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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

#581

Post by hylaride »

segfaltnh wrote: post #232
surfingdino wrote: post #139

This and my own experience with employee stock options led me to reject any work for startups that offer stock options. It is a way to make you work hard and allow to be treated like dirt for less money. The lowest point was having to walk across town to the office to eat energy bars from the office kitchenette, because I could not afford a bus fare or food as my pay was delayed by a week over Christmas. Meanwhile, t…

I don't believe a private sale entitles one to ignore a stock options legal rights. What are the relevant details here I'm missing?

For IPO sales, all options can eventually be converted into common shares then sold (often after various lockup periods giving other investors chances to cash out first).

For private sales, which can be structured in a variety of ways, there's a bucket order that can vary depending on the share structure (remember options aren't shares until converted). Most VCs have terms that they get paid out first to recoup their investment (and often then some) before common or option holders get paid out.

So for a simple example (I'm making these numbers and percentages up): Say if VCs invested $10m for 30% of a startup with a guarantee of first rights to get that back and 50%, then a founder class of shares owns a percentage, say 50%, and then there's a class of common shares/options that are in theory 20% of the company. So in thoery, the investors own 30%, employees on 20%, and founder(s) 50%.

Let's say then that the company then sells for $20m. The investors get their $10m back, plus $5m for their 50% return guarantee. The founder class of shares has rights to 50% of the company, but all that's remaining is the $5m left over which is 25%; they get it all. Everybody else gets shit unless the buyers want to retain any employees and give them anything extra (this can happen).

Things like this happen a lot. I knew people that worked at 500px (the photo site) and eventually the investors forced a sale after the business stagnated that even the founders got nothing in the end.

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

#582

Post by JakeTheAndroid »

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…

I don't agree it's a myth. Is it an extreme risk? Yes, of course. Do people view the risks to be way too low? Yes. But I worked at Cloudflare pre-IPO, got shares at 1.73, and at one point CF was at 200 a share. That was more or less what I was "promised" from the equity.

Stripe is one example of a successful startup not going public, but there are tons of startups that are going public. And there are many startups that wish they could go public, but they simply don't have the finances or business to do so.

I don't think VCs changed much from when Google went public until COVID. We were seeing massive overvaluations of tech companies for years. Once through 2020, VCs got scared and now the landscape is a bit different. But the AI craze has started to get VCs back out of their shells taking bets on risky projects.

So, yeah, idk what I agree with this assessment. At least it's not been my experience in tech over the last 8+ years.

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

#583

Post by dclowd9901 »

rbranson wrote: post #487
dclowd9901 wrote: post #449

Earlier quoted context omitted.

Ok, please argue in good faith here. Maybe 1 or 2 people who aren’t executives are pulling in that kind of money from FAANGs.

Incorrect. See: https://www.levels.fyi/companies/facebook/salaries/software-...

I was under the impression we were talking about ICs here -- your link shows that an upper-middle IC that you'd expect to be choosing between early startup or FAANG will see something around 450 a year, which tracks much closer to what I'd expect.

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

#584

Post by slashdave »

onlyrealcuzzo wrote: post #348
Finbarr wrote: post #66

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures. > As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR i…

Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away. Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really w…

> there's a decent chance you'll walk away with very little

Well, some founders care about their employees and their idea, and the idea of the start up failing is much more than just money.

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

#585

Post by AlwaysBCoding »

The situation I recently went through reads like a horror story:

> was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground.

> company is a breakout success, raises a large growth round.

> founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity.

> founders start thinking about early employees as "problems" because they have too much equity and could easily hire multiple FAANG engineers for the equity comp they're paying the early team. push all early employees out of the company.

> horrible ego-based decision making such as this kills the company culture and runs the company into the ground. company is a mess, stock is now worth significantly less.

---

> early employees have to pay money to exercise their stock options which are worth millions on paper. early employees have to front money to pay taxes on the capital gains on the stock.

> founders have pocketed millions, off the backs of other people's work, while the employees who built the company all owe huge tax bills and have no path whatsoever to ever seeing liquidity with the floundering company.

> all of this is because the employees did their jobs too well, the company grew too fast, and the founders egos got completely out of control.

To be blunt, situations like this should be illegal. joint-stock companies aren't slush funds for three people to personally enrich themselves off the labor and capital investment of others, they're supposed to be entities where all shareholders participate in the upside of the value creation together. Until there's some sort of legal framework for pursuing class-action lawsuits against founders who defraud their employees like this I don't think this situation will ever get better. There are already laws against self-dealing transactions by company executives, I don't see what is different in cases of extreme founder liquidity off the backs of other people's work.

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

#586

Post by Xcelerate »

onlyrealcuzzo wrote: post #417
foobarian wrote: post #406

Earlier quoted context omitted.

> making ~$1M per year working 6 hour days at FAANG Can you say more on this? I didn't realize FAANG TCO was quite that high. Maybe it's time to swallow some pride and take the adtech money after all...

The average SUCCESSFUL founder is in their earlier 30s. At that point - you should be at least L4 (probably L5) at FAANG. Salaries are about ~$450k at that level and age. In 5 years, if you work even a fraction of as hard as you need to be a successful founder, you should be L7 - salaries are usually >$800k at that point. No, it is not like any average slacker straight out of college in 5 years can get to a $1M salar…

> But if you're the type of person that could successfully grow a company to a multi hundred million valuation in 5 years - you can make $1M at FAANG.

Disagree. Totally different skill sets. Not saying there is no correlation at all, but probably less than one might think.

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

#587

Post by Finbarr »

ditonal wrote: post #566
Finbarr wrote: post #542

Earlier quoted context omitted.

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.

Early executives at those companies did very well. Early employees did well, but risk-adjusted , not really. I know people who were fairly early at those companies and they own nice SFH in the Bay Area but they're still working as Directors or whatever. Consider that if you could make 400k (including liquid stock) in compensation at FAANG but you take 180k at the startup, you're basically betting 220k a year on the c…

First of all, we're on the same page about the risk profile of working for larger companies being better for employees. But the reality is there aren't enough of those jobs for every single startup employee out there to get one. Some people also like the startup environment - move fast and break things, etc.

Your denominator (5000) is _all_ investments that YC has made. You need to look at investments of a certain vintage, e.g., 10 years or more. You also need to include all the other companies of that vintage where employees did well (way more companies in that cohort have sold or gone public). The result is 0.06% is a gross understimation of the success rate (where success is defined as successful enough for early employees to make a lot of money).

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

#588

Post by extragood »

hn_throwaway_99 wrote: post #397
extragood wrote: post #135

Earlier quoted context omitted.

I am convinced that the WFH movement is responsible for the recent offshoring trend. Before 2020, it was fairly uncommon to work remotely and most employees were expected to physically come to the office. You would relocate if you got a job in another state, and employers had to go through a painful visa process to access foreign workers or set up expensive international satellite offices. The great WFH experiment ki…

I definitely agree with this. In addition to WFH, consumer-grade Zoom/Meet/etc. got good enough right around the pandemic (just before really) where it made off shoring really feasible. I've especially seen an explosion of offshoring to Latin American and Eastern Europe. The time zones make things much more workable than, say, India or China.

Yep. My previous company almost exclusively hires in Latin and South America now. The interesting thing to me is that it hasn't affected the executives themselves yet. If employees from one region work just as well as employees from another for other roles (or at least cost to performance is favorable), then it seems hypocritical and counterproductive for them to insist on US-based execs. The vindictive part of me hopes that it catches up with them next.

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

#589

Post by remus »

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…

Not to mention that in reality there is no guarantee you'd end up selling for $250m. $500k now would look pretty damm good if the whole thing tanks and the other 90% of your shares become worthless.

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

#590

Post by rybosworld »

earnesti wrote: post #573
rybosworld wrote: post #563

Earlier quoted context omitted.

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…

> I don't think it needs any justification, really

From a founder's perspective sure, you can do what's best for you.

That's not what this article is about. This article is highlighting that there's a tendency in SV for founders to cash out early, and secretly. And along with that, there's a tendency to paint a narrative that the founders haven't sold a share. It's hard to see that as anything other than deceptive.

It's one thing to join a startup that you know may not succeed in the long run. It's another to join a startup that has a founder whose been secretly cashing out along the way.

Justification does seem necessary in that second scenario, at least from a morality perspective.

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