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Startup Equity 101

quarter--mile.com

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Re: Startup Equity 101

#11

Post by ldjkfkdsjnv »

Aurornis wrote: post #5
Oarch wrote: post #2

I wonder how much longer this logic can hold. I have equity in the startup I'm at. It's a very complex platform and in a niche / emerging market. Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure. The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable di…

There’s more to a successful business than masking an app. A lot of acquisitions are made by companies that could re-build the acquired product themselves. They’re buying the business, brand, and customer base, not the app.

This isnt true, nobody knows what will happen when you can very cheaply replicate software. The sales etc are valuable, but when the cost of producing the product goes to zero, weird things will happen.

Re: Startup Equity 101

#12

Post by TuringNYC »

>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price....

The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.)

If you dont have that, the price is purely theoretical. Further, if you cannot see the cap table and the preference overhang -- and most startups wont let you see it -- then you have no idea what the real price is regardeless of a theoretical 409A value.

Even if you can see the cap table, spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out -- the cone of uncertainty across 5 or 10yrs is far too great. The better move would probably to be to use that money to purchase long-dated LEAP call options on the Nasdaq Composite

Re: Startup Equity 101

#13

Post by leonhard »

ldjkfkdsjnv wrote: post #10

One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing It…

what’s a generational startup?

Re: Startup Equity 101

#14

Post by ldjkfkdsjnv »

leonhard wrote: post #13
ldjkfkdsjnv wrote: post #10

One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing It…

what’s a generational startup?

cursor

Re: Startup Equity 101

#15

Post by shishy »

leonhard wrote: post #13
ldjkfkdsjnv wrote: post #10

One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing It…

what’s a generational startup?

They probably meant a "once in a generation" startup like a unicorn

Re: Startup Equity 101

#16

Post by sdfasdfas134 »

ldjkfkdsjnv wrote: post #10

One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing It…

This is true. Once you lose control, the VCs will start to appoint their buddies in Atherton in as CEOs, VPs, SVPs, Chiefs of Staff, etc. Eventually you get pushed out. You wont even know what half the people do.

Or you get impossible performance plans placed on you (that their buddies wont get) which will mean you either achieve the impossible or you lose your founder stock.

If you are giving up voting control, ensure to get a secondary sale to sell some of your stock (5-10mil) so you're set for life. Then you can let the VCs burn the company down...if you really want.

Re: Startup Equity 101

#17

Post by Oarch »

edoceo wrote: post #9
haxton wrote: post #4

Earlier quoted context omitted.

Always treat startup equity as 0 until you've sold it.

Correct. The motivation for equity comp should be more of "I want to change the world" than the "I want big money". The odds are very against it. Here's some older stats (2017) https://berkonomics.com/?p=2899 But searching, you'll find loads more studies on startup/angel/seed. It's like, optimistically, 1/20

Good advice! Thankfully I do want to change the world (for the better I hasten to add) and so far so good.

Re: Startup Equity 101

#18

Post by SkyPuncher »

TuringNYC wrote: post #12

>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price.... The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely th…

Correct, the 409a is only going to show you the maximum possible value.

Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.

Re: Startup Equity 101

#19

Post by ghaff »

dakiol wrote: post #7

Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.

If you work for a moderately large company, it probably won't go to zero (though it could so you may want to hedge your bets). Not sure what SV specifically has to to do with it. I agree in general about focusing on cash on the barrel.

Re: Startup Equity 101

#20

Post by ptero »

dakiol wrote: post #7

Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.

It's the same thing in the SV. Unless the company is doing liquidity events the early, but post-founder equity is unlikely to pan out for employees.

And it can motivate employees to stay at the company way beyond what's good for them, as leaving the company means either abandoning your equity or exercising your options and paying real money for a very risky and illiquid asset. My 2c.

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