I was speaking with a friend whose son will be graduating next year. He is being offered a job to work at a start up when he graduates. The company will be making him two offers that he needs to choose from - one is higher salary and lower company equity and the other is higher company equity and lower salary.
I don’t have the actual numbers, which would affect the decision. I am wondering what the CC minds think is the right move for this type of offer.
What is the success rate for start ups? How much risk should a young new grad take?
You need to make enough to live.
After that it’s all up to the risk tolerance.
But what if the company doesn’t launch to set a market price on the equity.
On the other hand, what if he takes more cash, it goes crazy and everyone is a zillionaire but him.
To me it’s a belief in the company and a risk tolerance question.
Thx
7 Likes
I think a young, unencumbered new grad is at the best point to take a risk.
If it were my kid, and a first job, I’d be sure that they weren’t looking through rose colored glasses upon getting their first offer.
One of mine took a job with a start up, there was only one offer on the table, but it was too company heavy for my risk averse kid. A more favorable (to my kid) offer was negotiated.
5 Likes
Depends on the industry.
What is the exit strategy for this company? What series of financing is the company on (seed, A, B, etc.). Who are the investors and what is their track record (e.g., Y Combinator or uncle Ned and his buddies). How long is the current runway? These would be some questions to ask.
14 Likes
This can be difficult to judge, even for an experienced investor.
I do have some experience with startups, having working in high tech for several decades. Most of them fail. In my experience bad management or unfortunate investors can be more likely to kill you than the competition. This would tend to agree with @BunsenBurner’s question regarding the track record for the investors.
There is one thing that I do not have experience with, but a few friends do. That is a startup that does not succeed, but does not quite fail either. This can go on for quite a while. It would in many cases be better if the company just failed and you could take a different job and get on with your life.
Another thing with startups is that with a smaller company it is common for one employee to be asked to do a range of jobs. I liked this. One daughter also liked this (until her startup lost funding and she needed to find another biotech job).
Also, if you have substantial equity in the company, then bad management decisions become even more annoying than they usually are. It is bad enough when a bad decision makes your job more difficult. It is worse when a bad decision makes your job more difficult, and also makes your stock options less likely to ever be worth anything.
And occasionally things work out. I know a small number of people for whom they worked out very well. This is rare.
And it is a lot easier to do this when you are young. No kids no mortgage does for example make this easier to do, especially if you also have no student debt, and are in an industry where in case of failure another job is likely to be easy to find. It is not clear to me what industry that would be right now.
4 Likes
I took a huge pay cut to work for a tech startup in the 80s (as the 7th employee). Though I had a front row seat in an executive role breathing life unto the organization, I took the guarantee, not the equity. We took the company public in 1988, and I left for Harvard Business School. Even though the company still trades on the NASDAQ today, I did better with my personal investments than my cohort who took the options. Success does not always translate to a life-changing payoff.
Each employee needs to decide their risk tolerance and what they are willing to sacrifice.
As @DadTwoGirls posted, most fail. Even the successful ones do not guarantee lottery payouts.
On the other hand, it’s not always about the money. The resume I built from that venture gave me complete control over the rest of my career.
8 Likes
Here is our personal experience with startups. The biotech kind. Between my husband and myself, we worked at more than a dozen of startups. One went IPO and lingered for years but then suddenly hit a mother lode (and we got some crumbs, too), one went IPO and exploded during the Y2K genome sequencing craze (we were smart to cash out but not at the top) and then went penny stock, another went IPO after I left and then burned out quickly, two were acquired but the common shareholders got zip, and the rest folded. Thank goodness we did not work for equity only. We were able to diversify by investing $$ outside of biotech and buying a house.
8 Likes
The series of funding, burn rate, and founders are a huge factor. Personally I wouldn’t even consider a founder without a track record, but that’s me. For early funding rounds you should prepare for a long haul and lower odds of success (but higher payoff if successful).
I turned down an offer from a series-D startup 3 years ago and they still don’t look any closer to going public but appear to be doing well. That offer was lower salary than I wanted but decent equity and a great founder (the guy who started ActBlue in fact - I was all fanboy during my interview 
). I probably would’ve taken the offer if I was in my 20’s though so your life stage matters too.
Anyway, I’d almost always choose more cash, less equity. This is from the perspective of tech startups only, I have no experience with other industries.
2 Likes
My friend left his job at a major organization for a hot start up with huge backing - billions of dollars over many rounds.
His buy price is $4.50 a share and at one point the stock was over $100. He told me, he would have made more than his dad in his entire lifetime…if he could sell. He couldn’t.
He’s still ahead - but the stock has been as low as the mid single digits and today sits in the mid teens…and he got laid off.
Now he can sell but isn’t…he believes in the company.
But even if the company is successful, you can go through many highs and lows - it’s tough to see a high net worth that isn’t liquid, only to have it disappear.
On the other hand, no guts no glory!!
It’s a great way to get wealthy - many rich people got rich this way. But if you’re like me, I’d rather be comfortable vs. rich - so it really is mindset.
2 Likes
My kid is getting both - good salary, and a small percentage. As they get promoted, both increase. But they haven’t been offered a choice. Honestly, they believe so much in the company and the product, after having worked there for nearly a year, that I think that they would take equity over salary. But they wouldn’t have known that before they worked there.
2 Likes
My son has worked for a lot of startups. None of them have hit the jackpot, and mostly he has ended up leaving them after awhile. The best deal was working for a successful startup (Twitch) that offered a high salary and Amazon stock. Now, I’m more impressed when he works for a startup that offers both a good salary and equity. Very often, the equity does not pay out, and they are offering what costs them nothing, instead of pay. It’s nice to have high enough pay that you can invest it.
2 Likes
I’d give the investing team more weight. One local biotech that was sold to a pharma for a huge sum of money was
founded by a scientist who had zero track record in starting a business… but he was able to raise $$ from some savvy investors. That made a huge difference.
5 Likes
From the offers, he can determine the price per share or option that is implied by the offers. Of course, he needs to take into account such factors as being illiquid, vesting schedule, etc…
2 Likes
This is what my son got at his first job too. That’s the best route, a strong salary AND granted shares.
I’ll pile on and add to the previous mentioned notion that most fail. Even the ones that don’t fail, often go public for very little and then fail to grow. Shares are essentially worthless in a company still doing ok.
2 Likes
I fully understand the idea of potential equity that disappears. My husband had options for his company’s stock that he could not execute until a certain number of years had passed. Then in 2008 the company stock tanked and at that point the option cost was much higher than the stock value. He never executed them as they never got value (and has since retired and left the company).
I was always a fan of taking stuff upfront - salary vs. equity, salary vs. potential bonus, etc. But, I am very risk-adeverse.
Startup culture can be very attractive, but care should be taken in going down that road. Our S was very interested in startup culture having interned at two during college. Compared to his other two internships at large tech companies, the startup life, for him, was most attractive.
He did know, from taking two classes on startups, that the failure rate is extremely high - the classes cited 93% failure rate for tech startups with more than 20% failing to make it past a year.
For compensation, new grads need enough to live on (bottom line), I’d probably opt for more salary. Additionally, equity is typically granted yearly, so with each year he should be able to build his equity stake. Also, note that startup equity is typically illiquid, so salary should a prime concern.
The business environment for startups right now is challenging and the number of IPOs launching has been low for several years. Hopefully, with interest rate coming down (soon?) this will change, but startups, and their employees, need to be careful.
In the end, our S had two offers from startups and several others from large cap tech. All were structured the same way: signing bonus, base pay, yearly bonus target, and equity. He opted to to accept the offer from the larger (unicorn) startup. Interestingly, the other smaller startup failed, yep, just about a year later.
In his current startup, he has actually seen huge growth in both pay and equity. This is due to his skill set (machine learning) that is in very high demand, with companies trying to fend off poaching by other companies.
1 Like
The thing that hasn’t been mentioned…skill growth is generally accelerated in startups, particularly at hardware companies. It’s usually all hands on deck, with no where to hide. A year at a startup can be like two to three years at an established large company. That can lead to the ultimate combination…recruitment by a large company where compensation and equity in all its various forms are more assured, jumping in as a fully competent member of an elite team that doesn’t hire new grads. So, even if the startup goes sideways or ultimately fails, the experience can be very valuable.
14 Likes
@Choatiemom kind of inferred it.
That’s even true of small companies vs. large companies.
I always look at outside hires at where I work - and often they come from smaller organizations.
At large companies, like where I’ve worked, you are silo’d in certain duties.
At small companies, they have so much to learn, because they are involved in everything.
My daughter’s BF starts at a private, small fund company in August. His pay is lower than he expected and he’s bummed but he’s telling me all that he’s going to be doing - from research to operations and more. I’m sure at Fidelity or Vanguard or Invesco or T Rowe Price - that wouldn’t be the same…
1 Like
Others have already given most of the advice I’d be giving (I’m at my fourth tech startup), but one thing I haven’t seen anyone mention is the idea of early exercising. Without getting too in the weeds on it, there’s the “strike price” (what he would pay for each option) and the “fair market value” (basically what the latest round of investment has priced the shares at). Ideally, the strike price and fair market value (FMV) will be the same when he joins the company, and will be for at least some window of time.
Here’s the thing, though: The strike price stays the same over time, but the FMV will go up (as long as the company is growing and doing what it should be doing). If they differ at all when he exercises his options (that is, when he puts money down to buy them), the IRS will consider that a taxable gain. So if the strike price is $0.50, and the FMV is $0.80, and he exercises 10,000 options, the IRS is like “cool; you just spent $5,000 for something worth $8,000, so you owe us taxes on that $3,000 gain.” (This is true even if the shares can’t be re-sold, which is often the case for a pre-IPO startup!) You can imagine that if the FMV has gone up to, say, $5.00 per option (so they’re worth “$50,000” on paper) , that tax bill could get really high. So he has to pay the money for the options AND the taxes. (And if the company subsequently folds, he doesn’t get reimbursed for either the options OR the taxes!)
So. What to do? (I am not a tax advisor, so he should do more research!) Some startups allow employees to “early exercise” their options. If the company allows you to early exercise, you can buy the options you’ve been granted before they vest (normally you have to wait at least 1 year (the “1-year cliff”) to exercise any options, and the options aren’t fully exerciseable for a total of 4 years (the “4-year vest”)). Early exercising, though, if allowed, can happen basically on Day One. This means that when he first joins, and the FMV and strike price are ideally the exact same amount, if he early exercises, the IRS is like “so you spent $5,000 for something worth $5,000; no tax needs to be collected”. (This is what you want!) If he does this, there’s a form called an 83(b) that he would NEED to fill out within … 30 days, I think? … in order to get square with the IRS. Again: I am not a tax advisor!
There are other issues, of course — like how to get the money to early exercise your options if you’re fresh out of college and have no money? — but I wanted to keep the scope of my answer here to the whole “early exercising” bit and the 83(b) bit. As he’s considering his situation, he should ask his recruiter about the possibility of early exercising (not all companies allow it), and make sure he’s clear on the strike price and the current fair market value.
In terms of the “more cash” vs. “more equity” question, I would go for the more cash, myself. (Maybe that can be used to help pay for that early exercising money.) But his risk profile is surely different from mine, and — as others have noted — the founding team, company success to date, etc. etc. can all play a factor in the decision.
4 Likes
I was just going to bring this up, but @LionsTigersAndBears had much more detailed info. This happened to a family member years ago. Very large tax bill and within a few years the shares were worthless.
2 Likes