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My company sold for $100M and I got zilch – how can that be?

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Re: My company sold for $100M and I got zilch – how can that be?

#161

Post by ineedasername »

tyrust wrote: post #76
cj wrote: post #12

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.

I mean, I guess that's an issue sometimes, but this comment quite nicely summarized what the article explained at length.

Re: My company sold for $100M and I got zilch – how can that be?

#162

Post by ska »

jammygit wrote: post #20

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?

Very early on (pre series A) this isn't so hard. Be completely transparent with your early hires about the cap table, give them a percent or two (even 3-5 for a key hire) to buffer against dilution. Do it in stock, not options, with reverse vest [this is very jurisdiction dependent]. Use the same class as founders.

People in this position can get screwed on exit of course but it's harder (and usually they are the ones you'll want retention terms for anyway).

Doesn't' work at all past the first small handful of core people.

Sound too expensive? Not early enough? Pay something close to market rates and be doing something interesting.

Re: My company sold for $100M and I got zilch – how can that be?

#164

Post by aetherson »

jammygit wrote: post #56
aetherson wrote: post #37

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

That's equity compensation, in my view. It's not like it's different at the FAANGs. If you go to work at Apple, and you work super hard, and the company declines in stock value from $5jillion to $3jillion, nobody is like, "Whaaaat? Why didn't my equity go up in price? I worked really hard, and also $3jillion is still a ton of money!"

Equity compensation is about owning part of the COMPANY. If the company has destroyed value -- if it is now worth less than its bank account, with no company attached, was worth before any revenue -- then your equity is valueless.

Asking for the reward of equity with no risk is weird.

Re: My company sold for $100M and I got zilch – how can that be?

#165

Post by nighthawk648 »

dgzl wrote: post #96
tyrust wrote: post #76

Earlier quoted context omitted.

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.

What's baffling about it? If someone were to only read the title and not the article and came to the comments section, a summary about the title would be desired. What you're probably baffled about is why do people only read the title and not the article.

I’m not sure... HN is supposed to be real time discussions of articles. summarizing the article not only is not discussion (read it is regurgitation / bastardization) but any argument / discussion had based on the summary will be inaccurate as they are going off of the words of another, who more than likely integrated logical fallacies that did not exist before the comment.

Re: My company sold for $100M and I got zilch – how can that be?

#166

Post by ryandrake »

landryraccoon wrote: post #42
jammygit wrote: post #20

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…

Exactly. I once asked a founder if his books were open to viewing by employees and whether I could see the cap table. He looked at me like I had a horn growing out of my forehead, and later I learned he privately complained to the recruiter about how unreasonable and unacceptable requests like that were. There’s this big “youre the tech help and you don’t need to care about banky things like liquidation preference and future dilution” attitude still. Much safer to just go with an established company whose shares can be sold as soon as you get them.

Also:

> How is a legitimate startup supposed to recruit the best people under these conditions?

I’d argue most startups don’t need “the best people”. They need a few hard workers who can wear multiple hats and have a promising skills trajectory. The “social network for dogs” doesn’t need to hire Ken Thompson.

Re: My company sold for $100M and I got zilch – how can that be?

#167

Post by moron4hire »

The comment on "founders getting offended when asked about the preferred overhang" is a point I think that is getting missed. Yes, there is the whole "caveat emptor" of being an equity employee, but there is clearly a culture of hiding all of the necessary information for making an informed decision.

In a lot of ways, I think the over-emphasis on "startups change the world" has been a contribution to this. There is a greater supply of people who "want to work in a startup" (or rather, think they like the whatever idea they have in their head of what a startup means) than there is demand for early stage employees. So any founders who might have something to hide will have their pick of people to fleece. They can easily pass on anyone who asks the the probing questions about the real value of the company and just wait for a shmuck to come along who doesn't ask.

What can we do to educate the general populace enough to dry up that pool of shmucks? In the long run, the way things are has to be terrible for investors, too. They put their money into founders who aren't being up front with their employees, and probably not getting the best employees because of it.

Re: My company sold for $100M and I got zilch – how can that be?

#168

Post by jasode »

jammygit wrote: post #56
aetherson wrote: post #37

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

>, but is it sensible for the employees?

Yes, if the employees' future paychecks for the next few months is being funded by that VC check. If the options are (a) VC money - but can only get it with liquidation preference ... or (b) insist on no liquidation preference - and therefore no VC agrees which leads to bankruptcy ... the "sensible for employees" is a moot point because the constraints of limited runway mean the employees care more about steady paychecks rather than owning worthless stock of a bankrupt company. (E.g. Google's first employees' salaries were funded by $25 million VC money from Sequioa and KPCB because Google had near zero revenue. Yes, Sequioa & KPCB had liquidation preference but it was irrelevant to employees since they needed the paychecks.)

On the other hand, if payroll expenses can be funded by revenue and the VC check is optional, maybe not.

Re: My company sold for $100M and I got zilch – how can that be?

#169

Post by nighthawk648 »

sam1r wrote: post #79
tyrust wrote: post #76

Earlier quoted context omitted.

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.

Good point. I am not going to read this article anymore.

:c but please!

Re: My company sold for $100M and I got zilch – how can that be?

#170

Post by enra »

nostrademons wrote: post #27

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…

Just to note that it's not useful to group all of these companies together. While they all have massive valuations, and raised lot of funding, they don't have similar businesses at all, or capital efficiencies. The market is also different today than it was with Microsoft or Google. Companies are expected and also need to grow faster (or others will). It took Microsoft 10 years to break $100M in revenue. All companies on your list are about 10 years old but have revenues in several billions.

WeWork's problem was that while they valuation was $47B, they also had $47B committed in long term leases (essentially debt). Uber & Lyft, are in war and their scale hasn't helped the economics as much since neither can get a monopoly on demand or the supply side of the market. Postmates, Doordash, Instacart, all likely operate with large gross volumes but low transaction sizes and low margins which can be challenging.

Airbnb has now more cash the bank than they have ever raised ($3.5B) and it's growing [1]. I suspect Stripe's financials are strong as well.

Free cash flow, and the ability to use or invest it well, eventually lead to a great business. Raising a lot of money doesn't necessarily mean that you are burning a lot of it, and the economics of the business matters.

It's also likely Airbnb will do a direct listing since they don't actually need the cash. Which is also potentially better for employees than traditional IPOs.

Disclaimer: I used to work at Airbnb, but this is all public information or speculation on my part.

[1]:https://twitter.com/KateClarkTweets/status/11849334122319953...

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