[dreese]

I think about startup employee equity like this:

Salary = compensation for doing the job

Equity = compensation for taking the risk of working at a company with a high chance of failure

Therefore, in the future, an employee with lots of equity should still be paid a normal salary/raise/bonus because the equity isn't "current" compensation for doing the job, but a reward for taking a risk long ago.

But ignoring equity entirely is silly. Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.

Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool.

[rhizome]

I had a job offer once that gave me two options to choose from, which was really cool.

In which they suckered you into a false dilemma. You should always reply to those stupid negotiating tactics with "Both. Higher salary and more options."

[dreese]

Perhaps. I was younger then and didn't feel comfortable negotiating. I'm better at it now. He even had to explain to me how options worked.

But I learned a lot from working with him and met people that I still keep in contact with. I don't regret my choice to take the offer.

[Derson]

Do you have any place you'd suggest online to learn more about options?

[htormey]

"Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high. Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool."

So the two options you were given was more cash less equity or more equity less cash. Doesn't that negate your point that you should consider salary and equity separately? I don't really see from a financial perspective how you can seperate the two when considering a job as both relate to the risk you are taking.

[dreese]

I don't think it negates my point. It's just that I don't follow my own advice perfectly. :)

It's also a little similar to how founders essentially work for free in exchange for lots of ownership. If, as an employee, I can work for less money now, then I'm taking a bigger risk betting on the outcome of the company.

Startups often want to minimize cash flow, and some employees are interested in helping out with that in exchange for having more ownership. So it works for both sides.

But I try to keep "doing the job for salary" and "taking a risk for equity" separate in my mind.

[htormey]

I'm not sure I see your point. Isn't what you are describing the risk reward ratio:

http://www.investopedia.com/terms/r/riskrewardratio.asp

By trading salary (you could get paid more at a big co) for equity you are inherently making a financial decision by investing the difference. Keeping these things seperate is not the same as not thinking about them.

If you are talking taking about taking a pay cut to work with people you really like or to do more interesting or less stressful work then I understand. Apart from that I don't see any reason why you would take less salary unless you think the rick reward ratio was favorable.

[dreese]

My original point was that ignoring equity when evaluating a job offer isn't the best approach.

Most job offers don't include two options to choose from. Since I did have that choice, I evaluated my options exactly as you mention: whether to (effectively) invest the salary difference in exchange for more equity.

In most cases, job offers don't include that choice. If that had been my situation too, I would have evaluated whether the salary was worth doing the job. And then evaluated whether the equity was worth the risk of joining an insecure company.

But since this isn't an absolute rule, I might have tried to negotiate more equity if the salary wasn't quite high enough for me to make the jump. Or maybe asked for extra vacation time, or the option to work from home. (I've done all of those.) I know salary and equity cannot be kept totally separate, but I do start there when evaluating how I will respond to a given job offer.

[rhizome]

Isn't it the case that they have been decoupled such that a prospective employee could negotiate for a higher salary than that which was calculated on the risk/reward see-saw, merely by saying they have to protect themselves from a Zynga option-clawback scenario? It's not a hypothetical.

[kristiandupont]

>Equity = compensation for taking the risk of working at a company with a high chance of failure

But if you are getting a normal salary, what is this risk?

[Spooky23]

You're probably drawing lousy benefits and a no-frills 401k with bad funds. Plus the bonus of having to figure out when the payroll dollars run out.

I worked at a startup where towards the end before their buyout, they weren't paying the phone bills, and their core profit center was a call center. When you work in that situation and trying to troubleshoot downed circuits, which turn out to be shut off for non-payment, that's some serious stress.

Right now I work for a government org with some really awesome technology challenges. Plenty if politics, but also security and ok pay. I'd rather have a constitutionally protected pension and startup+ pay than startup pay and no equity

[Iftheshoefits]

It is much more likely the startup will fail than an established company. Consequently startup employees are taking a greater risk than established company employees. This, however, isn't really reflected in salary and is instead reflected in the lottery ticket/equity grant.

And just to add: my view is that at a startup, "market rate" is too low, even with equity on the table (to a certain extent--if it gets to double-digit equity my opinion is the negotiation isn't about bringing on an employee so much as a legitimate co-founder) especially given the broad responsibilities early employees are tasked with and the high likelihood of failure.

[bksenior]

That is a bit shortsighted way to look at value added for being part of a startup. Experience and an elevated role can increase earning power regardless of the start-up outcome.

[Iftheshoefits]

I think you're either overestimating the value of experience and title gained at a startup, or undervaluing the same at established companies, or possibly both.

Having a role at a startup doesn't automatically imply useful experience has been gained, or that the specific position and duties are somehow more solid than equivalent roles at established companies.

[jameshart]

You're assuming this evaluation is from the point of view of someone early in a programming career. If you've already got a bunch of experience, and had elevated roles, the cost benefit analysis is going to be different.

[nitrogen]

It's the risk you'll be out of a job in three months when the seed funding runs out, right before your benefits kick in.

[hcho]

That you can lose that job all of a sudden.

[LaGrange]

Increased risk of losing your job.

[potatolicious]

Right, but for engineers working in startup hubs, is that really a risk? You can pick up a phone and have a parade of offers on your desk in a few days.

At most your risk is missing out on, say, a week's wages between jobs.

[ambrood]

There are many of us on an H1-B here potatolicious. Technically I get 10 days to wrap my affairs and leave the country, not to mention losing any greencard application...

[potatolicious]

I'm also on a H1B, transferring one is trivial, though you're right that green cards make it more complicated.

[smm2000]

You may loose your job at start up at the most unfortunate moment. In 2000 you can find 10 jobs in about an hour, in 2001 you could not find one job if you life dependent on it. Big companies do layoffs too of cause - but probability to be cut is lower and they almost always offer generous severance package. Also your personal circumstances may make lay off extremely inconvenient - for example right before child is born or you have medical emergency.

You should definitely get some premium for this risk - how much is open to interpretation.