I was a late joiner at a near-IPO startup, and did better than I’ve ever done at an early stage one. Even then, I’ve done way better with post-IPO RSU refreshers than with the pre-IPO options. It took years for our publicly traded price to hit what management delusionally (or dishonestly) messaged us as our options’ worth pre-IPO.
I remember a conversation when we got new ISO grants, that they might be worth $X, based on blah-blah-blah, but they’ll be worth at least $2X soon because we’re growing, so really you’re getting $2X! Which doesn’t even make sense to me if we’re going to view today’s price as a discounted future cashflow. Anyways, we’re finally trading at $X today, years and years after IPO.
Moral of the story is that the people budgeting how much to pay you will engage with incredibly wishful thinking when deciding how much to pay you if they can. “Sure, Z shares seems super generous, right? We’re a rocket ship!” But when the market decides how much a share is really worth, they can’t screw you by pretending they’re paying out more.
I’m only working for public companies from here out. And none of those 1 year grants that seem to be popping up.
i know an early engineer who worked for a well known founder 10 or so years ago.
The company was sold to a large tech company for like 350mil but what happened first is the VCs/founders created a new company and sold the IP from old company to new company and sold the new company for the 350mil leaving the employees with a worthless company.
So also trusting the founders and the VCs they choose are in my opinion more important then any equity grant offer
That's a straw man argument. If you had an interest of any kind in a company, and someone screwed you, you can sue. In today's environment, companies will settle even if they have a good case, let alone if they are likely to lose. Plenty of lawyers will take such a case and get paid in a contingent fee arrangement.
Because most of the shiny things in SF were paid for with equity. And there are plenty of shiny things in SF. I am not saying you should work for equity, but I think you should realize why the real estate is as expensive in SF as it is. There are plenty of times when people got screwed over, and there are also - fewer, but enough to move the market - people who didn't. So when you ask the question "how could you have been so incredibly stupid to believe that equity is not worth $0," you just have to look around yourself and ask "how come that zillow lists so many properties for over $10m?" You shouldn't count on your equity returning anything, but you also shouldn't listen to people who take an overly unhealthy view at the potential upside.
Even at FAANG, not enough people have the seniority for their base salary to turn them into buyers of $10m homes. I appreciate your point that RSUs are different from options, but I still think it's indicative that cash rarely comprises the majority of the wealthy people's income.
Oh, fully agreed that cash rarely comprises the majority of wealthy people's income - but my point is that most of the tech wealthy in the SFBA comes from FAANG equity wealth, not startup equity wealth.
Startups exits sometimes make a handful of people mega-rich, but as this thread has revealed, making ordinary employees rich is quite rare. Not so rare are the people who hang out at FAANGs, collecting large amounts of equity, and riding the industry up. And yeah, the wealth in this case is typically not of the level to buy $10M homes, but $2M homes?
Once in a while you have a founder who strikes it rich, but that effect is overwhelmed by the more numerous folks just riding $GOOG, $AAPL, $FB, etc. to multi/deci-millionaire status.
Sorry, I wasn't suggesting anyone was stupid for believing the hype that founders use to punt their stocks. What I was trying to get at was whether you had an idea of the valuation of the stock relative to your exercise price. If so, and that looked good, what happened to your company for it to sell at a low price?
I don't think anybody knew the cap table for those companies. To be more precise: one of them didn't even have a cap table, the other was a secret between the lead investor and the original owner (an incubator). Needless to say nothing was disclosed to engineers, or any one of them for that matter. Even in this state, both companies raised a shitton of money.
This is what had been surprising to me in my experiences... first few startups the cap table was shared info but no specifics (investor pool 33%, employee pool 7%, etc) so at least you knew the rough outlay.
Then one recent startup was championing transparent salaries but wouldnt share anything about the cap table which seemed odd to me.
My current company the CEO answers questions about the stock outlay but not specifics but also doesnt claim to be transparent.
I just assumed from my earliest experiences most small companies were happy to explain the cap table and walk folks through dilution events.
RSUs (restricted stock) can be granted to employees if the startup is very very early because the par value of each share rounds down to $0.
If you join a company that just had a seed or Series A, the par value would be much higher, and if you were granted RSUs, you would need to buy the shares at whatever they’re valued at, which can be a lot if you’re buying 1% of a $10mm company (compared with a stock option which is simply the option to buy stock at a later date).
RSUs have voting rights and is usually the same stock founders have.
That’s said, an investor (or a founder for that matter) can come in at any time and rework the whole ownership structure by simply increasing the authorized share pool in a company from (let’s say) 10 million shares to 100 million shares, and then grant all of the newly created shares to other entities, thereby cutting the value of all other shares by 1/10.
A lot of it comes down to what investors force startups to do when they accept VC money, and also how ethically and morally the founders act from the perspective of employees with stock interest.
I’m a CEO and when I hire people, I’m very generous with stock options, but I tell people upfront they’re just lottery tickets. That’s really what they are.
IANAL, but there are two "problems" with this claim.
One is that "just create a bunch of shares and only give them to the founder" is true, but has tax consequences. (In your example, you just gave ~90% of the company to the founder at valuation $XM. Whether as options or as Restricted Stock, there's going to be a tax consequence to that either at grant or during vesting). A dishonest founder might do that, but they'd have to believe it was going to work out in their favor beyond just "I already have 40%, let's increase the value of the company".
Second though is that the Founders, usually as CEO and Board Directors, have a fiduciary duty to their shareholders. Even if you have full control of the voting rights, reallocating all the equity is a violation of that fiduciary responsibility. The injured parties have to sue you for it, and that might make the company equity worthless, but just because a company is private doesn't mean "anything goes".
Is there any kind of clause or legal structure that would prevent the kind of alteration to ownership structure you describe above? It seems like you’re saying anyone can do anything at any time. That’s scary and I feel like we need laws against that, or a different structure for representation of workers.
This is largely true at any smaller seed maturity or even Series A maturity.
As a sibling commenter mentioned, companies do have a fiduciary duty. But realistically, if the shareholders are composed of relatively unsophisticated investors/employees, you can do anything without being sued.
I obviously don’t subscribe to this kind of behavior at my own company, but being in the position it has opened my eyes the extent to which one could go if you were very greedy.
I take RSU to mean “RSUs in a publicly traded company” - i.e., the value of the shares is well known and the sort of “sell the IP and fuck the employees” shenanigans is much harder to pull off.
You can get RSUs in private startups which doesn’t mitigate the risks being discussed here. That said there are still benefits to having RSUs over options (i.e., 90 day exercise window).
I also take it to mean RSUs in a public company. I wouldn’t want RSUs in a private startup because I couldn’t sell them, but I’d still take the tax hit as they vest.
RSUs are actual stock that can be sold on the market. Options are the ability to buy a share in the future at a given price. One is real money now and the other is maybe money later.
Isn't this just a way of saying "work exclusively for public companies if you value equity"? You will not be able to sell private company shares on the market.
But I think you’re ignoring the liquidation preference discussed at the top of this thread: surely RSUs have the same junior rights as the shares from options if the company is acquired. One difference is that people are generally required to exercise options (and pay taxes on that) before they leave the company. But you also talk about selling RSUs on public markets so maybe you are thinking of something else?
If your RSUs vest when your company is still private, you’ll owe taxes but not be able to sell the shares for the money you’ll need to pay the taxes. That sounds way worse than options.
The most common way to issue them is so-called "double trigger" vesting where you have both a) a service requirement (the time) and b) an event required (like IPO or sale). Since you have risk of forfeiture if IPO/sale does not happen, IRS does not deem vested (and thus taxable) until both triggers are satisfied.
Which is why it would be entirely reasonable for someone who is granted stock as part of compensation to do a full diligence on the company before accepting the terms. Companies deliberately offer options knowing most people simply won't and thats how they get away with it.
I joined a private company a couple of months back. They gave me Options, but they made it clear they were "monopoly money" and gave me no ability to evaluate the value of the options - I accepted the offer EXCLUSIVELY based on the salary
Down rounds and preferential stocks are not fun