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Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

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Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#261

Post by mateus1 »

I was part of a leadership team at a startup for 4.5 years (went from 10 to 200 employees, series A and B). During that time I accumulated a significant number of stock options which could potentially make me a millionaire.

I left the company because my salary was incredibly low relative other companies in the same area.

I have left and I have no possibility of exercising the options. I technically could but that would mean ~50% of my net worth in a single risky investiment.

So yeah, I now price stock options at zero.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#262

Post by barnacled »

throwaway4748 wrote: post #188
barnacled wrote: post #171

Earlier quoted context omitted.

what was the company valued at and what % did you own after dilution? Roughly speaking of course. I cashed out $500k pre-tax as employee #1 at ~1.3% post-dilution but pre-IPO with the startup valued at $35M so had the company been valued at a sub-unicorny $350M or so it would have made me a millionaire. Just wondering how the % numbers compare.

Smaller percentage of a much larger company. It’s a speculative market right now which helps. Most of these startups you’re seeing in the news are going public at $5B-$10B plus valuations. The big ones for $50B+

yeah there surely must be a fairly large floor before an IPO makes any sense. I'm pretty convinced the one I cashed out of is going to get diluted a bit more than acqui-hired by one of the big investors (who is in the same field as the startup) as the growth just doesn't look to have happened there.

I think given the overall situation I came out of it well, but it does go to show that even when you do hit the startup share lottery as we both have the actual cash outcome can vary by a significant factor, though we are both lucky to have made cash given the 99.9% of startups whose shares end up worthless.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#263

Post by tkay2617 »

kevinmchugh wrote: post #98
rongenre wrote: post #80

The other point here is that it's taking ~10 years to go from a company being started to going public. So most employees are going to have to make the decision to either cough up thousands to exercise their illiquid options and pay taxes on them or just have them expire worthless. At this point, joining as a seed-round or series A employee seems like a sucker's bet if you're expecting equity to be worth anything.

Only if you think the exit must be an IPO. Acquisitions and mergers can happen a lot earlier than that. Though those don't always pay out, of course

I think the catch with acquisitions is that founders and investors have liquidation preferences.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#265

Post by barnacled »

I was lucky enough to cash out of a startup after 7 years and 3 or 4 rounds of funding (I had left by the time I got the payout) as a share buyback for one of the VC investors.

I was diluted from 3.2% to about 1.3% but the value of the company had clearly risen so _at that point_ it was unimportant.

However in my opinion the company's burn rate and lack of growth clearly meant a later exit (likely an acqui-hire IMO) would have seen dilution without an equivalent growth in value, not to mention the ever-increasing VC non-dilution shares accelerating that.

I got majorly screwed on tax because the startup made no efforts to be efficient and were very chaotic in their arrangements for payout so that is definitely another important factor.

Overall by winning the startup share lottery I made roughly $500k for 5 or so years working there and that was as employee #1 so the maths given the pay cut probably don't work out too well (perhaps break even if I'd played the career game well).

However of course I am hugely grateful it happened and I got to see a startup grow from 3 people to more than 10x that and learnt a lot, as well as changing my coding career direction substantially.

I wouldn't recommend joining a startup as a non-founder other than for changing career or starting out. The trade-offs don't really make sense in most cases and you get a lot less say than you think you might (founders understandably want to control what is their baby) - never do it for the money.

note: I posted a more detailed overview of what happened at https://news.ycombinator.com/item?id=25496667

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#266

Post by lazulicurio »

lisper wrote: post #219
PragmaticPulp wrote: post #147

Earlier quoted context omitted.

Blaming bankers and proposing revolution is one of those explanations that sounds satisfying but doesn’t really match the evidence. In some ways, as markets have become more efficient and transparent it becomes harder, not easier, for finance people to simply squeeze money out of the systems through financial tricks. We’re also living in a world where interest rates are at historical lows, making the cost of capital…

> doesn’t really match the evidence Here's some data: https://www.pewsocialtrends.org/2020/01/09/trends-in-income-... Something is driving down wealth at the low end while driving it up at the high end. It seems unlikely in the extreme that this a reflection of actual value produced by people at the high end relative to those at the low end. Much more likely is that this is a reflection of some kind of structural pro…

To quote myself:

> Although the economy is a complex system and it's dangerous to try to over-simplify, my personal opinion is that there are two main and intertwined causes:

1) the cost to participate in the US court system.

2) the abuse of copyright, patent, trademark, and contract[1] law to divorce workers from their experience and treat employee knowledge as company property.

The time and money involved in both pursuing and defending court cases favors larger entities with armies of lawyers and large war chests. Intellectual "property" cases take especially vast amounts of resources because of the fuzziness involved. Meanwhile, treating workers as fungible producers of ideas that can be bought and sold both reduces the bargaining power of individual workers while empowering companies that can amass large portfolios of patents, etc. to use in litigation.

Not sure about reforms for the court system, but patent and copyright reform, combined with restrictions on unfair employment contracts, would go a long way to improving the situation.

[1] NDAs, NCAs, etc.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#268

Post by Groxx »

formalsystem wrote: post #81

Is there any reason why stock options can't be non dilutable? If new investors want to come in, they need to buy existing shares, the number of shares can be infinitely divisible to make it easy to always accommodate new investors.

Lets say your company is valued at $100 and all stock is claimed for current employees. Now you want to raise money by selling 50% of your company to investors.

So you create $100 more and now they own 50% (at $200 valuation). This means the investors either over-paid (2x what they were worth!), or you were strongly under-valuing the stocks that existed before.

If you dilute, they get 50% at $50, and the existing stocks are now worth 50% their value. Because you literally sold half the company.

---

The first is pretty obviously ridiculous. Nobody would pay 2x the worth, that's the point of deciding on a value. If they paid 2x, it just means you didn't agree on the value.

But if they don't over-pay, it's the same as the second: prior to the sale, your company's value was actually $200 (you were just claiming otherwise), and after the sale your employees only have $100, i.e. half the company's value. Their stocks were still diluted.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#269

Post by spamizbad »

HALtheWise wrote: post #231
lisper wrote: post #219

Earlier quoted context omitted.

> doesn’t really match the evidence Here's some data: https://www.pewsocialtrends.org/2020/01/09/trends-in-income-... Something is driving down wealth at the low end while driving it up at the high end. It seems unlikely in the extreme that this a reflection of actual value produced by people at the high end relative to those at the low end. Much more likely is that this is a reflection of some kind of structural pro…

I wouldn't dismiss so quickly that it's impossible for some people to create orders of magnitude more value than others, or for that distribution to change dramatically with time. In farming, for example, increased mechanization has allowed a ~100x increase in per-worker production, and unless literally every other occupation had the same change over the same time period, that should lead to dramatic productivity dif…

I am reminded of Sagan's standard "Extraordinary claims require extraordinary evidence"

Has been there been any detailed breakdown of how much more effective the median CEO in 2020 is over the median executive in 1970? I am certain they are doing things better, have more data, etc but what scale are we really looking at here?

Because, just thinking out loud here, the bulk of the workforce in the United States is more educated and has more hard skills than their predecessors did in 1970s. Firms demanded technology skills, for which they provided little or no training, and their workforce was able to acquire the necessary skills.. and yet the "upside" was nothing more than possibly being able to keep their job.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#270

Post by pdonis »

mensetmanusman wrote: post #102

The recent HN article on meritocracy comes to mind. I had never considered it this way in the past, but in the 70’s, productivity started decoupling massively from productivity gains. I.e. the best people at finance (meritocracy) figured out how to capture all the new earnings relative to the workers (who didn’t know this game was going on). This has snowballed into a situation where the financial meritocracy is comp…

The 70s wasn't the first time this had happened. The Industrial Revolution itself was a small number of people extracting most of the new earnings from productivity gains relative to the workers.
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