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Startup Equity 101

quarter--mile.com

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Re: Startup Equity 101

#61

Post by mvkel »

So what is your equity really worth?

"The difference between the most recent FMV (409A) valuation and your exercise price."

This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares.

A better description would be "the most recent 409A valuation, minus preferred treatment, and your exercise price."

All of that is moot though, as an employee wouldn't have access to the cap table or liquidation stack. The short answer is you'll have no idea how much your equity is worth until you get the wire transfer into your bank account.

Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name.

Re: Startup Equity 101

#62

Post by phonon »

mvkel wrote: post #61

So what is your equity really worth? "The difference between the most recent FMV (409A) valuation and your exercise price." This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. A better description would be "the most recent 409A valuation, minus preferred treatment, and your exercise price." All…

409a valuations explicitly take into account share classes/liquidation preferences. That's kind of the point. If the Preferred last sold for $1.00, the 409a might value the Common at $0.10 per share, which would then typically be the FMV strike price set in the next round of issued options.

If the Common FMV has been steadily increasing from when you received your options, that would typically be a positive sign. Of course, 409a valuations are based on mathematical models. Since Common shares are so illiquid in a private start-up, you don't "really" know what they're worth until a liquidity event.

Re: Startup Equity 101

#63

Post by woodrow »

bradlys wrote: post #24

> If you join an early stage company and you have a decent amount of excess capital, early exercise everything and file an 83(b) election. The reasons for doing this: starting the QSBS clock, starting the long term capital gains clock, not needing to worry about your options expiring. I don't think this is ever worth the risk. If you're even thinking of doing this for QSBS purposes... the amount of tax you'd incur is…

FYI the whole point of early exercise + 83b election is that you "pay" all tax due, but the tax due is $0, so you don't pay anything. There _is_ non-trivial risk of sinking liquid cash into illiquid startup stock, but this risk has nothing to do with tax.

Re: Startup Equity 101

#64

Post by jiveturkey »

Eridrus wrote: post #52
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.

Not sure if you mean that seriously, or with tongue in cheek. It takes a very healthy dose of luck and market timing to be successful. Even the VCs, the experts, don't know how to pick winners. They expect a 90% failure rate, and this is among the ones they picked!

As an employee you don't have the same profit structure in play -- you can only work at one startup at a time. You cannot spread your bets around and let that one winner make the math work. You have to be 10x better at selecting a startup than the experts, probably 100x better if you expect to beat a big tech salary.

Re: Startup Equity 101

#65

Post by Oarch »

henry2023 wrote: post #30
ldjkfkdsjnv wrote: post #11

Earlier quoted context omitted.

This isnt true, nobody knows what will happen when you can very cheaply replicate software. The sales etc are valuable, but when the cost of producing the product goes to zero, weird things will happen.

Who says the cost of producing software is going to zero?

It's likely heading towards that direction.

Just seeing how Veo3 has taken huge chunks of value out of the film/production space in the last week. It's going to be very hard to justify many salaries going forward.

Re: Startup Equity 101

#66

Post by usrnm »

jiveturkey wrote: post #64
Eridrus wrote: post #52

Earlier quoted context omitted.

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.

Not sure if you mean that seriously, or with tongue in cheek. It takes a very healthy dose of luck and market timing to be successful. Even the VCs, the experts, don't know how to pick winners. They expect a 90% failure rate, and this is among the ones they picked ! As an employee you don't have the same profit structure in play -- you can only work at one startup at a time. You cannot spread your bets around and let…

That all is correct and leads to a very simple conclusion: working for a startup has a very low probability of making you rich. Doesn't mean that people shouldn't do it, but it's better to have healthy expectations.

Re: Startup Equity 101

#67

Post by atemerev »

So basically being a startup employee is a very bad deal, and you should either be employed at big tech, or be a founder yourself.

But how startups find early employees then?

Re: Startup Equity 101

#68

Post by windowshopping »

This guide leaves out something extremely important that just fucked over a friend of mine: double-trigger RSUs. My friend thought he was getting a certain amount of stock annually, but in fact he only got it if he was still employed there when the company went public. So after six years they fired him right before going public a month later, and he got nothing. And in order to get any severance, he had to sign an agreement giving up any right to pursue any legal claims against them. I didn't even believe this was possible at first. Almost no startup equity guides mention this. Read your contracts very carefully, people!

Re: Startup Equity 101

#69

Post by gorgoiler »

I know too many people who’ve had their stock zeroed out through dilution, preference vs common, partial buyouts where only some founders and investors get to sell, spurious “bad leaver” status for people who work for so-called competitors, forced resignations within particular timeframes that cause stock forfeiture, and on and on and on.

It would be an interesting addition to this guid to see these scenarios collected and enumerated with some tips around how to get caught out.

Re: Startup Equity 101

#70

Post by dilyevsky »

koolba wrote: post #59
duped wrote: post #40

Earlier quoted context omitted.

Tell that to the IRS

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

There's a 10y max ttl on ISOs to exercise or lose it. Also if you leave the company it's 90d. You typically can convert ISOs to NSOs but you lose some of the tax advantages of ISO (not a tax/investment advice, etc etc)
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