Most of America makes its money the old-fashioned way: by getting paid, dollar by hard-earned dollar. Silicon Valley, however, is not most of America. In Silicon Valley there is no shortage of riches, to be sure. But that wealth didn’t arrive in the form of paychecks. Instead, it invariably arrived when people cashed in the shares they’d been granted in fast-growing companies.
Which creates one of the deep paradoxes of Silicon Valley: if you’re being paid well, you’re a schmuck. Real wealth comes to those who don’t need to get paid. And there’s no better example of this phenomenon in action than Palantir, Peter Thiel’s secretive big-data behemoth.
Of all the injustices to be upset about in contemporary America, it’s not particularly easy to get worked up about BuzzFeed's report on the travails of Bay Area tech-company employees trying to convert their stock options into common stock. Palantir's employees are frustrated and infuriated: they can’t sell their shares in what has become “a ‘crap’ market” for such securities.
But the problems facing workers at Palantir right now aren’t just bad for the individuals concerned. They’re also emblematic of the way in which the Silicon Valley playing field is tilted sharply towards tech bros, making it harder for people from less privileged groups to succeed.
Palantir, like many other Silicon Valley companies, loves to pay its employees by printing its own currency: Instead of paying in cash, it pays in stock. To be precise, it pays in stock options. What’s more, as BuzzFeed reports, the company tells new employees that it is Palantir’s “hope and belief that these options will ultimately constitute the bulk of your overall compensation.”
The problem is that you can’t eat stock options, and you certainly can’t use them to make rent. In terms of cashflow, the amount of money that you get from stock options for the first few years that you’re at any given company is precisely zero.
The result is that it’s a lot easier to work at a hot Silicon Valley company like Palantir if you’re already firmly entrenched in the bubble of tech privilege.
If you’re reasonably wealthy already, of course you’re fine. You can go on nice vacations, afford an expensive San Francisco apartment, and generally make full use of everything the Bay Area has to offer. Your paycheck doesn’t cover all of those expenses, but that’s OK, because you have a large pile of cash you can dip into, even as your net worth continues to rise thanks to all those options.
Conversely, if you’re a straight-out-of-college tech bro (or gal, if you manage to break in), you’re also likely sitting pretty. Your debt is limited to student loans, you can shack up in a group house with a bunch of mates and blazingly-fast wifi, and you’re making enough money to pay for beer and pizza and even a really nice bicycle. Your life isn’t expensive, but it’s fun, and rewarding. And, just like the wealthy employee, eventually your job pays off when the options become stock and you get a big pile of money.
To use round numbers, let’s say you’re an engineer who could get a job paying $200,000 a year quite easily; instead, you accept a job at Palantir which pays $110,000 a year plus options. Essentially, you’re investing $90,000 per year into valuable Palantir options, in the hope and expectation that those options will pay off to the tune of many millions of dollars a few years down the line.
But of course not everybody has $90,000 a year to invest in stock options. Many talented engineers have dependents – parents they need to look after, or a couple of kids to support, or a loved one’s medical bills to cover. Or maybe they’re just old enough to live in a home which needs a new roof.
To put it another way: If you don’t live in a Silicon Valley bubble of privilege, and instead live in the messy and expensive real world, then you’re much more likely to take that $200k job than the job paying $110k plus options. The upside is job security, and a generous salary; the downside is that you’ll never find yourself enjoying a seven- or eight-figure payday.
The systemic downsides, however, are much broader than that. When Silicon Valley types valorize “entrepreneurship” and other such buzzy terms, what they’re really talking about is the ability to give away your highly-valuable labor in return for equity whose value you won’t see for many years to come. That’s one reason why the stereotypical Silicon Valley entrepreneur is young and childless.
What’s more, since most startups fail, you can’t count on your equity being worth anything. It’s not deferred payment so much as it’s the most expensive lottery ticket in the world. One which only the rich and privileged can afford.
And that’s just the baseline. If paying below-market salaries and making up the difference with equity was all that Palantir was doing, its behavior wouldn’t raise an eyebrow. Instead, what Palantir is doing is bad even by Silicon Valley standards.
That’s because instead of giving restricted stock, as most companies now do, Palantir hands out stock options, which need to be exercised lest they expire worthless. Essentially, after you’ve spent your requisite three or four years at the company, you have to spend a substantial amount of liquid cash in order to (a) buy a bunch of stock at a pre-set, below-market price; and then (b) pay a bunch of taxes on that stock. Where are you supposed to find that money? Well, that’s your problem.
Palantir, it turns out, is perfectly happy for you to let your options expire if you can’t afford the cost of buying them and paying the associated taxes. That leaves more equity for the existing owners, after all. You know, people like Peter Thiel.
Palantir’s playbook is pretty evil. If you work for a public company, then exercising options is no big deal: You convert your options into stock, and then you immediately sell as much of the stock as you need to, in order to pay for both the shares and the associated taxes. What you’re left with can be worth millions.
But Palantir employees can’t do that, because Palantir severely restricts the number of people allowed to buy its stock. When employees go searching for a buyer for their stock – someone who can provide them with the cash they need to extract the value inherent in their options – they’re increasingly coming up empty-handed. The result is that they face a miserable choice between losing the stock that they’ve earned over many years, or going deep into debt in order to be able to afford to keep it.
Palantir could, of course, simply act as the stock buyer itself. That’s the fair thing to do, when the company has stayed private much longer than anybody thought possible. But one look at Palantir’s chairman (Thiel, Peter) will show you that the company doesn’t care much about fairness.
Indeed, Thiel is Palantir’s ultimate example of the disconnect between the amount of work you put in and the amount of money that you end up making. He’s Palantir’s largest individual shareholder, with stock worth billions of dollars. His initial stake in the company was earned through previous iterations of the Silicon Valley lottery, most notably an early investment in Facebook, where he also never worked. He’s the classic example of a man making billions mainly because he had a lot of excess cash to begin with. Meanwhile, the people without such excess cash often can’t afford to take the kind of pay cuts that Palantir is offering. And even when they do, the company offers them no help when it comes time to cash in on their stock.
Palantir has an official diversity statement, which says that “to access the broadest and fullest set of ideas, our community must attract and encourage people of diverse backgrounds, perspectives, and life experiences.” Those are noble words. But one look at Palantir’s pay structure is enough to show that it isn’t walking the talk. If Palantir really valued a diverse workforce, it wouldn’t structure its compensation plan so that only the rich and the carefree find it an attractive workplace. Because right now, everybody else is getting left behind.