[dgreensp]

It goes without saying that you won't get personally rich from any contract or investment without running the numbers.

However, many employees consider it pretty enriching to work in a start-up environment for $200k+/year of salary and stock options, where the stock option portion is generally going up.

If you actually join early enough to get 0.25% of a company, like immediately post VC raise, usually the "success" scenario you talk about is not selling for 3x the current valuation. (I wonder how many companies that sell for that are actually "failures" but with well-connected VCs that can make a sale.)

And can we stop talking about "success" like a lottery? There are many Bay Area companies with actual business models making good revenue and growing it steadily into the multiple millions. I'm sure the early employees will make out just fine. I'm sure the founders would be interested in applying this "you're basically rolling the dice" model of business to their companies.

[michaelochurch]

Startup jobs at $200k are fairly rare, and not really accessible unless you're an executive implant. At least in New York, very few startup boards will sign off on an engineer salary at that level.

0.25 percent of a post-A company is pretty weak sauce. You should value equity at a fraction of what investors do. First, investors are diversified. You're not. Second, their stake gets the VCs control and an excuse to hand out executive positions to their underachieving, middle-aged friends. Yours doesn't. Third, your equity comes with a cliff and I can name a couple startups that are notorious for firing people days before cliff.

[argonaut]

The fact that investors are diversified and you're not is not a reason to value your equity stake differently than their equity stake. However, another valid reason to undervalue your stake relative to investors: the fact that investors get liquidity preferences.

[michaelochurch]

The fact that investors are diversified and you're not is not a reason to value your equity stake differently than their equity stake.

Actually, it is. For some theoretical literature on this, look into the Kelly Criterion, which argues that the best financial strategy is to optimize for log(W), where W is your total wealth (including future income, properly discounted, less costs of living, if one wants to get technical). The assumption is that, since it's (approximately) as hard to go from $50 to $100 as from $100 to $200, the proper utility function is the logarithm.

If you're a person of average means, you'd rather have $4.5 million than a 50-50 shot at $10 million. If you're a billionaire, you'd rather have the latter because of its superior EV.

Correlations also play a role. Assets with negative beta (correlation to equity market performance) can actually trade above expected value because of their risk-reducing benefit: they go up when the world goes down, which makes them desirable as hedges. All in all, you'd rather not have a basket of assets that all dive at the same time.

As a startup employee, you're typically poor enough to be risk-averse, and the one asset that you hold (equity) is correlated to your job and your reputation. Taking equity in lieu of cash makes you very exposed. You should expect a lot of equity to account for this. If you're giving up $20,000 per year in salary, you expect about $100,000 per year in equity at-valuation. Why? Because in addition to the concerns above, not only are you giving up some salary at the time, but you're also giving up future salary because startups tend not to give raises. (When things go well, the equity appreciation is the raise; when things go to shit, it's not a time to ask for much of anything.)

As an investor, you're rich and diversified enough that you can value assets at EV. As an employee dependent on stable income and reputation, you should be a lot more cautious about taking on that high-risk asset. Your life can go to shit in all sorts of ways: business failure isn't even the worst of them. The investor just sees the loss as a cost of doing business.

If nothing else, Zynga established what can go wrong when the bulk of your financial wealth is tied up by your employer. I mean, talk about a gigantic abuse of power: one's financial portfolio controlled by someone with firing authority.

VC-istan is built on the backs of young engineers who don't understand this stuff.

[dgreensp]

Well, to put this in the context of the original article, it was actually talking about executive-level positions. To grab some numbers from a random blog post (http://www.avc.com/a_vc/2010/11/employee-equity-how-much.htm...), a VP Product (or CEO) could be looking at a $175k salary with $87k/year of equity, while an early engineer might make $125k plus $31k/year equity (in his example). The posted article is mainly saying if you're going to settle for "only" the CEO numbers (175+87), rather than true fuck-you money, be sure you're at least meeting lots of VCs and building your network (for a future venture?). I don't think that's most people's take on the matter either.

I agree that very small equity grants don't exactly help engineers pay the bills compared to salary. In fact, small increases in salary seem to confer disproportionate financial and psychology benefits to employees, while stock options are more abstract, and looking to other fields they don't seem necessary to retain skilled professionals. So why not pay engineers with all salary and hold onto the stock? Mainly because start-ups have limited cash too, and equity to give away.

However, at the risk of over-generalizing, I think the competitive job market in the Bay Area means that engineers are paid good salaries plus at least a token amount of stock. For an early employee, it could mean a little icing on the cake, or in the best case significant wealth.

[argonaut]

This is an argument for valuing a diversified portfolio over one that is not diversified. However, there is no reason to value the same plain vanilla X number of shares in of themselves differently just because they are held by different parties (you or the VCs).

[dgreensp]

To clarify, I meant $200k including the current value of the stock options that vest in a year.

I'm also writing with engineers in mind rather than executives, and based on Bay Area salaries.

[michaelochurch]

I don't think that's a meaningful number. As I said, investors have plenty of reasons to value the equity at a higher level than an employee.

If you "cliff out" an investor, you go to jail. If you do that to an employee, that's fair game.

[nilkn]

For the typical engineer at the typical startup, that sounds way too high to me in terms of realized value.