That's the same as asking why do startups bother with starting a company. If the startup succeeds, you want employees to be aligned with the company success and motivated to stay and vest. If the company doesn't succeed, the equity is worthless.

From a strictly monetary point of view (as in, not counting the type of environment in which you want to work, etc.), let's say E1 is the expectation value of a payout of your equity in cash. So E1 = probability of a sale where your type of stock does not get screwed * cash value of your stock in this deal. E1 is by all accounts and all advice incredibly low.

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.

My former employees from IndexTank would differ. Our acquisition was life-changing to them. They didn't value equity at all when they joined, yet it worked out really well.

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

That is really good for you and your employees (no sarcasm intended at all; it really is a good thing). However, this case is an outlier. The percentage of startups that straight up fail or at least don't get sold is huge. The percentage of startups that succeed and make it to a sale/IPO but don't get a high valuation at this point is huge. The percentage of startups that get sold/go public but don't pay out or don't pay out enough to their common stock holders is huge. It's true that every lottery winner thinks that the $2 lottery ticket they bought was a great investment. That doesn't mean that investing significant amounts of money/time in lottery tickets is sound investment advice.

I think people who equate startup equity with lottery tickets don't really belong in startups to begin with. The whole point of working at a startup is that you go there and you make it succeed. Now of course there is still luck involved, and you shouldn't be so naive as to blindly take every founder's change-the-world pitch at face value, but whether you are a founder or early employee you have to believe that you can make it work.

There is a huge difference between making a startup succeed and a sale that pays out to you. A startup can get sold for lots of money but if during that sale your stock is not set up to be paid out, you lose. As an employee you can make a difference for whether the sale happens or not. You have very little control over how it happens.

Seems like you're moving the goal posts. I acknowledged luck in the equation, but how the sale happens has a lot to do with the founders, that is the people you decided to fall in with. Again, it's different from a lottery ticket because you can have knowledge about the founders, their track record and there modus operandi. The average first time startup employee might not have a clue, but that doesn't mean it's impossible to gain good insight that you can apply in your decision to join as an employee.

That is a fair point.

Thank you! I hope I'm right in my particular case ;)

It's not impossible to get life-changing money by being an employee in a start-up. But it does require a bunch of things to all line up, many of them outside of the employee's control, many others the employee hasn't even considered.

Because early on when you only have 500k-1M in the bank, you can't get the tier-1 150k+/year engineers and preserve your runway easily. Also, base+equity allow people a bit more of a trial period and spreads out the risk more. Lastly, retention is super important and you want to align risks/rewards. The idea is that you are giving people stock and diluting your share because you have conviction that post-dilution your sum will be a LOT more. :)

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.

Right, so in your case it makes perfect sense. You are a third partner with a 10% stake in the company. Contrast this with a first employee who is getting a 1% stake and less than half the normal salary. Would you have taken this position for a 1% stake, all else being the same?

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?

For retention. If the company actually starts taking off, the equity keeps people there. If they don't have equity, every person with a decent title at a fast growing startup will jump ship to other competitors immediately and get a big (cash) raise. The equity keeps people in the fast growing startup longer. Golden handcuffs and all that.

But if it's worthless, and the employee realizes it, then it will not serve its purpose. Case in point: my last gig gave me something like 0.15% of the company vested over 4 years. I left after 2.5 years and the equity did nothing to keep me there even though the company was in a reasonable place financially. Why? Because 0.15% * the valuation * likelihood of a sale * sale price * likelihood of my shares actually being given any value in a sale is effectively 0.

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.

Conversely, if the startup starts taking off, the startup might look for an excuse to fire you to weasel out of paying your unvested options. That happened at Zygna and Facebook.

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).

in my case I built the product and got sales going on my own. Lived EXTREMELY frugal for the next two years and stashed away six figures of profits. At that point I decided to bring people on at market rate salaries. Investors were impressed and since the need was on their end, they gave me quite a sizeable first round of investment, which I used to hire more people at market rate

it's like a lottery ticket. odds are it probably won't be worth anything, might be worth a lot.

It's unlike a lottery in that a lottery is pure chance. In a startup, you have an active role in changing the odds to succeed, however small they may be.