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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

#191

Post by sneak »

angio wrote: post #190
sneak wrote: post #187

Earlier quoted context omitted.

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.

Landlords and supermarkets dgaf. There is no real risk, and if they stress over it, that’s more a founder’s own psychological failing than anything else.

If you care what other people think that much, you probably don’t have sufficient quantities of the oft-cited “grit” that founders supposedly require.

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

#192

Post by pojzon »

khazhoux wrote: post #73
blobbers wrote: post #30

I think founders generally have 20 to 50x what the first employee has, in my experience. Employees rarely have more than 1%. Founders tend to start out with about 20-40% depending on number of cofounders.

Yeah that line in the article is completely off: > Ask most venture-backed founders why they get 10x more equity than employee #1 Employee #1 typically gets 1%. Sometimes could be up to 2%, but 1% is standard. So then the founder gets 10%? No way. I posit that very, very few early non-founding employees in SV startups have a true notion of how cheap they're working compared to the founders. Founders do founder-y stuf…

And what happens in case it does not work out well ?

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

#193

Post by gadders »

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…

>>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.

Yeah, if the founders don't do this I wouldn't want to work for them (not that I'm the target demographic anyway).

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

#194

Post by bambataa »

ZhadruOmjar wrote: post #143
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…

In my experience there has never been a good time to be a founding engineer even in companies that have later made it. It's much better to join the company 1-3 years prior to IPO/Sale where you get many of the benefits but significantly less stress. If I had worked at startups I would have been taking a 30-40% pay cut compared to the roles I did work and none of those startups have gone anywhere with most crashing an…

I’ve heard this a few times. Could you elaborate why? Surely at that point, less you are hired to a very senior role, you are going to get a very small equity % and a lot of the capitalisation growth has already been priced in? In exchange it is far less risky.

Do you just go for the market salary and treat the equity as a minor plus?

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

#195

Post by KaiserPro »

As an early stage engineer that was bought out by a FAANG, I can assure you that most of the hype surrounding buyouts is mostly an exaggeration.

Sure some people get millions, but most people do not, even early stage engineers.

Think about it, you as an engineer, have deliberately avoided working at $bigCorp, and are about to be given $5m in shares. Would you continue working at $bigCorp? no, you'd take the money and fuck right off.

Ok Ok you say, but look at the headline buyout figures Google buys a company for "450 million" that startup having raised 65m in capital for a valuation of x.

so, you as an employee have an option for 0.1%. Awesome, you're gonna get 450k right?

No.

The 450M is the headline figure, The PR figure. Its not actually how much the company is bought for (well it rarely is)

Google will pay off the 65M from investors, plus some amount, maybe give some shares. This will value the company at say 85-100M in terms of cash paid for actual shares.

oh sweet, so you'll get 0.1% of 100M right? well not always. There is debt seniority and weird structures that mean that certain investors are paid more per share than others.

So it might mean that the pool of employee money would be 10M or 1M. or even none. The structure is normally bespoke and deliberately opaque.

Ok, so fuck, not that much money.

If you are lucky, you'll get a job offer from google. This is where the head line figure comes in. Say Google pays 100M for the actual company, in actual cash, the rest of that headline figure comes from share offerings.

That is, if you join google, you'll get the standard level of pay, plus the normal share offer. However you'll then get an additional share offer from the headline figure. This could be double, or many multiples of the normal share offering.

TL;DR:

The headline buyout figure for startups is mostly fiction. You'll only get lots of money, if you are part of the 0.01% that IPO and stay long enough to get the full offering, even then thats not a given. The second best outcome is getting bought out and serving your golden handcuff period.

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

#196

Post by lancewiggs »

laser wrote: post #188
Finbarr wrote: post #150

Earlier quoted context omitted.

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 hug…

Flip it around - it becomes a condition of the deal happening imposed by investors, who themselves are motivated to present the best deal to founders, and to have founders less economically stressed. No secondaries - no deal, and that doesn’t help anyone.

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

#197

Post by pilingual »

extr wrote: post #154
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.

I recently applied to a seed stage YC company that was offering me 1.5% equity for a founding eng role which they felt was generous. So basically I get to do all the work for like 1/50th of what the founder has? Get real lol. I even pointed this out to them and they said "it's totally normal, that's the way it's done". Like oh okay, as long as everyone else is getting ripped off too.

What amount of equity would be fair?

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

#198

Post by anonymousDan »

extragood wrote: post #125
kneath wrote: post #16

Earlier quoted context omitted.

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…

How would you negotiate that in practice? Would it be reasonable to ask for it to be in your contract? How would you suggest wording it roughly? Sorry I'm inexperienced with this kind of thing and have no idea how I would go about negotiating for it.

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

#199

Post by anxman »

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.

I used Founders Preferred shares to get liquidity at the A (for a now defunct startup).

In our case, we offered all vested employees the option of selling in the same round on the same terms.

I personally don’t recall any disclosure requirements at 10 people; however, we didn’t have that many participate so perhaps it didn’t apply.

In general, Founders Preferred does layer on the preference stack but also hopefully by a relatively trivial amount to the overall funding size.

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

#200

Post by blitzar »

lumost wrote: post #90
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…

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.

> a lot of early stage founders looking for a "founding engineer"

I always just assumed that the Entrepreneur, Founder & CEO had come up with an amazing idea like "build an startup (Ai probably) that makes a lot of money" and got some funding - but don't know what software is, don't know how to code and isn't really sure what Ai is does or can be used for; so need someone to put the pieces together to execute their vision with (for) them.

Opportunity to get in the ground floor with a future Unicorn - must have 25 years experience, Salary $25,000, 2% equity with 5 year lock-in.

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