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Startup Equity 101

quarter--mile.com

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Re: Startup Equity 101

#41

Post by lurk2 »

ldjkfkdsjnv wrote: post #11
Aurornis wrote: post #5

Earlier quoted context omitted.

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.

This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.

Re: Startup Equity 101

#42

Post by bravesoul2 »

fluorinerocket wrote: post #32

I've concluded that options are a scam after owning them in many companies. It's never amounted to anything

Sometimes they are not. I think for post startup companies it is somewhat possible to put a value on ESOP then risk adjust for you losing the job, leaving etc. I have been paid out but think bonus cash for a holiday money not life changing. I kept it in post IPO and got more but then anyone could have done that post IPO.

Re: Startup Equity 101

#43

Post by bravesoul2 »

duped wrote: post #39
fluorinerocket wrote: post #32

I've concluded that options are a scam after owning them in many companies. It's never amounted to anything

We still get paid obscene salaries fucking around with the bonus of a shot to make even more obscene money. For all the complaining about options there's little acknowledgement of how little startup work contributes to society relative to the money we rake in from people willing to fund it.

Obscene salary is almost an oxymoron.

Maybe CEOs get that. Most people who get obscene money get it from some kind of investment.

Re: Startup Equity 101

#44

Post by ldjkfkdsjnv »

lurk2 wrote: post #41
ldjkfkdsjnv wrote: post #11

Earlier quoted context omitted.

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.

This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.

line of business saas is absolutely vulernable. the biggest companies on the planet are not under thread. SAAS companies worth 100M-300M are absolutely vulnerable

Re: Startup Equity 101

#45

Post by bravesoul2 »

fluorinerocket wrote: post #37
hamburglar wrote: post #33

Earlier quoted context omitted.

What you should understand is that they are a longshot. Like, worse than 10 to 1. I’ve gotten lucky and made a truckload of money on them, and know many people who have done the same. I’ve also had them be an utter waste of money. It’s very much a gamble and it’s unlikely to pay off. This doesn’t make it a scam.

A lottery ticket is legal but expected value is negative. Same with casino games. Sure it's legal and sometimes people win but in my book it's a scam, even if not technically one. What I particularly resent is the pretence from companies that a lower salary can be compensated by options. Such BS

No need to resent. Just don't take the job. There are jobs that pay the low salary and no magic beans either!

Re: Startup Equity 101

#46

Post by TuringNYC »

fragmede wrote: post #28
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…

> spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like. Meaning, they lend you the money, but if there's no IPO/liquidity event, you don't owe them any money. 70% (say) of a b…

>> There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like.

Yes they do this, but only for select companies. They wont touch most startup equity.

Re: Startup Equity 101

#48

Post by TuringNYC »

SkyPuncher wrote: post #18
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.

>> Then it gets even worse with multipliers and preferences.

Yeah, and most companies wont share the cap table with you, so you do not know the multipliers and preferences. Its like you get $(409a/X) in value, but you dont know what X is and they wont tell you -- but you still have to buy in or lose everything (you typically have to exercise all options upon departure, or lose it!)

Then, once you exercise, you wait for 5yrs to 10yrs for a liquidity event, if the company even survives that long. My annual discount rate would be like 10% or higher.

Re: Startup Equity 101

#49

Post by lurk2 »

ldjkfkdsjnv wrote: post #44
lurk2 wrote: post #41

Earlier quoted context omitted.

This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.

line of business saas is absolutely vulernable. the biggest companies on the planet are not under thread. SAAS companies worth 100M-300M are absolutely vulnerable

This has nothing to do with your original claim.

Re: Startup Equity 101

#50

Post by TuringNYC »

FreakLegion wrote: post #34
t0mas88 wrote: post #27

Earlier quoted context omitted.

Whether it's and vs either/or is the difference between a liquidation preference or a participating liquidation preference. And indeed the more than 1x cases are also problematic for common stock holders. But I do assume the 409A for the fair marker value of the common stock takes these into account? Not a US tax expert :-)

You can construct any arbitrary deal terms you like, of course, but in the Silicon Valley ecosystem nobody you'd want to raise money from does this. Deal terms are broadly standardized and the desirable investors only do clean term sheets. Quoting myself from another thread a couple years ago: VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a…

>>> VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a dirty term sheet (e.g. liquidation preference > 1x) from Sequoia, for example, because they don't return 8x on a fund by squeezing pennies out of failed startups.

Serious question -- if you are right, then why hide the cap tables?! Typically cap tables are even hidden from employees who have millions of theoretical dollars riding on the company.

Transparency is usually an indicator of above-board terms, and opaque things are usually opaque for a reason.

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