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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…
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Even more insidious: Participating Preferred, which is effectively double-dipping.
For those not so deep in the world of startup, can you give a layman's explanation of what Participating Preferred is?
I guess our definitions of what is "unfair" are quite different. I think a better term here would be "illegal". It's most certainly not illegal - but I definitely would not consider it fair.
Companies throw options at employees - or potential employees - like candy. They imply, explicitly or not, that when the company gets big and successful, these options are going to be worth tons of money.
Most of us here know they're probably worthless. But executives/entrepreneurs/whoever most definitely suggest otherwise. So it's more like false advertising.
Now is that "fair"? I don't personally think so. I think it's pretty dishonest. I think when sale time comes around, they most certainly realize that these employees think they're finally going to cash in, and they are more than happy to let them think, even though they know otherwise.
Obviously there are exceptions. There are occasions where they actually do end up being worth something. Or where the seniors folks are very clear about how worthless these things actually are. But, in my opinion at least, those are most definitely the exception to the rule. I'm also pretty cynical for the most part, too. So there's that.
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It's fine to want preferred stock, but it's pretty rare for employees to ever receive it (unless they put up cash) -- it's reserved for investors to avoid a sandbagging + abscond with the money raised scenario.
And employees deserve to be sandbagged? That seems monumentally unfair...
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…
I think I am misunderstanding. Is liquidation rate basically interest?
Liquidation preference is something that typically pays out once when an illiquid investment (private company stock) becomes liquid (IPO or sells).
They both share aspects in that you are investing money up front but they have different rules to how you get a return on that investment.
I feel like legal manipulation is very bad for the startup ecosystem. Even here, at the YC forums, people assume their startup equity is worth $0 and advise you to go with a FAANG (or day that they broke even with friends at faangs after their exits). How is a legitimate startup supposed to recruit the best people under these conditions?
> How is a legitimate startup supposed to recruit the best people under these conditions? Easy. Disclose the preference of the terms you got from investors to your early employees. This problem is self created. If you don't tell them the terms of your deal, they rightfully assume the terms will screw them, since otherwise why wouldn't you be transparent? Good workers rationally and rightfully go to FAANG instead of a…
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It would be nice if there was an equity dashboard inside each and every startup that basically said, "If the company is sold today at $100M, you get $X." Not only would it serve as motivation, but it would also show every effect every VCO demand on the corporation to your equity.
Ideally it would be a graph over time so you can see if your equity stake is going down or up in value, and you can make an informed decision about leaving. Also many of the VCO shenanigans might stop if people know ahead of time what it means.
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VCs really don't care about "sweat equity" or "discounted salary equity". They believe that if you don't bring actual cash to the table then you aren't risking as much as them (even though they are only putting their clients money, not their personal money in most cases). That's one reason I didn't have trouble bailing on a startup I helped start. We took in $1.5mm, did some things poorly (such is life but learned go…
I was the third employee at a startup. I was young and stupid and thought "20,000 shares" was a lot. I worked my ass off, it was immensely stressful, but we built and launched a product. I later found out it wasn't much of a stake at all- .1% and that's even before any dilution shenanigans and all that. We took a paycut part of the way through, had our 401k contributions slashed and such. A company in the space (but…
For a while I was confused and unsure why they weren't also pulling long hours, but I eventually learned the lesson. I was working hard to protect my baby, while my staff were just seeking to gain some experience in a cool niche. I would either have to realign incentives for them to also feel compelled to pull long hours, or I'd have to recalibrate my expectations.
In retrospect, I'm not sure what took me so long to realize this, but I'm glad it happened relatively early on in my life. The first job I took out of college, I made sure to keep my effort in line with my compensation and investment in the company.
I feel like legal manipulation is very bad for the startup ecosystem. Even here, at the YC forums, people assume their startup equity is worth $0 and advise you to go with a FAANG (or day that they broke even with friends at faangs after their exits). How is a legitimate startup supposed to recruit the best people under these conditions?
> How is a legitimate startup supposed to recruit the best people under these conditions? Easy. Disclose the preference of the terms you got from investors to your early employees. This problem is self created. If you don't tell them the terms of your deal, they rightfully assume the terms will screw them, since otherwise why wouldn't you be transparent? Good workers rationally and rightfully go to FAANG instead of a…
I think you're missing the parent's point. The behavior of the "bad apples" makes people turn away from startups entirely, myself included.
Even as a very early employee (say number 20) of a unicorn probably will not make that much...you'd be lucky to get $2M if it sold for $1B... Most people are better off just working at a big company if they want to build wealth.
That’s what I thought. The OP was hoping to receive 1mm for 4 years of work. VP role will give that easy in any sizable company.