That said, anecdotally, every one of my close circle of friends made decent amount money from equity (one of the many companies they worked at did very well) - far higher than the 10% stat that I hear talked about. May be the last two decades was lucky for this group of people.
That's not my experience. My TC is the amount I'll actually make this year (and have made in previous years), which includes my salary, bonus, and the value of the RSUs at vesting, which I auto-sell. I'm not "delaying" anything; I'm making great money right now. Unvested shares only matter to the extent that your future income might over/underperform current predictions to some extent. I definitely don't consider them "mine" yet in any way; they're simply a leading indicator of my estimated future TC at this company if I continue to stay employed here.
Options, yes, are a different matter, but RSUs in big companies are almost as good as cash (and when the market is going up, as it has been this past decade, they're better than cash).
Options in a startup are extremely likely to be worth nothing, ever. Not only does the company need some sort of liquidity or exit event, but the valuation then also has to be higher than the strike price on your options. And options usually have punishing exercise-or-lose-them requirements if you leave the company before a liquidity event.
RSUs, once they vest, are yours without having to exercise them. If it's a public company you can turn around and sell them on the open market immediately if you desire and get cash for them. If the company's stock declines, your RSUs are still worth something since the "basis" is $0. If you leave the company, your vested RSUs are still yours.
Yes 1-year cliffs for vesting are common and do defer compensation, but 1 year is not a long time at all to be at a company especially a large public company. After the first year the regular vesting cadence sets in and it's just a slightly more complicated form of cash, with market risk.
Over the past few years that market risk has hugely benefitted most tech companies and RSU recipients. In 2020 my RSU comp was more than 50% of my total comp, basically doubling my (already high) base salary. ESPP further compounded that.
As a personal example, I previously worked at Airbnb and had a mixture of options and RSUs. Some of my RSUs were only months away from their expiration date when the company went public; if anything had delayed the IPO much longer, they would have disappeared. With the options, I could have bought them and prevented them from disappearing even had the company not gone public. As a result, leading up to the IPO I was moderately worried about my RSUs, but not particularly worried about my options.
FWIW, you're probably thinking about ISOs ("incentive stock options") when you refer to the "punishing exercise-or-lose-them requirements;" companies can also offer NQSOs ("non-qualified stock options"), which are less tax-advantaged but can offer long exercise timeframes even after you leave the company. A lot of the "unicorn" startups, including Airbnb, allowed ISO holders to convert to NQSOs for that reason.
Options vs RSUs is a tricky subject and the ideal choice varies based on circumstance.
The quotes around "basis" here make me think you probably know this, but just in case someone needs this nit picked: this "basis" being referred to here is emphatically not the "cost basis" for tax purposes. If a $50 share vests and you sell it for $55, you have a cost basis of $50, giving you $50 income and $5 capital gain.
The question is, would you have had excellent returns if the company had been worth $1m per employee?
If you own 10% of a company and it sells for 2x the invested value, you might get < 5% of the sale price yourself once the investors are taken care of.
These two are very different things and they shouldn't be conflated. If you have FAANG RSUs vesting every few months or every year, you can convert them to cold hard cash on a regular basis.
Options in a startup, or a company that isn't traded publicly are a different animal.
Pity we didn't get an exit back in 2000 when I had 0.5% of Poptel (everyone was a dollar millionaire at one point).
At the moment I have EMI shares in my current employer which vest on change of control
I think more companies now have a policy where your RSUs vest every quarter, and there's no cliff (except for possibly the first new-hire grant[0]). So yes, it's delayed, but in practical terms you get your first vest within 3 months of getting the grant. (And if your company doesn't do refresh grants periodically, and equity is important to you, you should find another company.)
> Even when you hate your job, you will be hesitant to leave the company because of FOMO and sunk cost fallacy
This is unfortunately true. I do know people who aren't happy in their job (maybe not to the point of actively hating it), but stick around because of their golden handcuffs. I tend not to worry about that too much; they've decided[1] that being unhappy is worth the cash, and it's not a bad problem to have to be able to make that choice.
> That said, anecdotally, every one of my close circle of friends made decent amount money from equity
Exactly.
[0] Which I have a hard time complaining against. The company probably just spent $50k of its own resources to hire you, and I don't mind that they don't want to give you any equity until you've been there for a year.
[1] Then again, negotiation may be able to get similar equity terms at a new company that could presumably make them happy, and I think many people discount that fact.
For anyone "stuck" in this situation, recruiters from the other FAANGs you don't currently work at will try to match unvested shares in their offer. It always pays to interview once a year or so to see what the current offers are like, and it's fun to try out the other microkitchens. Well, until 2020 I guess.
That's extreme selection bias. One of the major ways startups recruit is via friends.
That goes the other way around too, the only way to have massive amounts of free time without going FIRE is to win the lottery. So why not throw the dice once or twice when you're young and then settle into a stable corporate job if it doesn't pay out?
As a [good] engineer you can have your cake and eat it too. Sure it won’t make you a billionaire but you can live a comfy life, maybe win the lottery, and retire at 50 if the lottery fails.
Philosophically the lottery ticket scenario is your own startup or early startup employee, where your rationalization is >$10 mil or bust. Either certified “seriously rich” anywhere in the world or you just wasted your time. That’s a asymmetric payoff of a lottery ticket
Hell, a friend of mine made about 1mil at IPO (on paper) and she’s a tech support manager. Not sure how early she joined but always said the cash was her highest salary ever.
Income sources: Passive income, Content, Equity that's potentially worth nothing, a backtested diversified portfolio (Golden Butterfly or All Weather Portfolio and why?) of sustainable investments, Business models [3]; Software implementations of solutions to businesses, organizations, and/or consumers' opportunities
Single-payer / Universal Healthcare is a looming family expense for many entrepreneurs; many of whom do get into entrepreneurship later in life.
Small businesses make up a significant portion of GDP. Small businesses have to have to accept risk.
There's still opportunity in the world.
[1] Startup School > Curriculum https://www.startupschool.org/curriculum
[2] https://www.ycombinator.com/library
[3] "Business models based on the compiled list at [HN]" https://gist.github.com/ndarville/4295324
From "Why companies lose their best innovators (2019)" https://news.ycombinator.com/item?id=23887903 :
> "Intrapreneurial." What does that even mean? The employee, within their specialized department, spends resources (time, money, equipment) on something that their superior managers have not allocated funding for because they want: (a) recognition; (b) job security; (c) to save resources such as time and money; (d) to work on something else instead of this wasteful process; (e) more money.
On paper any IP would be default belong to the Corp, but after some discussion/negotiations with your line manager and his higher-ups, you could do the paper work to declare.
Theft of IP from one company to a new company on the other hand there are multiple public examples of.
At settle, I received a wire transfer for $7.22. The bank charged me a $15 incoming wire transfer fee.
That said, there are good questions about how much things have changed vs 25 years ago, how likely an early employee is to see a big payout on exit, and how much the fever for VC-backed startups distorts employee choices. But that's another rant.)
At least with gambling, the house has to post the odds.
One formulation I've used that helps is to say, "From data source X, your market-rate comp package is $Y/year. You decide how much of $Y you want to use to buy in now, at a price set by the most recent investment round." That only works if the company has enough access to capital, of course. And it does set the price as that of the most optimistic VC the company could find. But I like that it takes it out of the realm of personality-based negotiation.
Yes, it's still risky to join a startup, but no it's not a lottery. The chance of being rewarded handsomely is orders of magnitude higher than buying lottery.
Because it's between 1500 and 2000 people that win at least $1m in lotteries in the US every year. Granted, lots more people play the lottery than start or join a startup, but it's an interesting comparison.
Tech companies are the largest companies in the US economy these days. They are the economy. For better or worse they're now too big to fail, and in some severe recession they would end up being bailed out like the banks were in 2008 since the alternative is a complete economic implosion.
I treat my RSUs as cash that has some variance to it (less variance than crypto, and roughly the same as the stock market overall). I even auto-sell them.
At Microsoft, it would be hard to cross $10m over 5 years, unless you're a really big shot. At a startup that rises to be a deca-unicorn, if you joined 5-7 years ago, that would be possible. Dropbox, AirBnb, Doordash e.t.c probably minted quite a few deca-millionares on their IPOs. Entry level folks would have made that much. That's what I mean by equity and skin in the game. Sure, there is a lot more risk but your upside is also huge. You can see how your work moves top line ARR and incentivizes you to focus on customers and build what they want and will pay for.
Sure at GOOG, MSFT, FB e.t.c once you go above senior to staff level, your equity/RSU component starts to be more valuable than the base salary. That's what I mean by skin in the game and proportional rewards. However those rewards can be unproportional once you have a large chain of managers. It incentivizes doing things that lead to climbing ladder rather than doing things that are good for your customers and long term ARR. Sometimes it's related, sometimes not. At a true startup, if it's unrelated the startup dies.
Instead of equity, ask for higher salary, and invest the difference in cryptocurrencies, stock market, and even the old-fashioned lottery. Maybe a bit of everything, to balance the portfolio. Your chances are not worse, and you can go sleep before the midnight.
So if people aren't sure what to do with surplus time/cash, equity will (on average, over the long haul) produce a better return. Buying an index fund gives you zero control but good odds on a steady return; trading your time for equity (a company you start or one you join) gives you more control and narrow odds on a higher return.
There's no one right answer here, though. I'm happy with the startups I've done, but right now I'm happy to be banking a steady salary. A lot of this depends on one's situation in life and one's personal values, especially risk tolerance.
You don't invest in crypto currencies, you join early enough to sell to the next level of the pyramid you convince via social media post :s
But well you're right to say people should balance portfolio, I however don't see the value of the lottery, it's like paying taxes twice, with no chance of winning ever. At least bitcoin slowly loses value, a lottery ticket will lost its entire value a few days after purchase in 99.9999% of cases
The expected ROI of the lottery is so low though It's hard to take someone seriously that mentions playing the lottery as an actual smart financial move.
Note I'm not saying that it's not possible to win in this system - clearly some people will, at the expense of many others. Perhaps it's my own ignorance, but I genuinely struggle to see how this isn't a zero sum game.
The fresh bacon index is maybe less exposed to this kind of thing because, unless the world mass-converts to Judaism or something, someone will pay to eat bacon, so there's a floor on how low the value can go. But gold? Industrial use of gold is minuscule compared to speculative gold trading. Today GC trades at US$1773 per troy ounce, which is 10% down from a few months ago, late 02020, and 100% up from 02008. In 02001 it was barely above US$200. It could drop to US$200 again, and everyone who bought today and held will have lost 80% of what they invested.
That can happen with fresh bacon, too. What's different with gold is that, if enough people decide to sell, it could drop to US$20. It could drop to US$2. Or it could rise to US$20000. We have more history about gold: it's been a precious metal for many millennia and a widespread currency for the last three. So it's a lot less likely for it to lose 99% or 99.9% of its value like that, or go up 100× (though, as I said, it's gone up very close to 10× in a mere score of years.)
People — and, especially, central banks and governments — invest in gold because they dont think it's likely for that to happen, and because it doesn't have the secular inflationary tendency that fiat currencies do. It may bounce up and down by a factor of 10 in a couple of decades, but in 01687 it was probably also within that same factor-of-10 band.
They're not looking for an expectation of profit when they seek a "store of value".
They're just looking to reduce the risk of indigency.
Are people buying Google, Facebook and Amazon stock suckers as well?
That is an idea from the 70s. Not many people would agree that there is an actual fair value for a stock anymore, much less that it is driven solely by accrued future dividends.
No, that is an idea from economics predating the 1970s. Did you mean the 1870s? It predates that.
You can value a stock however you like. Good luck, I wish you well.
It really depends on what level of formalism you consider to be the basis of "the idea". I'm referring to the "dividend discount model" (DDM) here, which to me is the first real well defined model of this idea in modern economy. Exposed in early 60s and democratized in the 70s:
"The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value."
Bitcoin provides very little value outside speculation, not zero, but very little. That is the difference.
It remains to be seen how resistant Bitcoin is if powerful governments really decide to take it down.
Bitcoin and Blockchain is an interesting project but 1 BTC > 50k USD... Yeah, sure...
> Bitcoin and Blockchain is an interesting project but 1 BTC > 50k USD... Yeah, sure...
Bitcoin could conceivably become the next global reserve currency, 50k USD is horribly undervalued from that PoV.
> Why do you care so much about predictable supply if the price is anything but predictable?
Because the price will go higher. When the price goes over $x MM per BTC it will be very predictable.
> How is such high volatility commodity a good storage of value?
It stores more value than any other commodity. When the stock market started in 1920s it was no less volatile than Bitcoin. Volatility is a sign of disruption as much as it is a sign of value.
> 1 BTC > 50k USD... Yeah, sure...
If only you could see the data I'm seeing.
The stock market was never meant to be a way to store value but a public tool to finance and own projects that actually produce economic value. Comparing it to the bitcoin market is a false equivalence.
But best of luck for your investments.
To find something on a similiar scale to bitcoin you might actually need to go back to the 18th or 17th centuries (see the “South Sea Bubble” or the “Tulip Mania”).
He'll do pretty well in the IPO because he has some of those early enough options as one of the first 25ish employees.
BUT!!!He left MSFT at $30-40ish a share, now worth $240 a share. Unfortunately, he divested most of it into more general index which has been fine, but not 6x.
He would have EASILY covered whatever money he's likely to make in the IPO by just staying at Microsoft and holding company shares for the last 9 years, and in fact probably would have made way more given stock rewards/promotions/salary increases etc.
That being said, he has enjoyed working at the startup and it has propelled him into a role that he wouldn't have been in at MSFT or any other big company so there is that to consider as well.
In recent times, these giant late rounds with the amount of preference given mean that when acquisition happens, it often doesn't pay out for regular employees/common stock. The common stock employees get is for the moon or bust, or hope an acquiring company is generous.
I've had several friends have the startups they worked for acquired, and their equity was worth nothing due to valuation and unfavorable liquidation preferences.
They got a nice hiring package from a big company, but not significantly better than one can get from applying on your own. And the opportunity cost of taking a below-market wage for several years probably nets out to a loss in pure dollar terms.
If I'm at a startup and I'm constantly working 14 hour days, I want equity. Because I am not going to work 14 hour days (or even 10 hour days) for just a normal base salary. I mean, sure, I wouldn't mind instead taking 4x a normal base salary to work those 14 hour days, but no company (startup or established business) is going to give you that deal. That equity may end up being worth nothing over the long term, but by joining an early startup, I am betting on a solid founding team and the product, and the team's ability to execute. And because it's a small team, I'm betting that I personally can be a big component in whether or not the company succeeds or fails. (Often it'll succeed or fail despite what I do, but that's not the point.)
We can debate the wisdom (with regard to productivity and health outcomes) of working habitual 14 hour days at all in the first place, but the bottom line is that if I'm going to be pouring so much of my life into something, I at least want the possibility (even if the probability is low) of a life-changing financial outcome. It's pretty rare that you're going to get that with a base salary, even at a larger, well-established, public company that has decently high growth.
And I get it, some people just don't want to make the base vs. illiquid-equity trade off. An early-stage startup is probably not for those people anyway, and there's nothing wrong with that. I did it three times: one was a complete flop (after I'd paid to exercise options that became worthless shares), one was a mediocre flop (got out of there in under a year, knew they were incapable of shipping, turned out I was right), and one was more successful than I ever expected. And yet I'm happy I joined all three, even the first one.
> Outside of FAANG (and top executives at F500 sized public companies) very few people are getting rich off of the "equity" component of their TC.
Not even at* FAANG. A new hire (today) at one of those companies is not going to get a life-changing equity grant. A hire from back when they were relatively new companies (or, as with Apple, down in the dumps circa 2000) can get that. But, a hire at that point will be expected to work more (often much more) than a normal 8-hour day.
I think people forget that a mulit-millionaire Googler who has been there since 2003 and is still there now is likely mainly rich because of the equity they got in the first 3 or 4 years. As companies mature, their equity comp declines rapidly. If that same person had joined Google 5 or 7 or even 10 years ago as an individual contributor, their equity comp would not make them rich; they're now getting most of their wealth from base salary.
> The vast majority of startups go bust before IPO or acquisition.
Right. And that's why you shouldn't join a startup because you expect to get rich. You should join because you like that style of work better than large-corporation life. But if they're going to expect you to pour your life into that startup, you should get a big chunk of equity that can -- if things work out -- compensate you for those long hours someday.
I joined a startup in 1999. There were 3 founders and I was employee #2 after that. I received a ton of options (this was before RSUs became popular). We had a great product and a great team, but 18 months later ran out of money and unfortunately it was right after the dotcom implosion of early 2001 when funding had completely dried up.
My takeaway was that base salary is actually the most important component of TC. Cash bonus based on some metric that you control comes second. Equity comes third. If you work for a FAANG, maybe equity can move higher up (though it remains to be seen how long this will be true).
Outside of FAANG (and top executives at F500 sized public companies) very few people are getting rich off of the "equity" component of their TC. The vast majority of startups go bust before IPO or acquisition.
Time is the most valuable commodity you have, don't squander it for lottery tickets and empty promises.