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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

#381

Post by hliyan »

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…

There was an oft-repeated response back in the day (but gladly rarer now) when you dig too deep into employee benefits at startups: "If you're offered a seat on a rocket ship, don't ask what seat!"

To this, I usually reply "Unless the seat happens to be in a stage that gets jettisoned before reaching orbit".

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

#382

Post by mtremsal »

quartesixte wrote: post #112
adastra22 wrote: post #107

Earlier quoted context omitted.

Are we talking about just YC-style internet/app startups? Two of my startups have been deep tech where you can't do shit without a Series A, and the third was crypto in the start of that boom where VCs were begging to lead your Series A. So maybe I just work in a vastly different field.

Yeah deep-tech (which I am also in) plays on a different scale when it comes to funding rounds, simply because of how expensive hardware is and how big the headcount gets to just make MVPs. My friends in software startups balk at the sheer burn rate and funding rounds at mine. $100mm for a Series A is unheard of in software. Thank you Thiel for setting the bar so high (the famous, "you need $1billion in total capital…

> $100mm for a Series A is unheard of in software.

Peak 2020: https://www.wiz.io/blog/wiz-comes-out-of-stealth-with-100m-s...

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

#383

Post by Finbarr »

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…

It is very common and usually a condition of closing. Investors know that preferred is way better than common. They are buying highly speculative assets and want strong downside protection.

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

#384

Post by shmel »

bradleyjg wrote: post #258
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.

All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup. The VCs and founders have optimized away all the incentive. Eventually the message will reach even naive 22 year olds.

If you only care about money, sure. I have plenty of friends working in FAANG. For some mysterious reason any time I ask them about work, they say something along the lines "ehh... it's fiiiine. Paycheck is pretty good though". Okay, not all, but perhaps 95%. And half of them work massive overtime on regular basis. I can get behind working weekends when you hope to change the world. They often say things like: "yeah, I have to work 60-70h per week because I don't want my boss to yell at me". Those who work normal hours say: "there is not much work to do really, we literally have meetings about meetings to fill the day. I wish I had some real work to do". I truly hope that higher TC compensates for that.

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

#385

Post by oblio »

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…

You have the current unicorns, basically anything from about the time YC started, and then you have the old school unicorns.

For comparison, Microsoft IPOed in 1986:

> The company's 1986 initial public offering (IPO) and subsequent rise in its share price created three billionaires and an estimated 12,000 millionaires among Microsoft employees.

https://en.wikipedia.org/wiki/Microsoft

I would really, really want to know if anything more recent has gotten to that level of widespread distribution of the riches.

I kind of doubt it, such an event would probably be considered Communist by modern standards :-)

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

#386

Post by lumost »

titanomachy wrote: post #171
extr wrote: post #154

Earlier quoted context omitted.

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.

I went through exactly the same discussion in my last job search, and was assured that the offer was in line with industry standards. Even if this tiny company somehow became worth a billion dollars, I’d still make less money than if I’d worked as a senior engineer at Google or wherever. I liked the team and I think it would have been a fun job, but not quite fun enough to work nearly for free. I don’t think I’ll eve…

I recall a discussion where a founder kept insisting that a 10% offer for a pre-funding startup was beyond standard and that I should be lucky to get such an offer.. the experience left a bad taste in my mouth.

Ultimately, this individual needed someone to shape and build the core of their product and the net of a series B would have been at most a wash compared to current employment.

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

#387

Post by oblio »

robertlagrant wrote: post #280
mapt wrote: post #75

Earlier quoted context omitted.

If you have 200 million "of your own money" to spare, you are no longer just a person for the purposes of this conversation, you're a walking VC fund, and you're not really risking a substantial change to your quality of life going from 250M to 50M net worth. Your living expenses are already generously compensated for by the large salary that you, the VC fund pays you, the person, out of your personal bank account, a…

> If you have 200 million "of your own money" to spare, you are no longer just a person for the purposes of this conversation, you're a walking VC fund, and you're not really risking a substantial change to your quality of life going from 250M to 50M net worth. Is that what happened? I thought he had $200m, and put in $200m.

Do we know this story from any credible source or are we just trusting Musk's (a famous liar) word about it?

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

#388

Post by boringg »

onlyrealcuzzo wrote: post #348
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…

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…

"Sure, you've got a decent chance to rocket past them in wealth."

I might rephrase that as you have a non-zero chance. Odds are not that high and certainly not decent.

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

#389

Post by oblio »

petesergeant wrote: post #224
KennyBlanken wrote: post #220

Earlier quoted context omitted.

...while he was getting loaned $200,000 a month for personal expenses by his billionaire buddies. https://www.cnbc.com/2017/04/27/the-crucial-decision-teslas-... Also, that may have kept tesla and spacex 'afloat' but what really saved both companies was billions upon billions of dollars in government contracts, subsidies, preferential loans, and tax breaks. Nevada alone gave nearly two billion dollars to Tesla.

The government is expecting something in return for these breaks rather than them being some kind of gift, though.

The government is not monolithic and politicians might except other things than what their constituents want. It's a bad test of the value of an investment.

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

#390

Post by mrkurt »

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…

Not that people with VC need defending, but:

Sure, if you magic up a startup with VC funds you suddenly have it easier than a small, bootstrapped business.

Startups almost never start with a round of VC though. There are almost always months or years of the same experience as a bootstrapped business (ie: extreme uncertainty, no money to pay yourself, etc).

Most startups don't manage to raise VC, and most startups that raise VC fail with no acquihire.

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