When a Unicorn Startup Stumbles, Its Employees Get Hurt • Hacker News Board

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#51

Post by nemo44x » Wed, Dec 23, 2015, 5:17 PM UTC

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now!

I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds.

The worst is I've seen people reject job offers that were far superior in cash compensation because they had a recent big option grant. A friend of mine stayed on at a place even though he didn't get a cash raise but instead was given some options that vested over a few years in addition to the options he already had, some of which were vested. Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble?

And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. Further limiting their career growth.

I've seen the other side too where friends have taken home a really nice pay day after liquidity - but it is the exception and not the rule.

I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#52

Post by Spoom » Wed, Dec 23, 2015, 5:17 PM UTC

ryporter wrote: post #49

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

According to the article, employees had the opportunity to sell their "worthless" shares for $3/share.

Prior to the deal, on the secondary market, while all of their managers were telling them that the shares would only massively increase in value.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#53

Post by untog » Wed, Dec 23, 2015, 5:19 PM UTC

encoderer wrote: post #31

sarciszewski wrote: post #5

> Even worse, they had paid taxes on the stock based on the higher value. That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.

Joining public or late stage pre-IPO companies, equity provides the possibility of real wealth. There is a great Wealthfront article about this -- that if you live in the bay area and have a normal nuclear family, you need equity if you hope to pay for a house, college, etc. I've seen this in my own life and in many colleagues, friends, and people I've hired. It's not a guaranteed paycheck, but in the bay area gettin…

if you live in the bay area and have a normal nuclear family, you need equity if you hope to pay for a house, college, etc.

Then holy hell am I glad I don't live in the Bay area. Because, as the article demonstrates, there is zero guarantee that the equity you have will be worth anything. That you'd depend on such a thing to pay your mortgage and send your kids to college? Madness.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#54

Post by nemo44x » Wed, Dec 23, 2015, 5:20 PM UTC

encoderer wrote: post #36

tvladeck wrote: post #10

Regarding the fact that the employees had to pay tax on what turned out to be worthless shares: They could have avoided this by waiting to exercise their options on the eve of the liquidity event. In this case there would have been no risk. But they exercised earlier presumably to start the clock on long term capital gains treatment for the stock they received when they exercised. They took risk they didn't need to t…

The wider the gap between the exercise price and the fair market value the more AMT you will owe on the shares when you exercise. By making a speculative investment -- by exercising early -- you will owe minimal AMT at exercise time and more capital gains later when you sell. There are very real tax advantages to exercising early.

If you really believe in the company and it's a rocket ship (some rockets explode mid-flight or stall though!) then I'd recommend buying some shares early on to hedge for the reason you state. But I probably would't early exercise 4 years of options on your first day at the company.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#55

Post by encoderer » Wed, Dec 23, 2015, 5:20 PM UTC

untog wrote: post #53

encoderer wrote: post #31

Earlier quoted context omitted.

Joining public or late stage pre-IPO companies, equity provides the possibility of real wealth. There is a great Wealthfront article about this -- that if you live in the bay area and have a normal nuclear family, you need equity if you hope to pay for a house, college, etc. I've seen this in my own life and in many colleagues, friends, and people I've hired. It's not a guaranteed paycheck, but in the bay area gettin…

if you live in the bay area and have a normal nuclear family, you need equity if you hope to pay for a house, college, etc. Then holy hell am I glad I don't live in the Bay area. Because, as the article demonstrates, there is zero guarantee that the equity you have will be worth anything. That you'd depend on such a thing to pay your mortgage and send your kids to college? Madness.

It's not like you sign a contract that says you must remain here for 20 years. Read the Wealthfront article linked in a sibling comment.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#56

Post by grandalf » Wed, Dec 23, 2015, 5:20 PM UTC

The real question is, when do you "buy in" to a valuation.

Things are only worth what someone else will pay. So if you don't have evidence that there is a buyer eagerly wanting to pay $5/share for the options you are getting for $4/share, don't assume they are worth anything.

Because of dilution math, it's very rare for employees of all but unicorn startups to cash in at anything close to the expected value of the shares. That means that your 50K shares awarded after a $5M series A (on a big pre money valuation) are not going to be worth much if the company sells for $10M the following year.

Founders should set up a chart that tracks the various possible outcomes and lets employees understand what their options will be worth in those scenarios and see what the founder would get in those scenarios. This would allow additional shares to be given to valued employees if the company turns out to be a beautiful white horse but not quite a unicorn.

The thing to be aware of is when the founder has the option of cashing out for $10M and the employees effectively getting nothing. If this happens the investors will have essentially lost interest and will potentially get their investment back but will not mention the deal to anyone again. This is a sort of perverse incentive because the founder will be inclined to deceive employees into thinking a big exit is on the way, while simultaneously negotiating a low millions acquisition and high salary at the acquiring company.

In that scenario, the founder should have to renegotiate so that the most valuable employees get at least 10% of the founder's payout, but employees rarely have (or use) that much leverage with the founder.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#57

Post by pc86 » Wed, Dec 23, 2015, 5:20 PM UTC

sarciszewski wrote: post #21

ScottGillis wrote: post #18

Earlier quoted context omitted.

It's all about risk. Unfortunately, this risk did not pay off.

If you want risk, be an entrepreneur. If you want security, be an employee for a big company. And I suppose I should add, "If you want to get screwed over, be an employee at a unicorn startup," based on this new information.

I'm not as pessimistic as most here, but start-up employee really is the worst of all worlds.

1. Reports vary but the general consensus seems to be lower pay than a Fortune 500 or similar for more demanding hours.

2. If you're offered equity it's an insulting fractional percentage (how can you be offered 0.1% and not let the profanities fly?), and will need to use actual money to exercise the options.

3. There are tons of stories of completely incompetent and/or corrupt founders literally locking the door on employees (Zirtual et al).

4. I'd be remiss if I didn't at least bring up the insane (comparatively) COL of the Bay Area compared to even other large US metropolitan areas.

I'm not going to start railing about VC-istan because I do think the degree to which the system is rigged gets overblown, but if you're going to be involved in start-ups it doesn't make sense to be anything other than a founder, C-level-for-hire employee, or investor IMO.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#58

Post by ryandrake » Wed, Dec 23, 2015, 5:21 PM UTC

Avshalom wrote: post #47

encoderer wrote: post #40

Earlier quoted context omitted.

It's a subjective term. But IMO, a few hundred grand after-taxes is real wealth to somebody making $150k a year. It can bend the net-worth growth curve of your life -- a huge home downpayment, elimination of your student loans, etc. Be smart, take an educated risk, and IMO don't listen to people who say equity is worthless.

A few hundred grand net absolutely is real wealth. To anybody really. But how many people are seeing a few hundred grand after-taxes (after taxes!)?

I'd love to see real data on what percentage of tech workers who receive equity ACTUALLY end up cashing out for over, say, $100K. Not a HN Survey, because of course everyone here has $10MM in equity, a mansion on the Peninsula, and a supermodel spouse. But a real survey across the huge tech company landscape, in and out of Silicon Valley.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#59

Post by MichaelGG » Wed, Dec 23, 2015, 5:21 PM UTC

nemo44x wrote: post #51

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now! I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds. The worst is I've seen people reject job off…

In the exceptional cases where they got a nice pay day, was the company unable to pay cash? If not then there's the answer why no bells ring.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#60

Post by nemo44x » Wed, Dec 23, 2015, 5:22 PM UTC

sbov wrote: post #42

Ultimately the problem seems to be preferred shares driving the valuation of common shares. They obviously aren't the same, so I don't know why it happens. I'm not a lawyer so I don't know if there's a way around this.

Fair Market Value drives the value of common shares, not preferred share costs. FMV is derived using a formula the IRS has to project what a share in the company is worth and it is usually far less than what the latest investors paid.