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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?

#291

Post by nearbuy »

joekrill wrote: post #154

> Again, let me emphasize, this is not inherently unfair. 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 ar…

You cut off the quote too early:

> Again, let me emphasize, this is not inherently unfair. [...] The problem is most companies hide it.

The author is saying it's not inherently unfair if the company is honest and upfront about it.

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

#292

Post by [deleted] »

awinder wrote: post #228

“In fact, one of my kids was recently interviewing at a startup and I told her to ask about the preferred overhang — she said the interviewer looked at her like she was asking about his sex life! She didn’t get a call-back.” I’ll do you one better. This is like asking someone you’re about to have sex with if they have an STD and then having them act indignant and not answer. And you should do the same thing in both c…

[deleted]

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

#293

Post by rajacombinator »

awinder wrote: post #228

“In fact, one of my kids was recently interviewing at a startup and I told her to ask about the preferred overhang — she said the interviewer looked at her like she was asking about his sex life! She didn’t get a call-back.” I’ll do you one better. This is like asking someone you’re about to have sex with if they have an STD and then having them act indignant and not answer. And you should do the same thing in both c…

It’s actually exactly like that, but in the opposite way from what you’re thinking ...

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

#295

Post by mattmaroon »

nostrademons wrote: post #77
bcrosby95 wrote: post #54

Earlier quoted context omitted.

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.

For brevity I omitted all of the dot-com flameouts and also the Web 2.0 startups that never got off the ground, but IMHO they support my larger point. 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…

But what if your competitor is willing to lose lots of money on large amounts of invested capital until you are out of business?

Uber and Lyft have it tough in that regard. At the end of the day they've got product market fit in a profitable industry. I mean the very worst case is they become more efficient cab companies, and cab companies have been making money for a very long time.

Their prices are artificially low due to competition, and they are in sort of a prisoner's dilemma. eventually one of them will go broke and the other will raise prices, or something will change about the market (such as driverless cars coming). But if one of them passes up raising and losing money they lose.

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

#296

Post by alecbenzer »

CamelCaseName wrote: post #287
alecbenzer wrote: post #283

Earlier quoted context omitted.

This is a really good point that I hadn't considered. Employees are "investing" money in a startup too in the form of opportunity cost, but a founder can't turn around and "sell" the investment when it's just time; when it's actual cash they can. I wonder if there are stories about this happening in certain contexts that predated liquidity preferences?

You bring up a good rebuttle, to which I ask, why not have the preferred shares vest? Then your stake accurately matches the risk you've taken on at any given time.

The time still isn't liquid, though. Yes, if you worked for someone for a year, you've given them $X (where $X is the paycut you took), but the founder can't just turn around and sell that $X to someone else. To the extent that they can, it's (to some extent) because the founder was able to take your time and turn it into something valuable, which is like, what founders/CEOs are supposed to do. At that point these is some sense in which the founder has also "earned" the liquidity.

With a direct cash infusion there's none of that. Any idiot can immediately sell $10M for $10M.

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

#297

Post by ry454 »

alecbenzer wrote: post #283
mlyle wrote: post #275

Earlier quoted context omitted.

Preferred stock (and specifically, liquidity preferences-- the common 1x, nonparticipating term) exists to ensure that if investors put in $10M for 20% of a company, you don't immediately sell the company for $10M and give them $2M back, and split $8M among yourselves. The deal is structured so that the investors have their option of either getting their original money returned or their share of the proportional shar…

This is a really good point that I hadn't considered. Employees are "investing" money in a startup too in the form of opportunity cost, but a founder can't turn around and "sell" the investment when it's just time; when it's actual cash they can. I wonder if there are stories about this happening in certain contexts that predated liquidity preferences?

Yup, that's the reason I've turned down all startup offers so far and some of them offered 2-3%. They like to hand wave about how much these 50,000 shares are going to cost or how rich I'm surely going to be even after dilution of these 2-3%, but when I tell them point blank that with my current compensation, over the course of 4 years I'm going to lose at least $1M, and ask them what I would get for a $1M investment, they suddenly struggle to find words. The reality is that, once you reach this level of miniature wealth and competence (and that happens quickly), the only next step is to start your own company. Startups don't really see employees as partners.

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

#298

Post by ry454 »

alecbenzer wrote: post #296
CamelCaseName wrote: post #287

Earlier quoted context omitted.

You bring up a good rebuttle, to which I ask, why not have the preferred shares vest? Then your stake accurately matches the risk you've taken on at any given time.

The time still isn't liquid, though. Yes, if you worked for someone for a year, you've given them $X (where $X is the paycut you took), but the founder can't just turn around and sell that $X to someone else. To the extent that they can, it's (to some extent) because the founder was able to take your time and turn it into something valuable, which is like, what founders/CEOs are supposed to do. At that point these is…

I think time is quite liquid. Let's say I get 500k/year on my current job and someone asks me to join his company for peanuts, but with a good chunk of stock. We could calculate the difference between 500k and peanuts and say that instead of joining that company, I'd pay him this difference every year. That difference would be enough to hire a small team for a small salary, but with stock options. The problem that most founders have is the unspoken refusal to accept that my time is worth this much.

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

#299

Post by WalterBright »

4ntonius8lock wrote: post #240
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…

> Why shouldn't they, when they put up all the money that the company's been burning? Because there is another group that's putting up all the work. In startups, that work is generally more intense and risk laden, which is why employees are offered shares as part of compensation. Otherwise, why would they be offering shares? Both groups deserve protection. The SEC was created so that people couldn't swindle each othe…

> putting up all the work

Generally speaking, the big money goes to the people who risk, not the people who work. If it didn't work that way, who would finance a risky project?

Investors may or may not get paid sometime in the future, while employees get paid today, whether what they do works out or not.

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

#300

Post by techsupporter »

greggman2 wrote: post #288
sokoloff wrote: post #261

Earlier quoted context omitted.

That labor is being paid cash along the way. It might additionally be getting common stock, under the same terms of other common shareholders, which is to say, behind the preferred shareholders, who are behind the bond holders.

I'm surprised how many people don't get this part. Person A, investor puts in $100k Person B, employee gets paid $100k Company fails. Person A lost $100k Person B gained $100k This is why person A gets the lion's share of the rewards if the company succeed. Person B risked nothing. Person A risked $100k. The typical retort from Person B is they could have gone to a different company so their risk was to work for this…

> Person B risked nothing.

They risked the single thing that absolutely no one, anywhere on the planet, can ever give them back: time.

Yes, they took a lower salary on the risk that it would pay off but they slid in the chips of their days existing on this planet alongside that risk. If no one was willing to take that risk alongside the venture capitalists who only invest easily-replenished money, the VCs would find their investments significantly restricted.

The problem is that the some of the people taking a risk and making investment, often the ones in the worst position, have far less information than others. It is inherently unfair that one "investor" can be worse off than another, especially when stacking up money against time. As the author wrote, this isn't inherently unfair...as long as it's not hidden.

But it's almost always hidden because the "lottery ticket hope" of turning 1% equity into seven figures is spoken of as being a regular amount of risk when, in reality, you'd be better taking that higher salary at a FMANGUNFXZOR company and putting the difference into actual lottery tickets.

(As an addendum, if anyone is about to reply with the words "rational actor" anywhere in it, I'm not moved by that rebuttal. Human beings are not rational all of the time and we are nowhere near as rational as economic textbooks would have you believe. Yet, somehow, that rationality or lack thereof is only called into question whenever the person in the crappier position with less leverage is the one who loses.)

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