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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

#571

Post by indymike »

wnolens wrote: post #500
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…

I almost left for an ultra early startup, still running on seed money. They offered a typical SDE2-Senior salary + 1%. I was kind of offended. I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them. Even IF they achieved a 100-300M exit, after dilution I would be compensated at best par with a FANG Senior over abou…

> . I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them.

I see this a lot in failing startups:

The CTO is a pure manager who can't do any actual engineering. The result is that the shares and salary that could have been traded for getting product to market faster & better ends up being burnt on an empty chair.

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

#572

Post by whiplash451 »

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…

Can you please explain in what way VCs have completely rewritten the rules? Asking genuinely.

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

#573

Post by earnesti »

rybosworld wrote: post #563
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…

None of this is very good justification for founders being the only employee that have the option to sell part of their stake. > If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. It obviously depends on your financial situation, but having the option vs not will certainly matter to some employees. Not to mention that the stake could well be worth $0 in the…

I don't think it needs any justification, really. The investor decides, whom to sell to and how much. If the founder doesn't want to organize a sale for employees, then he doesn't do that. He would probably have to pitch it and include it in to an already complicated funding round.

I totally understand why a typical founder doesn't want to do that. If for you as an employee it is a deal breaker, then you can complain about it, change company or whatever. It is not like the founder owes anything to the employees (unless he has promised that). Everyone in the equation are adults and have to decide themselves, if the position they are in makes sense for them with the terms they have.

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

#574

Post by burutthrow1234 »

WarOnPrivacy wrote: post #374
burutthrow1234 wrote: post #300

Earlier quoted context omitted.

> 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…

> Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.

This is a comment about brick and mortar businesses, I literally talked about having to personally guarantee a multi-year lease in the post.

And yes, some businesses are even harder due to regulatory requirements

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

#575

Post by yuliyp »

cashsterling wrote: post #550
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.

I mean it effectively means that the amount of cash going into the business is less than it otherwise would have been. The company wanted $5M of cash. With the owner selling $500k worth of shares it means they had to find $5.5M to be invested.

The only reason it happens is that the founder is negotiating both on behalf of the business and a bit for themselves.

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

#576

Post by brightball »

neilv wrote: post #503
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…

> 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 even if hedging is going to be the correct choice 99% of the time. IMHO, it's very easy not to regret, with…

Exactly. About 15 years ago I was offering equity in a good little startup. I didn't take it because I just wanted to go somewhere with a higher salary.

When they finally sold about a decade later I ran the numbers and determined it would have been about $40,000 based on the actual sale price.

There's no guarantee of a $50M exit for anybody.

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

#577

Post by whiplash451 »

gen220 wrote: post #458
bradlys wrote: post #405

Earlier quoted context omitted.

I’d say you’re uncommon. I’ve never seen anyone who is a typical engineer making $250k/yr at a startup that’s below $1B valuation. Same for the amount of work you’re doing and that it’s remote with that compensation. It’s possible you’d be making $700k+/yr if you were at google. About triple what you are now.

I think one component of their point is that the marginal utility of money beyond $200k/year cash comp is quite small, especially if you (1) came to tech early in life (2) plan on staying in it for most of your working life. With that perspective, $200k/year and $700k/year both reduce to "well-paid". Also, a Staff title at a Seed or Series A startup can definitely ask for $250k/year, although they'd likely be trading…

I would revisit that calculation assuming you are drained at 45 instead of 60, including taxes and the opportunity cost of 500K x a few years at 3% rate for the next 15 years.

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

#578

Post by bink »

sealthedeal wrote: post #567

I think its less about more risk etc, and its more like, they are the ones starting the company lol. 1. They are providing jobs 2. They are responsible for growing business 3. They are accountable to not only the employees but to board and investors, etc. They take money off the table because they are in a much different position than say an engineer. It might be bad to say, but the engineer is responsible for one pa…

Are founding engineers not also taking on risk? They're typically taking a much lower salary in exchange for their shares. They're avoiding vacations, nice cars, fancy houses, and other expenses that they could purchase if they worked for a larger, public company. In the example from the article WeWork founding engineers would've gone 9 years without seeing any value from their shares while the CEO was cashing out billions.

The difference in responsibilities is already accounted for in their disparate salaries and ownership stakes. I don't think it's very relevant to whether or not they should have the option of cashing out some of their stake during funding rounds.

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

#579

Post by MisterBastahrd »

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…

$500K right now would pay off my home and do a good job of setting me up for retirement in the future.

$5M when you already have $45M doesn't move the needle much.

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

#580

Post by dclowd9901 »

onlyrealcuzzo wrote: post #558
dclowd9901 wrote: post #455

Earlier quoted context omitted.

Big caveats on these numbers: 1. You’ll have to be located in SF or Seattle. 2. Going from L5-L7 is _not_ trivial. It requires a somewhat miraculous combination of being on a productive team with a good boss, a lot of opportunities for showy work and your own gamesmanship around corporate politics. Is it possible? Sure. But in my short stint at Amazon, I met a lot of people who should have been higher level and were…

> Going from L5-L7 is _not_ trivial It is trivial compared to growing a company successfully from $10M valuation to $100M valuation + an exit.

[citation needed]

Frankly, many more aspects of trying to grow your career from l5-l7 are out of your hands than they are when you're at a startup.

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