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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?

#321

Post by ry454 »

guelo wrote: post #206

Investor are short-sighted when they steal all the money from startup employees. Equity used to be the one way that startups could compete for talent but the more the word gets out that it's a scam the less that startups are able to compete.

The funny thing that all this might be funded by the big corps who don't really need any startups and competitors around: it's easier to invest 20-30 billions into destroying the reputation of the startup concept, than to continue buying them at 1-15 billions each.

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

#322

Post by superqd »

techsupporter wrote: post #300
greggman2 wrote: post #288

Earlier quoted context omitted.

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…

I agree. The idea that time is not risked as an investment is, IMHO, deeply weak minded. Dollars, when used to purchase labor, are essentially acting as concentrated time. It's like a conversion from matter to energy and back. Walking around with lots of dollars is like holding lots of time, more time than you actually have life. So someone with a lot of money has, in effect, a vault of highly dense time they can chip off and trade with someone else, buying, essentially, more life than they could ever have (i.e., paying others to do things they could never in their lives have the time to do).

We humans are such primates, though, that we regard those with far more money as essentially higher class in the social hierarchy, and venerate their actions, and their property, as inherently more valuable than someone with less.

So when investing in a company with money, you are able to participate in that company by buying someone else's time. But, assuming a fair exchange (which is usually not the case for the laborer), then the one who works is trading one year of time for one year of time from the investor, in the form of dollars (assuming a 100k/year salary). However, the investor isn't trading their time in the form of calendar time, but in dollars. The worker is trading their time not in dollars, but in calendar time. The point is, it's an equal exchange. Which, if there are two people, then both would split the reward 50/50 assuming all else is equal.

We get confused as primates because we are comparing dollars and time, not realizing that we need to convert to common units. To know the true fair split, we have to know how much each person invested in the same units, time or dollars, but not both. We have to convert all dollars invested to time, or all time invested to dollars, in order to know the true investment ratios. In the example of Person A and B, both put in 1 year of time, hence a 50/50 split.

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

#323

Post by alecbenzer »

jonathankoren wrote: post #318
alecbenzer wrote: post #263

Earlier quoted context omitted.

I just don't think it's a very useful mindset. Or at least, it's not a useful way of phrasing that mindset. You should absolutely understand the very large chance that your equity is worthless. You should absolutely 100% not plan any part of your life around the equity being worth something. You should understand that, even if the equity is ever worth something, it won't be liquid for a very, very long time. ...but a…

It's a mindset about for thinking about your own finances. That's it. It's absolutely the wrong tool for thinking about equity grants. I've always considered illiquid equity lottery tickets. Yes, playing the lottery is stupid because the expected value is so small. At the same time, I am absolutely buying into the company lottery pool, and want to maximize the number of tickets I get. If it pays off, wonderful. It it…

Like I said, I just think it's a poor name for that mindset. If what you mean is "Count on your equity being worth $0", say that, and not "Value your equity at $0".

Maybe this has to do with the contexts I've heard it in, but my gut is that it too often deters people from thinking more critically about their equity and whether they're being treated fairly. If someone new to startups read just the comment I originally replied to and not any of this follow-up, would they have understood what you're trying to say?

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

#324

Post by ry454 »

mlyle wrote: post #305
ry454 wrote: post #297

Earlier quoted context omitted.

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 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, There's a thing you're missing here, and it's option value. You don't commit to the lost mone…

That's a valid point, but if we think about it, what does the founder do with that instant $1M grant? Most likely the founder spreads this $1M over the next few years on employees and other expenses according to his plan, hoping to get the next, bigger, grant. In other words, there is no advantage of having the entire amount upfront (except maybe the lost possibility to invest into short term treasuries with tiny return).

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

#325

Post by superqd »

jeremyjh wrote: post #187
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…

I think if a venture is unsuccessful employees shouldn't expect to make money from their options. A venture that raises $60MM and sells for $100MM 4 years later is a failure. Making nothing in a case like that seems fair to me. What is perhaps unfair, is if the employee worked for substantially below market wages all of that time, and particularly if they were given a much rosier picture than was accurate. But we sho…

I think the problem is that it's often difficult to pinpoint the crux of the unfairness, but still feel it all the same. In my opinion, the unfairness is engendered by the realization that time and money are merely different units of the same thing. Which means the investors are getting guarantees on their invested time, but the folks who did all the work are completely unable to recoup any of the time they invested. When we cast the investments in the same units, it clarifies the nature of the inequity.

Investors convert dollars into time (like a conversion from matter to energy), and workers convert time into dollars (energy to matter). Even in physics a seemingly small amount of matter has enormous power with respect to the energy it can unleash. But it can take a lot of energy to form the tiniest lump of matter. Investors are turning their matter, their dollars, into time. A lot of money, in that respect, is essentially lots of time -- more time than you have life, if you have enough of it. So you can do more, by buying someone else's time.

For simplicity, if we ignore non-labor costs (labor is the largest expense in most software startups, e.g.), it would mean that the invested dollars purchased an EQUAL amount of invested time. That is, the investors dollars were converted, with perfect efficiency to time (unless they overpaid the workers, or the workers were underpaid), which means there was conservation of dollars/time. This implies a balance of the two sides of the equation, which means at best (again, for simplicity, only accounting labor costs) the investors could only be guaranteed a share of 50% of the purchase of the company. Or at least that is how it should work, in my opinion.

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

#326

Post by mlyle »

ry454 wrote: post #324
mlyle wrote: post #305

Earlier quoted context omitted.

> 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, There's a thing you're missing here, and it's option value. You don't commit to the lost mone…

That's a valid point, but if we think about it, what does the founder do with that instant $1M grant? Most likely the founder spreads this $1M over the next few years on employees and other expenses according to his plan, hoping to get the next, bigger, grant. In other words, there is no advantage of having the entire amount upfront (except maybe the lost possibility to invest into short term treasuries with tiny ret…

The investor has committed to the entire amount. If something materially bad happens the day after the raise that halves the value of the company, the investor can't flee and the management team can still spend the money if any business prospects at all remain.

You raise an amount that will get you to the next capital raise, and convince other entities that you are sufficiently capitalized (banks, lessors, contract counterparties, prospective employees), and deal with a moderate amount of contingency. You don't want to excessively raise, because it's excessively dilutive when capital is expensive. You also don't want to have to raise again with nothing to show for the spent cash.

Even if we grant your statement "there is no advantage of having the entire amount upfront"-- there would be a benefit to the investor of having option value about whether to continue to invest; option value that an employee has. It's easy to model this and see that option value is quite valuable. (Investors would really like it, so we do see things like efforts at tranched investments or leaving a round open... but entrepreneurs hardly want to have to sell an investor equity at the same price if the investor decides he wants it a year from now).

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

#327

Post by Canada »

harryh wrote: post #92
mamon wrote: post #78

Earlier quoted context omitted.

And if the seller in turn uses your $1 to buy a lottery ticket you both would have roughly equal chance of getting rich :)

I think that you are wrong and am demonstrating that with my willingness to put my money where my mouth is.

Are you really putting your money where your mouth is? Even if I have shares I think are worthless, your offer to buy them is also worthless, so why bother? Actually, your offer is worse than nothing, as I would spend hours dealing with the share purchase agreement without assurance you will follow through and it would send a clear signal to the company that pays me that I believe it's worthless.

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

#328

Post by jariel »

user5994461 wrote: post #214
jariel wrote: post #67

Earlier quoted context omitted.

Should be noted that Stripe et. al. are paying premium salaries and as they are well funded with customers and income, they're not very risky, or rather, probably the same amount of 'employment risk' as most other private entities. If they are not pushing everyone to work late hours and long weekends ... then there's little reason to expect that later employees should 'get rich' from a buyout - though they should get…

Not sure if you mean now or a few years ago. Either way, don't believe all the stripe marketing hype. I was working at a small startup circa 2015, around 100 employees. We looked carefully into payment providers to try to reduce costs. Turns out Stripe was very small, we would be their main customer with a 2 digit percentage of all transactions if we moved our payments through them. Stripe had (has?) few customers an…

I trust your personal experience, but I suggest Stripe is now handling quite a materially large chunk of coin.

Also, I think your statement about them needed massive capitalisation is fair; they're not Google or MSFT.

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

#329

Post by gnicholas »

H8crilA wrote: post #311
gnicholas wrote: post #279

Earlier quoted context omitted.

It’s also not the most polite/politic way to ask about it. A neutral way to get the same information is to ask about the cap table and then go from there if needed.

Salary negotiation (which is what this is) is not the time to be super polite and dance around important topics.

Actually, it wasn't salary negotiation because it was pre-offer. It was during an interview, and the author lamented that "She didn’t get a call-back".

I agree that during salary negotiations it is less important to tiptoe around things. Perhaps it was a bit premature to have even inquired about the cap table in any way during an interview, unless the interviewer had just mentioned how many options would be offered to a selected candidate (which would be oddly specific, pre-offer).

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

#330

Post by 4ntonius8lock »

WalterBright wrote: post #299
4ntonius8lock wrote: post #240

Earlier quoted context omitted.

> 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.

So people who work for a start up aren't taking risk?

Employment is more than just the paycheck. It's security. It's a career trajectory. Otherwise, why do consultants get paid more than employees?

You can see it that employees take no risk. That's fine. But then I wonder why start ups tout the stocks they give? And why is it acceptable to tout something that they know has no value?

The SEC has a function. To avoid dishonest actions that would otherwise be legal under standard criminal law from eroding trust in security markets. The employee of the article we are discussing here received 1% for losing out on opportunities of growth in a larger company. Obviously he was worth something to the company, and more than they were willing to pay him in cash. He was betting on the future value of the offerings he was receiving. By being able to trust that, start ups could/would/should obtain labor at discounted rates. This is good for the market. Trust in securities.

You can call him naive. But I will remind you that in the late 19th and early 20th century the stock market was not well capitalized. People presumed they were getting screwed. And anybody who placed trust in the system was called naive. "they shouldn't trust" is an easy argument. It's the old 'it's just the way it is' argument.

It's arguable, but I'd say creating trust within the exchange of securities via systems like the SEC was a great advance in the allocation of resources. It's why we have well capitalized markets. Without trust, friction comes along.

That is why I feel what was described in the article is deeply unfair and given that the entire structure of joint stock companies is a legislative creation, surely it could be changed.

So basically, your view that "the big money goes to the people who risk" seems idiosyncratic and reflexive rather than based on any substantial analysis of the article or the situation.

I'm hardly advocating for any revolutionary ideas. Overall, having read The Wealth of Nations, I'm a big supporter of Adam Smith's ideas. Which is why I can see how the system can be structured differently within the capitalist context.

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