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What I Wish I'd Known About Equity Before Joining a Unicorn

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Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#201

Post by jes5199 »

econner wrote: post #24
jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity…

I walked away from a unicorn, a few years ago. If I had stayed - and somehow survived the effects it was having on my mental health - I might actually be a millionaire now.

Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house.

But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#202

Post by [deleted] »

jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

[deleted]

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#203

Post by baursak »

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

Or it's just a larger, systemic issue. Saw this post yesterday on Reddit, which I think is quite relevant here as well: https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy...

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#204

Post by luckystartup »

JonFish85 wrote: post #156
luckystartup wrote: post #120

This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money. I had no idea it was so expensive to join a startup. At least, if you want to avoid golden h…

Don't spend the money before you have it in your account. It's easy to get lured into the idea that the paper money is real ("worst case, it's worth 25% of that and it's still millions!"). There are still so very many things that can wipe that out, if not to zero, to something that isn't even close to life-changing money. Easier said than done, but really the best thing to do is focus on your current work / life. Kee…

I haven't let it affect decisions like buying a new car. I've been looking at some houses, but just for fun.

I've been working on some of my own startups since I quit this job. I needed to keep my burn-rate low, so I lived in some very cheap countries in South America, South-east Asia, and/or Europe. Basically the "digital nomad" thing, except I didn't move around very much.

And then I somehow managed to find a long-term client, where they only need me to work 4 hours per week, at $150 per hour. This supports a very high standard of living in my current country, so I'm extremely happy with this arrangement. I stumbled into this completely by accident, and I never even knew it was possible. So now I'm thinking that this is a pretty good backup plan, and I've started to put down roots here.

I know this particular gig won't last forever, but I certainly don't want to go back to full-time employment. 20 hours per week would be hard enough.

I do need to keep working hard on my own projects. I still haven't been able to build something that generates passive income. Not even regular income.

I try to make a lot of time for fun projects and hobbies that don't make any money. Things like art and music, and making things. I know it's possible to have a career as an artist or a musician, but I don't think I'm that lucky. I wish I could really pour all of my energy and time into those things, instead of also spending time trying to monetize various apps and websites.

I might try Patreon. I already have some pretty popular YouTube videos, so I think there is an audience for the kind of projects that I love to build. That's what I would be doing if I was retired, so maybe Patreon can help me to do that right now. I might try to set that up when I finish my next project.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#206

Post by EGreg »

jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

At the risk of sounding like I'm self-promoting, we developed a Compensation Model at Qbix that is arguably much better than equity for both the worker and the company.

The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute.

The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea.

You can find the details here:

https://qbix.com/blog/index.php/2016/11/properly-valuing-con...

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#207

Post by mikemac »

erichurkman wrote: post #192
mikemac wrote: post #154

Earlier quoted context omitted.

I really doubt any startup would let you see the cap table as a prospective employee, ahead of being hired full time. It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.

Our waterfall / payout / fully diluted ownership / strike price / last round price is part of our offer package. I can't imagine joining a company without that information.

That's awesome, and pretty cool that you all eat your own dogfood. Think it sends a nice statement considering your product and hope more companies offer that to employees in the future. I'm a customer and big fan.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#208

Post by [deleted] »

taternuts wrote: post #147

> The working conditions at Silicon Valley companies are often the best in the world I'd take regular, sane hours and the ability to have a life over worthless perks like ping pong/foozeball tables and customized snacks. I can bring my own snacks, buy my own lunches with as long as I have a decent salary and that really doesn't bother me. The only real perks in a startup are more control over what you are building as…

[deleted]

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#209

Post by BrandonM »

Osiris wrote: post #96
BrandonM wrote: post #85

Earlier quoted context omitted.

Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.

And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.

But wait, there's more... Let's say that you decide it's too risky to early exercise in year 1, but by year 3 things are looking pretty good and you early exercise all your options.

Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500 spread in year 3, even though you don't technically own those year 4 shares yet.

Then, you leave or get fired 3 months later. Pursuant to the early exercise agreement, the company can repurchase 1,875 shares at your $0.20 strike price, giving you $375 back. Unfortunately, AFAICT, there's no way for you to reclaim the tax you paid on the $1,031.25 spread for those 1,875 shares; you just eat it.

Yeah, this stuff is complicated, and sadly it seems to fall to each startup employee to educate themselves.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#210

Post by finnh »

econner wrote: post #24
jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity…

There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this.

You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.

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