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Has anyone else had this experience and what do they advise others to do when faced with the dilemma of turning down an offer due to a lack of transparency into the option grant?
Earlier quoted context omitted.
So in your example, the investors are basically getting a 300% return if the company sells for 15M or more?
In my opinion: Liquidation preference of 1x (or lower) is just sensible alignment of investor and founder incentives. The investor wants to make sure that if they buy 20% of the company for $5M, the founders aren't now incented to take advantage of them (in an extreme example: the day after the fundraising, liquidating the company for its assets, taking home $4M themselves and handing the investor back $1M. In a less…
The only warrant for preferences is for fueling carry and information arbitrage within the VC circle. There is zero benefit to employees, who thankfully know more today.
Earlier quoted context omitted.
In my opinion: Liquidation preference of 1x (or lower) is just sensible alignment of investor and founder incentives. The investor wants to make sure that if they buy 20% of the company for $5M, the founders aren't now incented to take advantage of them (in an extreme example: the day after the fundraising, liquidating the company for its assets, taking home $4M themselves and handing the investor back $1M. In a less…
It may be sensible for the founders and investors, but is it sensible for the employees? Many startup employees are paid to a significant extent in stock and do not understand the situation they end up in. They are also powerless and just have to trust that the founders and investors will treat them well. Rationally, this leads to many of the best people ignoring the startup world
Heidi Roizen, VC, most definitely does not feel Former Millionaire's pain. Yes, liquidation preference overhang is the mechanism. However, the company got sold for $100M. Who sold the company? The founders + the VCs and they got theirs. They could have structured the deal to give the employees something. They didn't. The advice here is simple. Walk. Former Millionaire owes absolutely nothing to the new company. Stayi…
I wonder the best way to mitigate such situations without simply having to rely on VC/Founder goodwill. YC was a leader in their 'clean terms SAFE' which really helped set a 'good standard' for all parties that was a win-win all around, I wonder if there's such a policy framework that could facilitate the same in these situations. YC's concerns in their 'SAFE' situation was balancing VCFounder, not employees, that said, Sam Altman has always talked about sharing more equity with other team members.
From a 40,000 foot view, it's odd that employees who are investing their professional effort are relegated to a lower equity tier. I think the person asking the question in the article makes a valid point: why is it fair for human capital to be devalued in this way?
Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…
This matters more now that the current crop of tech companies have taken so much money. In the old days, when software companies sold software rather than traditional services enhanced by software, it was common to get to profitability around the B round and then never take any more investment after that. Google took $25-35M and then nothing until IPO, running the company from 2001-2004 off cashflow. Microsoft took n…
All the companies you're talking about have 1 thing in common: they're considered successes. You're going back in time and cherry picking companies that made it out alive. The early 00s/late 90s were full of companies that took Google levels of money that crashed and burned. There were also tons of companies that took little-to-no outside funding that crashed and burned.
In the late 90s we had a lot of companies that took a lot of money, and the founders and employees got nothing out of them other than painful experiences. When you look at one of the successful "fat" startups (PayPal), Max Levchin's take ($34M) of the $1.6B acquisition was on the same order as the Wufoo founder's take of their $35M acquisition, or the Viaweb founders take of their $49M acquisition. Even Amazon - probably the most successful "fat" startup in history - languished below its dot-com peak until AWS came out in 2007.
Margins matter. Capital efficiency matters. If you want to actually make money, you should make lots of profits on small amounts of invested capital, not lose lots of money on large amounts of invested capital.
Basically if you are working at startup value your options at 0 and you will be right 99% of the time.
If anyone reading this is working at a startup and values their options at zero please get in contact with me (contact info in my profile) and we'll find a way for you to sell me your equity for $1.
Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…
It always baffles me when the top comment isn't discussing the article, but provides a response to the headline as if the article doesn't even exist.
Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…
It always baffles me when the top comment isn't discussing the article, but provides a response to the headline as if the article doesn't even exist.