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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

#601

Post by AlwaysBCoding »

gedy wrote: post #592
AlwaysBCoding wrote: post #585

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground. > company is a breakout success, raises a large growth round. > founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity. > founders start thinking about early employees as "probl…

Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.

The company is Phantom, and the VCs are Paradigm.

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

#602

Post by shermantanktop »

BoorishBears wrote: post #222
Tepix wrote: post #216

Earlier quoted context omitted.

Is it?

It's not really compared to an average person's life, but in SV tradition never let the chance to subtly flaunt a wealth gap pass by freely (This is the part where you say "Yes, having lived both ")

Has 50M: wishes they had 250M

Has 250M: wishes they had 1B

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

#603

Post by flyinglizard »

Finbarr wrote: post #549
icedchai wrote: post #541

Earlier quoted context omitted.

Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."

Your daily reminder of the importance of maintaining board control.

Not realistic to maintain control past A unless you built a real rocketship. The board doesn’t usually want to run your company - they have enough other companies, some evidently better than yours as they don’t require this intervention.

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

#604

Post by zenlikethat »

RhodesianHunter wrote: post #543
zenlikethat wrote: post #452

Earlier quoted context omitted.

people already do a variant of “earlier gets more, later gets less” that’s a lot smoother/linear than your scheme and can be customized and adjusted to roles (engineers get more than salespeople as an example). With what you describe, offering some exec down the line 0.5% or whatever is impossible. You need flexibility because at any moment some killer candidate might come along that you need to juice the grant for.…

> Just being earlier doesn’t mean they contribute more to the company No, but being earlier does mean taking on more risk, which is the whole argument founders and seed investors make for their cuts.

But you can leave easily. and in 2024 I think people should insist on getting a decent salary (FAANG is impossible, but for most of the country, “even just” $170K is eye watering), and work life balance (sure, you will have to put in extra hours sometimes, but if it’s a 12 hours a day shop, don’t join). Founder should work a lot more aggressively, live a lot more spartan, and obviously is shackled to the damn thing with no optionality.

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

#605

Post by Finbarr »

nirvdrum wrote: post #555
jakjak123 wrote: post #523

Earlier quoted context omitted.

This 100%. Really the only reason to work at a startup as an engineer is if you really want to, because everyone pays low and the tiny bit of equity is essentially worthless in 99% of cases, which gives it a very low value.

And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options. If you've gotten laid off, eating into your savings while searching for a job is a pretty risky proposition. If you have an appreciable amount of equity, that bill can be rather high. Then there's AMT. Many end up letting the options expire. So, taking that pay cut for equity really didn't work…

The 90 day exercise window is the most obviously broken thing about startup equity in my opinion. We changed this to 5 years at Shogun.

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

#606

Post by gen220 »

whiplash451 wrote: post #577
gen220 wrote: post #458

Earlier quoted context omitted.

I think one component of their point is that the marginal utility of money beyond $200k/year cash comp is quite small, especially if you (1) came to tech early in life (2) plan on staying in it for most of your working life. With that perspective, $200k/year and $700k/year both reduce to "well-paid". Also, a Staff title at a Seed or Series A startup can definitely ask for $250k/year, although they'd likely be trading…

I would revisit that calculation assuming you are drained at 45 instead of 60, including taxes and the opportunity cost of 500K x a few years at 3% rate for the next 15 years.

That's pretty much exactly the calculation I'm positing. But actually with an even earlier terminus (late 30s or 40 at most).

Assume an "effective" average pay (i.e. "net" pay + retirement and other deductions, inflation-adjusted to today's dollars and averaged over the course of your career) of $120k/year.

From age 22 to 40, you've earned $2.16mm in inflation-adjusted-to-today dollars as a single earner. With a not-unreasonable average savings rate of 30%, not accounting for tax-advantaged growth or any growth at all, you'll come out with $650k of inflation-adjusted-to-today capital in savings.

Realistically, this should end up invested in some kind of equity (housing, stocks, bonds, whatever). If you finance the purchase of a house at 30, you're only 10 years into a traditional 30-year mortgage at this point, for reference. So you're roughly 1/3rd of your way to owning all the equity in your home. That's fairly comfortably a $1mm home (home equity being 30% of your assets at 40).

Of course, if you're DCA-ing into something that yields a modest average of 5%/year in inflation-adjusted returns, that $650k is closer to $1mm inflation-adjusted-to-today capital. And you still have 25 years at that point for your retirement savings to compound. And you can work part-time in something more fulfilling until retirement to supplement your income.

YMMV, but the marginal utility of money beyond $1mm in equity at 40 and $6k/month in expendable (on rental housing, food, travel, social events) income during your 20s and 30s is pretty small for most people. If you add a partner with any kind of income to the mix, it makes the marginal stress of earning more money even less appealing.

Edit: the main thing you ought to avoid like the plague is lifestyle creep. Spending money on things with zero or vanishingly-small happiness ROI. Read this story every year or two, or whenever you get a raise at work. https://www.marxists.org/archive/tolstoy/1886/how-much-land-...

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

#607

Post by tomp »

AlwaysBCoding wrote: post #585

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground. > company is a breakout success, raises a large growth round. > founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity. > founders start thinking about early employees as "probl…

employees aren't shareholders

they get options, not equity

personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!)

and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!

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

#608

Post by nine_k »

AlwaysBCoding wrote: post #585

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground. > company is a breakout success, raises a large growth round. > founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity. > founders start thinking about early employees as "probl…

If we talk about stock options, the company is still private, and no stock was issued.

Paying taxes on options for stock that may never materialize, or never be worth much, sucks.

I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.

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

#609

Post by joshuamerrill »

Founder liquidity events are done in secret in startup land. There's a simple reason for that.

It's wrong.

Startup employees, especially early ones, take on most of the risk that founders do. They take pay cuts. They work insane hours. They sacrifice.

And they have the same liquidity needs, too.

It's wrong to make them wait a decade for a fraction of the liquidity that founders got in the Series B.

It's wrong to force them to absorb the risk of the Series B, C, D, E, F, and IPO. All while the founders were set for life years ago.

If founders are going to take money off the table, they should extend the same liquidity offer, pro-rata, to their employees. Period.

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

#610

Post by georgeecollins »

AlwaysBCoding wrote: post #585

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground. > company is a breakout success, raises a large growth round. > founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity. > founders start thinking about early employees as "probl…

I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal.

I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?

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