The difference between an employee and an investor is that the investor puts their eggs in many baskets, and an employee puts all of their eggs in one basket. So investors get diversification of risk while employees do not. Therefore consistently accepting low probability but potentially high return choices on average works out well for investors and not for employees. And in fact investors push this way - their incentive is always to "swing for the fences" because their business model is based on the one or two investments that work out which pay for the failures.

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.)

'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.'

I think this is spot-on.

hmm, I just got a gig where we want to cut a salary/equity deal (we're checking each other out for mutual fit via hourly at first). I will be in no way a founder, but it appears to me that my job will be in significant part to get the code into a state where it's in a state for handover for acquisition.

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

I am also in the 'worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder' category. What I meant to say is that founders take more risk and get more equity than early employees, and that is how it should be.

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.

Okay, so let's look at it as an investment.

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...

Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.

I think you're confusing some concepts here. Dilution happens when new shares are issued causing your percentage ownership to go down. In general it's not a bad thing - when there's a new funding round the new cash will increase the value of the company to balance out the dilution and you end up with your equity being the same value. The thing people forget about when they talk about dilution from new rounds is that the cash added to the balance sheet increases the value of the company, probably even more than 1:1.

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.

The risk profiles and the investment profiles of most investors are completely different from those of most employees, so there is no way that equity has (proportionally) the same value for employees and investors.

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.

Yes, but investors spread their risk, as an essential part of their strategy. Employees have no such opportunity.

In my experience companies won't share what the percentage is of the stock you are getting. They just say you are getting X number of shares and won't tell you anything else. How do you verify what they are saying is correct?

Telling you total outstanding number of shares is required before you can have any idea what level of equity you are receiving. If they can't tell you that, then you have one problem. If they won't tell you, then you have another. Either way, I would be concerned.

I've never experienced that; I wouldn't stick around in any negotiation where that occurred.

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