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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

#541

Post by icedchai »

nlh wrote: post #532
tomrod wrote: post #445

Earlier quoted context omitted.

They don't control it.

One of the greatest quotes I've ever heard from a founder buddy was when his startup was going through a particularly dark moment and struggling: One of the investors said to him "Maybe you should seriously think about shutting down and giving us our money back", to which he replied: "It's not your money anymore."

Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."

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

#542

Post by Finbarr »

ditonal wrote: post #534
Finbarr wrote: post #520

Earlier quoted context omitted.

Let's not forget that FAANG companies were all startups at one point. Early employees at those companies experienced significant upside. Startups can be very high risk, and in rare cases, extreme upside.

This is the “startup myth” that lets the scam perpetuate. The world has changed. Google IPOed just a few years after it founded. Now Stripe, objectively one of the most successful startups ever, still hasn’t IPOed after 15 years. Liquidity preference Dilution Even the F in FAANG had a major movie made about early employees getting shafted by dilution! FAANG is 5 companies founded a long time ago. Since then VCs have…

Many huge private companies, like Stripe, have found ways to provide liquidity to their employees without going public, e.g., through tender offers. Some more recent examples of companies where early employees did very well would be AirBnB, Coinbase and DoorDash.

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

#543

Post by RhodesianHunter »

zenlikethat wrote: post #452
cosmic_quanta wrote: post #415

Earlier quoted context omitted.

Well, the alternative (which appears to be the status quo) is to give lower % equity to the first ~50 employees. What do you think is the ideal breakdown of equity for early employees?

people already do a variant of “earlier gets more, later gets less” that’s a lot smoother/linear than your scheme and can be customized and adjusted to roles (engineers get more than salespeople as an example). With what you describe, offering some exec down the line 0.5% or whatever is impossible. You need flexibility because at any moment some killer candidate might come along that you need to juice the grant for.…

> Just being earlier doesn’t mean they contribute more to the company

No, but being earlier does mean taking on more risk, which is the whole argument founders and seed investors make for their cuts.

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

#544

Post by dilyevsky »

jjav wrote: post #121
dilyevsky wrote: post #31

Earlier quoted context omitted.

Ive seen it restricted so yes

I think there's a confusion between the related events. Filing the 83(b) form with the IRS is between you and the IRS. Company isn't involved so not something they can restrict. However, filing that 83(b) only makes any sense if you are allowed to early exercise and that is indeed entirely up to the company. So if they don't let you early exercise you also won't be filing the 83(b). Pro tip: Never join a startup that…

Yes i assumed parent was referring to early exercise but maybe i misread. Imo early exercise doesn’t make a ton of sense when the company no longer qualifies for qsbs especially if long exercise window is offered so probably why it’s not offered - to avoid a ton of drama later on

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

#545

Post by divbzero »

Startups are far more founder-friendly than they used to be (thanks in part to YC’s contributions) but we have a ways to go to make them more employee-friendly too.

To call out the employee-friendly equity policies that OP has instituted at his new startup:

> Our employee option pool is 20% which is double the average

> We have a 3-month equity cliff which is 9 months sooner than the average.

> We allow employees to exercise options up to 10 years after they leave instead of 90 days.

> Our equity packages vest over 3 years instead of the industry standard 4-year period.

> … only taking liquidity if I can also offer it to employees as well.

The 10-year exercise window is especially noteworthy since the cost to exercise options can be substantial.

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

#546

Post by randerson »

davedx wrote: post #493
randerson wrote: post #433

Earlier quoted context omitted.

My experience was similar, right down to the $10,000 worth of options. Eventually the company went public and those options would have been worth $5M if I'd had the foresight (and cash) to exercise them (which I didn't). The co-founders did not have exercise costs or AMT of course. It is an unfair system indeed. I'd encourage those seeking to be early engineers to go work at a FAANG for a few years before joining a s…

Wait, you couldn’t find the 10k cash to exercise 5m worth of options?

The paper value was far lower during the exercise window & no guarantee it would ever be liquid. The AMT would also have dwarfed the 10k.

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

#547

Post by throrway12 »

torginus wrote: post #352
throrway12 wrote: post #129

I worked at a preseed company recently. Here's my experience: - Work 9 to 7 everyday. 6 days a week. - People are working 9 am - 5 am in crunch time. Then joining again at 10 am. - Monetary Comp is exactly market average. - Equity Comp is even more paltry since founders raised at a huge valuation. - Founders make unrealistic promises. Eg: It took a competitor with 7 people, 3 months to make a product. The founder tol…

Sorry if founders already raised a huge valuation, why didn't they hire more devs? I'm sure what can be done with 996 style slave labor with 3 devs can be done with 6 devs working 9 to 5. It's not like they couldn't afford the salaries (and you mentioned they weren't paying that much anyways).

because they are cheap ass people. Pivoted 3 times since 2021 to the latest hype, currently building another generic AI app. They still have 5-6 years of runway left with current burn-rate.

If they go all out in 12 months, they would actually be considered a winner/failure. Purgatory is comfortable.

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

#548

Post by extragood »

chollida1 wrote: post #257
extragood wrote: post #125

Earlier quoted context omitted.

It happens. I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount. I more recently interviewed with a pre-series A company and they said that they'd…

> I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount.f Oh wow, how many companies have a series A after 3 years? How did your company survive with…

That policy was actually one of the major reasons I liked that company and stuck with them for so long. Their goal early on was to avoid raising money if at all possible, and they managed that for a long time by mostly being cash-flow positive/profitable. The trade off is slower, but sustainable growth.

We hit an inflection point in the early pandemic where money was cheap and we had a ton of new customers coming in, so we were able to secure very favorable terms for the Series A and used that money to expand the business. Things continued to go in the right direction for the next ~2 years and we ended up doing a Series B round, and that in retrospect was a mistake. We over-hired in 2022 and couldn't back that up with increased business. And because we had given up so much control to investors in the previous rounds, we were unable to return to the sustainable-growth strategy that had worked for us in the past, and had to adopt faster growth strategies, none of which panned out and ultimately hurt the company and led to many rounds of lay-offs.

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

#549

Post by Finbarr »

icedchai wrote: post #541
nlh wrote: post #532

Earlier quoted context omitted.

One of the greatest quotes I've ever heard from a founder buddy was when his startup was going through a particularly dark moment and struggling: One of the investors said to him "Maybe you should seriously think about shutting down and giving us our money back", to which he replied: "It's not your money anymore."

Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."

Your daily reminder of the importance of maintaining board control.

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

#550

Post by cashsterling »

corry wrote: post #488

Three interesting part of the discussion: (1) The opportunity cost to the founder of taking early liquidity: If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case…

Great points... as to #3, investors are often happy to be buyers. They are buying shares anyways that would otherwise have to be created. Allowing founders and employees to sell shares lowers dilution vs. creation of new shares... usually this is not a large effect, but still not bad for current & future investors.
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