Based on my experience, the median offer for 1st engineers at an early stage startup is around $100K + 1%, vested over 4 years. My guess is that the same engineer's market rate at Big Co is $150K. It is nearly impossible that 1% is worth $50K /year.
Most startups will try to convince you that you should price common shares according to the company's last valuation (or more), but by my estimation, this is off by at LEAST a multiple of 2.
Here is why:
- Common shares are worth ~25% less than preferred shares due to liquid preference
- Inflation -- earnings from common stock are paid out on average 5 years from now. you should apply a 20% discount to the company's current valuation due to this.
- Risk -- startups are inherently risky. unless you are already wealthy, you should be further discounting for this.
Here is a spreadsheet that models out each of these discounts: https://docs.google.com/spreadsheets/d/1fA95D0YR9RWF7JGrP1W9...
In reality, you should be pricing common shares at closer to half the company's last valuation. Unfortunately, in my experience, employees are willing to buy into the hype and are currently valuing their shares at TWICE the company's last valuation.
Don't count on companies being an agent for change in this area -- employees just need to get smarter. Companies will follow suit by raising offers.
Also, although I agree that common shares are overvalued, I don't buy the undertone of your message -- that employees ought to make more BECAUSE their founders are getting rich. How much founders make and how much employees make should have little to do with each other. The former is dictated by how good of a business the founder has built, and the latter is governed by how much your peers are willing to work for.
Previously VCs got most of the cream, founders got to ride out the public markets for their pay day, and early employees had to hope they were working at a Microsoft.
Like big companies started to do it last time around, the startup will have to start giving RSUs instead of options without too much unreasonable limitations on sale of those RSUs on the secondary market. That would allow to much more easily (and realistically) valuate and realize your actual compensation.
Every time startup makes me an offer (and i almost don't interview with startups), a typical option loaded one, i always kind of wonder - "you wanna me forgo $50K+ in total in exchange for what? Shouldn't i get a stock like other investors? Because applying my time and skills at discounted rate is like investing the monetary value of that discount.". The only time when startup matched the total (of a concurrent offer from a public co.), several years ago and i should have taken it, it was a really early stage back then a unicorn of today. One can say being generous is a sign of unicorn :)
Does that actually happen? I've always wondered if founders walked away from failed startups having made a couple million off the funding rounds... How common is that?
Often the only way you find out is if you have access to and read through the company documents. Another way is having a friend that works in finance and has visibility into this kind of stuff / you monitor SEC filings or other finance services or heard it through the rumor mill.
The logic is to incentivize the founders to go for the big wins that the VC formula is set up for.
[1] The VCs are bound to an business model and we who take their money are bound to support their outcomes. That's not a bad thing, but it constrains options.
[2] I found out early on (this is about to be a conclusion based on extremely limited data) that any VC that hadn't himself been through three down-turns, two as a VC, were 1000% worse than useless on the board. You don't want to get stuck to the hip with a wet-behind-the-ears rockstar-wannabe VClet going into a downturn.
1. We’re at the end of a bubble and doing a slow pop. Multiple companies that have raised a lot of money don’t have the revenue or unit economics to be sustainable. Employees with compensation tied up in stock aren’t going to do well. Had a friend leave two companies within 6 months (didn’t bother vesting) that both raised over $100 million because the executive teams were celebrating $900 deals.
2. Startups don’t exit anymore. Waiting 8-10 years for an exit is unacceptable. It might be okay for founders who take a couple million off the table at the B round or VCs who keep the IRR on their books, but for employees it’s a fail.
3. Founders as rockstars. The narrative is hurting the industry. People I like and respected raise money and become narcissistic assholes. Last founder I worked for who I considered a friend told me “he was like Elon Musk or Larry Paige, a technical genius, and not to question his leadership”. This was after he fired his cofounder and chased off the one other employee of our seed stage startup.
4. Risk vs. Reward. As an employee with founders trying to keep 50% of the company to be like Zuck, companies never exiting, and no idea what the terms of later rounds are, working at a startup is becoming stupid. Saying it’s about the mission, it’s about learning not earning, when the VCs and founders are doing great is disingenuous.
We’re at the end of the cycle. I’ve seen 3 now: 2001, 2008, 2016. Hopefully in the next round the powers that be will figure out how to better reward everyone who takes risk working at startups. Right now employees take almost as much risk as founders for much less reward.