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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

#351

Post by smileysteve »

nugget wrote: post #307
adekok wrote: post #97

Earlier quoted context omitted.

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money. One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No". Thanks, but no thanks. If you admit that you're not going to share the benefits, I have n…

Just to play devil's advocate - as a founder, I've both made money and lost money. Some of my ventures were self-funded to failure and I had to write off hundreds of thousands of dollars. I repeatedly remind my family that my worst case is not a year of unemployment with zero income but rather a year of business failure with a painful amount of red ink. One or two experiences like that and you become very aware of th…

> line between people willing to risk their time and money vs. people only willing to risk their time

But when people take equity instead of compensation at BigCo, they are quite literally risking money + time.

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

#352

Post by rrhyne »

adventured wrote: post #273
roadnottaken wrote: post #84

Earlier quoted context omitted.

Wow, did not know about that. What do you think the chances are it gets passed in the forseeable future?

The chances of it getting through within the next few years, is 100%, in my opinion. There will be numerous opportunities to fix this particular problem, along with all the other items getting targeted when it comes to tax & regulation reform. It has wide bi-partisan support, and the tech industry is the largest lobbyist force on earth now, as such it'll be a matter of how soon rather than if.

One counter point... think about who is lobbying for changes. If it's primarily founders/executives at startups, know they do not stand to gain from removing these golden handcuffs. This bill will make turnover higher and hiring more expensive.

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

#353

Post by JonFish85 »

hedora wrote: post #95
dandare wrote: post #57

> How many outstanding shares are there? (This will allow you to calculate your ownership in the company.) Is it not true that company can (and usually will) issue new shares and dilute your stake at every investment round? (I am just a layman like you)

Hiring is the primary source of dilution at new companies. Stock packages have to come from somewhere. Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but i…

> Hiring is the primary source of dilution at new companies.

Is that true? Generally don't companies set aside ~5% of the company for employees? Even the first 5 employees probably get a combined total of less than 10%, whereas the first investors probably get 10+%.

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

#354

Post by kuchi »

About trying to find an answer to: “Does the company's leaders want it to be sold or go public? And [ ..] time horizon” I think it’s impossible to find the right answer. I worked in a startup where every year the founders would tell us that next year we’d go to IPO. Then that year comes, and they wouldn’t: one year it was another company’s big IPO that had sucked the market dry, one year it was that valuations were low, one year it was that the cost of IPO was high, and on and on. I don’t think the founders were intentionally lying, but this question in advance, was not the right question because no one knew the answer. This question basically only begs for an answer to please the audience. So instead I think you have to look into the market and stats of that year as a whole to guesstimate where the company may be headed.

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

#355

Post by kooshball »

djb_hackernews wrote: post #144
econner wrote: post #24

Earlier quoted context omitted.

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…

The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen. Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and i…

You are absolutely wrong about the $100k option grants. There are a lot of startup that offer that to senior engineers.

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

#356

Post by ryandrake »

spamizbad wrote: post #264
cookiecaper wrote: post #162

Earlier quoted context omitted.

Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big. The systems are always going to be biased to the people who have the…

For a startup I think market-rate salary for early employees is more than fair, assuming it's coupled with an appropriate options package. But if we're talking about "Well you make market rate if you value your options like XYZ..." then yeah, that's BS.

Exactly. Equity should balance out the risk and opportunity cost of joining a start-up vs. an established company, NOT compensate for a below-market salary.

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

#357

Post by vacri »

beagle3 wrote: post #94
econner wrote: post #24

Earlier quoted context omitted.

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…

Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144). An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a usele…

Australia is even worse in that you owe tax on the options, before any event of any kind has occured. I think that they're pushing through legislation now in order to make it more US-like and allow founders to offer these worthless lottery tickets to potential employees :)

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

#358

Post by mattkrause »

dpark wrote: post #329
mattkrause wrote: post #164

Earlier quoted context omitted.

Others may messed it up, but Intuit lobbies to keep things that way. Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16. https://soprweb.senate.gov/index.cfm?event=getFilingDetails&... Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 v…

The lack of auto filing is not the core issue with our tax code. The ridiculous complexity is. I want auto filing but the tax code could be drastically simplified without the government directly competing with TurboTax.

Elsewhere in one of their filings, it also says "Simplification of the tax code."

I'm totally fine blaming them.

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

#359

Post by chrdlu »

econner wrote: post #271
chrdlu wrote: post #247

Earlier quoted context omitted.

The good news is that there are a couple new firms that aim to address this exact issue. The firm I work for is called the Employee Stock Option Fund (ESOFund) and we aim to help employees exercise and cover the taxes associated with the exercise (on a non-recourse basis - meaning you don't have to pay us back if the company fails). In exchange, we split the future profits. If you use us, it is a risk-free way to exe…

What percent of the "profits" do you take? Can you explain how ESOFund would work in the situation I outlined above?

Each of our deal is custom tailored to the specific situation. In the situation above, we would help provide the 300k upfront and then we would negotiate terms. We aim to take less than half of the ultimate proceeds, but that ultimately depends on how the company exits. We don't require any transfer or pledge of stock and as a result, we take on a lot of counter party risk. We aim to price it in such a way where it is a good deal for the both of us. As you can imagine though, the deals that cost more money upfront requires a high payoff in the future. The other advantage we offer is that we can move extremely quickly. While other firms might take a few months to decide, we've closed deals in less than 24 hours before.

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

#360

Post by gmarx »

AnonMcThrowAway wrote: post #227

Early employees usually get hosed, and I wouldn't sign up again unless comp was at least equivalent. The best large companies are much better run than they were 20 years ago, generally pay much better, offer a fair chance of stock appreciation (and it's liquid!) while offering more opportunities for professional growth. I speak from a lot of experience. True story: I was the first employee at a startup that raised >…

worked hard, sure, but if the sale was for multiples of what was invested it's hard to see any argument for screwing early employees (aside from, because we can and we like more money for ourselves instead of these people we never expect to see again)
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