Taking a pay cut for a potential larger payout down the road

[Stu Gotz]

Without getting into the details - has anyone on the board taken a pay cut for a potential equity payout down the road? Mortgage, kids, etc so there is a bit of risk. PE portfolio company with an owner who doesn't seem to want to cede control any time soon. Thanks for any insights.

[cravenmorhead]

I didn't do this but my father-in-law did. As I understand the story, he was working for Ma Bell/AT&T (can't remember if this was before or after Bell was split up). Anyway, management wanted to free up some cash, so an offer went out to quite a few employees that they could defer a decent chunk of their compensation until after age 65. The offer went lower than VPs, since AFAIK he never made it to VP level in the company. Anyway, this was in the days of big crazy interest rates, so the carrot was that employees that took the deal got an ROI guaranteed by Bell of something that now seems crazy; not sure of the number but >8%. He passed away a year and a half ago, but the benefit was inheritable, so now both kids receive a Not Insignificant Amount of Money each January for the next 15 years.

The move certainly worked out for him and for his family, but one of the things I would consider is whether you're 100% sure the company will still be around "down the road" and whether, if they are still around, the return on your gamble is guaranteed. Then weigh the probability of the payout happening with the baseline worst-case scenario, as well as any upside.

I've also worked on cases where employees were promised equity or some sort of deferred compensation (a percentage of a major deal, for example) and were fired days or weeks before the deferred compensation vested. If you're in an at-will employment state, there may not be much you can do if that happens.

[assman]

The question is...do you feel lucky today



for the record i do not have mortgage, kids and have a wife who earns a good bit but I would still turn it down

[BmillsSkier]

I saw this first hand in the form of an ESOP. Owner told employees that he was there for the long haul and it was a benefit to all employees but especially the ones making $250k+ as they would receive more shares which would in theory be worth more down the not too distant road (and shares would become a bigger part of comp moving forward) My wife was one of these employees.

We were hesitant because the owner/founder Doc was getting up in agenans this seemed like an easy way for him to get a payout/liquidate without selling the company.

Sure enough he used his shares to leverage the startup of a new company and was gone completely within 2 years. The day the ESOP became official Doc started taking a step back, culture changed, and high worth employees started leaving - my wife included.

We laugh at the near worthless statements that we get each January showing her share's value. So glad she got out when she did.

TL;DR - make sure the company as you know it will be around in substantially the same or better form looking at 5, 10, 15 year intervals.

[Conundrum]

Have a friend who did but changed companies to do it. He's three weeks in. I'll check back in 20 years and let you know how it went for him.

If the guy is in it for the good of the company, there's some ways to structure a life insurance policy where the original owner gets paid when he retires, the equity you're paying up front pays the premium, and the company retains the policy so when the guy actually dies, the company receives the money it paid out for him to retire. If a contract and policy like that is in place, it's somewhat secure that he isn't going to take your money and run. Too much to lose for him.

[Tye 1on]

Between the risk and time value of $ it sounds like a tough call, but no direct experience to offer.

[iceman]

It all depends on the company and the people involved. It's a gamble. No way for anybody outside the situation to judge, but getting paid now is a lot safer.

[neufox47]

I have a friend who worked at what amounts to a failed startup but they got bought and he made out with 5 years salary in stock options. Another friend who worked for a company with really promising technology that ran into commercial implementation issues and his stock is worth about $.0000001. If you believe in the company and they are paying you enough to sustain your standard of living, id give it a go. Few get rich without stock options or equity posotions.

[sirbumpsalot]

"bird in the hand is worth two in the bush"

I've seen plenty of these work out (including my spouse), but I've seen even more (including myself) not have it work out.

[cravenmorhead]

One other thing; if this is a gamble of 5% of your takehome pay for big potential upside, it may just be worth the gamble. But if you're considering forgoing a significant chunk of your paycheck, it's probably worth taking the offer paperwork to an employment lawyer and paying for a couple hours of their time. It shouldn't take them long to understand the agreement and translate it for you so that you have a concrete understanding of best-case and worst-case scenarios and how the brass making the offer could screw you. Totally worth the few hundred bucks you pay the lawyer to find out if you may be leaving thousands or hundreds of thousands on the table if management restructures the company or something. Employment lawyer may also be able to offer edits to close those loopholes.

[Tele'ndaboat]

I'd say it depends on if you are happy with your current job or not. And if you would be happy in the new one, or is it just for money... If your unhappy and you think the new job will fix it then go for it.

If it is just about money, then well, no one can answer that for you. Your risks don't sound like they are that big. No one is going to die. And, yes I have done this twice. And, no it didn't work out the first time, but so far it has the second time. And yes I ended up in a lot of debt. And yes I have a mortgage and a family and all that shit... And no I'm not young.

[Danno]

I took a pay cut for a job with a pension. Less than a year before I vest, we'll see how long I last (each year increases annual payout).

[54-46]

I took a 15% pay cut for a job with a pension but it didn't work out after a year and I didn't get to vest. Only saving grace was a mini golden parachute.

[ilikebeer]

Devil is in the details. How much equity/cash trade off, company position, PE position (and motivation and timeline), and how much your vision meshes with theirs.

Most PEs want their portfolio companies to succeed; the question you need to answer is how quickly you would participate.

PM w any questions...

[TahoeJ]

I left my job for another one with a 25-30% lower salary but ownership in the company. It worked out extremely well. However, I had already known everyone involved for several years and believed in the team being assembled, otherwise I wouldn't have done it. So unless you feel *really* good about the prospects (is the company profitable now?) I would proceed with caution.

[hutash]

If it is a Trump company, take the money now.

I took a big pay cut when I went from an employee to practice owner, but in the end I am doing well, but I am 100% in control. In this day and age or corporate greed I would be hesitant to take any deal that require any significant period of time to make it a good deal. The average employee these days does not stay with a company very long both due to lack of loyalty by the employee and corporate cut backs. Look at any such deal very carefully.

[Harry]

I've also worked on cases where employees were promised equity or some sort of deferred compensation (a percentage of a major deal, for example) and were fired days or weeks before the deferred compensation vested. If you're in an at-will employment state, there may not be much you can do if that happens.

This happened to me. Was the VP, with the company 27 years, got laid off just weeks before I was due to gain 10 percent ownership of the company. Cost me multiple millions $$$$. Hired a lawyer but got nowhere because of at-will employment.

Only positive outcome is that the dickhead who did it was diagnosed with brain cancer shortly afterward and died a slow agonizing death, and his 30 year younger than him trophy wife robbed him blind while he withered away. Karma is a bitch. :the finger:

I should look her up, she was cute.

[shroom]

yeah, you seem to do well with reunions.

[dtown]

Depends what's important to you...I left a great ski community because we wanted to raise our family with 2 parent at home. My wife stayed home, we lived to a significantly higher COL, essentially the same thing as a pay decrease, and started from scratch. From there it took us a few years. It now we're very financially stable. Do we live in the mountains? Nope but we can build a mile xc ski trail and MTB trail on our property and travel to hit different Mountains whenever we want. I bet I've decreased my retirement age by 3 years and more every day

[stfu&gbtw]

I took a 50% pay cut about 6 years into my career to switch from consulting to FTE with a company that is very well respected in IB. Got all the money back over 5 years, and the relationship has proven to be extremely profitable in the long run. Have been offered plenty of startup bullshit stock option deals with companies that weren't ever going to do anything. Never bit and haven't ever regretted it. I'd mentioned doing some early testing with Google in another thread, but that was never offered as a job - I was just trying to be helpful. I would have signed on with them - everyone knew they were an insane shop... But they're still just a bunch of developers...

[Stu Gotz]

Thanks to all for the responses.

Current employer had a magnificent run and founders and partners are now treading water. (Did not participate in said magnificence.)

Prospective employer believes offer is extremely generous and more than likely salary will not move until liquidity event which may or may not happen in next decade.

First world problems, I know.

[Jeffreaux]

Happy to help. I deal with these issues for a living. PM me.

It can be a crapshoot but you can also significantly reduce your odds if approached properly.

[muted]

This happened to me. Was the VP, with the company 27 years, got laid off just weeks before I was due to gain 10 percent ownership of the company. Cost me multiple millions $$$$. Hired a lawyer but got nowhere because of at-will employment.

Only positive outcome is that the dickhead who did it was diagnosed with brain cancer shortly afterward and died a slow agonizing death, and his 30 year younger than him trophy wife robbed him blind while he withered away. Karma is a bitch. :the finger:

I should look her up, she was cute.

marry her and then you'll finally get your money.

[mall walker]

Advice I have found helpful when making this decision myself:

Roll d100. (Not the right kind of geek? Sorry. rand(100) then.)

0~70: Your equity grant is worth nothing.

71~94: Your equity grant is worth a lump sum of money which makes you about as much money as you gave up working for the startup, instead of working for a megacorp at a higher salary with better benefits.

95~99: Your equity grant is a lifechanging amount of money. You won’t feel rich — you’re not the richest person you know, because many of the people you spent the last several years with are now richer than you by definition — but your family will never again give you grief for not having gone into $FAVORED_FIELD like a proper $YOUR_INGROUP.

100: You worked at the next Google, and are rich beyond the dreams of avarice. Congratulations.

Perceptive readers will note that 100 does not actually show up on a d100 or rand(100).

Why are you so negative about equity grants?

Because you radically overestimate the likelihood that your startup will succeed and radically overestimate the portion of the pie that will be allocated to you if the startup succeeds. Read about dilution and liquidation preferences on Hacker News or Venture Hacks, then remember that there are people who know more about negotiating deals than you know about programming and imagine what you could do to a program if there were several hundred million on the line.

( http://www.kalzumeus.com/2011/10/28/...-a-programmer/ )


I don't necessarily think option grants are bad or anything, but to me it's a perk closer to working from home or setting your own hours than health insurance or salary. It's a factor, but personally I have not found that trading real money in the bank for maybe money down the road has been a great long-term strategy for building wealth. YMMV, I also don't gamble at casinos so maybe I'm just boring.

(I do work for a startup and I did receive options, but just found a place that also met/exceeded my salary expectations, and I treated/treat the options as the lottery ticket they basically are)