financially sound outcome – and a very good one, at that. Even if things went great at Keen, with a big Series A or early profitability, we’d probably make less.

What does "a big Series A" have to do with your long term financial outcome? The A-round money goes to the company, not to your family. How many companies with "institutional" VC rounds fail? Answer: most of them.

[rdl]

It's pretty common to subsidize employee equity because employees having equity are incented to work, and because common generally is discounted to preferred by a larger factor very early in the formation of the company. It's reasonable to simultaneously treat employee equity as $2mm valuation and investor equity at $5mm valuation, especially with a note.

In this case, though, I think the way to win the negotiation is to walk. A competent engineer is more like $150-200k total comp in the bay area, and doing that as $100k + 100k of equity/yr in a real company is pretty plausible.

A more plausible story is offering $50-100k and then equity levels which ramp up rapidly as you go down to $50k. Someone taking $50k vs. $60k should get more than $10k x 4 of extra equity. Maybe something like 100/0.10 90/0.15 80/0.25 70/0.40 60/0.6 50/1. Then, if you need to prioritize candidates, absent other factors, the 50/1 people have a plus mark.

[tptacek]

I'll admit: my issue here comes down to hating sliding equity/salary scales like this one. The rough amount of skin you want a team member to have in the game should be a part of the role definition, not a detail of the comp plan.

There have to be better ways to account for sub-market salary than a salary/equity scale multiple percentage points long. Ick.

[rdl]

I'd probably have a range for the req (based on budget), and make an offer with two points (specific to the employee). The market is weird enough now that if you wanted to hire an SSL protocol expert, you might end up hiring someone with 2-3 years of general security and dev experience who has read the book, or someone who is EAY, and even the first option might be better than no one in many roles.

I've heard Palantir does three offers, and taking the top cash one is a bad signal.

Also, I think employees undervalue equity, and there's a weird signaling/etc. effect where shitty companies give out equity freely, good companies don't. Cash is cash, though.

[tptacek]

I strongly agree with the last part of your comment; I think that nails my uneasiness about this particular offer.

[dkador]

You think that if a company offers a sizable equity percentage as part of their comp it signals something negative about that company?

[rdl]

Yes, if the founders of a company, who have the best visibility into the company, don't value their equity, it's a waving red flag on fire. Either they are idiots (inexperienced at best, incompetent more likely), or company = doomed.

Obviously offering tptacek 5% in a company isn't bad, but offering an office admin 5% is.

[dkador]

(Couldn't reply directly to you, rdl, sorry.)

I agree that offering an office manager 5% is silly and offering a founder-level person 5% could make sense. I guess I was more curious to see what you think the right ranges are.

[dorkitude]

Until you're profitable (i.e. while you're still dependent on venture funding), my thinking is that equity is cash: the two are convertible quantities, with the conversion rate being based on our company's likely next valuation or cap.

If, as a founder, you give up so much equity that your option pool is totally depleted at the next funding round, then 10-20% will need to go to an option pool top-of -- and there's that much less equity to sell to the new investors, meaning less cash can flow into the coffers. Spending equity costs the company cash.

Meanwhile, if you spend double the cash of another startup in the same stage, your runway depletes doubly fast, and you need to raise sooner. Spending cash costs the company equity.

[davidhperry]

Interesting. Do you know what happens to the folks who take all cash vs. one of the other offers?

[rdl]

I know of no employees who took the mostly-cash offer, but that may be a selection bias on my part; I've never worked for Palantir, and am just friends/hang out with people who particularly care about their job (independent of where they work), don't have children or other major cash obligations, and are libertarian tax-minimizers. Those people are highly likely to shoot for highest EV (vs. low risk) and pushing as much income to capital gains as possible.

[dchichkov]

I think that 50k/1% should be considered only as a 'hobby occupation'. Or, if one is trying to change a field of work.

Because this early employee 1% is a) going to get diluted; b) it is over 4 years; c) most likely will result in $0 - $5000 cash-wise. And 50k (without benefits I assume) is.. well nothing.

[rdl]

If you're already well-off enough to not need income, or have a rich doctor as a spouse, it's quite reasonable to trade salary for equity.

Also, I'd love to take $50k/yr + 1% equity in an already successful startup. Say, Facebook.

[potatolicious]

> "If you're already well-off enough to not need income, or have a rich doctor as a spouse, it's quite reasonable to trade salary for equity."

It is never reasonable to trade your skills at substantially below-market compensation - regardless of if you can afford to do so. I have a lot of savings, but that doesn't make it reasonable for me to start lighting cigars with $20 bills.

Equity is a form of compensation, in this case dchichkov worked it out to be a expected value of $5K (or thereabouts) - how does one justify taking a haircut substantially more than this? (in this case, the haircut is on the order of $50-100K depending on the person).

[colmvp]

Unless lighting cigars with $20 bills could give you more money, I don't see that as an applicable analogy. If anything, it's a version of gambling.

Taking a significant paycut can be worth it if the options offered proportionately compensated the salary disparity IF the startup exits AND at a number that you estimate it could potentially hit.

If one isn't willing to take that risk then they should opt for less equity/no equity but a fairer market value.

[rdl]

At a very early stage startup, being a late founder means $50k cash salary (I get $30k as a founder, and if we did a late founder, I'd push for the same salary) vs. $100k+ for employee #1, but huge equity (5-50% instead of 0.5-5%, depending on person, size of team, how late, etc.). If you don't view founder-level equity as being worth $50-100k less cash comp, you probably shouldn't work there.

[dchichkov]

If you are already well-off, then 50k/yr wouldn't make any difference for you. And you probably have connections and can bring in a lot of value. So, if you are serious enough about it, ask no salary and a late co-founder status. Would serve you a lot better. And wouldn't allow other founders tell you, that they are paying you "salary".

[sofuture]

Yeah, and I'd take $20k/yr + a winning Powerball ticket.

[ricardobeat]

Higher equity is always the most rewarding option in the best possible outcome. But it's hard to leave safe money on the table. Four years from now the company could be worth way more than the current $5mm, then those $20k/year would look like scraps.

I agree with tptacek; 100/0.1 and 50/1 suit very different persons, the company should decide which type it's going after and limit that range.

[robryan]

At 50/1 for a company just out of of an accelerator you would have to think that you would be better off jut starting your own company.

[rdl]

Also depends on which company, and who you are. There are companies that go into accelerators after raising money, with great traction, etc. If you're just out of school or bigco and NOT a potential founder right now, doing 50/1 for 2 years to build great experience might be worthwhile, although pushing for higher cash comp once the company raises >$1mm or so might be reasonable.

From what I've seen of YC W12 and S12 companies, there are >10 where I would have done $50-70k + 1% to work there for 2-4y, back when I was 25, and absolutely after leaving school.

[sallen]

I thought she mentioned it was a 4 year vesting for that equity, which means 1% = $80k. But then that values the company at $8M, which also doesn't match the asserted $5M.

[tptacek]

I'm not following how you're drawing a 4x valuation from vesting, but I'll admit that my head is in an SSL3 negotiation bug I'm grappling with while posting, so maybe I'm crazy.

[sallen]

She'd only get 1/4th of that equity per year, and the salary is given in a yearly amount.

[tptacek]

Oh, right. Of course. See, I was crazy.

Thanks!

[ricardobeat]

$20k/year over 4 years = $80k

[mcguire]

Technically, it'd be $20k/year over 4 years, discounted at some reasonable rate, say...crap. So, $80k.

[wetzler]

Thanks for the thoughtful response! (I wrote the post)

I tried to take the approach you recommended and arrive at some numbers completely independent of the offer. I don't think I made that clear in the post, though.

Calculating the company's worth based on the offer is a cool idea, wish I would have thought of it at the time.

A big Series A is important because we discussed adjusting salaries to market value in the event of a Series A.

[dorkitude]

To be fair, it's actually like saying 1% equity converts to roughly $20k per year, since salary is annual.

[ajross]

But one year is about the horizon time most of these startups are looking at. At that point either they'll get real funding and the salaries will get rescaled to market values or they'll fail. Either way they're looking at saving about $20k total in the immediate term.

[jongraehl]

re: CEO just told you it's $2MM, yes, but perhaps he'll instead tell you it's actually $5MM but he wants to incent you to take a larger equity stake (the other options trading off expected reward for additional financial security).