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When a Unicorn Startup Stumbles, Its Employees Get Hurt

nytimes.com

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

#171

Post by balls187 »

DocSavage wrote: post #146
arbitrage314 wrote: post #121

Earlier quoted context omitted.

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.

Doesn't this just apply to those with either sufficient net worth or earned income to qualify as an accredited investor? Or have you heard of startups taking the money of some new graduate making less than $200k/year with insufficient net worth?

In the US, this is the definition of Accredited Investor[1].

The SEC allows companies to sell shares privately, using Regulation D. Regulation D has a number of rules that govern it, such as, you cannot generally solicit your offering (for example: take an ad out in the NYT annoucning you are raising money).

You can raise unlimited funds from Accredited investors (see link). You don't need to provide information (via prospectus) to these investors, as it's assumed they have the acumen to obtain and understand the information to understand the investment being made.

Companies can also raise funds from up to 35 non-accredited investors. However, in doing so, must ensure due diligence that those non-accredited investors can bare the economic burden, are made to understand the investment, etc.

By and large, that amount of work is more than enough to turn some founders away from dealing with non accredited investors.

In certain cases, a pre-seed, initial funding round may come from a "friends and family" round.

The SEC recently passed a law allowing selling shares via Crowdfunding, but because it's fairly new, the risk* to future Venture rounds is unknown, and I'd expect founders to be tepid with adopting Crowdfunding as a viable method to raise money.

[1] http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d...

* Venture Capitalists (afaik) haven't published an opinion on crowd funding, so founders may inadvertently risk future startup financing rounds if they screw up their capilization table with a crowd funding round.

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

#172

Post by HiLo »

tlogan wrote: post #164
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 disagree because it is not true all startups offer less than market-base salary. If a startup has VC backing then there is absolutely no reason for the startup to offer less than market salary. If a startup does not have money to pay employees then founders should raise more. Or sell more. Employees are not VCs. Simple. Also look this way: if start up is not offering market salary, then think this way: how that sta…

>If a startup does not have money to pay employees then founders should raise more.

> then think this way: how that startup is going to attract talent from established companies (whose expertise are needed if that startup wants to become big).

THANK YOU so much for saying this

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

#173

Post by marme »

tomasien wrote: post #123
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.

we need both what you suggest and tax reform around options. It is crazy that you have to pay tax on stock you cant sell. It would be incredibly easy for the IRS to just say when you execute an option that stock will always be treated as regular income and can never get benefit of capital gains tax no matter how long you hold it before selling. There are obviously many drawbacks to this but at least you cant get screwed paying taxes on money you never earn. This will never happen because the people lobbying for the current tax codes are not the people getting hurt by these ridiculous AMT rules. AMT was created to prevent people like steve jobs from collecting their entire salary in the form of options and not paying any taxes but the people most effected are clearly not rich CEOs like steve jobs

If i buy a plot of land work hard to build a house on that land i dont have to pay tax on the increased value of the property until i sell it yet if i work at a company and buy options as it grows i am taxed immediately before i can realize a gain

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

#174

Post by misiti3780 »

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…

Thanks for the comment but when you say you invested 100K in a company - are you talking about publicly traded companies, investing via the secondary markets, or both ?

You cant invest 100K in uber right now ....

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

#175

Post by tvladeck »

beagle3 wrote: post #126
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 forc…

You're making the point that if there were a liquidity event they'd be forced to exercise.

I made the point that they didn't have to exercise when they did, and if they had waited they wouldn't have taken on any risk about the price of the stock they were receiving.

Note how those are not mutually exclusive.

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

#176

Post by czbond »

acconrad wrote: post #167
czbond wrote: post #155

Earlier quoted context omitted.

The number is "high" as a single datapoint, but only due to an inflated SanFran economy. A $250k SF job adjusted to where I live in Dallas is actually considerably less than I make. I would need nearly $370k in SF dollars to do the same thing. http://money.cnn.com/calculator/pf/cost-of-living/

Right I'm well aware of the cost of living, but he did answer that he was 30 and living in SF. I live in Boston which is of relative cost-of-living (and salary) parity to SF, but you don't see $250k jobs being advertised for Google, Twitter and Microsoft here in Boston. I also feel like that number is inflated because a big portion of that likely comes beyond base salary (stock options, etc).

Absolutely agree!

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

#177

Post by balls187 »

ChuckMcM wrote: post #70

I remember clearly when I was in a similar situation with the sale of a company I helped start in 1999. All this gain on paper which required (because of the Alternative Minimum Tax rule) that I pay taxes on gains I had not realized. And then later realizing an actual loss. And the decade afterwards of getting $3,000/year that I could claim against my taxes. The only reason I'm not still claiming my $3,000 a year is…

Thanks for sharing your story.

When you got the stock, was it issued as option grant, or actual stock grant?

What would your advice be to people who hold most of their "investment" in a single companies stock?

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

#179

Post by arbitrage314 »

tlogan wrote: post #164
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 disagree because it is not true all startups offer less than market-base salary. If a startup has VC backing then there is absolutely no reason for the startup to offer less than market salary. If a startup does not have money to pay employees then founders should raise more. Or sell more. Employees are not VCs. Simple. Also look this way: if start up is not offering market salary, then think this way: how that sta…

You bring up a good and interesting point.

From what I've seen, startups almost always pay less than market, but they make up for it in four different ways:

1. Quality of life and work: employees at startups get to touch more things, work on more exciting projects, eat free food, play ping pong, be a part of a tight-knit culture, etc. A lot of people highly value this, and I don't blame them!

2. Employees mistakenly overestimating the value of their options, their probability of success, and the uniqueness of the startup culture.

3. Related to both #1 and #2, hiring employees that don't care about money and/or haven't taken finance 101.

4. Related to #1, #2, and #3: hiring employees that are so excited about the startup that they don't care about the deal they're getting.

I've NEVER seen a good engineer get a better offer at a startup than he/she would've gotten at a large company, but it's certainly possible.

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

#180

Post by balls187 »

jpollock wrote: post #105
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…

The best articles of incorporation I saw had preferred stock for the founders, but any acquisition or liquidity change would convert all preferred shares to common 1:1 and instantly vested all options. It did cause some interesting tax issues for people when we were bought, but I don't think I'd sign any other set of terms now. But then, the founders were very classy.

By having multiple classes of stock, the founders were unable to take advantage of pass-through taxation via S-Corp Designation. The losses incurred by a company at early stages offset personal tax liabilities by a significant amount.

Having an acceleration clause isn't anything out of the norm though. I negotiated an acceleration clause if upon we took qualified investment of a certain dollar amount.

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