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Last active Jul 9, 2019

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It's bad in the middle

It's bad in the middle

Trigger warning: this post talks about money. Skip it if you don’t want to read about money. For real: compensation, money – the whole thing stresses me out. I wrote it because I strongly suspect something’s going on, and that this suspicion has been confirmed a few times, and I think it’s worthwhile to sketch it all out. I take care not to name any numbers here: though you can make very little money in startups and many people manage to, a lot of people also make a lot of money, and the absurdity of the amounts never wears off, ever, and the jealousy will eat you. Note also that I’m not an accountant or a lawyer and this post has nothing to do with my current or previous employers.

Diagnosis:

  • Early stage startups give you equity for cheap, freedom
  • Public tech companies give you cash, liquid equity, stability
  • Middle stage startups are chaotic, less equity and at a worse price, and not as much cash as late-stage startups

Therefore, for a lot of people, it's bad in the middle. Early stage companies are risky as hell but can be worth it, and can also be exciting places where you can work on what you love and learn a lot. Late stage companies can be comfortable place with great work-life balance and the opportunity to work on impactful projects. Middle-stage companies are stuck in the middle, without a clear value proposition.


Here are the general principles:

Equity compensation is unequal in magnitudes, cash compensation is unequal in low multiples.

In short, the gap between 'founder equity' and 'early employee' equity is often 5-10x. The gap between 'early employee' equity and 'mid-stage employee equity' is easily 5-100x, or more. This dwarfs cash salary gaps. Equity is how most millionaires are made.

So equity is a lottery ticket, sure. But not all lottery tickets are created equal, and if you're offered a seat on a rocket ship, you sure as hell should ask which one.

Pre-IPO equity is a lottery ticket, post-IPO equity is cash with a tax loophole.

Pre-IPO equity varies in value between negative, zero, and a lot. It is often negative: as you’ll read all over the place, people can pay taxes to buy their equity and then end up 'underwater' with the stock worth little or nothing.

But stock compensation is a completely different thing in post-IPO companies. You can sell stock every month if you want, at a clear price. You can hold onto that stock with relative assurance that you can sell it in a year at a lower tax rate. It's not a lottery ticket: it's only a bit riskier than cash.

A round of funding is a discontinuity in the strike price of equity (higher is worse), and stability (better is better).

Equity is something you have an option to buy at a price. That price matters tremendously. It's supposed to be inexpensive, relative to what the price might eventually be once the company potentially goes public or gets acquired. But the price increases over time, before either of those events, and that’s simply bad for mid-stage employees: unless you’re even more optimistic than the frothy predictions of investors, you are taking a questionable bet.

In other words, if you get an email from a recruiter saying that they just raised a huge round of capital, they're saying we just increased our employee stock price. They're also saying that they just got more runway and stability. They're saying both.

The average time to IPO is increasing quickly is increasing, which means that mid-stage equity is riskier, worth less, and still risky

Megafunders like Softbank are essentially replacing IPOs or at least delaying them by years. There's some upside for early employees and founders: huge funding rounds often include buybacks which let them sell shares early at the cost of, well, potentially, the economy.


Caveats:

This mostly applies to engineers, designers, writers, people referred to as "Individual Contributors" or ICs in the tech industry.

My suspicion is that mid-stage startups are actually ideal for managers and VPs, because the main task happening is the formation of a large company, and that formation is all about structure. And that for lesser-paying roles, salary deviations are narrower.

I'm not your advisor.

This is what I've seen happening and I think there's some evidence that, if you're a mid-career 'individual contributor', the smart choice is to work at one of the ends, not at the middle. This is really, really, not financial advice of any kind.


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