I'm an older, successful dev in Chicago. I recently corresponded w/ a local startup CEO on linkedin. My skillset seemed to be a good fit for the role, but their stated top salary would be a 20K pay cut for me. So I ran a quick estimate, based on expected exit and expected dilution figures that I found on the internet (I know, grain of salt...), added a risk premium for myself, and found that I would want about 7% equity, in order to be interested. They said no, of course.
My point is that (some) startups can't or won't pay for the technical skills they want. And that's their problem, not ours.
Alternatively you could have accrued the salary deficit as convertible debt that would roll into the next funding round, at a discount -- which is a bit more anchored than estimating a 1% chance of exit at $600M valuation (if you were serious about wanting the job, which it sounds like you mostly weren't).
All these figures are subject to debate and would be more realistically modeled by probability distributions, but I was looking for a back-of-the-napkin quick estimate as a starting point for negotiation.
I also neglected to make explicit my use of the expected value of the exit in my calculations.
Seems like the key number here is the 1% chance of exit. If you really think the odds are that bad -- and I'm not saying you're wrong! -- then there isn't an offer they can make you that you'll take. They'd have to convince you that the odds are at least 5%, and probably higher, before there's a basis for a deal.
Averaged over all startups, of course, 1% is a reasonable estimate (might even be high). So another way to put this is, a savvy top developer just isn't going to join an average startup, period. They'll have to be persuaded that the opportunity is an extraordinary one. The bulk of startups will have to make do with less-experienced developers. This is why pretty much every startup now needs a technical co-founder.
> 1% chance of exit at 600M valuation after those 5 years
Ah, I see, I wouldn't have taken that into account since I'm not sure it quite works out that way. It seems you've intertwined probability with opportunity cost, is that correct?
EDIT: Thanks for the breakdown, by the way! I really appreciate the insight.
This is the right math if he's stuck there for 5 years, but his opportunity cost is lower if he can exit the role earlier if the company isn't trending towards the exit he wants.
That's true, I don't have a complete picture. I, probably falsely, assumed that he was being brought in as an employee in a team of at least a few people.
It's because those same software engineers have 0 financial background. It's not different than a software engineer going into a financial firm and saying "I can't believe none of these guys know how their technology works".
The most financial exposure these individuals have is reading the $Xmillion Series X funding, or $Xbillion exits that they see on TechCrunch on a daily basis. Their risk is assessed on those headlines.
From my own experience, it was naivety and manipulation.
I trusted the founder when he would make big promises for the future. He didn't bring up equity until the last moment once we already were ready to quit and join. In hindsight these are clearly common business tactics (get the person to accept before going into details), but as a young engineer I had more trust in older more experienced folks like the founder. Even when there were huge alarm bells ringing in my head, I said yes. It's hard to describe how a good salesman can have you saying yes to things you aren't comfortable with.
In the end the company crashed and burned after losing all it's founding team who all work at top companies now.
Because being underutilized in a large company is unfulfilling. Because being a staff engineer in a large company gets you no closer to running your own business. Because you want to learn technology that you cannot yet compete for. Because options outside of large companies are limited, especially if you are unable to take large immediate financial risks.
Personally, because I don't like being told what to do :) If I don't have a significant amount of control I shut down, become depressed, anxious that I'm wasting my life, etc. I'm also wary of being taken advantage of. If I'm going to spend half or more my waking hours working I want to be reaping the profits. I need freedom. I've been directing product at a seed stage startup to get my bearings in the small business world but now I'm feeling antsy because I am starting to think I could be doing better on my own while having more control over my time, the products I build, the money those products earn, etc.
Yep, I think people are starting to realize that unless you are (a) a founder with 20-30% equity or (b) an early employee at one of the few startups that successfully exits for >$1B without any down rounds, your equity most likely will not be worth more than $100k. If your equity is only a $100k bonus after 7 years, it doesn't make as much sense monetarily to take a pay cut to work at the startup.
My friends and I discuss this all the time. There are always people trying to get us (software engineers) to join various startups around town/country, but the comparatively low salaries coupled with the exceptionally low possibility that any offered/granted equity will be "worth it" some day leads almost all of us to follow more traditional routes with companies that can pay us today, not MAYBE tomorrow.
Devs seem to be realizing this, at least the ones I know (new thing).
Seems the endgame's going to be higher equity grants. If VCs won't fund something unproven at 350/head and devs won't work for peanuts, higher equity grants seem the only option.
I think it'll be just like Hollywood, in that projects are evaluated as much for who they've managed to recruit (e.g. a movie with Brad Pitt is fundable) as on other business fundamentals.
It's striking how much of business views "labor" as ancillary to success. That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie.
> That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie.
Or starting a medical practice
Or starting a hedge fund
Or starting a law firm
It might be the most important thing for any new venture, across history. There is a good reason that the start of the story about Jason and the Golden Fleece describes assembling his crew of Argonauts.
This is very much aligned with what I have learned, and its only made worse by successful startups often taking 8+ years to exit with many more rounds than before. The stock incentives are aligned with the startup exiting in four years or dying.
O.1% of common shares with complicated tax options. Investors get preferred shares cause they invest money. But engineers get common shares even though they're asked to take paycuts.
Startups insist this is "standard". Well I hope it's standard for them to fail until they actually value engineers. I don't see why engineers need to be a monastic underclass to subsidize founders and VCs.
Don't forget 90day expiry if you leave. Even though you already sacrificed the salary for them. Also very unclear legal ramifications if the company is sold. ie, do you get immediate vesting, do your options disappear, do they become some number of options in the new firm (how many, why that ratio?)... They can deny the sale to anyone until IPO.
Its comp they can take away, block or otherwise control.
My experience has been that options have negative value. I learned this the hard way when I exercised options from a firm that has since gone sideways. I ended up with a $40,000 tax bill on stock that is worthless.
Nowadays I only look at companies that can offer RSUs. Until the re-write the tax code to stop taxing people on fictional gains, options are crap, especially with companies remaining private far longer than you are likely to remain working there.
I can apply it against future gains, but its complicated. Since I was never able to sell the stock, the gain is entirely fictional, which is why ISOs suck so badly.
This is absolutely it. I worked for 2 different start-ups and as an engineer it is damn near impossible to get tangible value out of equity options, yet they're being used as a mechanism not to pay market rate salaries with the notion that it'll be "worth it in the long run".
Maybe it can be, but I haven't seen it, nor has anyone I know working in the valley.
