True, but honestly if you aren’t already a co-founder, friends with the investors, or very close to the founders, or have A LOT of experience on the business side of tech startups, I’m afraid to say the chances of you getting screwed are extremely high.
As an engineer, you won’t be privy to much if any of the business side, investor meetings, etc. I’m talking about personal relationships. Most engineers I know don’t even have access to or know what the cap table is. The only companies where I’ve made any money from the equity have been ones where the founders are already rich and happen to be nice, altruistic people. It’s unfortunatley how the sausage is made in SV. Most engineers (>90%) make $0 from any equity, no matter how well they have played their game. The era of massage therapists startup millionaires is over. The cat has been out of the bag for awhile now, people know there is money to be made in these companies so they are structuring them to do that.
I’m pretty sure engineers often get screwed as this has something to do with the fact they just don’t have face time with investors or access to the business side and spend their lives “heads down” building the product.
A sad anachronism but very true. Or maybe I'm just old and bitter? lol
Kind of depends on your definition of "getting screwed." The venn overlap of companies that are very successful and also screw early employees out of stock options is very small, but sometimes expectations aren't properly set about how options work.
It is difficult to make money as an engineer via early stock options, but it is not impossible and the problems of a. understanding what you're being offered and b. making sure you don't get screwed are fairly tractable imo. The hard part is building a company that makes these things matter. Survivorship bias, n of 1 etc. of course, though.
The main problem with startups is joining as employee 10-500ish/public. That's where you aren't getting good stock offers, no one has heard of your company yet and your salary sucks. The upside is this is a great place to learn as a junior both about engineering and about stock options.
You are right that you need to have a lot of business experience to really understand this stuff too. Dabbling in startups is a good way to spin your tires and get screwed, but if you commit to the industry and go through enough deals you can learn enough to protect yourself.
If anyone is currently considering an offer that includes equity and wants some help thinking about how to value it my contact info is in profile, feel free to reach out.
The venn overlap of companies that are very successful and also screw early employees out of stock options is very small, but sometimes expectations aren't properly set about how options work.
Do you have any support for this? I'd love to read (or whatever) if so.
but sometimes expectations aren't properly set about how options work.
Sorry I don't have a source, but what I really meant by that was: when you hear the stories of engineers getting "screwed out of options" it always boils down to things like liquidation preferences and taxes and things like that that are built into the stock agreement. You also very rarely hear these stories in places that are doing super well, it's places that are failing and the company is being chopped up for scraps that things like liquidation preferences really even become a serious problem for employees anyway. The real problem is usually just that the business doesn't do well.
I'm sure there are exceptions and places where people disagree about the terms of the actual agreement but by and large these stories are "a thing that felt really low chance happened and the stock agreement had a clause for that and that sucks for me." Truly shitty situations, but ones that you can factor into your risk model when deciding whether or not to accept the offer. Part of the deal of having ownership in the business is taking the responsibility of that risk on. Not everyone wants that which is why a higher salary at a more stable big company makes more sense for some people.
Also, I think the perverse incentives thing is real, but again I want to reiterate: the cool thing about stock options is that they allow you to have a small (but often significant) amount of ownership in the means of production. But that also means increased responsibility, which includes the responsibility to understand the value of the options agreements you sign. If you need to hire a lawyer to explain the agreement, or you need more information on the business, cap table etc., in order to fairly value the options in the offer those are all fair questions to ask. Additionally the way companies respond to your request for such information will tell you everything you need to know about how they truly feel about employee ownership.
To add to that: most engineers are completely clueless about how equity works.
And the typical startup execs do everything they can to keep them that way.
Most engineers I met in SV only knew their equity "will be worth X millions" because that's what the founder told them when they joined. They don't understand funding rounds, dilution, the power of the board and majority owners... Often they don't know what the cap table is.
1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best.
2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock.
> 1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best.
If a founder is selling you on anything but a very sober view of the stock that's a great signal to not join the company. Even so, it is not too difficult to model a few reasonable dilution, acquisition etc. scenarios and get a feel for how you'd do in each.
> 2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock.
Sort of. The reason this doesn't really happen much in practice is that it destroys the company's talent pool and ability to hire in the future. Most companies that are succeeding don't tend to screw employees, it's only when they've entered the "squeezing blood from a stone" phase that these things start happening, and at that point the stock's not worth much anyway.
> If a founder is selling you on anything but a very sober view of the stock that's a great signal to not join the company.
Have you interviewed in many startups? "Sober view" is not what you'd get from a founder hard-selling you on any role. Try "wildly optimistic, unrealistically so".
> Even so, it is not too difficult to model a few reasonable dilution, acquisition etc. scenarios and get a feel for how you'd do in each.
Eh. Unless it's a late-stage startups (which is not the typical scenario), it's very hard to know what will happen. You can model some events, but the key question remains unanswered: how successful is this going to be?
Absent this crucial detail, any talk of future outcomes represents, at best, some good intentions. Even the most generous founder can't do much for you when his startup fails to make any money and runs out of funding.
> Most companies that are succeeding don't tend to screw employees, it's only when they've entered the "squeezing blood from a stone" phase that these things start happening, and at that point the stock's not worth much anyway.
It's true that companies tend to be more generous when they are successful, and most of the nastiness and screwing people over happens when things are going south.
Still, you overestimate how much damage screwing people will do, and underestimate how greedy various decision makers can get.
There are unfortunately many cases in which the startup had a good exit, yet everyone below the top saw little or no money. There are even cases where the startup had an incredible exit, and still went out of its way to suck all potential earnings out of its employees pockets. For example, Skype exited for $8.5bn, yet made sure to claw-back any potential gains from multiple employees, using an obscure small-print clause that essentially made even vested stock worthless:
Apparently, they weren't too concerned about "poisoning the talent pool", which seems like good judgment, given how nobody seems to even remember this incident anymore.
> Have you interviewed in many startups? "Sober view" is not what you'd get from a founder hard-selling you on any role. Try "wildly optimistic, unrealistically so".
Don't join those companies. I've spent over a decade in the startup industry, I've interviewed at a ton of startups. Most startups are not worth working at.
> Eh. Unless it's a late-stage startups (which is not the typical scenario), it's very hard to know what will happen. You can model some events, but the key question remains unanswered: how successful is this going to be?
Right, that's exactly what I said...in the case that it's not successful it's not like anyone is getting rich, so in that case it's not like employees have been "screwed out" of options.
In reference to Skype: they did absolutely poison the talent pool look at you remembering and posting this article. Are you or anyone reading this thread ever going to consider working for Skype? Why else would TechCrunch cover it?
Not only that, the agreement that Skype offered did not change, so a bunch of people signed a shitty agreement and are then upset that it didn't work out well. This is not the rug being pulled out from underneath engineers, this is engineers not understanding what they are signing.
You're right that most startup options are worthless, but not all are, and that doesn't mean you can't reason about which are worthless and which are not.
I agree completely, which is why I stopped working at startups myself. The question was about how startups are in general, so we must acknowledge that wildly optimistic equity value expectations are the norm.
"Just don't work at these places" isn't viable advice when the vast majority of startups are like this. Like it or not, most people open to working for a startup will end up working for a startup like this, where the founder tells all candidates their 0.0001% is going to be worth millions because the startup is taking over a $300bn industry.
> Right, that's exactly what I said...in the case that it's not successful it's not like anyone is getting rich, so in that case it's not like employees have been "screwed out" of options.
Sure, but modelling liquidity events and such is totally worthless if the most important number isn't known. Especially when that most important number dominates the others. How many funding rounds is the startup going to have? Totally depends on its revenue. Same for dilution, and how likely they are to look for ways to screw regular shareholders over.
> In reference to Skype: they did absolutely poison the talent pool look at you remembering and posting this article.
So one person in a huge thread is evidence Skype paid dearly for that massive shit show?
Let's get real. The typical fresh graduate hasn't even heard of the Skype IPO. Skype is now part of MS. Even hearing of this awful story, would anyone refrain from joining MS because of it?
I doubt.
> You're right that most startup options are worthless, but not all are, and that doesn't mean you can't reason about which are worthless and which are not.
This reply was for someone who is the average financially-non-savvy startup employee. It's not for me, maybe also not for you.
If I was looking to work for a startup again, I'd know what to look for, and what to avoid.
> The question was about how startups are in general, so we must acknowledge that wildly optimistic equity value expectations are the norm.
Isn't this true about life in general? Even when you go interview at bigco they are lying to you about your position and how great the work/life balance is etc. It's weird to me that HN expects employers to be their personal lawyers, explaining incentives to them when it comes to options.
The idea that there are tons of employers out there violating legal agreements over options is nonsense and its what is implied in a lot of these threads. People need to learn about options, like people need to learn about everything in their career to get good at their jobs. It's not a mystical art, people are just greedy and read the FB story and expect to show up and make a billion dollars their first go around so they don't bother to read or understand the agreements. I certainly was like that, got burned, and then wised up.
FWIW I'd actually still considering joining Skype today I'd just read the agreement before I did so. I would expect them to stick to their agreements, as they have a track record of doing in the past. As I said, it's bizarre to me that the expectation is that people signing these agreements aren't responsible for understanding them.
> Isn't this true about life in general? Even when you go interview at bigco they are lying to you about your position and how great the work/life balance is etc.
No, it's not. Because if they tell you their work-life balance is great, and you join and realize everyone works 12 hour days, then they have a disgruntled employee who's probably going to leave ASAP. That deception is affecting your life right now, probably in ways that threaten your life or lifestyle, things you counted on.
Also, you're not going to hear about the workplace only from "the employer". You're going to get input from a bunch of employees like yourself. They're not going to orchestrate a lie, typically. Definitely not a lie about something you're likely to discover immediately.
"Hey guys, how was your weekend? Oh, and thanks for totally lying about the great work life balance... You totally got me, haha... My kids don't even remember me anymore, hilarious!!"
Compare that to options, which worth is hypothetical and up for debate. None of your fellow employees know more than what the founders told them. It's some glowing future promise that will only be broken a few years down the road... When they typically won't need you anymore...
That's what the threads here are about, by the way. I don't see a ton of people complaining their hyped-up worthless equity was illegal. It's just that all these people assumed it would be worth a lot, because that's what they were told, and ended up with nothing.
All these bubbles take years to burst, and then folks find out after 4-5 years that their equity is worth nothing, so they come to complain here in HN threads.
> Compare that to options, which worth is hypothetical and up for debate. None of your fellow employees know more than what the founders told them. It's some glowing future promise that will only be broken a few years down the road... When they typically won't need you anymore...
Hmmm...I think the part that is maybe missing from your model is that the value is not hypothetical and made up, you need to price the certainty into the value itself when negotiating the offer. If you are given very little information, the value is low. But it's not "high value low certainty" it's simply low value.
Skype equity that allows you to be fired and have it bought back at strike price is not "high value low certainty" it's simply low value. Engineers overvalued their equity going into it. They were not misled, and this was something that could've been reasoned about going in easily. They should've read what they were signing.
Some employers will give you enough information to make an informed decision (cap table, current revenue, projections, etc.). Most will not. Most are not worth working for, or at least their options are not worth valuing above $0. Some are, though.
> Hmmm...I think the part that is maybe missing from your model is that the value is not hypothetical and made up, you need to price the certainty into the value itself when negotiating the offer. If you are given very little information, the value is low. But it's not "high value low certainty" it's simply low value.
The context for this argument is that joining a profitable business carries less risk of being deceived / manipulated and waking up after 4+ years to a reality that is totally different than what you were repeatedly lectured to expect.
Your response doesn't really refute or address that argument. You are claiming that in the theoretical case that you are given 100% valid information and 0% hype, you should be able to to get a more accurate profit expectation. That's, of course, true.
The reality still is that you will not get 100% facts and 0% hype in the vast majority of startups. The entire industry has been operating for some time on bringing in clueless fresh grads, telling them they're all "rockstars", and that if they'll just work 14hr/day for 4 years, they'll also be multi-millionaires.
So while in theory (as you correctly point out) there can still be room for verification and realistic assessment of upside in startups, in practice the startup model has more loopholes, and these are universally exploited, such that the industry is generally quite deceptive.
It's just like how in theory, given perfect information, a used car can be priced almost as accurately as a new one. In practice, since there's so much room for deception and manipulation, that's not the case, and the industry has a well-deserved reputation of being shady and untrustworthy.
Now, imagine profitable businesses offered you a deal like this: "You start working at half your usual market salary. After 4 years, if you're still with us and we really like you, we'll pay you a huge one time bonus. We won't tell you exactly how much it will be, because frankly we don't know (and there's a tiny chance we won't be able to pay it anyway), but it will almost certainly be over $10 million and you'll get sooo rich, bro!".
Most people would laugh at that, because the normal full-time employment isn't so exploitable. But the startup model is, and that's the deal most startup employees agree to.
> Skype equity that allows you to be fired and have it bought back at strike price is not "high value low certainty" it's simply low value. Engineers overvalued their equity going into it. They were not misled, and this was something that could've been reasoned about going in easily. They should've read what they were signing.
As before, you are correct in theory, but in practice this is extremely shady. There's a pretty standard set of terms for equity in startups, and clawbacks are definitely not part of it. In fact, they go pretty much directly against it, and against the meaning of what option plans aim to be and achieve.
It's not unreasonable for an inexperienced engineer to assume the standard terms will be followed in his case as well. A fresh grad won't spend a substantial portion of his signing bonus on a lawyer to read his contract, and the clause was obscure and vaguely phrased that even a lawyer might miss it.
What Skype (technically, SLP) did was obviously legal, but extremely shady, and a good example of a savvy business tricking naive engineers. This wasn't innocent: these options that could (and eventually did) amount to millions of dollars were dangled in front of the employees noses since they were mere candidates. And all this time, they were actually worthless.
Legal? Probably. Shady and deceptive? Definitely.
> Some employers will give you enough information to make an informed decision (cap table, current revenue, projections, etc.). Most will not. Most are not worth working for, or at least their options are not worth valuing above $0. Some are, though.
Now I'm curious: which are these employers, in your opinion?
> The context for this argument is that joining a profitable business carries less risk of being deceived / manipulated and waking up after 4+ years to a reality that is totally different than what you were repeatedly lectured to expect.
> Your response doesn't really refute or address that argument. You are claiming that in the theoretical case that you are given 100% valid information and 0% hype, you should be able to to get a more accurate profit expectation. That's, of course, true.
You need to put yourself in a position where being deceived is fraud. If they show you fake revenue numbers that's fraud. If you don't understand that the real revenue numbers they are giving you aren't good enough, that's not fraud. If they don't tell you every single thing about the business that's not fraud. If they tell you they expect the business to do really well and it doesn't, that's not fraud. Ask the questions you need to get a feel for if the risk is worth it to you and take an educated risk. If they don't give you enough information run.
How much the employer hypes the position doesn't even come into the equation. I don't really understand why you think it's an important thing. Hype is not part of the deal. The numbers and the structure of the agreement are. Of course the CEO is excited about his company why else would he be risking so much to start it? Stop paying attention to emotions and start paying attention to the documents you are signing and the deals you are making.
> What Skype (technically, SLP) did was obviously legal, but extremely shady, and a good example of a savvy business tricking naive engineers. This wasn't innocent: these options that could (and eventually did) amount to millions of dollars were dangled in front of the employees noses since they were mere candidates. And all this time, they were actually worthless.
Again, why are you letting these engineers off the hook for not reading or understanding documents they signed that said in really big letters SIGN HERE IF YOU UNDERSTAND THIS. I can't imagine anything less misleading than spelling out your exact intent in legalese and then following through with it. Engineers chose to pay attention to the cheer leaders instead of the lawyers to their detriment. Why would employees expect Skype lawyers and managers to be on their team?
> Now I'm curious: which are these employers, in your opinion?
Cap table access is rare though I've gotten it a few times, and high level numbers about the cap table are not (# shares, %owned be investors etc.), revenue numbers are widely available, projections are widely available, I dunno man these aren't huge things for early stage employees to ask for, I think most people just usually don't.
> You need to put yourself in a position where being deceived is fraud.
>
> How much the employer hypes the position doesn't even come into the equation. I don't really understand why you think it's an important thing. Hype is not part of the deal. The numbers and the structure of the agreement are.
Again, what you're arguing here is like "The used car industry isn't shady at all. All you have to do is spend a couple of months learning to evaluate used cars, maybe a couple more to learn the relevant law and know what the salesperson can't legally lie about, then you'll probably be almost as good at detecting the real value of the used car as the people whose full time job is to hide and inflate it!".
Yes, in theory if all fresh grads took a full semester of financial literacy, startup equity models, and US securities law, they'd stand a chance against the savvy business folk greeting them at the door. In practice, it's not happening, so it's simply unrealistic to expect that, level of knowledge from a fresh grad. What's actually happening is that they do get manipulated (yes, not illegally so, typically) and then a few years later, they find out, and become bitter and come to post at HN about it.
> Again, why are you letting these engineers off the hook for not reading or understanding documents they signed that said in really big letters SIGN HERE IF YOU UNDERSTAND THIS.
I'm judging them by realistic standards, you're judging them by unrealistic standards. From what I recall of reading that clause at the time, it was near incomprehensible unless you knew both legalese and exactly how equity works. If they got a decent lawyer to review the contract for them, he'd probably catch it, but how many fresh grads spend the time and money to find a good lawyer for their first job?
I think you're being too demanding of naive fresh grads, and surprisingly forgiving of savvy businesses that are out to manipulate them with fine print in what would normally be a standard contract.
> I dunno man these aren't huge things for early stage employees to ask for, I think most people just usually don't.
Right, that's the reality I'm talking about, in which most employees are naive fresh grads. They hear some really attractive numbers from the founders, and they don't know anything about equity and how it works, legally or financially.
That's the reality we're dealing with here. Yes, I agree, these engineers could do more to protect themselves. Reality is, though, they don't. It's not completely crazy that they don't - learning all this stuff takes time and effort, and engineers aren't primarily interested in finance or US security law.
This general lack of knowledge also creates an environment in which more savvy people are at a disadvantage. For example, I obviously know to ask for the necessary data to evaluate my equity. Typical scenario I encountered, including in the last time I interviewed with startups:
They don't tell you anything you need to know. "You'll get X shares, which we estimate to be worth roughly a gazillion dollars when we exit, since we'll be taking over a bajillion dollar market."
That really is all you'll typically hear in the pitch talks. Seems like the vast majority of engineers never ask. So now when I ask for more information, I'm the odd one out. I got weird stares just for asking about the total size of the equity pool (!).
It's not pretty, and theoretically wrong, yet that's how the industry operates. It's been over a decade now, and these practices have become standard: giving employees no information, systematically hyping them with unrealistic valuations, and when it all blows up, their inflated fantasies collapse, but by then, they've served their purpose, so nobody cares.
I think your analogy is 100% spot on. I'm not arguing that the startup industry isn't shady, I'm arguing that it is and, much like the shady used car industry, and much like you said, you can totally find good deals if you know what you're doing. Yes, like any way of making a lot of money, it is hard to know what you're doing and founders promising you millions in 2 years, like all get rich quick schemes, don't work out, it turns out. Let's not throw out the baby with the bath water though.
> They don't tell you anything you need to know. "You'll get X shares, which we estimate to be worth roughly a gazillion dollars when we exit, since we'll be taking over a bajillion dollar market."
I have literally only once been told what shares would be worth on an exit and it was the first, worst company I ever worked for. Every other time I have been told total # shares and current FMV. You're correct this is a sign for dogshit founders though.
> That really is all you'll typically hear in the pitch talks. Seems like the vast majority of engineers never ask. So now when I ask for more information, I'm the odd one out. I got weird stares just for asking about the total size of the equity pool (!).
My experience with this has only been positive. I have always found that founders respect you for asking these kinds of questions, even if they don't want to give you the information. If a founder reacts poorly, again, that's your free sign to leave.
But look: yes, most people aren't good at starting startups and so most equity is worthless. Some of them are trying to screw you, but most of them just don't understand themselves. Don't buy most used cars. Don't join most startups. Don't live your life through simplistic stereotypes like sleazy used car salesman and misleading startup founder.
Anyway all I can really do is offer my assistance in helping others figure this stuff out, as I did in a previous post. This can be a frustrating industry but it can be rewarding as well.
> I'm not arguing that the startup industry isn't shady, I'm arguing that it is and, much like the shady used car industry, and much like you said, you can totally find good deals if you know what you're doing.
I suspect this is what's happening in the startup industry. At least back when I was involved, there were a handful of startups that were really good, and a vast majority that were really bad.
As time goes by, people become more aware of this. You yourself agree that most startups are awful, so most people with startup experience don't have many good things to say about that experience. You see that reflected in HN threads, including this one.
This leads to negative evaluation of all startups, since it's hard to tell which are good and which are bad - and mostly they are bad.
Theoretically, a Lemon Market ultimately collapses.
This isn't inescapable fate. If the industry reestablishes some ground rules, mostly obvious ones that already existed in early startup culture, then it can get on the path to recovery.
For example, equity should be meaningful, instead of the scam it has become. There are way too many stories of companies enjoying a good exit while nobody benefits except the founders and the VCs.
There's a lot of skilled people who will not go anywhere near a startup again because they and all their friends have been burned by this and similar endemic issues.
Startups heavily recruit naive fresh grads for that very reason, but that pool is shrinking for them as profitable tech companies pay more and more competitively. Right now I think most of the top grads want to go to top tech, not to startups.
If all the best engineers, especially senior ones, ditch the startup lemon market, that will be very bad for us here in the US. Our economy and culture has benefited immensely from startups like Google that became huge success stories because they offered meaningful equity, attracted top talent, and truly disrupted their market. Unless startup reposition themselves to attract this kind of talent, this won't happen anymore.
Thank you for that link, it seems really informative! I'm going to give it a read, since this is something I've recently become interested in learning more about.
Yep. The one surefire way of becoming a startup millionaire as an engineer: save and invest consistently. I recommend that everyone read "The Millionaire Next Door" in their 20's, and actually follow it.
In 20+ years in the industry, the only equity that ever paid off didn't even make up for the pay cut that I took to go there. We don't talk about all the losers.
So far I've made way more from my house than from any company equity in SV. Earn cash, buy a house. Benefit from prop 13 and the mortgage interest deduction.
As an engineer, you won’t be privy to much if any of the business side, investor meetings, etc. I’m talking about personal relationships. Most engineers I know don’t even have access to or know what the cap table is. The only companies where I’ve made any money from the equity have been ones where the founders are already rich and happen to be nice, altruistic people. It’s unfortunatley how the sausage is made in SV. Most engineers (>90%) make $0 from any equity, no matter how well they have played their game. The era of massage therapists startup millionaires is over. The cat has been out of the bag for awhile now, people know there is money to be made in these companies so they are structuring them to do that.
I’m pretty sure engineers often get screwed as this has something to do with the fact they just don’t have face time with investors or access to the business side and spend their lives “heads down” building the product.
A sad anachronism but very true. Or maybe I'm just old and bitter? lol