[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.

[tptacek]

This person isn't an office admin. I don't know where that notion is coming from (elsewhere on the thread, I assume), but it's a little disturbing.

[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.

[rdl]

In a company which is post accelerator and has raised $1-2mm, without being an absurd success or abject failure, I value equity for employees using a valuation of 0.5-0.75x the cap on convertible debt if you were to issue the debt right now. I have no idea how to handle this at Series A or beyond; a bridge I will burn when I come to it. You may adjust this based on whether you view investor money as particularly cheap (which varies by segment), how long since you raised, etc. The main thing is it should be consistent across employees at a given time.

(So, e.g., a $10mm cap note company which has raised $2mm would treat each 1% of employee equity as $50-$75k. So giving up $25k in cash salary should get you, as a 4 year grant, 2% to 1.3% equity. That is in line with the 0.5-1% for a seed stage 5-7y experience strong individual contributor equity, which is a slightly low amount; generally I've seen 0.1-0.25% for 3-5y experience Series A hires, on say a $20-30mm valuation, which also is in line with this.)

The annoying thing is a company wants to discount equity to employees at 0.5-0.75x. Engineers often discount it to 0.1, especially people who have been burned in the past (90% of people in the first bubble, ex-Zynga people, etc. If you're negotiating with someone who irrationally discounts equity, just pay him more cash and pocket the difference).

A Google SSE or Staff Eng is about $200-225k on the market (total comp), a 3-5 year guy is more like 125-150k, and a very junior person is 75-100k. You can allocate that among perks, equity, bonus, %, and base in various ways.

There is basically no way to use just above-market salary to hire good people, but lack of market salary can get people to rule you out. I've worked at companies where ~everyone got $150k cash + strong equity (0.25-1%), and it ended up just being mercenary people who worked there and remained, due to other defects in corporate culture. (I've also worked in a 200-500k cash-comp-only environment, and the quality of people was inferior to any startup I've ever seen.)

You can probably get people to sacrifice 0-25% of total comp (and maybe up to 50% for short periods of time, like 3-6mo until financing). They are only willing to do that if they think it is "fair", which means they have good odds of doing well on the deal, and others in the company, particularly founders, make similar sacrifices. If a founder is paying himself $150k/yr, and is trying to negotiate a $225k Staff Engineer hire to take $50k cash + $50k equity, you'll probably only get the most self-sacrificing and useless person to join. If a founder is paying himself $30k and is trying to get a $225k SE to take $70k/yr until Series A (6mo), then $120k, plus $50k of equity, and some other perks ("not being at Google of 2012" seems like a serious perk for a lot of the people I've talked to), you'd have a shot.

The best way to allocate equity that I've seen was the 'allocate by cohort' strategy (I forget who proposed this...maybe hn user joshu? or suster or feld or someone). Basically all of your hires at seed stage get x%. All of your hires from Series A to Series B get x% also. But your first pool is split across 5 people, and your second pool is split across 25 people. It is way easier for me to understand the relative importance of the 5 people hired during seed stage vs. figuring out their time/risk weighted importance in a company all the way to IPO.

[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.