Then 2020 happened and startups are going public at a rate not seen since the dot com days.
Whenever an article like this is posted HN seems to immediately raise this issue about how startup equity is just a lottery ticket when the probability of it paying off is clearly so much higher especially at a time when so many startups this year and next are going public at $10B plus valuations.
If there was a time to have options at a growing, revenue generating startup it’s today.
I'm not sure I agree. How many tech IPOs have there been this year? 20 or 30? Of those 20 or 30 companies, how many of their peers at founding (~2010-2013) have survived?
If I take knowledge of 2020, go back in time, and take a job, it seems like a great deal. If I'm back in 2010 or 2011, and take only knowledge of the world at that time, would I have chosen AirBNB? I'm not sure.
Even if I did, what are the odds I could/would stick around long enough to make it to the IPO -- or was willing to exercise illiquid stock at departure with years to go before the stock can be sold?
To make it fair, one should of course also consider companies which did not IPO but had good acquisitions. I'm not sure what that number is, 300? 3000? Still, across a field of 20,000 or more startups it is unclear how I'd get to this smaller set.
I think there are def things that can increase the odds, but I dont think it is fair to look backwards using 2020 knowledge.
Worse, you’re penalized the longer you stay at a company pre-IPO if you ever want to leave. If you do decide to exercise your shares, you not only have to pay the cost of exercise, but you also have to pay taxes on the difference in strike price and presumed current market value. Despite there being no actual market, the high possibility that there will never be a market, and that “current value” may reflect extremely favorable investment terms not available on the open market.
If your strike price is $1/share, you have 100,000 shares, and the last funding round closed at $20/share, you have to pay $100,000 to exercise and pay taxes on $2,000,000 that you’re still highly likely to never actually have the opportunity to turn into real dollars through a stock sale.
The longer you stick around, the more you’re incentivized to stay waiting around for a liquidity event at a job you’ve outgrown and potentially hate at this point. While the company itself has incentives to delay IPO as long as possible, knowing full well that they’ll lose a sizable amount of their burnt-out senior talent within months of going public.
Add to this the possibility of a "reverse stock split". My friend's old company wiped him and many of his colleagues out just prior to being acquired by Google.
I didn’t say everyone is going get rich joining a startup. But there’s a dozen startups from Airbnb to DoorDash to Roblox to Affirm to Coinbase to Robinhood that IPO’d this year or will next where early employees who had strike prices in the pennies or dollars will become very wealthy.
And that’s always been the case. The point is that joining any of those companies once they are notable and large means your strike and equity offering will be sufficiently small as to render it a nice consolation prize and probably (hopefully?) make up for the years you weren’t earning equity at a higher-paying public firm.
Yes, there are always people winning the startup lottery. That has never changed and nobody has ever claimed winning at it is impossible. No, there are not many of them and now is no better a time than any other.
Well funded private startups have competed with the FAANG on compensation for years. They in fact overcompensate to make up for lack of liquidity and inherent risk you take. Those employees who took the Airbnb offer are doing way better than if they took an equivalent role at a Google or Facebook.
The point is the term “lottery” is like a 1 in a million chance or more. Startup options are not a 1 in a million random scratch off ticket. You make an informed decision about a company when you decide to join just like a VC would. It isn’t like you’re picking a company to work for at random.
> You make an informed decision about a company when you decide to join just like a VC would.
Firstly, almost no startup I've seen lets me look at the cap table or board minutes, much less finances. So you get a very limited view as an employee or potential employee.
Secondly, even suppose you had the same knowledge as a VC -- the VC is making a portfolio bet that 1 of their 20 companies will hit it big. You get one lottery ticket, not a portfolio, so the risk/reward is totally different.
I trust you are smart enough to be well aware of the kind of bias you are bringing to the table with this judgement, in addition to some plain inaccuracies (actual startups - not AirBnB years deep into its lifecycle where the equity being doled out is not going to make you rich in an exit) regarding compensation vs giants like any FAANG.
I am glad you are excited about working at startups. There are a lot of people on here with a LOT of working experience who have seen this game play out over and over and are not dazzled by a handful of giants making it out anymore.
Yes, it’s probably better odds than the literal lottery. That does not say a lot. Anyhow, I’m happy you’re excited and am not going to convince you - clearly. Enjoy your weekend dude.
I guess I “won” the lottery working for one of the companies going public but all of these names have been highly visibly for nearly the whole past decade and an option anyone could have considered over a big corporate job.
If you have known about this company for 10 years and gotten in late your lottery ticket will look like you matched 4 numbers out of 6 with a few extra thousand. But you also took less money over that time so the amount drops.
If you got in before anyone heard of the company it could be a true lottery ticket.
What companies do you know that have been around for 10 years that someone should join today to get the next lottery ticket?
Go to levels.fyi and retroactively give yourself an SDE2 / SDE3 job for the years you worked at the startup, then compare that to the payout someone would have had from working at AirBNB for the last few years. Even if you assume you liquidated all the RSUs as they vested, it's tough to say that the cushy, low-stress $300k+/year FAANG job would've been a bad choice.
> You make an informed decision about a company when you decide to join just like a VC would.
Do you know how much more information a VC gets before it closes a deal vs yet another employee? Do you get to see their books before you get hired? likely no. Likely not even once you are an employee. This is kept very far away from you.
The actually promising startups don't have problems finding people. From what I've heard, it used to be way harder to get into Google in the early days compared to now. So most people only have a choice among a bunch of non-promising startups.
And for every one you've heard of, there are IPOs you've not heard of, acquisitions, etc.
You might not get rich, but there are plenty of folks out there who have made a few hundred thousand in a small company IPO, or an extra $50k for 6 months of work, or whatever.
Basically if you're in college and reading this on HN don't listen to HN comments that discount equity or value it at zero.
Know that it's hard to value, but that isn't the same as zero. It could be worth millions, it could be worth nothing, it could be worth somewhere in between.
There are lots of angel investors in the bay area because of exits that netted them 2-5M or higher ($10-20M) as regular employees. This feedback loop is part of the reason the bay area generates so many companies.
It's a bet like anything else, try and judge what kind of people the founders are and how solid the business is. Learn about ISOs and what questions to ask/how the basics work (things like the linked article here). It's an investment - owning equity in a good company is the quickest way to get real wealth if you don't already have a lot of money.
Ignore a lot of the people that make over-confident statements about it being worthless, consider the risk, value the company and founders, decide for yourself.
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Today Stripe seems like a good choice to get a good equity return as an employee on IPO, Roblox and Robinhood are others. It's not obvious how things will turn out, but it's not impossible to make a good guess.
> There are lots of angel investors in the bay area because of exits that netted them 2-5M or higher ($10-20M) as regular employees.
But that happened back in the day when an early employee got a good cut of the stock. VCs have been perfecting their process, especially since the early 2010s. The contracts are different now -- the founders and the VCs get pretty much all the equity now.
Look at even the biggest IPOs this year. Look at how much equity was in the employee stock pools. Not nearly as much as it used to be.
> Today Stripe seems like a good choice to get a good equity return as an employee on IPO
That's highly unlikely. The company is doing well, but a new employee will get a tiny fraction of the equity.
Stripe was founded in 2010. Robinhood in 2013. Roblox in 2004 (!). If you were an early employee at one of these companies, stayed two years, and were considering whether to buy your options, you'd have to spend a large sum of your own money (plus the taxes - oh god, the taxes!) for a potential (unlikely) payoff occurring on average a decade down the line. Additionally, given this incredibly high amount of uncertainty, would you really be motivated to work that little bit harder considering such a distant liquidity event?
Hindsight is 20/20, it's easy to pick the success stories after the fact. Can you pick the 3 companies most likely to IPO in ~2030, and would you stake money on that?
> It's a bet like anything else, try and judge what kind of people the founders are and how solid the business is. Learn about ISOs and what questions to ask/how the basics work (things like the linked article here). It's an investment - owning equity in a good company is the quickest way to get real wealth if you don't already have a lot of money.
Sure, it's the quickest way to get real wealth if you get very lucky. For most people it's a losing proposition.
There is no tax on exercise unless there’s a spread.
Companies are taking longer to IPO, that doesn’t make them a bad bet but the time horizon is longer because of all the private money available (in part from people making money via equity).
FB started in 2003 and went public in 2012. You could have joined in 2010 and your equity today would be in the seven figures.
I’d bet on stripe being similar (though I don’t know the specifics of their offer letters). I think Robinhood is a good bet too. For a smaller, less known company - I’d pick cloud kitchens.
> “ Sure, it's the quickest way to get real wealth if you get very lucky. For most people it's a losing proposition.”
People on HN can keep repeating this to feel better about themselves, but those that ignore it are the ones that’ll make seven figure (or higher) returns.
Edit: SpaceX (Starlink) are other bets I’d be happy to make.
Why wouldn't there be a spread? You're an early employee at a company; by the time you choose to exercise, the company is presumably valued at a significantly greater amount than when you joined?
> FB started in 2003 and went public in 2012. You could have joined in 2010 and your equity today would be in the seven figures.
Feel free to prove me wrong, but I have my doubts that you would receive anywhere near enough stock as a regular employee that late in the day to make it worth millions of dollars after IPO. Same with Stripe. (Note that appreciation in the value of Facebook stock between 2012 and 2020 doesn't matter at all. Anyone could have bought Facebook stock in 2012 and seen those gains).
Well if there is a spread then you have some other options (second market, third party exercise) and you already have some return. If it's valued at significantly greater than when you joined you're in a decent position.
> "Note that appreciation in the value of Facebook stock between 2012 and 2020 doesn't matter at all. Anyone could have bought Facebook stock in 2012 and seen those gains"
This isn't really true - FB is kind of an exception since it went down after IPO, but in the general case regular investors don't usually have the ability to get in at the initial price. Also later in a company's life employees are more likely to be granted RSUs instead of options. Holding RSUs is different than dumping in money on IPO day as an outsider (even exercising options gives you some buffer that makes it lower risk).
I don't know what FB's 409a was in 2010, but I've had friends at FB, Snap, AirBnB, Slack, Palantir, Tesla all do extremely well from their pre-IPO equity and none (except for Snap) were super early employees.
Yes there's risk in exercising options, you can mitigate that by choosing well. It's worth taking it seriously when evaluating comp.
I'd also argue the opportunity cost/downside risk here is not so bad either. Salaries at modern VC startups are pretty good anyway. You can make the bet and just work at your preferred megacorp if it doesn't work out.
Also - I appreciate the back and forth, the reason I push a little on this issue on HN is because I think it misleads new grads who read these comments into thinking they shouldn't value equity, I think the answer is more nuanced.
No worries, and I appreciate the back and forth as well. To be clear, I don't think that options have no value. I think that at a mature company they definitely have some value and you need to consider that. I think that as an early employee they have nonzero value, but I don't think they have a lot of value (this is where you and I mainly differ, I assume).
> Well if there is a spread then you have some other options (second market, third party exercise) and you already have some return. If it's valued at significantly greater than when you joined you're in a decent position.
IME this is true at more established private companies but not at most startups. I don't think it would be that easy at Stripe in 2012 or 2013, for instance.
> Yes there's risk in exercising options, you can mitigate that by choosing well. It's worth taking it seriously when evaluating comp.
With all due respect, I think that you may be letting hindsight get in the way of how difficult it is to pick which companies are going to be successful in 8-12 years' time. I certainly couldn't pick the Stripe, Slack or Palantir of 2030. But if you can, you are much more insightful than I am - although I think that my (limited) level of discernment may be more representative of the average person making these decisions.
> I'd also argue the opportunity cost/downside risk here is not so bad either. Salaries at modern VC startups are pretty good anyway. You can make the bet and just work at your preferred megacorp if it doesn't work out.
They're not bad, but you can easily pocket an additional $100k+/yr working at a big company, that money adds up when you invest it, and that money is guaranteed. (There are plenty of non-financial reasons to work at the startup, though, obviously.)
Also don't be afraid to insist on learning the current valuation and anticipated future valuation from stakeholders if they are trying to give you an equity grant. You have a right to know!
I heard a rumor that Stripe recently changed their initial RSU grant. Now the value is fixed, you get $x worth of stock every year. So new hires lose out on a lot of the upside from stock growth.
I don't believe that's how RSUs work at Stripe (or anywhere). On hiring, you get 5000 RSUs (or whatever the number), and after time vesting, they convert into stock. New hires gain a lot of the upside from stock growth, even with RSUs.
Even now, maybe not. Does anyone know whether most of these companies ever did share buybacks for the rank and file employees? If not, then imagine the scenario where you left somewhere between 2015 and 2019 and had 30(?) days to exercise ISOs. You might have to put in a ton of money and even more for the tax bill. Maybe more than you can afford.
I’d love to know whether this is a common story or a rare one, but I doubt that data exists publicly.
I had a company offer to arrange a purchase of some of my (non-public) stock as I was leaving. They knew of an investor that wanted to own more shares and brokered a price that was well above the most recent 409a, so I was able to exercise everything and sell off exactly enough to cover the tax consequences of my "gain." Not only did it let me exercise options to get stock without having to come up with a bunch of cash, but it gave me more confidence that I actually wanted the stock. Very cool move on the company's part, in my opinion. I have no idea how common this is.
Nowadays there are non-recourse loans available on the market for that (covering both exercise costs and taxes). Not for all startups though and mostly late stage ones.
> If there was a time to have options at a growing, revenue generating startup it’s today.
AirBnB, DoorDash, etc. have been giving RSU's, not options, for years. RSU's are still worthless without an exit, but stock options have the major problem that you can wind up with negative value, or even extremely negative value. RSU's at least have a floor of zero.
It’s becoming more common to grant 7-10 year window after certain tenure (like two years) at least among yc companies. I’ve also seen window extended per year of tenure
Most do not become wealthy or even approximate “rich.”
Most are simply made whole after years of being underpaid.
Looking at successful exits (the ones you hear about) as your indicator of the market state is lopsided and inaccurate. I have one friend who did well in an exit. I have countless other friends who have been in and out of startups that either fail, get rolled into another company with little/no cash landing in their pockets, or get acquired for a pittance.
You are looking at the Michael Jordans and Kobe Bryants and deciding that everyone can win big in basketball.
I have a very different experience. And so do many of my friends.
Again there’s always winners and losers. I didn’t say everyone is a winner. But the odds are no where near “random lottery odds” especially if you aren’t just randomly picking a company to work for and have a clue why the company could be successful.
Snap, AirBnB, Stripe, FB, Tesla (though TSLA is kind of a weird exception in lots of ways) - it isn't that hard to see which companies are rocket ships in early growth. If you can get a seat on one even as employee 500 you'll probably do pretty well.
Yes there's risk, but the odds aren't lottery odds and it does a disservice to inexperienced people that don't understand what's true to pretend this is the case.
You also get to make this bet a few times if you're good at interviewing and willing to jump around every four years or so to a new place (something I haven't done, but I've seen people do).
Professional investors struggle to make good investment decisions after years of intense practice, and many many investment decisions.
Why do you think naive employees can pick winners? Clearly the vast majority don't or can't...
The only difference is that an employee might get in on a hot deal where many investors are chasing one great looking deal and most investors will miss out.
I suspect it's because a lot of investors don't know what they're doing and are further removed from the details.
The good ones (of which there are few) have hands on experience as founders or a deep understanding of the industry and personal technical experience. Employees don't have to be naive, they're on the ground with an understanding of the technology and are likely to see first hand what works and what doesn't.
Obviously not everyone will succeed, but there's no reason employees can't do a better job than investors (and many do).
So you feel like your circle of friends is good at picking which startups will have a financially successful exit? If true, you should be a VC and not a lowly tech worker ;)
Tell them what? That if they had invested part of their huge six figure salaries into a diversity of tech stocks over the past several years they could have been actual millionaires by now instead of waiting this long for some IPO sitting on bubbly valuations that could pop in an instant?
you assume no one is putting part of their base salary and cash bonus in the stock like any other person would. of course they are. just because the equity portion of your comp is illiquid vs someone else doesn’t mean you don’t have the means to save and invest.
The comparison is being drawn between employees who joined say google, amazon, or netflix - and those who joined startups. The employees at the public company benefit in negotiations with the employer by having price transparency on the value of their equity as well as liquidity.
You could work for Facebook, but think Apple is a better bet and sell your equity every month to buy apple shares. Most startup employees overvalue their equity and accept lower total compensation compared to their public company counterparts and receive illiquid or potentially even negative value financial instruments in return.
Unlike an actual lottery ticket, the theory was that there was incentive to help the company succeed in the stock options:
From Steve Blank's article:
> Startup employees calculated that a) their hard work could change the odds [of their options being valuable] and b) someday the stock options they were vesting might make them into millionaires.
So while from an odds perspective, today's ISOs are still (perhaps) better investments than state-run lottery tickets, from an employer/employee perspective the alignment of interests is no longer there. And (as you've noted down-thread) this is resulting in employees asking for much higher salaries that essentially match what they're being offered by already public companies. In addition, employees may be more focused on the success of their careers and less on the success of their employer.
Posting anon for obvious reasons. There is no alignment of interest for most employees with stock options, and anyone that things so is being naive or foolish.
Firstly, you have no idea what the cap table looks like as an employee, so it isnt clear whether you alignment is equivalent to a grain of salt or a car or a private island. And if it werent a grain of salt, the company would be eager to tell you.
Next, founders often get partial cashouts, so their goals are different from yours. They already got their nice house in palo alto, their nice car, and a kids's college fund. Now they are swinging bats for a grand slam. You are the ball they are hitting -- most likely they strike out. You lose, they still win, just not as big.
Next, VC-installed management, friends of the board, and other insiders are already cashing out while you "wait for the big IPO." The insiders are getting nice cash bonuses. They are on incentive plans where they get $1/2 Million or more for hitting targets. Or they are 20somethings who are mysteriously senior directors or VPs earning cushy 400k salaries. You arent.
Instead, you are taking your "startup salary", a big discount over big company stock. You're working just as hard. Each year you give up big perks and big pay at big companies you could be working at. If you cant take it anymore, you lose, because you have to exercise illiquid stock and pay tax with real money. If you get bullied or have been sexually harrassed and are desperate to find another job, you still lose -- , because you have to exercise illiquid stock and pay tax with real money.
Except there are a line of suckers, often out of college, willing to take this bet. So the music plays on.
3. If you are risk loving, work at a late stage startup with some semi-liquid private market for stock
4. If you are looking for punishment, roll the dice with an early stage startup OR play the lottery
The ONLY real scenario where early stage startups make sense is if they give you a great role you cannot get at a big company, something with lots of learning or growth. That is actually a great opportunity.
At this point the fed seems trapped, maybe even permanently so - in 5 years asset prices will have been driven multiples higher on fed money and 0% interest. It would take a gargantuan amount of political will get the base rate back to even 3% - bringing down asset prices and corporate/institutional/individual borrowers with them.
“People keep saying that lotteries are ‘a tax on people who can’t do math’, but if you pay attention there are lottery winners every day. There’s no better time to play the lottery!”
Look at venture capital, since they’re the ones that invest in every one of these VC-backed funds. Most funds don’t make money and of those that do, exceedingly few beat the S&P 500.
The examples you’re giving are a tiny sliver of startups and at this point are not startups.
Whenever an article like this is posted HN seems to immediately raise this issue about how startup equity is just a lottery ticket when the probability of it paying off is clearly so much higher especially at a time when so many startups this year and next are going public at $10B plus valuations.
If there was a time to have options at a growing, revenue generating startup it’s today.