You might hate that guy in the next cubicle, right? That guy was one of the first hires at the company and he’s worth so much more than you. And you are so much smarter and work so much harder. He vested and cashed out. That IPO ship has sailed and you missed it. You are coasting on your paycheck and some stock options that are not exactly bargains.
Welcome to IPO envy; the green monster that’s poisoning Silicon Valley from within.
“On IPO day and in the weeks after, the dynamic between those who made money at our company vs. those who had joined less than a year ago and had not yet vested, became painfully clear. Some groups re-formed along these lines at lunch, after work, and even within large working teams,” said a former CTO in a forum on Quora.
“Out of our 500 plus employees, there were clearly a few ‘jerks’ who showed up with brand new cars in the weeks after the IPO and sprayed some money around. It was unwelcome but they did it anyway. It made the unvested feel horrible – especially as the stock fluctuated with market/macro conditions.”
Tech IPO Haves and Have Nots
Silicon Valley’s San Mateo and Santa Clara counties now include 76,000 millionaires and billionaires according to Business Insider. But there is a gap between the IPO haves and have nots. A software engineer averages $139,000 in annual salary with $32,000 of that in equity, according to Paysa. High housing costs – about $2,000 – $3,000 just to rent a one bedroom apartment along with other living expenses can make it hard out there for a techie wannabe millionaire. And take fomo to a whole new level.
IPO inequality and subsequent IPO envy doesn’t seem to be disappearing any time soon. A recent article on Medium by Scott Belsky said, “One of my sad predictions for 2017 is a bunch of big headline-worthy acquisitions and IPOs that leave a lot of hard working employees at these companies in a weird spot. They’ll be congratulated by everyone they know for their extraordinary success while scratching their heads wondering why they barely benefited.”
It’s no wonder that post-IPO tech companies often hide away their newly minted millionaires who choose to stay on by re-assigning them to “special projects.”
Why the Big Gap Between Exec and Employee Equity?
That happy little group of techies working away in a garage with an “all for one and one for all” is gone. The money just got too big. Now often the people at the top see the company more as a means of value extraction rather than value creation. In the beginning, tech companies retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth. Now the highest ranking executives get to skim the cream off the top. This is not unique to the tech world in the U.S. today. According to the Harvard Business Review, in 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. This inequitable situation across industries is why we now have the 1%.
Analyzing Facebook’s IPO, a 2012 Wall Street Journal blog post noted that most of the gains would go to the co-founders and the big venture capital investors. In 2009, an engineer with 15 years experience hired by Facebook could get options to buy 65,000 shares at $6 a share. After the 5-1 stock split in 2010, those shares would have been worth $12 million at the expected valuation of $40 a share.
That was 2009 and for a 15-year engineer. By 2012, the article pointed out that Facebook had become “far more stingy” with stock in recent years. “Managers hired last year were getting as little as 2,000 shares – giving them paper wealth of a measly $80,000.”
Tech companies give employees a smaller piece of the pie now because they can.
Snap IPO May Not Reap Rewards For All
Snap raised about $3.4 billion in Wednesday’s IPO, offering 200 million shares one of the biggest IPO offering in recent U.S. history.
But not everyone may reap the benefits despite all the hype. In 2016, the Venice-based company issued $679 million in stock options that had vested or were expected to vest, according to the LA Times. These options made it possible for early employees to buy shares that would vest well ahead of the IPO. But Snap also issued $2.7 billion worth of restricted stock units. These are shares offered to later hires. They can only be sold after a certain date is reached or certain personal or corporate performance benchmarks have been met. And whether they are met remains to be seen.
“This means that of Snap’s 2,000 employees, hundreds could potentially become on-paper millionaires if the company goes public at its ambitious $22.2-billion valuation. But many also stand to come away with much less, or nothing at all,” the article reports.
Not everyone who works at a start-up that goes public becomes an overnight millionaire. A lot of it depends on timing.
How much money an employee makes from an IPO can hinge on when they joined the company. That can determine how many stock options or restricted stock units they receive. An early employee might be able to exercise stock options at, say, 50 cents a share, while a later employee might pay $30. Another timing factor is when they decide to sell.
Whether to sell the stock or hold onto it in hopes of a bigger payout is a huge decision often having to be made by someone relatively young. Those who make the wrong move at the wrong time could be haunted by what-ifs for the rest of their lives.
How stressful is that? Especially while you’re trying to focus on a demanding tech job so the company becomes worth even more, right? Yet this gamble on company stock remains how the tech employee game gets played. The LA Times recently explored this phenomenon in an article with the lengthy headline: When tech companies go public, employees can strike it rich – or not. And then the trouble starts. “…despite the precarious nature of stock-based compensation, it remains a deeply ingrained tech industry tradition. Employees routinely forfeit higher salaries for more stock. A startup’s likelihood of going public is often a determining factor in joining a company. And even though the entire premise is a gamble — one that can breed anxiety, envy and resentment — many tech workers cross their fingers and place enormous hope in their bet,” the article states.
For tech workers, watching the news and trying to stay tuned in to the company grapevine can be a nerve-wracking experience as a company goes public. Yet this hot topic seldom gets openly discussed because of the taboo against talking about personal salaries, stocks, wealth and income that strangely persists. Former employees of companies that went public talk more openly and have commented in the media that they often grappled with anxieties about when to sell stock. There’s also a surge of envy when they find out that colleagues may have received a bigger bump from an IPO.
“It’s a natural human emotion,” Mike Vorhaus, president of Magid Advisors, who has advised technology companies for more than 20 years, told the LA Times. “You hear people say things like, ‘I got 50,000 shares vesting over four years, and I heard that Bob, who does what I do, got 100,000 shares, and the only difference is we started a week apart.’ People get disgruntled about it.”
Tech employees also need to contend with everyone’s assumption that they’re super rich after an IPO. Whether they did or didn’t, either way it could get awkward.
Equity: Your Piece of the Pie
Equity as part of your total compensation package means you get a piece of the company as part of your total compensation package. It has come to be one of the hallmarks of working at a startup. As Tech Republic says, getting equity, “… is attractive not only for its perceived monetary value, but for the sense of ownership it gives employees.”
What is equity, really? Paysa experts explain: Equity compensation comes in several forms, the most common of which are stock and options. The fundamental difference between the two is that the recipient of a stock grant owns the stock immediately, whereas the recipient of options has the right to purchase stock at a pre-determined price, but is not yet a stockholder.
Common stock is the most basic form of stock a company will issue. It is usually granted to people who have or currently are providing services to the company, including employees, contractors, advisors and directors.
Preferred stock is generally reserved for investors, strategic partners and financial institutions. Preferred stock holders get to be first in line if the company is acquired or liquidated. These stocks may also be called series A when it refers to the stock sold to investors in exchange for the first round of venture capital funding,
But in the event of an IPO, which stands for initial public offering, when a company transitions from being privately held to being traded on the public stock market, all shares of stock become common stock.
For more details on how this all works, check out Paysa’s background info here.
Asking the Right Questions About Your Equity Options
An important part of not ending up with IPO envy is to ask questions up front. Part of the problem industry insiders say is that employees do not ask questions or do not ask the right questions. They assume that the CEO has their best interests at heart. The reality is the CEO probably has his VC investors best interests at heart not to mention his own.
Key pieces of info to ask for according to experts are the total number of shares outstanding and the strike price at the last valuation. If the company is acquired at a down round from the last valuation, you may get zero from your options. If the company is acquired at a premium to the strike price, the preferred stock / convertible debt terms almost certainly won’t impact the per share compensation at all.
Another question might be to ask how much money you’d make from your options if the company were to sell or IPO for $100 million, $200 million, $300 million or $400 million. Although the answer will include disclaimers, you’ll get an idea of the potential impact of terms from late-stage financings.
What? You didn’t minor in finance in college? Liquidity to you means the tap on the keg is working? Take notes. Then share them with someone who understands this stuff better than you do – maybe a paid financial adviser if you want to protect your privacy. And avoid being the object of IPO envy yourself should you hit the big time.
Late Stage Start-up Or Start-up?
If you like the excitement of risk and the odds of striking gold in the mine, your best bet may be to find a startup with a mission that you are passionate about and join as a founding member or early employee with equity. An employee at a startup with staff who are enthusiastic and committed to the company’s mission may be more likely to become a millionaire than an employee who works someplace only to become a millionaire. If your bet pays off, you could be set for life.
On the other hand, there’s something to be said for working at a late stage company. You join a large well-established company because it is secure and successful. You will earn a good salary and receive a signing bonus, health care, 401Ks, annual bonuses and other perks. Plus adding a position at a recognizable big brand name company to your resume will make you a more attractive hire to a promising new start-up and then perhaps the sky’s the limit.
Before joining any company, first check out their ranking on Paysa. Also explore on Paysa what similar positions to yours pay in salary and equity. These tools can help you negotiate a better deal.