Ever played Portal (or its sequel)? It’s a great game that combines characteristics of the first-person shooter genre with spatial relations puzzles in a really engaging way. I don’t think I’m giving too much away when I say that the plot driver in the game is a maliciously insane artificial intelligence. She promises you cake if you can complete all the puzzles.
Later in the game, you might run across this graffito:
It’s a narrative moment that manages to be disheartening without being surprising.
If you write software (or do interactive design, or any one of the jobs related to the field), you may, especially when being made an offer by a startup or early-stage company, be asked to take stock in lieu of salary. The company has limited funds, and needs to “extend its runway” or “manage its burn rate”, or whatever buzzphrase the kids are using these days to rationalize paying sub-market salaries. They’ll ask whether you wouldn’t rather have the upside from a good exit next year (or the one after, or the one after that) than a few tens of thousands of dollars in your paycheck this year (or next year, or the one after that)? There will probably be emotional manipulation as well, centered around the assertion that they want to work with people who believe in what they’re doing. You may hear the phrase “team player”.
Ignore everything they tell you that isn’t in the paperwork.
I’m not saying don’t take equity. It’s a very nice thing to have, if the company actually works out. Taking it in lieu of salary, though, can be a major mistake. You’re basically agreeing to get paid in lottery tickets.
There are a few reasons why trading money for stock is a dangerous idea (unless you’re a founder, which is a whole different matter):
The company probably won’t make it. Most don’t. That’s a bummer, but it’s a fact, and no matter how much you actually like the company or what it’s doing or the people working there, it’s a fact you shouldn’t avoid when negotiating your compensation.
You’re almost certainly getting common stock. Google around about the difference between common and preferred stock. The latter is what founders and investors get, and one of the things it means is that if the company folds, people with preferred stock get something out of the company when its assets are liquidated. You don’t. And if the company doesn’t fold…
A successful exit doesn’t necessarily mean that you get rewarded. You might make out, but a lot depends on the ethics of the company’s investors. A new investment round that you think should raise the value of your shares above the exercise price might not have that effect. Investors will sometimes reapportion the outstanding shares or otherwise fiddle with paper and numbers such that all the reward accrues to them, while the value of your shares stays flat.
You have very little control over the outcome. One of the rationales for offering equity rather than salary is that, as a key employee in a young venture, you should share in both the risks and rewards of the venture. In reality, though, even if you do everything perfectly, you have very little influence over whether the company succeeds (unless you’re a founder or executive). You’re giving up some chunk of your compensation to chance and the behavior of others.
Add to this that a lot of these companies want you to work insane hours (and I have a whole different rant about why that’s a bad idea, for you and the company)… Well, I don’t think the ethics of that are talked about enough. Fodder for another post or three.
By my way of thinking, if a company can’t pay market salaries for the professionals it needs to do business, then it’s not well-capitalized enough to do business. In the best case, this means they’ll cut corners on other stuff like tools, work environment, support staff, and other things that might have supported you in doing your best work. In the worst case, they know they’re low-balling you and the stock will probably be worth less than the cereal box tops you used to collect for your school, but for their own reasons they’re okay with gambling with your livelihood and financial well-being.
It’s often made worse by the fact that the person trying to sell you this deal may actually think it’s a good thing, and won’t understand if you don’t think he’s doing you a huge favor. (There are reasons why company founders are sometimes delusionally optimistic, and that can even be a Good Thing™ – but again, that’s fodder for another post.) No matter how smart, ethical, and sincere the person is who’s trying to get you to take his lottery tickets instead of the money your skills are worth, this is not a person who is rationally serving your interests. They’re serving their own interests, and those interests of their investors that they are contractually obligated to serve – and rationality is a crapshoot.
Research the salary range you can command in your market. Read the paperwork and understand what you’re being offered when someone offers you equity in a company (or other non-monetary compensation) as part of your compensation package. Know yourself and how much risk you can tolerate, knowing that any upside to your equity is unlikely to materialize and unpredictable in its magnitude if it does. Get a lawyer if you need help understanding the paperwork. Don’t be shy about negotiating – as I write this, it’s still a seller’s labor market in the software world.
Most of all, make your own choices for your own reasons. Focus on the facts of your offer, and not on what the person making the offer thinks the upside will be (it will always be huge), or what they think the risk will be (they will minimize it), or their reasons that you should take the deal. “Team player” is too often a code phrase for someone who will be loyal to the company’s interests without having that loyalty reciprocated.
Please don’t misunderstand me: I think you should take risks, but I think they should be smart risks that serve you. I don’t think that every employer is out to screw you, but a few definitely are, and even for those that aren’t the onus is always on you to watch out for your own interests.
And I’m certainly not saying you shouldn’t take equity in a company – but I am saying that almost any deal that would be unfair without the equity is still unfair with it, given the uncertainties. Demand a fair deal, and don’t feel bad about walking away from an offer that doesn’t work for you.