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Silicon Valley's best kept secret: Founder liquidity

stefantheard.com

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Re: Silicon Valley's best kept secret: Founder liquidity

#121

Earlier quoted context omitted.

Does anyone restrict 83b elections? Is that even allowed?

Ive seen it restricted so yes

I think there's a confusion between the related events. Filing the 83(b) form with the IRS is between you and the IRS. Company isn't involved so not something they can restrict.

However, filing that 83(b) only makes any sense if you are allowed to early exercise and that is indeed entirely up to the company. So if they don't let you early exercise you also won't be filing the 83(b).

Pro tip: Never join a startup that does not let you early exercise!!

Re: Silicon Valley's best kept secret: Founder liquidity

#122

Earlier quoted context omitted.

Does anyone restrict 83b elections? Is that even allowed?

What would this even look like? An 83b election is something I file with the IRS. Are you suggesting a company might have me sign a contract committing me to not file an 83b election? How would they ever find out if I did file, and why would they care?

My understanding is that 83b applies to stock, not options, so you have to first exercise the options and hold unvested stock. That requires early exercise.

Re: Silicon Valley's best kept secret: Founder liquidity

#123

Earlier quoted context omitted.

I can share some details. Employee 1: ~1% Employee 10: ~0.1% Employee 1000: 0.01% I'm extrapolating from past experiences in SaaS companies where I was employee number X and X has varied fairly widely.

This always seems like a huge scam to me. Employee 1 gets 1%? It seems unfair from multiple perspectives. One is just a straight up naive sense of fairness. If I'm going to be in the trenches with you, I had better be able to see my ownership % in a pie chart with my glasses off. If we're out here both making chairs and when we sell a chair for $100, you get $85 (assuming someone took one of the standard-ish seed rou…

This isn't a terrible take, but there doesn't seem to be a shortage of people for whom this doesn't feel like a scam.

I'm not particularly fond of the founder hype train, and the typical line is indeed "various risks and blah blah blah" but what's often left out is that employee #1 at a post-funding startup is a pretty different job/profile than co-founder.

Most employee #1's don't have relationships with investors, might not be as employable outside the startup world, and they don't sit on the board, don't have the same formal responsibilities, and rarely are able to raise money to found their own startup -- in fact, this is the often the key reason they're even interested in being employee #1.

It's a market, and as a market I'm not sure it's that skewed.

Want 25%+ of the company? Start it. There's no cabal preventing you from doing that. Have better options than 1% of a likely-dead startup, that pay more and have better WLB? Take them.

After all, few industries give any employees equity. First employee at an ice cream parlor? 0%. First employee of a hedge fund? 0%. First employee of a medical practice? 0%.

Equity grants can be motivating and aligning, and frankly more industries should probably consider them. But not that many people are in a position to found a startup that can raise money (larger equity grants are much more common for pre-external-funding employees) and this differential reflects that.

Btw, "1% of the other 10000 startups that folded" is worth about the same as a founder's 40%: $0. The issue is the middle ground, but there the equity grant is often not worth the paper it's written on: typically the acquirers dictate who gets the money. 1% or 5%, unless the acquirer is trying to retain you, chances are you'll see nothing even if the nominal payout is large.

Anyway, the upshot is what people have been saying for decades: don't do a startup for the money. Do it because you want to be part of that kind of thing, and treat any exit money as a bonus.

Re: Silicon Valley's best kept secret: Founder liquidity

#124
The founders I've known were already wealthy when they decided to do a startup. They aren't at risk because even if the startup falls through without making a cent they have enough money in their bank account to withdraw $200k/year for thirty years. There's no risk there.

Re: Silicon Valley's best kept secret: Founder liquidity

#125
post #16
post #6

The best startups have a concept which is summed up thusly: “We all go to the pay window at the same time.” It’s ok for founders to take a little bit of money off of the table if they extend that to their employees as well. Asymmetry is where things get weird. I’ve seen many founders who got deep into the fundraising cycles without ever realizing they could take a cent out. VCs will constantly tell you to let it all…

I have seen a lot of companies, a lot of rounds. I have known zero founders who have turned down an option to take money off the table (and zero A raises that offered that to employees). I love the idea of your universe, though.

It happens.

I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount.

I more recently interviewed with a pre-series A company and they said that they'd include me in a liquidity event when I brought up compensation.

Re: Silicon Valley's best kept secret: Founder liquidity

#126
post #90

I was mentally, physically and emotionally worn out when I left my previous startup after being an early employee. Despite that I really wanted to stay and be part of what my friends and I were building. Had I had the chance to 'de-risk my life' with some equity to replenish my empty bank account, which was empty from taking an early employee salary, I may have been able to stay but in the end I had to get out. Getti…

This is the model, you can see a lot of early stage founders looking for a "founding engineer" which is really just an excuse to pay founder salaries for 1% of the company rather than 50%. If the founding engineer quits without buying their options, then the founding team recoups the 1% equity. Its a recipe for the founding engineer to be burned out and pushed out.

What if they give 1-2% and good market rate salary (~200k/y) to a founding engineer? Is that still a bad deal?

Re: Silicon Valley's best kept secret: Founder liquidity

#127

I was mentally, physically and emotionally worn out when I left my previous startup after being an early employee. Despite that I really wanted to stay and be part of what my friends and I were building. Had I had the chance to 'de-risk my life' with some equity to replenish my empty bank account, which was empty from taking an early employee salary, I may have been able to stay but in the end I had to get out. Getti…

The irony of being an early engineering employee (and any engineer really) is that the better job you do the easier it is to replace you with someone who can maintain what you built. Accepting a below market salary and then doing a great job is a huge risk.

Re: Silicon Valley's best kept secret: Founder liquidity

#128
post #90

I was mentally, physically and emotionally worn out when I left my previous startup after being an early employee. Despite that I really wanted to stay and be part of what my friends and I were building. Had I had the chance to 'de-risk my life' with some equity to replenish my empty bank account, which was empty from taking an early employee salary, I may have been able to stay but in the end I had to get out. Getti…

This is the model, you can see a lot of early stage founders looking for a "founding engineer" which is really just an excuse to pay founder salaries for 1% of the company rather than 50%. If the founding engineer quits without buying their options, then the founding team recoups the 1% equity. Its a recipe for the founding engineer to be burned out and pushed out.

This reminds me of how I have seen a few asks lately for roles where a company is looking for a CTO for their “AI startup”. How an “AI startup” (whatever that might actually mean) can _start up_ without a CTO is beyond me, and raises some very big red flags about what that company might be up to.

Re: Silicon Valley's best kept secret: Founder liquidity

#129
I worked at a preseed company recently. Here's my experience:

- Work 9 to 7 everyday. 6 days a week.

- People are working 9 am - 5 am in crunch time. Then joining again at 10 am.

- Monetary Comp is exactly market average.

- Equity Comp is even more paltry since founders raised at a huge valuation.

- Founders make unrealistic promises. Eg: It took a competitor with 7 people, 3 months to make a product. The founder told us Saturday that he wanted it built by Monday (with 3 total devs).

- Founders message you 24 x 7. If you don't reply, there's a "serious discussion" to be had next time.

- Non Accomodating of anything because "It's a startup".

I left the place after 10 weeks. I saw 3 people leaving the 6 person company in these 10 weeks. The ones who stayed were under heavy financial stress or had drank the kool aid.

Re: Silicon Valley's best kept secret: Founder liquidity

#130
post #8

Only a small percentage of tech companies raise a series A or beyond. To me, this just seems like a capital-efficient alternative to the founder increasing their salary that could be negotiated. I had no such perception that this was some “secret” thing, I assumed it happened since you can do whatever you want if the investors and founders agree that it makes sense.

This whole thread is leaving me very confused. Series A is the first priced round. You're saying only a small percentage of tech companies raise a priced round?

As you noted below, it depends on the industry.

But for software, and my impression is that it is even more like this in most other industries, a huge amount of tech ventures never receive any funding. Many of these are never even properly incorporated and may not be included in datasets. Then, for the ones that do raise seed money, usually with SAFEs, 50-60% of them would fail before raising a significant priced round (series A).

The overall point being, there’s a lot of risk between starting a company and raising a sizeable priced round for most people.

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