I have watched friends get paid a smaller salary, hoping for a great exit only to find their options diluated or the company just simply failing.

Now you probably only have lucky and successful friends or that friends who didn't get enough cash to buy a house are probably not in the back of your mind, as nobody wants to advertise either their failure or failure of their friends.

It just get chucked to "oh well, startups are risky". But then the winner get famous and everyone talks about them, making it seem like joining a startup and accepting options instead of a good salary is a sure way to succeed.

Notice, this is the same process the lottery system uses. We make fun of those people, but it is the same idea. Lottery always havily publicizes their winners, that is not just random marketing but a very useful tactic -- make everyone believe they can win took -- "Look at him, they got a huge giant check, so can you". If they televised ever single lottery loser, nobody would buy the tickets.

Unlike the lottery, knowledge and skill play a role here.

True, but that's not quite the analogy I was going for, the analogy was how survivorship bias is used in both cases for promoting the idea-- everyone picks the winners and remembers / tells / markets those while disregardign the losers. I do it too, it is just a natural human tendency.

In both cases, if every time someone heard about a successful startup they also heard about many failed ones, they might have a different perspective.

The best you can do is to accept that you're not an expert in picking winners. (Just see how many hedge fund managers underperform the market. Even the supposed experts have problems doing any better than random decisions.)

Startups are a lottery to a large degree, and for employees without significant equity, the odds don't seem great.

Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor.

Though it's likely that your first several years of awesome salary will be spent paying off loans.

If you are low enough level though, that isn't necessarily a concern since you aren't expected to source deals.

There's also a technical meaning to tournament theory that helps explain why firms in some industries are so structured. You can read more about that here: http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&T...

So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing. But for junior analysts and such, there really isn't that stigma since their performance is not measured on a sales basis (and thus their mobility is not necessarily hindered by a down year).

Do you have any info or insights into how deal sourcing typically works at that level? Seems like a crazy thing to measure against when your annual deal volume would be relatively low given the size of the deals.

I've never worked in finance, but I have a lot of friends who do.

From the day they entered (ie. as junior analysts), up or out has been the mantra. You simply cannot be in a position for more than a few years. If you're not promoted to the next level, you're fired (though most of them had the sense to switch industries when it became clear they weren't going to be promoted).

Deal sourcing comes in at higher levels, but the "tournament" structure is embedded throughout.

A good portion of the business people you meet outside of finance are people who wanted to work in finance but couldn't hack it.

EV = payout * probability

So for cash:

EV = 150k (or whatever your salary is) * 100% (it's guaranteed)

For equity it might be:

EV = 1M * 10% = 100k

I guess the same type of mind that believes meritocracy really exists could believe such a thing...

Does my last employer not have a large contract with Prudential, because of my work?

This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail.

Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones?

> Does my last employer not have a large contract with Prudential, because of my work?

If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure. If the contract didn't make a substantial difference in the company's outlook, then how does that relate to my point?

> If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure.

In any startup with <5 employees if an early employee leaves it's a huge risk to the company that may result in bankruptcy or failure of the company. Engineer #1 is as important as a founder in the startups I've worked at.

If there are 3 founders and 2 non-founder employees, then typically each employee is doing (approximately) 20% of the work. Not many small companies can just shrug off losing 20% of their workforce.

> This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail.

I hate to be rude but WTF are you talking about? I've known several successful startup CEOs and they keep good employees close and well taken care of. For one thing, startups usually fail, so you're going to have to keep your good employees open to working with you on your next attempt, and if you keep treating them like slaves/resources they won't come with you to your next venture. Second, how are you going to recruit new talent if your reputation as a founder is that you treat your employees like interchangeable "resources"?

>Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones?

No, I just don't think anything can be done without people and that one person is not the same as another.

Did I "positively influence the outcome" in the company I work for? Almost assuredly.

Of course, this is coming from a mind which does basically believe in a meritocracy, so...

I don't know the actual answer (and it would be difficult to convince me that anybody has all the data either) but many people "experienced" with startups believe that so many more options come out worthless that cash is strictly better, better expected return at lower risk.

however, in the same way that the freakonomics guys explain people playing state lotteries even thought they are "not worth it": state lotteries (and startups) offer some of the few chances that most people have to actually get rich, so even though they don't pay off on average, they are "the only way" and "worth it" to some people. Not claiming that these people have clear ideas about either expected values or risks involved, but they have clear ideas that "it's the only way". For workers at many skill levels, they may have a sense that in their industry they won't be too much worse off in the long run so why not take a shot.

If you worked for 5 companies in 10 years, then you've got 50% of your options (likely) at each of those companies. Seems a decent-ish diversity.

Yeah, if you worked for Google back in the day, you could actually do this. Now? With the crowded landscape of tech companies competing to provide services, except for the few services who have one or MAYBE two companies that completely own the field? You'd be insane to take options.

You're one lucky person to know!

Mainly I'm framing this in comparison to additional salary which is also unlikely to generate significant wealth unless you are very good or very lucky (Probobally both) at managing your money.

Let's say the salary difference is $50,000/year. Over 20 years, that's maybe half a million dollars, post tax, that you gain by ditching options. Maybe that's not significant to you, but it seems to me to be a pretty rational decision to prefer a relatively certain half million dollars over a low chance of some substantially higher payout.

I'm CEO and co-founder of a funded company. We pay competitive salaries + options. I don't begrudge someone who isn't interested in options. Options are actually expensive to me. We are still fairly early stage (Series A funded) so the founders own most of the company and the option pool primarily dilutes the founders. I want to give options to someone who wants them. I'm fine paying more salary in lieu of of options.

I think of options like a profit-sharing plan in a mature company. If the company does very well then the employees should share in that success. Some folks feel that paying very low salaries and heavy options breeds loyalty. I personally don't subscribe to that. I prefer to pay something competitive and have options as nice upside for the employee.

Speaking as someone who recently did a round of interviewing with a mix of established companies and startups, $50k is a _very_ conservative guess. The difference between my Google offer and the highest startup one was ~$100K - if you drop to the average startup offer, it goes up to ~$150k. And that was at ~3.5 years of experience - it gets worse as you become more experienced.

It's hard for me to imagine how sure of a bet a startup would have to be for their equity to be worth $150k/year.

That said, this is makes sense to me. Google's stock options aren't making employees wealthy these days. Yet it's still a fantastic company and obviously compensates with salary. On the other hand, no startup that I know of can pay 3-400K salaries for 3-4 years exp.

Also it should be said that the type of work you likely do and the culture at a large public company will likely be very different from a small startup. Culture, ability to influence direction, large potential upside (though unlikely) are reasons people continue to pick startups despite lower salaries.

To be fair, the Google offer does include RSUs. However, since you can immediately sell those I think its fair to treat them like cash.

However, the Google/FB overs likely include RSUs valued at $400K that vest over 4 years, while the private companies offer options (at the time) "worth" (at current company valuation) ~$300-400K, with incredibly low strike prices since the 409a can be much lower than the preferred valuation. It really depends on how well the company has down, but since the last 3 years those private companies have doubled to 8x in value (see Uber), and thus the Uber employee's shares would be worth $2.4M-$3.2M. Google also appreciated (+50%) making the RSUs worth $600K, but still has not appreciated as much. Of course, this is just one example, picking the most successful companies, but it is illustrative of the general principle: if 20-30% of the time you can get on a rocketship, you can be +EV but with higher variance.

It would take incredible foresight for a company to correctly manage to pull off such a feat.

If you go hardcore for options, then you might take every job with a reduced salary and a chance of striking it rich. If you're totally against then you might take every job with a more established company (or unconventional startup) that pays better. The tradeoff of potential riches versus more certain earnings is as I described.

Something like 90% of companies fail in 5 years...

Additionally you can theoretically invest the extra money over your vesting period of the options at whatever $insert ETF produces as an annual return.

Setting all the monetary issues asside I'm not sure if I'd prefer more money or more options on a philosophical basis. I feel like I'd go for options because if you work at a startup you should share the vision and work there because you believe it's awesome stuff that will change the world. OTOH taking the salary might make you less prone to certain biases and more "objective" in everyday work (+not overinvested in one outcome). tl;dr: I think I'd take the options package if I'd work at a startup because if I wouldn't I'd have to question why I work there in the first place

And with companies like Uber that seem to plan to never have an IPO, and also this meme that it's good to screw ex-employees out of their vested shares, it's not necessarily an unreasonable assumption.

> the tax on W2 income is simply the worst

As opposed to getting taxed on what you eventually make from your options?

Yes, it's possible to get such tax rates, but generally only for amounts under $100K.

I'm mot even sure how you "optimize for gaining a "life changing amount of money"? That's like saying you are going to optimize for luck. There a substantial amount of luck involved in seriously "cashing out" on a startup.

For my own part, I've been at this for over 20 years and I've never come close to making any significant amount of money from options. They have lost all incentive power. Pay me cash money now, and I'll invest it however I please.

Living in a cheap location is also not everyone's dream. It would be life changing for me to retire to Costa Rica, but it would not be a positive change. I live in a pretty expensive city (Seattle) because I like it here.

Also, even if you don't move having 500+k / person in the bank is life changing. The median bay area house is 635,000$ which becomes affordable while saving money. Dual income with a 1+ Million down payment and you can actually buy a nice place.

When you repeatedly refer to being single, you imply that it's the better way to save, whether you intend that or not. And when someone asks about it, brushing off the question by pretending they should have applied rigorous logic to the statement is somewhat... let's say silly. Ability to control a spouse's spending and willingness to relocate are legitimate answers that you make weaker with the attempted logical refutation.

Having 500k in the bank also isn't really life changing if your plan is to spend it on a house. With a high income, you could theoretically save for 10ish years and buy a pretty nice home outright. You could also just take a loan out immediately and live in the same home for those ten years, acquiring equity and tax benefits along the way.

Saving to buy outright or mostly outright only makes sense if you are either extremely risk averse or you believe that non-real assets will appreciate much faster than real assets over the medium term. Right now you can get a super jumbo loan at less than 4%. If you want buy a million dollar home and have a million dollars in cash, it's really not a given that you should buy the house in cash. That implies that you believe the stock market will do worse than, say, 3% (reduced due to tax advantages of mortgages and disadvantages of capital gains) for many years.

Further a 100k income simply can't afford to buy a 900k place. 900k * .06 = 54k/year + taxes + repairs + insurance + utilities. Put a 500k down payment on that and suddenly it's a 400k place and much higher taxes. Now you might be able to swing 900k that with a roommates, but again not having them is a major life change.

I mentioned that in another fork of this thread but was being facetious. Adults do not generally share a bedroom unless they're in a sexual relationship. Sharing a bedroom platonically is not a reasonable thing to expect people to do to save money. Sharing an apartment, yes. A bedroom, no.

> Further a 100k income simply can't afford to buy a 900k place. 900k .06 = 54k/year + taxes + repairs + insurance + utilities. Put a 500k down payment on that and suddenly it's a 400k place and much higher taxes. Now you might be able to swing 900k that with a roommates, but again not having them is a major life change.*

Your numbers don't make sense. First, if you're paying 6% on your mortgage, you're overpaying by a ton. Assuming you even try to get a decent rate, you're looking closer to 3% once you factor in the tax advantages. Second, if you can save 500k in 10 years, you're saving close to 50k/year plus paying for housing. So it's a lie to claim you cannot afford 54k/year in house payments.

You do get to deduct interest, but you lose out on the standard deduction you can also play a lot of games with savings. Things like not taking a car loan because use can pay with after tax money saving on the loan and paying less for the car. Financing your own credit card saves money where if your house poor debt is just a fact of life etc. You can also more safely have a high deductible health insurance.

Also, you get interest on savings so your not saving 50k per year to get 500k in 10 years.

Interest on savings is negligible. If you take the highest money market rates, you'll get just north of 1%. If you stick the money in a 5-year CD, you'll get 2% and lower liquidity. Meanwhile the housing market is rising faster (how long that's sustainable is unknown).

I'm not sure what you're talking about with the car loan. If you think it's worth having a cushion of cash in the bank (I certainly think so) so that you can do things like buy your cars in cash, then saving for 10 years so that you can dump all the money into the house is a terrible idea because you've just lost your cash cushion. (Your best bet for saving on cars is to just buy fewer of them anyway.) For the high-deductible insurance, you only need a few thousand in the bank to take the risk out of that. You need enough cash on hand to cover your deductible. After that it basically looks like any other insurance plan. And certainly, a larger cash cushion makes copay/coinsurance easier to handle, but that's not specific to high-deductible insurance.

If you think you should live far beneath your means as a general rule, I can't argue with that. There's no compelling argument for why you should spend all your money if you have the option to save. It insulates you from risk and allows you to retire sooner if that's your goal. But if you are living far beneath your means so that you can just dump all your savings into a house in 10 years that you could afford today with the same income, I think you're wasting your time, especially in a market like SF where home prices are increasing so rapidly.

Also, I am basically assuming your going to get raises over time. So your initial 100k salary might be 150k in 10 years. Thus ~35k savings in your first year + 4% net interest (inducing things like that car loan) and cost dollar averaging etc and 4% more savings next year = 500k at the end.

As to housing prices, they might go up or stall. But, because your not in the market you can time things to buy when the market dips. Further, rent control means renting is divorced from increasing housing price changes so you gain a lot of the upside with fixed payments even if prices increase without the downside. Further, if prices fall you can rent somewhere else.

The truth is people are rarely going to do this, but people are also rarely going to hit big money from a startup.

This is all hypothetical and a really bad plan for increasing your overall wealth. Car manufacturers are the ones who subsidize the loans. If you see a 0% loan, it's not the dealer who's giving you that, so it's entirely likely that paying in cash will save you nothing. Those 0% loans are also for new cars (I've never seen them for used cars) and if you need to save a few dollars, buying used will do far more for you anyway.

> Thus ~35k savings in your first year + 4% net interest (inducing things like that car loan)

You can't just assert 4% interest and hand-wave it away with "things like that car loan". That's double the interest you'd get on the best 5-year CDs. So somewhere you need to account for that extra 2% interest and how it's going to compound for 10 years. You aren't buying a car every year even if that somehow would double your effective interest. Also, if you buy a car outright, it's presumably coming out of that 35k anyway. So no, your numbers still do not work.

> As to housing prices, they might go up or stall. But, because your not in the market you can time things to buy when the market dips.

Good luck with that. Timing the market is a really bad bet. There's no guarantee that the market will dip during the next 10 years. It could maintain growth for 15 years, or plateau after 5, or crash in 1 year (while you're still saving) but rebound and keep growing for another two decades after that. There's also no guarantee that it won't dip 20% as soon as you decide you're buying at the bottom.

> Further, rent control means renting is divorced from increasing housing price changes so you gain a lot of the upside with fixed payments even if prices increase without the downside. Further, if prices fall you can rent somewhere else.

Lots of places don't have rent control. Also, rent control might help your rent stay "low" (it's definitely not actually low in the bay) but it won't make buying more attainable. Again, if you want to rent because you think it's a better strategy than buying, go ahead. But renting while you try to save a half million in cash to buy a house seems like a really bad strategy. Saving aggressively is generally a good idea. If your goal is homeownership, though, saving to buy in cash has not looked like a good strategy since the government started incentivizing mortgage loans.

As to ROI the car thing saves you around 6% meaning you need less than 4% from everything else to average out. Other options including dividend stocks are very likely to provide 4+% over 10 years ex Coca Cola. Is that 100% well no, but you can also make well over 4%. 450k or 650k is not a major issue vs. being yet another person who pasts on HN 10 years in startups and nothing to show for it.

Much like risking buying a house for the market to drop 40% in 10 years.

I don't know where you're getting the 6% number for buying a car in cash. That's definitely not going to happen. You could get a car loan at a better rate than that from a bank and pay the dealer in cash. Bankrate.com is showing me a rate below 3% for financing a new car over 5 years.

Your belief that you can do better than 4% in the market is exactly why it does not make sense to save and buy a house in cash. If you have 500k in cash and have the option to dump it into a house or dump it into the stock market, and you believe the stock market will perform significantly better than real estate, then you are wasting money by dumping it into the house. If you believe you can get, say, 6% in the stock market, then taking out a mortgage at 4% lets you earn 2% extra each year.

Buying a house was an example of a life changing thing you could do with 500k even with a six figure job. And no you can't buy a house at 100k with zero savings in the bay.

Sure, that's true long before you randomly hit ~500k, but that was chosen as a 'good' return from joining a startup that does not become Google as a non founder.

PS: As to returns, if you can't get 4+% retirement get's a lot harder. 1.04 ^ 40 = 4.8x So, 10% is not even close to cutting it. At 2% forget about it. Best of luck.

Back on topic, we did go down an odd path specifically about the house. My initial point really boils down to what you want to do with the money. It could be very life-changing to save $500k in ten years and retire somewhere cheap. If you're just going to buy a house, it's really not that life-changing, both because you can do that without 500k in cash, and because owning a house is really not that different day-to-day from renting.

I'm not clear what you mean when you say "10% is not even close to cutting it". If your retirement goals depend on a >10% return, you're likely to be disappointed. The S&P 500 has only been ~5%/year for the past 10 years, and that's before accounting for inflation. It wasn't doing so hot before that, either, with ~4%/year over the last 20.

Giving up 500k in salary for a chance to make 500k in stock is a terrible bet. Alternatively, only save up 100k in 10 years, go to Vegas and bet it all at slightly negative odds. You can set things up for a 20% chance of getting ~500k which is better odds than many startups while still having more day to day money.

Wouldn't the employer insist on paying in the local salary range?

Do they have good schools in $cheap_location?

Anyway, if you compare starting a family with ~1M in the bank and 1 income at 50k vs. dual income 220k in the valley and no savings outside of home equity there are benefits on both sides.

This is an outlier and, in my opinion, not representative of any useful demographic for this discussion. The idea that you bank $100k a year (let's even through in compounding) is certainly feasible, but not common.

If you are single, living in the bay, and making 100+k and not saving like a bandit it's because that's your choice.

If you consider Walmart and McDonalds employees then that's a large part of the us population.

So, companies that exist in that tiny portion which are actually hugely profitable? Most companies aren't, and most options are worth little to nothing at the end of the day. After a decade in start ups and now supporting a family, I'll always take salary over options.

For one thing, it's fiscally unsound to have the majority of your net worth and your salary tied to a single investment.

In practice when you're a technical founder (or cofounder with one), you might have three fantastic people you can't afford, great technical roles. They'd do great work for 40 hours per week, they believe in your vision and you, because your vision has a competitive advantage they can execute well with, and you can essentially generate equity value out of thin air together. They cost way less than the amount of value that could be generated, so they make sense from a business investment perspective.

But the company just might not have the funds yet.

So, besides giving out options as compensation, or giving out a market salary, the third, practical alternative, is not to hire any of the three persons, but instead work for 130 hours per week doing their 3 jobs and your job, and sleep 5.4 hours per day.

This divides to 32.5 hours per "job" (130 / (3+1)). In practice by not hiring these great engineers, you've also not hired their coffee breaks, lunches, not hired the time they spend reading Hacker News, reading about new technologies, trying various stuff such as a new framework they'd like to try, you've not hired the time they spend writing documentation or any kind of testing whatsoever, and you've not hired any downtime they spend waiting for anything whatsoever. In fact, with these concessions, the 130 hours turns out to be an exaggeration.

So, some people call the results of this "technical debt", which is a bit of a misnomer.

It's a misnomer because if the project doesn't start generating value, you can kill it and nobody has to clean up anything. So in this sense, rather than a "technical debt" - it's more of a technical option. Instead of generating employee stock options, you've created technical stock options, where if the technical results actually make it rain, then at that point the project is investable, people can be hired for a market salary, and they can rewrite all the code that you've optioned. In this very real sense it really is an option, rather than debt.

So, in practice a lot of silicon valley seems to work this way. A lot of successful people have succeeded using more or less this formula.

We've all heard lots of stories of seasoned developers being brought on to clean up spaghetti code written by a founder or cofounder, that proved the business case but was hideous, poorly documented, structured, tested, with even security and backup policies and redundancy policies making it a miracle that nothing melted down.

So when one wonders why some founders work so much - well, this is the reason.

The people who could have written all this properly from the start, weren't available given the finances the company had at the time.

Often other people aren't willing to share the vision, and if you want something built, regardless of its value, at times you just have to do it - before anyone has funded you.

So this is a very real third possibility that many people do not realize really is a kind of "option".

An essay on this is here:

http://higherorderlogic.com/2010/07/bad-code-isnt-technical-...

Working really hard and acquiring technical debt isn't really an alternative to hiring and compensating employees, it's (usually) a prerequisite. A single technical cofounder can be enough to get a company to Series A, but at some point you have to hire people.

If we wanted to discuss an actual alternative, it would be to hire people in other locations at far lower rates than those commanded in SV. But that comes with its own set of problems.

How awful do you think the original Facebook PHP codebase was? Or Google's original hacked together web crawler.