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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

#181

Post by chatmasta »

kneath wrote: post #16
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 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.

This assumes that the founders are aware of, or offered, the option. If anything this is an argument for why founders should be represented by a banker or lawyer at the closing of every investment round. Let the founders do the negotiating, but once it comes time to sign the papers, bring in the sharks.

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

#182

Post by tock »

jensneuse wrote: post #162

As a founder with multiple years of experience I can say that this post and a lot of other comments are coming from people who don't understand the life of a founder. It's not so much about risk. My peers earn 5-10x my salary. I'm paying my employees more than myself. I have to provide for 3 kids and we have a lot of debt on the house. I'm working day and night, 24/7. I don't like the phrase "taking money off the tab…

Aren't most early employees also working very long hours for 1/4th the pay and maybe 1% equity? A lot of them also have kids and debt. The life of a "founder" is not really that different from how most people in the world make ends meet. Heck most small businesses run on loans not VC money and are a ton more stressful.

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

#183

Post by dcow »

matthewsinclair wrote: post #128
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.

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.

It’s not necessarily a red flag. Sometimes the founder/CEO is technical and decides to solo it with hired engineers until not having a real CTO is a flight risk, or until they’re too busy to be contributing code anymore, or both.

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

#184

Post by xandrius »

zaptheimpaler wrote: post #172
xandrius wrote: post #155

Earlier quoted context omitted.

Yeah but I don't think it's fair to compare salaries to FAANG firms, as they are extreme outliers (and not really good companies). So you would get paid like at another company but get equity on top and it's not a good deal? How comes?

Depends on the options available to the candidate. Typically someone joining a startup very early probably has the skill to get FAANG salaries with less stress and more free time. There are also hundreds or thousands of mid size companies that pay very well nowadays, its not just FAANG.

Yeah but smaller startups might be more open to non-US applicants, FAANG and other more established companies don't seem to be interested in hiring abroad.

That's what makes the early startup scene the only thing available for some.

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

#185

Post by meheleventyone »

lmeyerov wrote: post #178
quartesixte wrote: post #108

Earlier quoted context omitted.

I have witnessed small liquidity events at Series A and Series B that allowed for some small percentage of all total equity vested (around 3-5% ish, depending on the terms of your specific options grant) to be cashed out at some multiple of the FMV price. AFAIK the founders held themselves to the same restrictions (5% total, I believe?) to keep it relatively "fair". Pre-Seed, Seed, and some really really early Series…

is this zero-interest rate phenomena in action?

Nope! Although the availability of funding obviously plays a role so the wider investment environment affects it.

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

#186

Post by sneak »

> We allow employees to exercise options up to 10 years after they leave instead of 90 days.

This always struck me as completely unethical. Your vested options are part of your pay; you should be able to exercise them years after leaving. I would never work for a startup that evaporates my vested options 90 days after leaving. That’s like clawing back cash comp, in my view.

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

#187

Post by sneak »

Finbarr wrote: post #66

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures. > As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR i…

Where would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.

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

#188

Post by laser »

Finbarr wrote: post #150
Finbarr wrote: post #66

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures. > As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR i…

The bigger secret is that stock sold in secondary sales by founders and employees is usually common stock, and the purchasers will often get the right to convert this to preferred stock. This means that the company is instantly encumbered with a greater liquidation preference, without the increase in balance sheet to offset it.

How is that legal and not considered self-dealing and unjust enrichment? If I was a minority common stock owner in a business I assume I would have standing to sue for damages if a majority owner or officer made my position materially worse while enriching themselves in such a manner? Are you sure such a right is typically granted? I mean even the gap between 409A valuations and preferred valuations, as well as a huge amount of precedent, give a different material value to preferred and common stock. Giving that right out of thin air in a sale by an insider is effectively theft from common holders and I have trouble believing what you’re saying as I’m not sure how that could be kosher, if perhaps infrequently litigated. But is it really standard like you make it sound? That would be a very dirty secret and I expect would and should lead to litigation.

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

#190

Post by angio »

sneak wrote: post #187
Finbarr wrote: post #66

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures. > As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR i…

Where would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.

A lot of people (esp people that performed extremely well in school and in corporate environment) find "failing" and "losing reputation" very stressful.
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