Recently, a company I used to work for laid off some folks and appears to be in some difficulty. At least that’s what I hear; the exact terms are secret, and I don’t work there anymore, so I’m not privy to all the details. There’s a lot I could say about this happening; that place represents a big part of my life and I’m sad to see it go. And, overall, That company and the two guys that founded it were extremely good to me, so I don’t want you to interpret any of what I’m about to say as disparaging them in any way. They were, and are, awesome.
But one (relatively minor) aspect of this interests me. If they go under, my 6,000 or so shares of their stock became worth essentially nothing. This represents approximately the seventh or eighth time in my career that a company has given me stock in themselves as part of their compensation package. Only once, of those seven or eight times, has that resulted in any money for me. That one time was Google, and the shares I got there turned into about $25,000 after a year and a half of work - a very nice windfall, but not exactly a game changer. The other six or seven times they were worth nothing.
Offering shares as part of a compensation package is a standard Silicon Valley modus operandi. It’s become so well known it’s almost a societal trope; the underpaid wunderkind who works his tail off for Twitter before anyone even knows what a Tweet is, and comes away a millionaire.
But the truth is that, much like any form of gambling, most people lose. And make no mistake about it; accepting stock as part of a compensation package is gambling. Consider, for a moment, video poker. Clearly there is an element of skill (the “poker” part). If you play exceptionally poorly, you are sure to lose your money. But even if you play optimally, you will still eventually lose. The fact that some skill is involved does not transform it into a game of skill. Similarly, when you accept stock in a company you work for, the insinuation is that, because you are a part of that company, you can affect whether your stock is worth anything or not. This is - within a measurement error - simply not the case, as anyone who has been through the process can attest. Only perhaps the first couple of founders can have any significant affect on the eventual fate of a company, and even then they are often quickly swamped by the impact of investors. I was employee number 7 at this company, and got there well before they grew; even still, it would be pure hubris on my part to claim that I had any real role in its success or failure. The fact is that you have way more control over a hand of video poker than you do over your stock.
In addition, the deck is stacked against you. Accepting compensation in the form of stock is like making an extremely risky investment about which you know little. You are underinformed, over-leveraged, and essentially in over your head from day 1.
I have no problem with the idea of companies offering stock to new employees, per se. Just like I don’t have any problem with them offering free lunch or yoga classes. But the truth is this: the free lunch and the yoga class is almost certainly worth more than that stock, and it is disingenuous in the extreme - to the point of flat out untruth - to try to claim otherwise. Advertising stock as a significant part of a compensation package is akin to telling a lottery player that they are sure to win. It is morally and ethically bankrupt. Even a successful company - like this one was - is very likely to eventually either go out of business or achieve a steady state, and in either case your stock is essentially worth zero. And of course most startups simply quickly fail. The odds of a successful conversion event that awards you significant monetary value are so incredibly poor as to be not worth mentioning. More importantly, your role in that success is a rounding error at best.
To be sure, there is a growing awareness of this. In my early dotcom days, I worked for a company which had the guts to offer a stock purchase plan to its employees wherein they could trade their salary - up to 100% of it - for stock. I knew a guy who wrote a check to the company every month, to pay his salary taxes, and took 100% of his compensation in stock which - you guess it - ended up worth precisely zero. And that was considered a successful company, which is still in business, but simply never went public.
I firmly believe there will be a legislative backlash against these tactics in the future. Until that happens, though, if you know any young engineers, suggest that they politely ask for cash. If they want to gamble, they’ll get better odds in Vegas.