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Startup Equity 101

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Re: Startup Equity 101

#51

Post by x0xrx »

bcyn wrote: post #29
CPLX wrote: post #22

Earlier quoted context omitted.

> the 409a is only going to show you the maximum possible value While the points about uncertainty of options are quite accurate, this detail isn’t really true. For the most part a 409a is the lowest reasonable valuation the company could talk the auditors into accepting. The lower it is the less tax paid and everyone knows that.

You're correct about valuation, but the parent post was meant to address "how much liquid dollars should you expect to receive vs. 409a." You are likely to receive less in most cases (read: unless there are wildly successful public liquidity events) due to liquidation preferences.

Plenty of (non-VC backed) startups raise some money and then sell privately; it’s often the case that preference does not cause the common stock value to drop below the most recent 409a in these cases.

(In my experience, the 409a is on the order of 20% of the most recent raise, and preference is not more than 50%, in my area. And obviously you hope to sell for more than the last raise!).

Re: Startup Equity 101

#52

Post by Eridrus »

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…

I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup.

The details all matter, but they all matter far less than that fact.

People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.

Re: Startup Equity 101

#53

Post by throwawaythekey »

vrosas wrote: post #26

One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true: 1. the founder already has generational wealth and this current company means practically nothing to them. 2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.

The first time founders I had couldn't keep 100% of the equity out of the VCs pockets, so YMMV.

Re: Startup Equity 101

#54

Post by ipaddr »

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…

If you find a company they accept you should keep your shares if possible. Most companies will not be accepted for good reason.

Re: Startup Equity 101

#55

Post by ipaddr »

dakiol wrote: post #7

Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.

The problem becomes they (the company) talks/treats it as money paid and expects a lower salary (or additional passion like being happy to wake up at 4am to deal with an issue randomly) in exchange. They also want people who buy into the lie.

Re: Startup Equity 101

#56

Post by ipaddr »

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.

Startup positions vs regular positions often pay much lower. Obscene salaries and startups (which are mostly bootstrapped) don't go hand in hand.

Startup founder who raises gets to play with obscene money.

If you come across obscene money startup jobs share them. Tons of unemployed developers lurking who would take % of obscene.

Re: Startup Equity 101

#57

Post by FreakLegion »

TuringNYC wrote: post #50
FreakLegion wrote: post #34

Earlier quoted context omitted.

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 ha…

The cap table is just a spreadsheet of who owns what. Employees don't need to see that level of detail to understand their shares, so there's no particular reason to pass it around, and plenty of reasons not to.

Many startups are happy to give relevant details, though, like the percentage of fully diluted shares you own, the last preferred share price, whether any investors got non-standard terms, etc. Rather than asking to see the cap table, ask the questions you want the cap table to answer. If they won't tell you, maybe pass on working there.

Re: Startup Equity 101

#59

Post by koolba »

duped wrote: post #40
lotsofpulp wrote: post #35

Earlier quoted context omitted.

Options at non publicly traded companies are worth zero. Or should be valued the same as a lottery ticket.

Tell that to the IRS

What’s there to tell? Option grants that are not exercised have no tax consequence.

Re: Startup Equity 101

#60

Post by fluorinerocket »

ipaddr wrote: post #55
dakiol wrote: post #7

Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.

The problem becomes they (the company) talks/treats it as money paid and expects a lower salary (or additional passion like being happy to wake up at 4am to deal with an issue randomly) in exchange. They also want people who buy into the lie.

Exactly
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