This, IMO, is one of the biggest advantages at a startup. Employees can bring in new ideas, implement them, and bring value to the company. A win-win.
The company our S is at transitioned from options to double-triggered RSUs and IMO that’s a far better way to go. The double-trigger means there is a vesting schedule as normal, but the RSUs are not completely vested until a liquidity event occurs (IPO or acquisition). At that time employees can pay the tax in total or make a partial sale to cover the tax liability.
Ideally, when a successful company gets acquired, shareholders get something. But not always. There is a new “trend”… deferred compensation of common stock holders (like employees) upon achieving a milestone after acquisition, like $xM in net income from product sales in 5 years. As accounting can be very creative, that milestone may not be achieved even if the product sells like hotcakes.
My brother did a number of start-ups in the Bay area in the late 80’s and early 90’s. Took a mix of salary and equity, but because he was working full-out and was living with roommates (his start-up friends) he could afford a lower salary to max his equity. I remember him telling me you are never going to get rich on salary. (Depends on your definition of rich.) None of his early start-ups made him rich, except in experience. In his last start-up, he again went equity heavy, although at that point he was living alone in San Francisco so had expenses, but stayed in the same rental for a long time so at least benefited from rent control. When Amazon bought the company, the shares he had taken were converted to Amazon shares. He told me then. that if Amazon shares went to $100 he’d retire. (Ended up going to $3800 and he held them and retired at 47.) Won’t work out for everyone, and certainly won’t work out for many start-ups, but if you’re in it for the long haul, the more at-bats the better your chances. So he’d recommend a young single person do as much equity as possible as long as they believe in the company (and if not, move on).
One of my kids loves being in a small company where he makes a difference. He was fine with taking risks when he was younger and before he had a family. He has worked for 3 start-ups, and had to deal with 2 layoffs, one during a big market drop and one when his company was postured for a buyout and they d/c’d the dept he was in. He managed to cobble together other opportunities. He didn’t starve. He then considered an MBA and did all to move forward with that, but had the opportunity to join another small company that was still young. (That last one was after he was married but before kids.) It was subsequently acquired by a big, well-known company and he came out just fine. No risk, no gain. He considered leaving for another start-up about 3 years ago, but with the family and responsibilities he decided not to. He still may at another time, but not now.
You can have deep belief in a company and still ride it into the ground. Just look at Scott Galloway’s experience with 98.6. The bottom line is that one might hit it big, but that’s going to be one that greatly defies the odds. Diverting salary for equity is a ploy. As I said, solid companies should give very competitive salaries AND equity.
My son is the cofounder of a startup that has had some success (accepted into and completed a well known accelerator, several rounds of funding, a proven revenue model, well established partners).
As they have grown they have shifted the compensation mix. Initially they were lucky enough to be well funded such that all employees were almost entirely salaried (but offered equity and most passed). Over time they now want all employees to have a vested interest in the success.
While still salaried all new senior hires are expected to take “SAFE” notes a as part of total comp.
In most cases employees view this as an opportunity to participate given the stage and trajectory.
This “evolution” of remuneration is typical I am told and consistent with the advice of Y Combinator and or Techstars.
No simple answers for what to do as an employee, totally depends on the situation.
I’d start by asking what his need is for cash - to live, to repay debt, to squirrel away for other plans (grad school, z house, etc.) . The salary heavy offer will have certainty, and many of us need that (and cash). At the same time, a recent grad is unlikely to have many of the obligations of someone with a family, so in many ways, is at the best time of life to take a risk – if they can.
An equity heavy offer can have a high payoff, but as mentioned, that’s not a guarantee. I personally have made this bet a few times, and while there have been a few successes, none have been extraordinary. In fact, I’d have to say that if I put them all togetger, I’d have been better off with salary. I have friends who have had great success with equity.
Regardless, since these are both with the same company, the opportunity to work at a company at this earlier stage is likely to be really exciting and fulfilling. So long as there are people with experience to mentor, there will likely be many more chances for breadth and engagement than in a bigger, siloed company. Fwiw, I have seen startups that have done a lot of reinventing of the wheel - not knowing what they don’t know - so it’s not a given that every startup is a great learning experience.
One thing not mentioned is that you may need to stay longer (eg four years) for all your equity to vest. It’s worth giving some thought to what that means in terms of career planning, since many people move on from their first job quite quickly. For example if you think you might go back to school (eg for an MBA) or relocate (eg for a relationship), then that would suggest taking cash could be better.
One, it’s not just four years, because companies will keep adding vested stock options of various flavors continuing to push the payoff into the future.
Two, although it’s common to change jobs quickly (I think the average is every two years for engineers), I wouldn’t. Your resume looks better if you stay three years or more, but more importantly, it takes a while to get engrained into the culture and duties.
I can’t find a solid study to prove this, but many sites on the internet are saying that most new grads (over 50%) leave their first job after only a year.
Some companies keep employees with “golden handcuffs”, especially when the market is doing well. I know one young person who feels he can’t leave his current job because he has so much equity in the company stock which he would lose if he left. Not sure how the vesting works for his place (it is not a startup).
For established companies, the value is real and known. New hires are typically granted four years of options that they can proportionally exercise 4-8 times a year. Then they’re given more at review time if they’re performing well. If you quit, you will always walk away from some stock.
A typical option or RSU grant has a 4-year vesting schedule: 1/4 becomes exercisable after 1 year, and the rest vests monthly or quarterly in equal portions over the next 3 years. However, companies are not required to stick to this schedule and can get creative.
That demonstrates that a company can be creative with their vesting schedule. So someone considering equity compensation, either at a startup or an established company, would be wise to ask how the shares vest.
It’s just one example of how companies deal with equity shares. I would have guessed that the shares would have vested more like @BunsenBurner described, but that’s not the case.
It’s another thing the person may want to ask about/be aware of when considering total compensation.
Another thing many people don’t pay a lot of attention to is retirement matching contributions. Someone close to me is changing jobs currently, and the matching difference is 5% of pay. over time that adds up…
The difference is that there isn’t a known guaranteed value to startup shares. There’s the promise of future value, hopefully much higher than the strike price. The sad reality is that it’s FAR more likely those shares will be worth zero that that they’ll be a homer.
I’d take the salary and I wouldn’t exercise any of the options if they don’t expire until there’s a clearer picture.
https://www.bls.gov/news.release/tenure.nr0.htm has some information about job tenure, although it does not directly answer the question about new graduates. Table 1 indicates that the median years of job tenure with current employer for age 20-24 is 1.2 years, although that age group includes both new graduates of any post-secondary education and those doing part time or school break work while still in post-secondary education.
