Dan Luu
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Another case against taking startup employee equity
🕑 Added 2020-02-03 12:00:03 +0000 UTCSince moving to SF, I've had a number of people ask if I want to invest in the seed round of their startup. Until I moved here, I didn't realize that you could do this without being incredibly wealthy (as opposed to just normal programmer levels of wealthy), but it turns out that, when raising a seed round it's common to cobble together a set of checks that are between $100k and $200k from each investor. Typical valuations will be $10M to $20M, meaning that a check like that will get you about 1% of the company.
This is similar to what you'd get if you joined as a very early employee who isn't brought in to be a "late co-founder" or something similar. The differences are:
1. You get the equity immediately, it doesn't vest over four years.
2. The equity won't expire (employee options will usually expire 90 days after you leave the company; if they don't, they commonly expire 7 or 10 years after you join the company)
3. You get a better share class than employees.
4. It's easier to be an investor than an employer (there's much less due diligence, you're not going to get rejected from investing for failing a design interview or some whiteboard coding problem).
5. You get access to much more information as an investor than you would as an employee.
Someone who's working at a big bay area tech company at normal "senior" level of compensation can make one or two of these investments a year and still have as much money as someone who goes and works for these companies directly (if you account for stock price increases which result in people getting much higher realized compensation than "expected"; if you don't at look at target comp numbers, someone would have to be "staff" to have this much cash available to them annually). The difference is that, if you do this, you get 16 to 32 times as much equity, since you can take 1% to 2% startup equity every year, not every four years.
I should really add this note to my blog post on options vs. cash (https://danluu.com/startup-options/), it really hammers home what a bad deal options are for employees. If someone wants to work at a startup for the "startup experience", there's nothing wrong with that, but from a compensation standpoint, you can literally get higher takehome pay while getting well over an order of magnitude more equity on better terms by working at a big company and then investing in startups.
Comments
The check sizes can be MUCH smaller than this-I've seen lots of $5-20K checks, and written a number under $50K myself. You absolutely don't get as much information as employees, but what you do get is probably higher S/N.
I don't think I have enough expertise in this to be comfortable gambling other people's money (although, if you look at historical VC returns, you could say that doesn't make me much different from the median VC:).
Similar to Jay's comment: Have you thought about starting a Dan Luu Seed Found? You could target "small" investors (100k in or what) and could probably attract hundreds of them, which might be enough to do reasonably diversified angel investments. On the other hand, if you want to spend time on that, why bother with small investors, I suppose.
