You are the ultimate check on that. If the compensation package makes the startup not attractive compared to staying put, you should stay put.

It’s up to the startup to put the offer to you, but up to you whether to take it.

Oh, totally agreed 100%. I’m just saying that there is a way to value a time investment that is on par with what financial investors are buying into. It doesn’t need to be some hand-wavy idea of who’s ‘risking’ more due to the unknown chance the startup might fail, and it doesn’t need to speculate about who would be hurt worse. It can be a purely fair and financial idea for early devs; their stock compensation value is the discrepancy between what the startup pays and what their market rate is.

I'd be fine with it not matching exactly. I'm willing to pay some amount of opportunity cost in lost comp elsewhere as an investment in the company. I'd just like the ROI on that investment to not be like 5-10x worse than a VC's.

I’m also fine with it not matching exactly. In fact, I have only ever accepted offers where it doesn’t match exactly. :) But, one thing to keep in mind is that the value of a time investment in a company naturally goes down over time as the company grows larger, and as the company is able to pay more competitively. Investors will get a larger stake because of when they put the money in, all up front. Devs typically won’t get the same stock compensation dollar for dollar, only because the time investment is spread out. My time during the third year might be measured against a company with a much higher valuation than my first year there.

> based on today’s valuation of the stock.

This is the tricky part, especially if you are very early.

Really what you want is the (statistical sense) expected value of the equity be something like the opportunity cost, for it to make sense for you. But until the company has been around for a while and through a few rounds, valuation is mostly a fantasy...

It’s not that tricky, because the investors are getting a valuation. The money I risk/invest/forego now because it’s a startup maybe ought to get the same valuation the investors are getting, that’s all.

I really agree with your point. I don't see how most startups could make competitive offers with unicorns/FAANG, unless it was for non-monetary reasons like a promotion.

Give out way more stock options, so that the pay is the same risk-adjusted.

Early stage startups should be showering employees with high risk equity and paying less cash compensation. This saves the company money and allows them to hire better talent. Having highly skilled engineers/bizops/designers/sales staff who are incentivized to make the company successful is a huge win.

Not just early stage startups. Any startup that's competing with FAANG for talent should be competitive with FAANG on compensation, on a risk-adjusted basis. Which means if there's a successful exit, everyone makes more than they would have than if they had just worked at FAANG. Early-stage employees should make a lot more, and later-stage employees should make somewhat more.

I'm not really sure how options should be valued, and I haven't negotiated from a position of have a ton of unvested equity. But if an engineer got extremely lucky by joining the right startup, say Coinbase, leaving early might mean giving up a few million in unvested equity.

That's a lot of equity if the startup treats that lost income as if the engineer had invested that amount in the last fundraising round. Options instead of stock, common instead of preferred shares, and risk adjustment should all probably increase the equity amount. I'm not sure that most startups would give mid-level engineers millions in equity.

so the key question here is what a "mid-level" engineer can do for your company early. An engineer with 5 years of experience at FAANG will easily make ~200-250k, competitive scaling startups and public companies will compensate equivalently withing ~30% in liquid compensation.

If that engineer instead works for 100k and takes 100k in illiquid equity which may or may not be worth something in 10 years, they are losing well over a million dollars in opportunity. Given that 5 more years at a top-tier firm would double their compensation they could easily be giving up multiple millions. To be employee #5-50 this individual should be getting an equity option that would reasonably be worth millions in an exit scenario for it to make sense.

Most startups simply aren't competitive for this mid-level engineer given current compensation practices. Which leads to a sub-selection of talent for those who for various reasons aren't willing or able to work at a firm willing to pay that level of compensation. Bear in mind, if the engineer had liquid equity from a public corporation they would be able to leave equity in hand after 4 years.

Whether this is a problem or not is an interesting question for startup CEOs. Generally I've found success in software is more closely correlated to the quality of employees than the quantity, and historically companies with generous compensation practices seem to be the successful ones.

Thank you!

Because there are considerably more jobs outside of FAANG then within it.

> It’s not that tricky, because the investors are getting a valuation

That works ok in theory if you are signing a contract at the same time a round is finalizing... otherwise it remains tricky.

Without the investment funds, where is the startup getting the funds to pay you 100k/year? Some startups take a while to hit big and the only source of funding is investors. Fair or not, there’s a power imbalance and ignoring that seems foolish.

Also, the view you have is biased to the rare success scenario. In the failure scenario, the employee comes out ahead since they at least got some amount of their investment back.

Also not all investors are created equal. Some investors are strategic partners who can help grow your business. They forgo a salary because they provide advice and a social network the founder can tap into at critical junctures. That’s extremely valuable in some cases. Not all investors play that role (or play it well) but it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.

Loans still exist. They didn't magically disappear with the rise of venture capital.

Have you tried to obtain a loan for a startup? I recommend you go try to bootstrap it without collateral & the bank is just happy to eat the loss when it doesn't work out.

I think everything you said is true at face value, but do you have a viable alternative proposal? Do you prefer to believe that financial investment is riskier than time investment, and do you want to preserve the status quo where there’s a power imbalance in favor of money investors? I’m suggesting a way to value an employee’s time investment in a startup that doesn’t depend on speculation or subjective discussion of who’s taking more intangible “risk”. Employees and investors are both sacrificing the same thing to participate: money.

> the view you have is biased to the rare success scenario [...] the employee comes out ahead since they at least got some amount of their investment back.

Maybe you didn’t understand my suggestion, because the cash compensation is not a return on investment. If you forego $100k/yr for stock options, and the company goes belly up, you lose that amount. The cash compensation is keeping you from making a larger investment, it’s a hedge against risk. Cash paid counts against the time investment. Your suggestion is the same as saying the investors come out ahead because they had money in the bank that they didn’t invest.

FWIW, what I’m suggesting comes from experience both as a founder and as a dev participating in a startup. As a founder, realizing that I don’t need to have debates about what skills or status someone is bringing to the table was helpful in negotiations. As a founder and dev, using time as the metric gives me a framework for thinking about stock compensation that can be applied to everyone in the company equally, and gives both parties room to negotiate. As a dev, valuing my time this way allows me to choose my level of risk, as long as the company is open to paying more or less cash, which several in my life have been. And best of all, as a dev, valuing my time this way typically ends up with a higher number than a random offer of some amount of stock where it’s hard to decide whether to accept it because it’s not linked to my effort.

> it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.

This is spot-on, and really goes to my point. It’s better to take that idea off the table completely, because there is no valuing contributions beforehand, and no fair way to measure it after the fact - if there’s a way to even measure it at all. Everyone in the company is investing something than can be measured and weighed fairly between people. The people who end up contributing more will enjoy faster promotions, longer tenures, greater chance of success, so they do end up compensated. But it’s a bad idea to try to let people argue about their contribution or value in non-measurable terms, and a bad idea to commit to paying for that before the contribution is made. I know this from experience, letting someone talk me into believing their contribution would be huge, and granting a large stock package, only to find out later when it couldn’t be changed that they were not the heavy hitter they made themselves out to be.

So I'm missing your point. If you forego $100k/yr of stock options to work at a startup, you're hedging your risk. You're still getting healthcare & a regular paycheck (even if it's less). This directly impacts the company's runway (i.e. your "100k investment" looks like a cost to the company. Don't forget that once you're past the seed round (where the company is literally making nothing), you're looking at multi-million dollar rounds where the minimum check size is maybe low-to-mid six-figures. That's also the point where employee compensation starts to rise btw so your sacrifice is largely meaningful just to you (not to mention that you are getting compensated well anyway in the success scenario, but less than those that took a bet with 0 hedge).

I'll note that nothing is actually stopping you from saying "sorry, no I don't want to work at your startup but would you take a 100k investment instead?" & becoming an investor yourself. You get to choose which role you want to play so why is "but I put time equity into it & didn't get rewarded the same" a fairness axis? You have access to all the information at your fingertips. To me if you're unhappy with a particular outcome that depends on which side of the equation you were on, that has to do with your own decision making ability/negotiating ability.

Again, all true statements, but I’m still not hearing any suggestion or viable alternative for how to value an employee’s equity, or how to grant stock. What are you suggesting? How would you grant stock as a founder? Have you started a company before?

My point is that there is a reasonable and fair metric and strategy by which to grant stock, and that this metric is not based on subjective and speculative and unmeasurable ideas about someone’s supposed risk and/or future contribution to the company. You’re making all great points, but none so far have been reasons not to grant stock according to a simple formula that considers the company’s valuation and the employee’s non-cash-compensated time investment. The top comment I replied to was referring to a subjective notion of “risk” on the part of investors, and that’s what I’m responding to by pointing out that investors and employees are risking exactly the same thing, especially if the employees do what you said here and evaluate what role they want to play the same way the investor did.