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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

#371

Post by Finbarr »

anxman wrote: post #199
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.

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 b…

Yes, as I mentioned it only applies when you have 10 sellers.

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

#372

Post by djbusby »

geepeeyoudata wrote: post #316
koalaman wrote: post #266

I recently left a long career in FANG to roll the dice on an early startup. I was pretty surprised by the uneven terms between founders and early employees. From what I could tell the early employees takes more risk than the founders because they don't get that magic token dollar turning into their share of the founding equity event and have to pay the fictional valuation of the seed to convert their options. Dependi…

I worked at a Series A startup as an employee, and wont be doing that anymore. Early engineers have all the risk (lose job the second things go bad) but little upside. They would offer 500 options, or 1000 options, or 30,000 options -- but when you look at the prices, that was worth $100-$10,000. Why would anyone take all this risk, and lower base salaries for that lottery ticket?! Secondly, they wont share the cap t…

If you are early and they not sharing the cap-table it's a red-flag.

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

#373

Post by mezyt »

repomies69 wrote: post #131
JumpCrisscross wrote: post #119

Earlier quoted context omitted.

> another reason for VCs encouraging founders to sell shares: giving them a taste of wealth VCs are wealthy. Some of them weren't born wealthy. The best among them recognise that removing the worry about e.g. paying rent will make a better CEO.

It is about aligning risk preferences. Being "all-in" is not likely a good thing for a founder. The founder prefers to take less risk which results to mediocre exit for the investor. The investor would rather have bigger exit or nothing, and giving the founder some money is helping to aling the risk preferences a bit towards the same direction. As for employees? They are typically not calling the shots about company…

> As for employees? They are typically not calling the shots about company direction.

They can be motivated or not, knowing that the founder made big bucks and they made nothing is bound to lower motivation. Thus the title of the article, founder's liquidity is a well guarded secret.

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

#374

Post by WarOnPrivacy »

burutthrow1234 wrote: post #300
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…

> Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here! Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque. If you fail you get acquired and get golden handcuffs. If you start a real business you can…

> Honestly VC-funded startups seem like a cake walk compared to actually starting a small business.

Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.

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

#375

Post by Finbarr »

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.

Hiring, firing, layoffs, making the wrong decisions with limited information and not finding out they were wrong until years later, huge shifts in the tech market around you undermining your business, competitor actions wrecking your business, pressure from investors, pressure from your family to earn more money, uncertainty about whether the business will ever succeed, and an endless list of other things.

> You don’t lose any money if your startup fails.

Except all the money you lost by not having a proper job along the way. Also it’s not uncommon for founders to float the company at early stage until investment is raised, and they don’t always get a refund for this.

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

#376

Post by djbusby »

sleepingreset wrote: post #305
throwailearner wrote: post #297

Posting from throwaway so I can be very open. I joined a YC startup as engineer #1 with close to $200k salary and 2% options vesting at the usual 4 years, with a 10 year window. I feel like this was bettern than usual, and for a while felt like I struck an awesome deal, but as time went on I realised I was building everything single-handedly, while getting (at best) 2%, which started to annoy me deep down. Over two y…

out of college directly, would you recommend a similar position? looking for early career options

I'd say take a startup. Those early companies don't have a lot of staff so you can try lots of things, wear lots of hats. Good experience. Take cash, don't get played by options/equity. When you find the hat you like move into a more stable role.

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

#377

Post by Finbarr »

colordrops wrote: post #165
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…

I often hear about these SEC rules that explain why individual contributors get fucked, as if that's a good excuse. Either the requirements and disclosures should be fulfilled and more than 10 sellers allowed, or the rules should change, or both.

I didn’t comment on whether it was a good reason or not. My comment was just highlighting some of the complexities in what the blog author was hoping to achieve.

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

#378

Post by keeptrying »

extragood wrote: post #135
selestify wrote: post #95

Earlier quoted context omitted.

Why the disparity? Especially with Canada - no language barrier and no time zone differences. Why doesn’t the free market equalize Canadian dev wages with American ones?

I am convinced that the WFH movement is responsible for the recent offshoring trend. Before 2020, it was fairly uncommon to work remotely and most employees were expected to physically come to the office. You would relocate if you got a job in another state, and employers had to go through a painful visa process to access foreign workers or set up expensive international satellite offices. The great WFH experiment ki…

True. WFH was the real trial of offshoring especially to similar time zones.

Also it took the risk off the CEO plate that remote might fail. Further the market is rewarding them for it now.

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

#379

Post by Finbarr »

whynotminot wrote: post #367
onlyrealcuzzo wrote: post #348

Earlier quoted context omitted.

Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away. Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really w…

It’s a shame you were forced to take on this burden and not allowed to be a regular engineer like your peers.

Nobody is forced to become a founder. A lot of people are naive to the sheer level of stress involved, and think it’s going to be easier than it actually is. You don’t find out just how stressful it is until you’re already super committed, have raised money, have employees, and there’s no easy way out without screwing a whole bunch of people over.

Founders tend to only talk about the good things happening at their companies, and tech press tends to focus on the successes. These things contribute to more people starting companies.

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

#380

Post by sashank_1509 »

throwailearner wrote: post #297

Posting from throwaway so I can be very open. I joined a YC startup as engineer #1 with close to $200k salary and 2% options vesting at the usual 4 years, with a 10 year window. I feel like this was bettern than usual, and for a while felt like I struck an awesome deal, but as time went on I realised I was building everything single-handedly, while getting (at best) 2%, which started to annoy me deep down. Over two y…

10% to a founding engineer almost never happens. You’re in cofounder territory. There really are 2 reasons to stay in the startup,

1. The startups reaches a great valuation. If it reaches a 1B valuation, then even assuming 50% dilution, you have 10M for 2+ years of work, almost 3-5M per year TC! Yes your founders are earning much more but comparison is the thief of joy, you just got a salary that no big tech company could match (unless you’re in C suite)

2. The startup doesn’t reach a large valuation but grows rapidly making you in charge of a large group. This too is useful, promotions in big tech have a very standard time schedule, it takes 8-9 years to reach staff (or never) and then 4-5 years for every subsequent promotion if it happens. With a startup, if as a founding engineer you gain experience leading a team of 50 people, you’re scoped for staff and above in your next job hop. Of course you need to sell this in your interviews but I’ve seen this happen and it can be worth it, if you played your cards right.

If none of this is possible, you should leave.

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