When a Unicorn Startup Stumbles, Its Employees Get Hurt • Hacker News Board

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#121

Post by arbitrage314 » Wed, Dec 23, 2015, 6:10 PM UTC

askafriend wrote: post #113

arbitrage314 wrote: post #111

I'm going to keep repeating this comment until the world hears it--I think most people joining startups are being taken advantage of without realizing it. Sorry to be repeating myself: If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and si…

Can you explain how you were able to invest 100k into a startup without being an angel investor?

Most startups are more than happy to take your money. Just email or meet with the founders, explain your enthusiasm for the company, and you're usually good to go!

For higher-profile deals, though--e.g., Uber--you wouldn't be able to invest such a small amount.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#122

Post by msoad » Wed, Dec 23, 2015, 6:11 PM UTC

arbitrage314 wrote: post #108

If you're going to work at a startup, ask for two things: 1. No employee equity whatsoever, but a slightly higher salary to make up for it 2. The ability to invest in the the next round I've worked at a startup and done #1 and #2 above, and it's working out great. I'm very happy to be owning preferred shares.

That's a very interesting approach!

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#123

Post by tomasien » Wed, Dec 23, 2015, 6:11 PM UTC

mikekij wrote: post #116

This article highlights the need for two changes in the startup world: 1) We need a different term for the "post-money valuation" that VCs place on a company after fundraising. It is not a valuation in the same way that a public company is valued, due in large part to the preferred stock liquidation preference. Employees hear about a $1B valuation and assume that the IPO or acquisition price will be some multiple of…

I'm not sure we need #2 - we need companies to be better about not forcing their employees to exercise options when they leave the company and we need employees not to exercise options early to minimize the taxes they may have to pay in a windfall. This can simply be executed by every company without any government tax code reform needed.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#124

Post by balls187 » Wed, Dec 23, 2015, 6:11 PM UTC

ditonal wrote: post #93

rlucas wrote: post #82

Earlier quoted context omitted.

> Tech employees need to wake up about common vs preferred shares, and that the former are worthless. > ... > They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. You've muddled orthogonal concepts together here. 1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Found…

Thank you for the informative response. 1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on found…

Let's do a thought experiment, you have a pie that you need to allocate, and you need to allocate it to the following groups.

Founders Investors Non-Founding Executives Non-Founding Employees

How do you allocate the pie fairly? How how do you ensure that risk is properly rewarded?

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#125

Post by antoinevg » Wed, Dec 23, 2015, 6:13 PM UTC

rlucas wrote: post #82

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

> Tech employees need to wake up about common vs preferred shares, and that the former are worthless. > ... > They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. You've muddled orthogonal concepts together here. 1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Found…

All of which is true but until the larger community of founders and investors buy into the rational basis for their existence those common shares do not provide any incentive for a competent programmer to take the risk of working for a startup rather than for an established company.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#126

Post by beagle3 » Wed, Dec 23, 2015, 6:14 PM UTC

tvladeck wrote: post #10

Regarding the fact that the employees had to pay tax on what turned out to be worthless shares: They could have avoided this by waiting to exercise their options on the eve of the liquidity event. In this case there would have been no risk. But they exercised earlier presumably to start the clock on long term capital gains treatment for the stock they received when they exercised. They took risk they didn't need to t…

This is often repeated wisdom, and it is quite wrong.

If the liquidity event involves the public stock market in any way e.g. IPO, merger, acquisition with a nontrivial part of the proceeds paid in shares of a public company - then you are forced to execise on one hand, and have a lock-up period, usually 6 months, forced by the underwriters or SEC rule 144.

That is, there is a mandatory 6 months wait between the forced exercise and the effective liquidity event.

This applies to investors as well as employees, BTW: I was bitten by this as an investor -- a modest 5X return on investment after 2 years turned out to be less than 2.5X return (still nice), but the taxes were paid on the 5X numbers, and the end result net of taxes was therefore 1.1X -- and it would have been a loss if everything happened in the other half of the year (luckily, I was able to net the gains with the losses because the 6 month lockup was april-october; but had it been october-april, even that wouldn't have been possible).

In two other tax regimes I've operated in, you are only ever assessed taxes in the event you can take money into your pocket. The US system is ridiculously unfair in this sense.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#127

Post by arbitrage314 » Wed, Dec 23, 2015, 6:14 PM UTC

ryguytilidie wrote: post #117

arbitrage314 wrote: post #111

I'm going to keep repeating this comment until the world hears it--I think most people joining startups are being taken advantage of without realizing it. Sorry to be repeating myself: If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and si…

I would also imagine that you get a MUCH better deal and probably higher preference by investing versus being an employee. Which is also not a great message to send employees.

Yes, in addition to the amazing tax benefits of investing rather than being an employee, you get preferred shares.

I also want to add that I know of a startup which allowed employees to trade off salary for equity in a way that completely screwed their employees. E.g., they gave their engineers something like either 0.2% and $150k, or 0.3% and $100k.

This implied a valuation of $200 million (since an employee would trade off 0.1% of the company for four years of $150k instead of $100k--for an added $200k bonus, and $200k / 0.1% is $200 million).

At the time, though, the company was selling shares to investors at a valuation of $50 million.

In other words, they were charging employees quadruple the price for equity. I'm thinking about writing a blog post on it.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#128

Post by drveen » Wed, Dec 23, 2015, 6:15 PM UTC

ardiem wrote: post #29

davidu wrote: post #11

Earlier quoted context omitted.

Only those who early exercise, or exercise their stock as it vests. They did this to try and optimize for long-term capital gains. For most employees who leave their option grants as options, there is nothing to worry about. When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value…

Correct me if I'm wrong, but even with an early exercise (or an exercise of vested options) where the valuation matches the strike price, that employee would still have had to personally fork over the amount needed to purchase the underlying shares. In the scenario described in the article, they've still lost a substantial chunk of money if the valuation is now a fraction of the strike price. Secondly, while capital…

2 approaches:

1) you pay the strike, and pray the valuation continues to rise through any IPO, buyout, etc..

2) arbitrage - you pay the low strike, then sell in the secondary market for more, and hopefully realize a one-time profit after cost frictions.

From the article, sounds like most of the afflicted here were playing strategy (1), while there was some window to execute on (2) though many may have not noticed it.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#129

Post by arbitrage314 » Wed, Dec 23, 2015, 6:16 PM UTC

benmanns wrote: post #115

arbitrage314 wrote: post #111

I'm going to keep repeating this comment until the world hears it--I think most people joining startups are being taken advantage of without realizing it. Sorry to be repeating myself: If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and si…

How did you invest in a startup with only $100k? Was this a seed-stage thing or were you a small contributor to a later round?

I was a small contributor in a later round (series A or B).

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#130

Post by ryan-c » Wed, Dec 23, 2015, 6:16 PM UTC

keithpeter wrote: post #97

UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?

> Why were employees paying tax on the nominal value of the shares?

Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options.

> Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?

Yes, but this requires the employee to pre-pay for the shares when they are issued.

Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.