[LRUG] Looking to meet...

[Paul Robinson]

On 14 Sep 2011, at 19:15, Stevie Graham wrote:

> Equity options are a useful way to get people to behave irrationally.


Woah there, equity options != equity.

You should only take *equity* in lieu of a higher salary, never options. Options have a whole barrel of issues with them that mean they must be seen as nothing more than a bonus that might never get paid (or in accountancy speak "realised").

I think in most UK start-ups where founding teams are 2-5 people, straight-up equity is common. The next trenche to come on board will typically get options. If you're in that next round of recruitment, you are probably looking at a company that has revenue, possibly profits, and has market validation. If it doesn't, don't take the job! :-) Anyway, options in that scenario are fine (caveats Stevie points out notwithstanding), because a lot of the risk is gone. There's still some there, but you're probably going to get offered a decent salary anyway.

When you first walk in and there's nothing more than some ideas on a whiteboard, well, options are worthless. Equity is where I'd say you need to be.


> We're innately wired to be loss averse, and so when we have already made sacrifices for a possible greater gain in the future (anticipated pay off from equity options in lieu of salary) we're less likely to walk away and cut our losses, a.k.a the good old sunk cost fallacy.


Absolutely. This is why I like equity over options: if you walk away, you still own a share of the company.

It actually makes it easier to walk away: "Hey our cash burn is really high right now, how about I come off pay roll and go do some contracting for six months whilst sales and marketing pick up? We don't need too many new features right now anyway, and I'll bug fix in my spare time to protect my equity" is a conversation I've started several times.


> The funny thing about this anecdote is the option grants had not been formalised insofar that not only were the actual grant amounts still undefined, the entire options scheme existed only as a vague verbal agreement. Cue excuses of  "It's too expensive and time consuming to sort out now, we need to focus on customer acquisition and series A". Remember, equity options are a useful way to get people to behave irrationally.


Uh-oh. That sounds like that story doesn't have a happy ending...


> You have to stay 4 years for your grant to vest, and your position is also extremely weak to negotiate a better salary when the startup is well funded or profitable. That's a cost of £100,000 to you, and the startup has to exit for £10,000,000 just for you to BREAK EVEN. Have a good think about the product, the team, etc and ask yourself the questions "How common are £10MM UK exits?" and "Do I think there is a realistic probability that this company will exit for £10MM+?" 


I agree most people over-value equity and options, and under-value a decent salary. I also think some founders know this, and deliberately exploit it.

Those people calling me "nasty" or breaking "the spirit of the list" don't realise that all I'm actually trying to do is raise a serious point about some people being exploited when there's no need for it: I'm actually hoping this conversation turns into one where several people look at the deals they're on and question them.

Perhaps it's the Northern trade unionist in me, but I *hate* people not getting fairly rewarded for their talent.


> You're taking a huge risk by taking equity in lieu of pay, Most startups fail, and working at an early stage startup is a bit like being in the wild west; don't be surprised to be let go for some bullshit reason when traction doesn't happen and the startup needs to slash costs to stay alive. You won't get your unvested options in this case, you've wasted your time.


Reasons I've had to leave start-ups with nothing:

- A director having a serious cocaine addiction which only made itself apparent to me when he tried breaking into my hotel room at 2am to verbally abuse me and start a fight
- The realisation that a couple of the directors had remortgaged their homes 3 times in 6 months to meet pay roll, and had kept it a secret
- £1.2 million spent on tech, £3.3 million spent overall on a product nobody wanted or needed (worse, most of that money was public money), and the realisation after 4 years that maybe we were just setting fire to cash every day
- The VC pulling the plug on future trenches of funding already committed to because "not enough is being spent on sales". Just because a VC says they're going to give you £x doesn't mean you'll actually get it

And those are just the ones that spring to mind. However, I like having skin in the game, I like the potential rewards that come with the 1-in-10 start-ups that succeed, and I like the motivation that comes with it.

I am happy to take equity in lieu of salary, but only if I believe in the product. Otherwise I want fair compensation.

What I'm not prepared to take is half market rate just because it's a "trendy" start-up and to work long hours for zero perks...


> You're basically investing £100k of your own money in the company. What terms would an angel investor get for that? 10-20% probably. Think of it that way and it starts looking like a huge scam.



You should definitely run the numbers, and you should definitely push those numbers back across the table to the founders. They'll normally better their offer. That doesn't mean it's a scam, just that it's a calculated risk - as long as you bother to calculate it first!