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> I had what would be considered a good payout. When looking over the course of my career, however, it simply made up for the reduced salary I took for the yea

> I had what would be considered a good payout. When looking over the course of my career, however, it simply made up for the reduced salary I took for the years I worked there. This is such an important point for people to know when they're joining startups. You're basically investing in the startup. If you're going to be an investor it's good to know what your alternative investments are. If you put $50k in the stock market every year for 5 years @ avg. 8% return, your have ~$400k. Over 10 years it's ~$900k. At 1% equity (after dilution) you'll need a ~40-90M exit to reach those goals. Given that your taxable event will be bigger, it's probably more like a $60-120M exit to break even if you're considering a $50k/year pay cut in return for equity. Both the market and startups have risks. But if the upside of investing in a startup won't reasonably beat the market then you're essentially taking a pay cut.

kenneth 7y ago
An exit would usually be considered long-term capital gains under the tax code, which luckily tops out at 20% (+ state income tax)
- ojn 7y ago
  Only if you joined early enough that doing early exercise of stock options is financially viable.
- hedora 7y ago
  In CA the max marginal rates are close to 40% for long term capital gains and 51% for short term / income tax.
- sk5t 7y ago
  If you exit by cashless exercise of options, it's (usually) then blasted by the full effect of wage/income tax.
maxxxxx 7y ago
“If you put $50k in the stock market every year for 5 years @ avg. 8% return, your have ~$400k. Over 10 years it's ~$900k.” That’s not always the case. Stock market returns are not guaranteed. If you start in the wrong decade you may be losing money.
- ivalm 7y ago
  startup returns are even less guaranteed. I think the main point is startup risk-adjusted returns are bad for non-founders.
finnh 7y ago
8% return on average is abnormally high. But, on the other hand - the chance of retaining even 1% of a startup that exits for >50M is very small. By the time of an exit, almost no engineers will have anywhere near that equity.
- jaredklewis 7y ago
  After accounting for inflation and dividends, 7% is average (historically) for annual returns. So only a little high. If the parent was not accounting for inflation, 8% is low.
  - exelius 7y ago
    I see the 7% return figure trotted out as average equity returns; but I think that number reflects a lot of “easy money” from the asymmetry of global industrialization in the post-WW2 era. Europe and America spent the 1920s through 1940s building fossil fuel powered heavy industry through a couple of particularly destructive wars. Then we spent the next 50 years spreading it around the globe, with American and European companies collecting a vast majority of the profits. I’m not entirely sure it’s an assumption that will be correct for too much longer given the industrialization around the globe has increased competition significantly. I think the true equity growth rate is closer to inflation / population growth rate; especially once we take the costs of climate change into account (think of it as a loan we have to pay back in either remediation of adverse climate effects or decreased future productivity).
    - bluedino 7y ago
      401k’s haven been that spectacular for the last 15 years
      - exelius 7y ago
        Exactly my point! We can’t grow at 7% in perpetuity; so at some point it’s going to have to slow down. It feels like that’s starting to happen.
sokoloff 7y ago
For early stage startups, consider an 83(b) election for better tax treatment on exit.
paganel 7y ago
> But if the upside of investing in a startup won't reasonably beat the market then you're essentially taking a pay cut. Like the OP said, if you look at it only from a financial point of view then joining a start-up is probably a worst financial decision compared to joining an established company. The OP mentioned that going the start-up way has provided him/her with unique skills that then were of great help in his/her career. I can chime in with my own anecdote and say that joining a start-up/small-ish company has provided me with a greater will to do the actual work, a greater sense of purpose compared to me potentially having chosen to work for en established/bigger company. I'm in this job (I'm a programmer) for the long run, I genuinely think that had I chosen to work at a big company my mental health would have been in shambles because I would have felt as an insignificant cog in the corporate machine no matter the compensation.
ibarea277 7y ago
This people do not understand the math of startup comp. If you get equity instead of cash, you could have taken that cash and just put it into as high a risk investment as you want. As such, startups are really offering access to an illiquid investment (but how sure are you it's better than other options), and forced risk-taking with some short-term tax benenfits (most people wouldn't put 10-20% of their income into one stock and you pay tax up front). You could go to google, put 30% of your income into crypto, and have some thing a lot like a startup risk/reward profile w/ a lot more liquidity. It's just that that feels riskier to people. Startup is only a great deal financial for the founders.
Vadoff 7y ago
How'd you do your math? 50k every year @ 8% would result in 317k and 782k in 5 and 10 years respectively.

kenneth 7y ago

An exit would usually be considered long-term capital gains under the tax code, which luckily tops out at 20% (+ state income tax)

ojn 7y ago
Only if you joined early enough that doing early exercise of stock options is financially viable.
hedora 7y ago
In CA the max marginal rates are close to 40% for long term capital gains and 51% for short term / income tax.
sk5t 7y ago
If you exit by cashless exercise of options, it's (usually) then blasted by the full effect of wage/income tax.

maxxxxx 7y ago

“If you put $50k in the stock market every year for 5 years @ avg. 8% return, your have ~$400k. Over 10 years it's ~$900k.” That’s not always the case. Stock market returns are not guaranteed. If you start in the wrong decade you may be losing money.

ivalm 7y ago
startup returns are even less guaranteed. I think the main point is startup risk-adjusted returns are bad for non-founders.

finnh 7y ago

8% return on average is abnormally high. But, on the other hand - the chance of retaining even 1% of a startup that exits for >50M is very small. By the time of an exit, almost no engineers will have anywhere near that equity.

jaredklewis 7y ago
After accounting for inflation and dividends, 7% is average (historically) for annual returns. So only a little high. If the parent was not accounting for inflation, 8% is low.
- exelius 7y ago
  I see the 7% return figure trotted out as average equity returns; but I think that number reflects a lot of “easy money” from the asymmetry of global industrialization in the post-WW2 era. Europe and America spent the 1920s through 1940s building fossil fuel powered heavy industry through a couple of particularly destructive wars. Then we spent the next 50 years spreading it around the globe, with American and European companies collecting a vast majority of the profits. I’m not entirely sure it’s an assumption that will be correct for too much longer given the industrialization around the globe has increased competition significantly. I think the true equity growth rate is closer to inflation / population growth rate; especially once we take the costs of climate change into account (think of it as a loan we have to pay back in either remediation of adverse climate effects or decreased future productivity).
  - bluedino 7y ago
    401k’s haven been that spectacular for the last 15 years
    - exelius 7y ago
      Exactly my point! We can’t grow at 7% in perpetuity; so at some point it’s going to have to slow down. It feels like that’s starting to happen.

sokoloff 7y ago

For early stage startups, consider an 83(b) election for better tax treatment on exit.

paganel 7y ago

> But if the upside of investing in a startup won't reasonably beat the market then you're essentially taking a pay cut. Like the OP said, if you look at it only from a financial point of view then joining a start-up is probably a worst financial decision compared to joining an established company. The OP mentioned that going the start-up way has provided him/her with unique skills that then were of great help in his/her career. I can chime in with my own anecdote and say that joining a start-up/small-ish company has provided me with a greater will to do the actual work, a greater sense of purpose compared to me potentially having chosen to work for en established/bigger company. I'm in this job (I'm a programmer) for the long run, I genuinely think that had I chosen to work at a big company my mental health would have been in shambles because I would have felt as an insignificant cog in the corporate machine no matter the compensation.

ibarea277 7y ago

This people do not understand the math of startup comp. If you get equity instead of cash, you could have taken that cash and just put it into as high a risk investment as you want. As such, startups are really offering access to an illiquid investment (but how sure are you it's better than other options), and forced risk-taking with some short-term tax benenfits (most people wouldn't put 10-20% of their income into one stock and you pay tax up front). You could go to google, put 30% of your income into crypto, and have some thing a lot like a startup risk/reward profile w/ a lot more liquidity. It's just that that feels riskier to people. Startup is only a great deal financial for the founders.

Vadoff 7y ago

How'd you do your math? 50k every year @ 8% would result in 317k and 782k in 5 and 10 years respectively.