Quote: Startup Equity for Senior Engineers Often a 'Lottery Ticket'
A social media discussion advised senior engineers to prioritize salary over equity when evaluating startup offers, calling equity a "lottery ticket." The post noted that typical equity for a senior engineer at a Series A company is only around 0.05% to 0.2%, highlighting the financial realities of startup compensation.
- The typical 4-year vesting schedule for startup equity includes a 1-year cliff, meaning an employee who leaves before their first anniversary receives no vested options. After the first year, 25% of the total grant typically vests, with the remainder vesting monthly over the next 36 months. - An engineer's equity stake is subject to dilution each time the company raises a new funding round by issuing new shares. This means that while the value of their shares may increase with the company's valuation, their percentage of ownership will decrease. - The "strike price" is the fixed price per share an employee pays to purchase their vested options, which is determined by a 409A valuation at the time the options are granted. A lower strike price, common in early-stage startups, can lead to a greater potential profit when the shares are eventually sold. - The odds of a startup failing are high, with some data suggesting that around 90% of startups ultimately fail. More specifically, roughly 20-23% fail within the first year, and about 50% fail within five years. - Exercising stock options has tax implications; for Non-Qualified Stock Options (NSOs), the difference between the fair market value at the time of exercise and the strike price is taxed as ordinary income. For Incentive Stock Options (ISOs), this "spread" can trigger the Alternative Minimum Tax (AMT). - The timeline from a startup's founding to a liquidity event like an IPO can be lengthy, with a median of 7 to 10 years. For software companies specifically, the median time to an IPO is around 9 years. - Even if a startup is acquired, employees with common stock are not guaranteed a payout. Investors with preferred stock have liquidation preferences, meaning they get paid first, and if the exit valuation is low, there may be nothing left for common shareholders. - The value of an equity grant is not just the percentage, but also the potential for the company's valuation to grow significantly. An early employee's 1% stake could be diluted to 0.4% by a Series D funding round, but the dollar value of that smaller stake could be substantially higher if the company's valuation has increased.
