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Silicon Valley's best kept secret: Founder liquidity

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

#131

Post by repomies69 »

JumpCrisscross wrote: post #119
varenc wrote: post #84

I always thought there was another reason for VCs encouraging founders to sell shares: giving them a taste of wealth. If you're a founder that sold 2M in stock a year ago and a 200M acquisition offer comes along, you'd be less tempted now that you appreciate the difference between small millions and big millions. If you thought you had a real chance of going much bigger, having cash already makes you more willing to…

> another reason for VCs encouraging founders to sell shares: giving them a taste of wealth VCs are wealthy. Some of them weren't born wealthy. The best among them recognise that removing the worry about e.g. paying rent will make a better CEO.

It is about aligning risk preferences. Being "all-in" is not likely a good thing for a founder. The founder prefers to take less risk which results to mediocre exit for the investor. The investor would rather have bigger exit or nothing, and giving the founder some money is helping to aling the risk preferences a bit towards the same direction.

As for employees? They are typically not calling the shots about company direction. I don't see a reason why investors would care about employees.

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

#132

Post by jahewson »

atomicnumber3 wrote: post #67
parentheses wrote: post #32

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…

Unicorn or bust is the name of the game. Once you understand that it’s not so bad.

It’s also possible to level-up pretty well from an acquisition, where maybe the equity was not life changing but you’re now in a bigco at a higher level than you’d otherwise be. The trap there is that many startup folks are not cut out for bigco life.

But yeah if you were dreaming of sailing off into the sunset you need to be a founder (or remarkably lucky). That’s one reason why there’s so many startups.

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

#133

Post by ivalm »

carliton wrote: post #89

Many companies don’t get to Series A and very few companies get to Series B. Even if they do get to Series A or B, they won’t be able to raise the amounts you see in the news and have heavy dilution. Very few founders have double digits percent ownership by Series B and Series C. Liquidity of $400k or more is a lot and isn’t available for many founders. All of this after 7 to 10 years of working 80+ hours week, no so…

> All of this after 7 to 10 years of working 80+ hours week, no social life, loosing family, sacrificing health, taking less than $100k/year salary

If you are taking less than $100k/year salary for 7 to 10 years while also absolutely no-lifing then that’s on you.

It’s true that early on you prob take ramen salary, but that’s for one or two years. You can prob scale to 200k by year 3 if your thing is viable. No-lifing when your startup is in year 5 is just a personal choice. If by year 5 you aren’t on a path of unicorn then prob it’s time to evaluate if it’s worth so much sacrifice or if you should run it as a lifestyle business (or just go do something else).

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

#134

Post by nytesky »

josh2600 wrote: 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’m sorry, I think the era of “change the world” motivation in tech was eclipsed by “make 42 tons of money” about a decade ago.

Along that line, I would be very surprised that there are founders who don’t seek an opportunity to set aside their nest egg to “de-risk”.

You say you have seen such guileless dedication to the founding first hand, can you share what industry or type of company? Perhaps I’m just exposed to the wrong crowd.

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

#135

Post by extragood »

selestify wrote: post #95
adastra22 wrote: post #79

Earlier quoted context omitted.

In most of the world (even just considering developed nations) fresh CS grads do not make more than $100k. Senior software engineers don't even make that much anywhere in Europe or most of Canada.

Why the disparity? Especially with Canada - no language barrier and no time zone differences. Why doesn’t the free market equalize Canadian dev wages with American ones?

I am convinced that the WFH movement is responsible for the recent offshoring trend.

Before 2020, it was fairly uncommon to work remotely and most employees were expected to physically come to the office. You would relocate if you got a job in another state, and employers had to go through a painful visa process to access foreign workers or set up expensive international satellite offices.

The great WFH experiment kicked off by the pandemic concluded that no productivity was lost, so many employers realized that they did not actually need to hire domestically at all. Everyone can be remote and work from wherever. LCOL in the US is still extravagant compared to many other regions, so a top engineer can now be hired for pennies on the dollar. I think there's a very good chance that tech salaries in the US have begun to and will continue to equalize with the rest of the world as a result.

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

#136

Post by halgir »

xandrius wrote: post #126
lumost wrote: post #90

Earlier quoted context omitted.

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?

If the salary is market rate for that person, I suppose it's by definition a fair deal. I've seen startups hire "founding xyz" two years after they started. Looks to be a vanity title in many cases.

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

#137

Post by deepGem »

jjav wrote: post #109
jmward01 wrote: post #68

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…

> Getting out for an early employee after funding rounds is expensive Early exercise and 83(b) is a must, or forget about it. When considering joining an early startup ask if they will allow you to early exercise as soon as you start (well, it'll be after board approval but as soon as that happens). If they don't allow that or if the price is too high for your comfort level, don't join that startup.

Every startup CEO must demystify 83(b) for their employees.

If you don't have cash on hand to pay for early taxes, the company can pay a signing bonus or something for those who elect 83(b) to pay for the upfront taxes.

OR

Just pay market salaries and leave the choice to employees to do whatever they want with cash. You want to buy our company stock great here's the grant. You want to put your money in S&P index go ahead.

The employee equity part needs a lot more simplification. I don't know why it is not as simple as

Here are 2 options for you

Salary 200K OR Salary 100K Equity 100K If equity 100K exercise 83(b) - pay taxes at 200K income OR defer taxes for the subsequent exercise dates. (Could land a huge tax bill) OR defer the exercise date for a liquidity event/secondary sale.

Those who value risk will take the last option and those who don't will stick to full salary. 83(b) exercise, when presented like this, doesn't seem all that rosy.

There could be some legalities that I am unaware of, but broadly this should work.

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

#139

Post by surfingdino »

This and my own experience with employee stock options led me to reject any work for startups that offer stock options. It is a way to make you work hard and allow to be treated like dirt for less money. The lowest point was having to walk across town to the office to eat energy bars from the office kitchenette, because I could not afford a bus fare or food as my pay was delayed by a week over Christmas. Meanwhile, the founder was holidaying in Dubai, driving a BMW X7 to work, and showing off a house with a small park and a pond bought in leafy Berkshire. Employee #1 treated the rest of us like dirt. I got laid off in a round of cuts just before my options kicked in and thought it was unjust, but a year later the company was sold to a competitor and the investors got a nice return, the founder got another pot of gold, and the employees with stock options got nothing, because it was a private sale and not an IPO. Employee # 1 was in a bit of a shock allegedly.

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

#140

Post by jonathankoren »

xandrius wrote: post #126
lumost wrote: post #90

Earlier quoted context omitted.

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?

Yes. Because you’re literally the same as the founder, but getting waaaay less equity.

First employee is always a sucker

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