Open guide to equity compensation

As our 30 person startup has grown, I made a conscious decision to stop pitching stock options as a primary component of compensation.

Which means the job offer still includes stock options, but during the job offer call we don’t talk up the future value of the stock options. We don’t create any expectation that the options will be worth anything.

Upside from a founder perspective is we end up giving away less equity than we otherwise might. Downside from a founder perspective is you need up increase cash compensation to close the gap in some cases, where you might otherwise talk up the value of options.

Main upside for the employee is they don’t need to worry too much about stock options intricacies because they don’t view them as a primary aspect of their compensation.

In my experience, almost everyone prefers cash over startup stock options. And from an employee perspective, it’s almost always the right decision to place very little value ($0) on the stock option component of your offer. The vast majority of cases stock options end up worthless.

Even if the company has a successful exit lots of times the founders have different stock class than employees which allows them to cook the books in creative ways where employee stocks are devalued without affecting founder stocks.

I personally went through a successful exit of a company where I was one of the early engineers and was privy to orchestrating the sale (working with potential buyers and consultants) and saw this happen.

I now am granted stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud.

"Cooking the books" could mean many things but most people would interpret this as fraud. There are many exit scenarios that aren't fraud but rather stacks of preferential stock that get paid before common, who usually get paid last.

What happened in your exit scenario?

"Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most early stage startups is an intentional attempt to deceive employees. There's a lot of founders out there telling early engineers they're getting "0.5%" when they know full well that a $1B acquisition down the line is not going to put 5 million dollars in the engineer's pocket.

Can you explain? In most cases, preferences won’t come into play, assuming you raise at a standard 1x preference and sell for more than you have raised. In that case, owning 0.5% should roughly translate into $5M (modulo dilution).

That would be the naive mathematical interpretation and how the system would work if engineers designed it. Lawyers designed it, though, and they probably know some tricks to make that not happen.

You think engineers never scam?