Salary = compensation for doing the job

Equity = compensation for taking the risk of working at a company with a high chance of failure

Therefore, in the future, an employee with lots of equity should still be paid a normal salary/raise/bonus because the equity isn't "current" compensation for doing the job, but a reward for taking a risk long ago.

But ignoring equity entirely is silly. Much better to say that you should consider salary and equity separately. One is for doing the job and the other for doing it now when uncertainty and the possibility of failure are high.

Also, some people (like me) would trade an increase in equity for a smaller salary, so it's not a perfect separation. I had a job offer once that gave me two options to choose from, which was really cool.

In which they suckered you into a false dilemma. You should always reply to those stupid negotiating tactics with "Both. Higher salary and more options."

But I learned a lot from working with him and met people that I still keep in contact with. I don't regret my choice to take the offer.

So the two options you were given was more cash less equity or more equity less cash. Doesn't that negate your point that you should consider salary and equity separately? I don't really see from a financial perspective how you can seperate the two when considering a job as both relate to the risk you are taking.

It's also a little similar to how founders essentially work for free in exchange for lots of ownership. If, as an employee, I can work for less money now, then I'm taking a bigger risk betting on the outcome of the company.

Startups often want to minimize cash flow, and some employees are interested in helping out with that in exchange for having more ownership. So it works for both sides.

But I try to keep "doing the job for salary" and "taking a risk for equity" separate in my mind.

http://www.investopedia.com/terms/r/riskrewardratio.asp

By trading salary (you could get paid more at a big co) for equity you are inherently making a financial decision by investing the difference. Keeping these things seperate is not the same as not thinking about them.

If you are talking taking about taking a pay cut to work with people you really like or to do more interesting or less stressful work then I understand. Apart from that I don't see any reason why you would take less salary unless you think the rick reward ratio was favorable.

Most job offers don't include two options to choose from. Since I did have that choice, I evaluated my options exactly as you mention: whether to (effectively) invest the salary difference in exchange for more equity.

In most cases, job offers don't include that choice. If that had been my situation too, I would have evaluated whether the salary was worth doing the job. And then evaluated whether the equity was worth the risk of joining an insecure company.

But since this isn't an absolute rule, I might have tried to negotiate more equity if the salary wasn't quite high enough for me to make the jump. Or maybe asked for extra vacation time, or the option to work from home. (I've done all of those.) I know salary and equity cannot be kept totally separate, but I do start there when evaluating how I will respond to a given job offer.

But if you are getting a normal salary, what is this risk?

I worked at a startup where towards the end before their buyout, they weren't paying the phone bills, and their core profit center was a call center. When you work in that situation and trying to troubleshoot downed circuits, which turn out to be shut off for non-payment, that's some serious stress.

Right now I work for a government org with some really awesome technology challenges. Plenty if politics, but also security and ok pay. I'd rather have a constitutionally protected pension and startup+ pay than startup pay and no equity

And just to add: my view is that at a startup, "market rate" is too low, even with equity on the table (to a certain extent--if it gets to double-digit equity my opinion is the negotiation isn't about bringing on an employee so much as a legitimate co-founder) especially given the broad responsibilities early employees are tasked with and the high likelihood of failure.

Having a role at a startup doesn't automatically imply useful experience has been gained, or that the specific position and duties are somehow more solid than equivalent roles at established companies.

At most your risk is missing out on, say, a week's wages between jobs.

You should definitely get some premium for this risk - how much is open to interpretation.

At any rate that was advice given to me by my father, who worked in the IT department of a large oil company, had a long line of pointy haired bosses who took the credit for anything that went well, which was eventually gutted and outsourced leaving just him and a couple others as insurance. I've regretted it when I did not heed that advice.

I'd disagree with that. Some of the most entertaining bits of work I've ever done were for companies whose main job wasn't software.

The problem isn't companies who aren't focussed on software. The problem is companies that don't value the great things that software-oriented folk can produce. Unfortunately there are plenty of the latter in the software-focused end of the spectrum too.

Don't work anywhere that treats you badly. Sure. Don't work anywhere that doesn't value you. Sure. Don't work anywhere you don't enjoy yourself. Sure.

But I know some folk who are having excellent fun at banks. Solving stupidly hard problems that fascinate 'em, fostered by great management, and being compensated very well for their trouble.. I know others who have worked at large tech focussed companies that have had bloody awful stories of management idiocy. Hell — I've got more than enough horror stories from smaller tech-focused organisations.

Plenty of non-software companies can live or die on the quality of their algorithms. It could be a small development team but it can be challenging and rewarding. Plus it will give you a bigger perspective.

The key is to work somewhere that you are valued.

Notwithstanding the fact that a ton of companies that would like to believe they're "software" companies really aren't, the high turnover at Silicon Valley firms suggests that working for these types of software-centric employers isn't the happiness panacea you make it out to be.

Working for a "pure" software company is great advice if you are optimizing for overall happiness, but not so much for maximizing your income.

I cannot agree enough with this. I know it's anecdotal, but I've had more than ten jobs in my career so far and the only exception to what you're saying was an initiative by a highly technical and visionary director (later VP), which was scrapped as soon as he left the company.

The point I'm trying to make is that it sure is possible to have a really fun and challenging job as a programmer in a non-software company, but it's a stroke of luck you should never, ever rely on and it won't last. At least, that's according to my experience so far.

I think that this also applies the other way around. If you're a founder building your early team, you should not hire people who want to join because of the equity. You should be bringing in people because they want to work on the problem for the salary that you can give them or promise to give.

If you hire someone who has an expectation that he will make a million dollars in 4 years - it can lead to a lot of bitterness while you are building the product - especially when you are having a few bad months. Have seen this happening a bunch of times.

Equity != Money, equity ~= the percentage of ownership and responsibility.

Edit: Salary AND relatively high ownership of the company / product. Some people don't mind taking risks if they have an opportunity to build and own something great.

I think this holds in starting but ownership and responsibility is more on people's attitude. The equity will also remains the same(in %).

I like your point about not joining/hiring to make few millions in 4 years. It probably is a driving factor in start but wont sustain for 4 years. Again people's attitude.

The entire point of the corporate form is separating degree of ownership from degree of responsibility.

Now let's look at E2 which will be the expectation value of a payout from investing your salary difference between a high paying corporate job and a startup. Let's set this number at a safe value of $50,000/year. Invest $50k a year for 10 years in some safe stock and bond mutual funds and I bet E2 and much higher than E1. Heck, invest $50k year in lottery tickets and you might make out better than working at a startup.

That's not to say you should ignore startup jobs. They have a ton of other benefits. Just seems like equity is not one of them unless you are a founder.

You can think of employee equity as insurance against "I joined Facebook early and all I got was this lousy t-shirt."

FWIW, I joined a startup as that third partner (domain expert + execution guy), taking 10% of the equity while collecting 70k/yr (my base rate is north of 200k/yr otherwise). It would have brutalized the startup's seed money and jeopardized them if I somehow didn't perform and deliver.

Edit: your point is that good engineers cost $150k (really closer to $200k with taxes, etc). That's correct. So what happens when these engineers as a group realize that taking $70k + 0.5% equity is not the same as taking $150k + full benefits elsewhere? What other options do startups actually have at that point? More importantly, will this point happen and will it happen soon?

Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.

So, there are several bad things that can happen with options/equity.

1. The company fails, the options are worthless

2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience).

3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).

If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there).

Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.

If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it.

When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed.

If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will.

But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.

(Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)

I think this is spot-on.

So I don't think it's quite that clear cut.

Once a company has enough revenue (or investment money) to hire employees, much of the risk has already been removed. A product is either prototyped and tested or partially built. Discussions with potential customers have already taken place. Initial marketing strategies and plans have been made. And founders often do that without getting paid or even a guarantee that they will ever get paid.

They also end up with 10x-20x more equity than an early employee who gets paid a normal salary.

So if equity in a company is highly motivating, and you don't mind working on an exciting idea knowing that you may never see any money, then founding a company might be a good fit.

Or you can make job decisions now that will help you learn to be a founder in the future.

Founding a company is a roller coaster of joy and despair, so it's not for everyone. I haven't tried it yet, but a side project of mine has felt like that roller coaster. I can only imagine that doing it full-time would be the same, except magnified.

Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it.

Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell.

And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings).

This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move.

I am not a financial advisor, this is not advice, blah blah blah...

Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.

Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse).

All in all, as an employee, I would value equity between 4-10 times less than the investors would.

to me, that's a red flag on multiple levels.

Really? Even if some 'banks' pay better, these banks tend to be located in a handful of cities in the world - but there are startups in a lot of more locations.

And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000, not far ahead of the average base salary of $87,000 for a software engineer at a tech company, according to salaries self-reported by employees on the jobs and careers site Glassdoor.com. http://www.marketwatch.com/story/silicon-valley-vs-wall-stre...

so for a highly sought after trading associate (real example, really high valued financial institution), get 100k base but also getting forward guidance for a 200k bonus at an absolute minimum - e.g. if not turning out to be completely incompetent.

1.) My point was to answer (here, I'm quoting)

> And it doesn't seem clear that finance firms pay that well: > The average base salary for a software engineer at a finance firm is $92,000

by saying (and here I'm quoting the first sentence of my post)

> The best in finance have most of their compensation on a perfomance-bonus basis.

which is a relatively straightforward clarification, and on which point I went on to cite 100k base + 200k bonus.

As to the second point?

2.) I've yet to meet anyone "software engineers at software firms" who "make tens of millions". Or maybe that's just biased to my age group? But the best from my circles turned a 200+ offer to found a startup, and then a year after that didn't work out, has since taken a 300+ offer. I can assure the level of talent required for something like this is, indeed, atypical.

But I also can't say that you're wrong, since I can't say I'm familiar with every outlier case. Just that your experience has been different?

Well, at risk of sounding nasty, I actually don't think what you're talking about -- again, people working as software engineers at software firms making annual incomes measured in multiple 8-figures -- exists anywhere, even as an outlier.

I also happen to know quite a few finance guys at top tier shops who are not quite cracking google-level compensation, even all in. But this is all anecdotal, and may not be representative of shops you're talking about.

This is actually a very good piece of advice.

Are they less parasitic if they just sit on their money, or are they parasites just for having the money in the first place?

No, it's the opposite. The vast majority of firefighters eventually have to fight a fire. The vast majority of startups never catch fire.

Just the job security alone is enough to balance out the equity. A shitty salary is not an excuse.