Talented engineers are well served by a rule of thumb not to reach for more equity, but rather to negotiate in terms of their actual rate. The startup that can't reason about your comp in terms of the going rate for engineers, that instead reflexively assumes you're wasting their time, is a startup you want to avoid working for.
Employee private stock outcomes are generally very poor even when the startup "succeeds". No party to the financing of a startup is served less faithfully than the ones who contribute via deferred or diminished salaries.
That doesn't mean you can't compensate engineers by giving them "skin in the game", but it does mean that when you write derisively about a candidate using their going rate as a starting point, you risk communicating something very unfavorable about your business and hiring practices.
Should you expect your going rate at an established company plus equity? That seemed to be one complaint from the article; they offered him a big salary with less equity:
"He...took the two offers we gave them (big salary/small equity and small salary/big equity) and created a custom big salary / big equity + bonus counter offer that was laughable at best."
[edit] I agree that most engineers overvalue equity, just like most people overvalue a lottery ticket.
Your going rate at established companies is probably simply your going rate. Start there; it's what the market values your services at. That number is your floor, not your ceiling.
At a financed, leveraged startup, you're not going to get that number in cash. But you need to get that number, risk-adjusted, in some fashion. Generally, engineers should not expect to be "worth less" to startups. They're just compensated using different instruments.
The problem with berating engineers for framing comp discussions in terms of their going rate is that engineers can't value equity the way founders can. It's an asymmetric information problem. The founders know more about the value of their equity and have more control over the variables that will change those values. So the onus is on the company, not the candidate, to justify the equity grants being used to offset salary.
The way that should probably work for most startups is a conversation about expected future revenues. Acquired startups aren't really valued in terms of forward revenue multiples, but that is the scoring system used by most bystanders to evaluate a deal. So a compensation discussion that involves equity should involve quarterly revenue projections and a notion of what multiple of that revenue the company might be acquired at (or, if you're shooting for Mars and not the moon, where you'd IPO at --- but the IPO story is usually so B.S. that it's a warning sign).
A founder who can't have that conversation with a candidate or can't do it convincingly has no business trying to sell equity to a candidate. Which, make no mistake, is exactly what founders are doing when they compensate employees with equity: they are selling stock in their company, and it's the least valuable stock in the company.
> At a financed, leveraged startup, you're not going to get that number in cash. But you need to get that number, risk-adjusted, in some fashion. Generally, engineers should not expect to be "worth less" to startups. They're just compensated using different instruments.
Completely agree.
> The problem with berating engineers for framing comp discussions in terms of their going rate is that engineers can't value equity the way founders can. It's an asymmetric information problem. The founders know more about the value of their equity and have more control over the variables that will change those values.
And this is the part where I personally believe in 100% transparency. I am here to build a business that will make everyone involved happy. I am not afraid to show you the things that are going well, or the things that are going terrible or to share any other number with you. Of course, you don't know if I am lying to you or not. But guess what? The same is true of any job. It is naive of the founder to believe that they can permanently hide the state of the startup to the people they are hiring. If I lied to you, you will find out soon enough and leave. There are so many amazing startups in Silicon Valley, that is dumb for a founder to lie about these things. So the better approach is to be 100% transparent from the beginning.
That's great, and I believe you, but you should know when you write things like this that every startup founder ever says the same thing. You can make a more compelling case with actual numbers.
The bigger issue though is, when someone comes in too expensive for you to hire, that's not a flaw in them. I am guessing you hire fewer people than I do, so, words and words and words to the wise: people are going to come in higher than you can afford. Some of them will be people you'd want to hire, others not. You are probably no more reliable at valuing them than they are. Don't get irritated about it and don't preach. Just shrug and walk away. Thank them for their time. Don't get mad at them for wasting your time. If you are serious about recruiting, nobody can waste your time. And nobody looks good trying to tell people they're worth less than they think they are. Ever.
At your going rate, I would expect some not much. The risk of start up failure is greater than the risk of lay offs and large company failure(in a time frame that would be relevant to an employee who values the safety of large company life.)
> Employee private stock outcomes are generally very poor even when the startup "succeeds". No party to the financing of a startup is served less faithfully than the ones who contribute via deferred or diminished salaries.
A six-figure salary is by no means "deferred". And, of course, I understand that there is a big difference between 100K and 150K/year. The whole point of the blog post is that if you want the 150K, then you can easily go to a Series C funded startup and get that (alongside the lower equity offer). If you want a higher stake, then you can go to the earlier stage startup, get your 90K and huge chunk of equity. If the parties want to have a custom "in between", then that is reasonable, too. Some startups can do it, others cannot depending on cash-flow. Expecting early stage-like equity and later-stage-like salary doesn't make sense. Not to mention the other equally important issues that we had with the candidate.
Your first sentence is a non sequitur. It's grammatically correct but contains no detectable semantic meaning. Salary is deferred when it would ordinarily be due immediately but is paid later. Formally, a deferred salary is a commitment to pay a precise amount of money at some point in the future. Colloquially, any promise of compensation that would ordinarily be due in the next pay period but will instead come 1-2 years from now at "exit" is a deferred payment.
Your reasoning about "Series C" versus "Series A" startups and salary expectations is also suspect. We pay market salaries to a large number of very talented, very specialized engineers and haven't raised a dollar of funding.
The problem with your reasoning is that it isn't based on the market, but rather on some kind of status hierarchy about startups. The mistake I think you're making is that you frame things in terms of "90k and a huge chunk of equity", rather than "your market rate of 150k, 2/3rds in salary, 1/3rd in equity, risk-adjusted based on expected liquidity from revenues we forecast at N, N+1, N+k over the next k quarters, at acquisition multiple y".
If you write the blog post that way, so that you can make a case that a 150k candidate is effectively demanding 300k, your post starts to make sense (but it's a little boring, right?). But when you write it in terms of "Series A employees should get 90k", you go way off the rails.
Later edit: you can also reason through your equity valuation with a candidate the way 'ChuckMcM does, but it seems like to do that honestly, your equity would need to be liquid enough that you could place another x00,000 shares; in particular, you can't just treat your last valuation as gospel; just like your B investors can reduce your valuation, so can candidates.
Your analyses are very good and your posts pedagogical.
I'd like to add that, just as you have the company presenting this in a certain light, the engineer needs to look at this investment of $60,000 a year of his personal money as cash salary to buy stock in a startup the same as a $150,000 a year earning person would view any other $60,000 a year stock investment in an extremely high risk unproven early startup. As a point of comparison, we know that Y Combinator gets significant equity for one time investments of only $10,000 in early stage startups. An investment of $60,000 a year should be valued similarly. Clearly the employee is directly contributing more than six times as much as Y Combinator does and should receive six times the equity for that first year.
> Expecting early stage-like equity and later-stage-like salary doesn't make sense.
Not for you maybe, but for the lucky sob who gets it, it definitely makes sense! Just like employers generally aren't in it to be "nice" to their employees, employees are not trying to be "nice" either. Now if you have a scarce resource, you are supposed to try and get a as high price as possible for it. Free market and all that.
Also, this James fellow, if he actually was an amazing engineer, one of the best in the area and Google-material, then I don't think it is unreasonable for him to ask for both a high salary and a big chunk of equity. If he also worked "crazy hours" that one of him would replace a team of 3-5 average engineers. If so, you were the one pasing on a great bargain. :)
The less he talks about these red flags the happier he will be. Just the concept of interviewing someone and then writing a negative blog post about it is skeezy.
Employee private stock outcomes are generally very poor even when the startup "succeeds". No party to the financing of a startup is served less faithfully than the ones who contribute via deferred or diminished salaries.
That doesn't mean you can't compensate engineers by giving them "skin in the game", but it does mean that when you write derisively about a candidate using their going rate as a starting point, you risk communicating something very unfavorable about your business and hiring practices.