I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
Genuine question: For liquidation preference >= 1x, why even call it equity instead of debt ? The point of equity is that you own a part of it, and you get a proportional share. The point of debt is that the money owed to you is preferred over other owners (i.e. equity owners). It seems to me that liquidation preferences allow investors to take the best of both worlds.
Sell for half a billion and get nothing (2021)
291–300 of 334 posts
Re: Sell for half a billion and get nothing (2021)
#292Earlier quoted context omitted.
Were they? Do you have inside info? I have done many startups, and in none apart from one did I accept a lower salary whether as regular staff or as a founder [EDIT: to be clear: after a funding round, as a full time employee; as a founder/co-founder I've of course done work for free on the side, but with according amount of stock]. In the one where I did, I forced in a clause in the investment agreement guaranteeing…
In my experience, startup employers will never volunteer information like whether there are liquidation preferences.
Re: Sell for half a billion and get nothing (2021)
#293Earlier quoted context omitted.
You’re just paying for your equity in a different currency.
yeah, but one that put you in a weaker position because work based equity is often after a cliff and most likely from the non preference pool and doesn't have clause for buy in during fundraising events
Re: Sell for half a billion and get nothing (2021)
#294I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
2) You missed the 3rd case, sometimes the business is simply a bad one (like the example in TFA), or all the oxygen is getting sucked out by the new shepherd dog, eg right now with AI. The business can die right then and there, or the founder can take the equity on the only terms they can get. Given that any decent founder is drunk on their own kool-aid, and believes their fortunes will change in just 1 quarter or even 1 year, they just need to ride it out, it often seems like a good idea, and what's the difference? Die now or die later. At least take a shot at it.
IOW it's not all villains on one side and incompetent heroes on the other.
The real downside is that now you're working for the VCs. You kind of were the entire time -- that's built-in -- but it's more pointed now. If you make it to IPO none if it matters ...
As the theme of TFA's website goes, build a "fundable" startup. Easier said then done, of course. Like so many of such self-help in the startup world, the entire site is a bit of a lie, selling false hope. They even position FanDuel as some VC abusive situation (thus selling themself as the savior), by talking only about the huge amount of money, "half a billion" dollars. No mention at all of how much FanDuel raised ...
Re: Sell for half a billion and get nothing (2021)
#295Earlier quoted context omitted.
Were they? Do you have inside info? I have done many startups, and in none apart from one did I accept a lower salary whether as regular staff or as a founder [EDIT: to be clear: after a funding round, as a full time employee; as a founder/co-founder I've of course done work for free on the side, but with according amount of stock]. In the one where I did, I forced in a clause in the investment agreement guaranteeing…
Isn't that the broadly accepted value proposition for working at a startup? You accept greater job insecurity than more established companies, and lower salary than more established companies, but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket. You don't sign on with Meta expecting a great exit, but you gamble that you might see a grea…
It's a common negotiating tactic. As I said, I've only once (in 30 years) accepted less, and then I owned 25% of the company prior to the investment. Sometimes they do mean it, but far less often than people think.
> You accept greater job insecurity than more established companies
This is true, and a reason to not accept a lower salary because you are more in need of an ability to maintain or expand your cushion.
> and lower salary than more established companies,
There are certainly companies that want you to think this is just the way it is. And it depends on what you compare against. You won't get FAANG salaries at a startup, but most people don't work at FAANG's.
Some startups will not hire at non-FAANG market rates either. If you have the skills to be attractive to them, however, odds are you don't have to settle, and that includes choosing other startups. Unless you're convinced this specific startup is the next Google, odds are it's a bad bet to concentrate your risk by accepting a trade like that.
Most of the time you'd be better off getting a market-rate salary and investing the money in a way that spreads your risk.
> but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket.
The problem is that it is exactly like buying a lottery ticket: The odds are extremely heavily against you and most such jobs do not provide enough shares to be worth it when you factor in likely dilution and things like liquidation preferences and the very, very high odds that the company will fold before any exit event.
If the company is pre-seed and you're offered 5-10%+ and a guaranteed (in writing!) salary increase after the A round maybe. If you're coming in as employee 10+ after A and you're being offered sub .1%, sure you could win the lottery, but you could also find another startup and get the lottery ticket and* the salary, and put the extra salary in an index fund and be far more likely to get a high return.
I'm not saying there aren't ever deals that are worth it, but put another way: If you accept a lower salary for shares, you're investing in the company. Have you done the calculations of risk-adjusted potential returns and done the due diligence you would if you were to put money on the table? If not, why not? It's the same thing.
Unless you're really sold on that startup in particular to the point where if you weren't hired you'd like to participate in their investment round with your own cash, it's likely not just a bad deal, but you're concentrating your risk.
> I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
Most tech workers also don't negotiate their salaries. I've hired dozens over several decades, and I've had less than I can count on one hand actually try to negotiate, and in each case, we went back with a higher offer. Conversely, I've never accepted a first offer. I've sometimes walked because we were too far apart, but I've never had a prospective employer decline to up their initial offer.
I've been offered substantially higher pay than the CEO by startups who did want to pay below-market but were more concerned about getting the right person.
My experience is that if you can get offers, you can get offers from startups at market rate, and it's down to whether or not you consider that investment worthwhile if it had been separated from the employment. If you struggle, and a startup offering below market is the only option, sure, don't be too proud, I wouldn't be either if times were tough.
Re: Sell for half a billion and get nothing (2021)
#296Earlier quoted context omitted.
Yeah. I've not had an exit that high, but I've had an exit where my 25% initially was whittled down to 10k, and frankly I was surprised I got anything at all - in the end I was diluted to hell and back, but none of the later rounds had any liquidation preference that got triggered. It's easy to see a large exit number and assume it means it's a success, but in the case in question the (significantly more modest than…
Stories like this often have a lot of missing details that would provide more context and explain why things played out the way it did. I have no doubt the founders knew the risks they were taking and signed up for it. However, the big question is whether the employees knew the risk they had been signed up for. The lack of transparency for employees is where the big problem lies. If you are a non-exec level employee…
For starters, in any early stage startup I'd discount by 90%+ just because it's a startup, entirely irrespective of whether I like the idea, and what investors think.
Re: Sell for half a billion and get nothing (2021)
#297I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
Re: Sell for half a billion and get nothing (2021)
#298As to these folks - I pass no judgement here, could be they just didn’t read the fine print or this was the best possible outcome. Hire a good lawyer next time.
Re: Sell for half a billion and get nothing (2021)
#299Earlier quoted context omitted.
And plenty more made nothing. It’s survivorship bias in a nutshell. You take 10 people who worked for a public BigTech company that gave cash + RSUs and 10 people who got the same in “equity” in 10 different private companies, who do you think will be ahead in 10 years? 10 years is the average amount of time it takes for the few companies that make it to have an exit event.
I didn't say hang on for ten years, I said people joining late stage series D companies like Stripe, Databricks, SpaceX etc. Those are very likely to have multiple liquidity events before they even go public, and are known to pay more than FAANG. You're trading some liquidity and some security for a higher upside. Those are the companies that have the best luck luring away FAANG engineers with higher comp (if things…
When you work for a public company, you know exactly when your RSUs are going to vest, they appear in your brokerage account and you can (and should) sell the same day and diversify.
Re: Sell for half a billion and get nothing (2021)
#300Earlier quoted context omitted.
Yeah I have a small business and I sway strongly towards being contempt with letting the business grow at its own rate. No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if w…
> No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. Actually, it just might. RightNow was a bootstrapped startup back in the dotcom heydays, which managed a 9 digit exit after selling to Oracle. Midjourney is a unicorn without a cent of VC funding. Zapier raised just $2m, and they only got into YC on their second try. The old ma…