Startups as a Career and Transparency on Equity Grants

Posted on: July 28, 2013
Posted in Career

Generally speaking, there’s a major lack of transparency around startup equity in the tech world. Often the people who can write about options and salary are VCs / founders who feel they are too dirty to share or can’t properly obscure individuals and stories. It feels like most conversations about equity and pay stay between friends in back rooms.

Recently AngelList Talent added some transparency with their recruiting tools, which is nice to see, but many jobs have a very nebulous equity range (e.g. 0.0 – 2%).

Here’s a basis for how equity is commonly granted to employees in early startups:

One really interesting career-related pattern comes out of all this:

If you are optimizing for money and you don’t want to found a startup, you need to approach learning and making $ at a startup in very different ways than the choices a VC would make. While a VC can invest in say 30 different companies across a fund (5-ish year horizon) in hopes of finding the next Google, you cannot work at 30 different early stage companies in your entire career.

The obvious calculation here is time. If you don’t pick winners then you may waste several good years, and not have much to show in terms of money or success either.

This is why as a prospective employee it’s important to think about whether the company is de-risked or not. When a company raises an A round, it’s not de-risked to the same degree that the options grants are reduced. Chris Dixon covered this here. I agree that a “bad time” financially-speaking is probably joining a startup right at completion of the A round when the company has some momentum and hype but hasn’t reached revenues or real product-market fit.

You also need to narrow in on what you are seeking. If it’s $ (if so you could be doing startups for the wrong reason) then you may want to learn a lot by hacking away, creating deep relationships in the industry you are interested in, starting a company, etc then going somewhere that is series B or C funded and entering its major growth phase (skipping early companies all together).

Take Dropbox, Airbnb, Uber, or Square 12-24 months ago. To make up a number in a reasonable range say an employee gets 0.05% equity, but the valuation goes 10x. Then by that example, your $200K stake could turn into $2M (if the company goes from $400M to a $4B valuation which roughly approximates what each of the above companies did in about a 1 year spread). This is much more money than if you get 0.5% equity of a company that sells for $50M.

There were plenty of people who got rich off going to Google even right at the IPO when the company was worth $40B with this strategy, even though they were not early employees. In fact I had a friend who chased big companies pre-IPO with this strategy and on his 3rd one hit it big with Google.

Btw, I am in no way saying that you should be chasing a carrot of getting rich by working at startup companies. The truth is building things in modern tech can be much more exciting and fulfilling than the alternative (working in mature industries or advising / consulting where you spend all your time marginally improving things and you’re not building anything).

But it’s a good exercise to weigh the financial upside you’ll have as being a “part owner” in relation to experience gained and future career optionality depending on company maturity and stage.

  • johnsjobs

    Steve – great post – lots of things to consider when evaluating what companies to join when building a startup career.

    One thing that I think is interesting about joining later stage startups (like your friend who hit it big on Google pre-IPO) is that you get a career halo effect from joining these companies, and it doesn’t matter a heck of a lot to outside observers (e.g. hiring managers) if you joined 2 yrs before IPO or 2 months before IPO. Lots of opportunity to watch a company de-risk itself before jumping in.

    Hope to see more writing from you re: startup careers!

    • http://stevecheney.com/ steve cheney

      Valid point on ex post facto halo from joining a big name. No doubt. People forget exactly when things happened (Google IPO?) years later… so it’s easy to see that on a resume and think “they worked there, they claim to be an expert in that, check”. No one will admit they make hiring decisions based on the brands on your resume, but I agree it happens.

      • http://www.hunterwalk.com/ hunterwalk

        to be clear, I was Google pre-IPO ;-)

        • http://stevecheney.com/ steve cheney

          Holy moly, see I forgot you even worked at Google :)

  • mdudas

    Nailed it!

    • http://stevecheney.com/ steve cheney

      Thanks so much, appreciate you reading.

  • http://www.hunterwalk.com/ hunterwalk

    nice post. some opinions:

    1. It’s really really hard to become wealthy joining a company at A Round because usually all that’s been de-risked is a little bit of funding/runway. You get a fraction of a percent. In these cases I advise smart folks to bet not on the company or the investors but the founders. If they’re the smartest people you know and can just execute like machines, then the habits you learn and relationships are way more valuable than the NPV of the equity.

    2. Companies routinely undercomp important hires after Series A. i forget who wrote it but nice blog post a few years back articulating why you should still have room for a few 1-3% equity hires.

    3. Max NPV IMHO is founding or joining market-leading company right before or after Series B.

    4. Valley has some people who habitually join the rocketship after it took off, get overcomped because of their resume, do a few years of good but not great work and then move. What sucks is these folks often get hired in above in-house talent who then roll their eyes and often have to report to an exec who slows stuff down, etc.

    • http://stevecheney.com/ steve cheney

      Excellent comments – thank you for taking the time to add to the convo.

      Agree that if you can seek out very exceptional founders and learn from them (esp at a young age) this can cement the experience and future value for you way beyond the equity involved

      On saving dry powder and undercomp of future important post-series A hires – because of the built in dynamics of board members / VCs and option pool standards, I often see founders push for these exceptions and personally give equity away that was not initially allocated when making a key hire.

  • Justin Overdorff

    Great post!

    1) I agree with @hunterwalk:disqus and think great companies, who know that people/key hires matter, will hold a few extra equity bullets in the chamber for top hires that will be brought into high impact roles.

    2) On the topic of joining “growth companies” right before IPO/post series B, Andy Rachleff (former founder of Benchmark and CEO of Wealthfront) has a great blog post that I constantly refer others to when making career decisions in technology/startups. Andy points his Stanford students to join “midsized companies with momentum.” Andy’s belief and I agree, is that “You get more credit than you deserve for being part of a successful company, and less credit than you deserve for being part of an unsuccessful company.” As @johnsjobs:disqus mentioned – the Halo effect can be incredibly powerful for your career.

    Andy’s post here – https://blog.wealthfront.com/hot-mid-size-silicon-valley-companies/

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  • James Smits

    One quick reaction regarding implied value of ownership in a company (paragraph beginning “Take Dropbox, Airbnb, Uber…”

    This take ignores the notion of a waterfall. A new hire garners options of common stock which sits behind debt and preferred stock. With all of the companies mentioned, large sums of funding have been raised at the very least in exchange for preferred stock and, potentially, with liquidation preferences and participation features.

    The example employee with 0.05% should never think that their value has increased 10 fold. In fact, a new hire receiving options should always consider the number of shares outstanding and the preference they sit behind (at the very least a 1X). This is an extremely common mistake but not one to be overlooked.

    • http://stevecheney.com/ steve cheney

      Implicit to my argument are valuation increases over time that mitigate any chance of liquidation / participation — i.e. these are companies that twill continue winning and investors won’t need these mitigations. I understand this is an assumption and employees would have been burned with companies like Living Social. This gets in to the “real option” debate of taking risk into account for real option value and I wanted to generalize for the case of winners…

      This point: “a new hire receiving options should always consider the number of shares outstanding” – yes and obviously. As long as you know 2 you have the 3rd — amount of shares granted and outstanding shares give you equity percentage, etc.

  • #ThankYouSirAlex

    Excellent post. Thank you for bringing sanity to a market that is rapidly getting inflated. Too many people expect a lot for nothing. Why should I give you a big chunk of my company until you prove you can actually deliver value? I will share this post with everyone who says to me, “I think I deserve a large portion…” I get frustrated by both kids and seasoned professionals who ask for founders shares. Sorry, you have not worked 4 jobs and forgone significant earnings, you haven’t lived through 6 pivots, just to build the foundation.

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