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Open guide to equity compensation

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656 points mooreds | 4 comments | 13 Apr 25 19:13 UTC | HN request time: 0s | source
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cj ◴[13 Apr 25 20:33 UTC] No.43675640[source]▶
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.

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__turbobrew__ ◴[13 Apr 25 20:50 UTC] No.43675759[source]▶
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.

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pc86 ◴[14 Apr 25 12:39 UTC] No.43680644[source]▶
Somewhere along the line "privately-owned company" morphed into "do what in any regulated industry would be considered fraud."

Multiple classes of stock for non-investors in a pre-IPO/private company should be illegal because there's no visibility or transparency. The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Maybe have an out if you have verified third-party audits and cooking the books like you mention (which happens all the time) carries the same fraud penalties as if you did it for a public company.

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1. chrisfosterelli ◴[14 Apr 25 16:24 UTC] No.43683007[source]▶
Not every company is a unicorn. For bootstrapped companies that might never sell, multiple classes of stock can be extremely useful for a variety of legitimate accounting and dividend purposes. One of the local law firm's company setup packages uses a de facto _six_ share classes.

I agree with your concerns re. transparency but I don't think eliminating share classes would fix that.

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2. haneefmubarak ◴[14 Apr 25 16:47 UTC] No.43683255[source]▶
I'm super curious - what are the six classes and what's the reasoning behind them?
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3. chrisfosterelli ◴[14 Apr 25 17:15 UTC] No.43683607[source]▶
A common structure would be something like:

* Class A - voting shares, founders / controlling parties, etc. Typically small fixed share count (e.g. 100), not issued dividends directly but used to represent percent of controlling interest.

* Class B - non-voting shares, early stage employees, advisors, supporters, etc. Used to issue dividends.

* Class C - Same as class B but reserved for future issuance through more formal programs like ESOP when you're ready for that

Then you might have some preferred shares for investors, say class D and E for two investor groups and then a Class F for convertible debt (even bootstrapped companies can have owner / friends / family / seed / etc money, plus may want to not rule out raising at some point).

This is obviously a lot of classes, but by doing something like this you can separate control from economic upside, create different terms / stock agreements for different classes, keep room for future planning (things like ESOP), facilitate investor needs (they almost always want preferred shares), have more flexibility with fundraising or convertible debt, etc.

I'm not actually trying to argue that exactly six classes are necessary or optimal, but moreso that its common to want not just one single share class. Practically speaking I imagine that firm does six because they're trying to give a template that'll work for many of their companies and reduce the amount of per-customer customization. My company has less although more than one.

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4. haneefmubarak ◴[14 Apr 25 21:07 UTC] No.43686350{3}[source]▶
Ah, I'm thoroughly familiar with the idea of multiple share classes (although I must commend your excellent explanation and examples here) - I was actually particularly interested what their six choices were to cover the bases as a lowest common denominator etc. No worries at all if you can't say though, I get that.