Startup Equity 101

Original Article ↗ Hacker News Discussion ↗

Perceived value and odds of startup equity

  • Many commenters treat startup equity/options as having expected value near zero, especially for rank‑and‑file employees with <1% common stock.
  • Equity is often framed as a lottery ticket: occasionally life‑changing, more often worthless, and rarely better than simply taking higher cash compensation.
  • Several people describe multiple exits where their options paid nothing despite acquisitions or decent outcomes for founders and investors.
  • Some argue this makes options feel like a “legal scam,” especially when used to justify below‑market salaries or extra “passion” work.

AI, software costs, and business value

  • One strand worries that AI will drive the cost of building software toward zero, threatening the value of complex niche products and hence employee equity.
  • Others counter that businesses are acquired for brand, customers, distribution, and network effects, not the code itself; cloning an app isn’t enough.
  • There is disagreement on how far and how fast AI will erode software‑company moats, with mid‑tier SaaS seen as more vulnerable than giants.

Taxes and exercising options

  • AMT: the calculation itself is claimed to be simpler than normal tax, but the difficulty is knowing when it applies and how long it affects you.
  • Early exercise + 83(b): debated heavily. Proponents like starting the QSBS and long‑term capital gains clocks; critics see it as unjustifiable risk for typical employees who may owe large taxes on illiquid shares.
  • Extended post‑termination exercise windows are recommended over early exercise for most people.
  • Double‑trigger RSUs are flagged as a major hidden risk: if you’re fired before the liquidity event, you may walk away with nothing despite years of vesting on paper.
  • Some mention non‑US quirks (e.g., Australia taxing unrealized gains in retirement accounts), and that much of the guide is US‑centric.

Control, preferences, and opacity

  • Several emphasize that control matters more than nominal percentage: once founders lose control, VCs can replace them and structure terms to favor investors.
  • Liquidation preferences, participating prefs, and multiple share classes mean 409A “value” often overstates what common shareholders will realize.
  • There’s debate on how “clean” typical VC terms are, but consensus that employees rarely see full cap tables; instead, they should at least ask targeted questions (ownership %, preference terms, last preferred price).
  • Broad advice: assume your equity is worthless until money hits your bank account.

Employee experiences and fairness concerns

  • Stories include:
    • Founders and early investors taking secondary liquidity while employees are locked out.
    • Acquisitions structured as asset sales, wiping out option value.
    • Dilution, “bad leaver” clauses, forced resignations around key dates, and firing just before IPO to avoid RSU payouts.
  • Some see repeat/wealthy founders as especially good at structuring outcomes to favor themselves; others argue this is overly cynical and not universally true.

Why people still join startups

  • Non‑financial reasons: more autonomy, low‑oversight environments, broader responsibilities, faster learning, less rigid processes than big tech.
  • Startups can still pay well compared to most of the job market (though usually below FAANG‑level comp), and equity is treated as a potential bonus, not a plan.
  • Several commenters conclude: work at startups for the work and environment; treat equity as upside, not a reliable part of compensation.