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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

#611

Post by skybrian »

PheonixPharts wrote: post #557
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…

> hard not to regret the choice If you can't handle "regret" in these cases, then you probably shouldn't be in a position where you're deriving the vast majority of your income/weatlh from investments (which is fundamentally what a CEO does). It's astounding how many ICs can't wrap their heads around the concept that holding onto your RSUs make absolutely no financial sense. With rare exceptions, this doesn't make se…

I believe in diversification and index funds for most people, but this seems overdone.

The issue here is that sometimes if you procrastinate about diversifying, it pays off very well. As a Google employee (who joined after IPO), it was by far my best investment and funded my retirement.

I guess that's accidental gambling. I did have other investments.

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

#612

Post by Matticus_Rex »

fragmede wrote: post #591
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…

to put it bluntly asf, you're being poor (and I'm being insensitive). what's $500k going to do for you if you come from a rich family? you already have your rent paid for until you die, and vacations paid for. all you have to do to do is put up with your annoying family, which isn't the worst if you've been through therapy. your mom or dad's abusive? if you've been through enough family therapy, that's not a problem.…

Yes, there are people who won't get the same benefit from hedging like this.

But they're a small minority. Not that many people meet your description here.

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

#613

Post by georgeecollins »

tomp wrote: post #607
AlwaysBCoding wrote: post #585

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 "probl…

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your…

That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment.

Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.

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

#615

Post by abvdasker »

goalonetwo wrote: post #598

In my 20s I joined a couple startups as "early engineer" or "founding engineer". I quickly realized those are the absolute worst positions to be in. You take almost as much risk as the founders but almost none of the upside. One startup died, the other one sold for 100m$. Out of that I saw 400k$ as an exit. Not too bad but even with that exit I ended up making way less than if I joined a FAANG. In both cases the foun…

I second this. I took a large salary cut to be 1/2 of an engineering team at a seed stage startup for ~1.25%. After 2 years of pretty grueling work I left to go back to big tech for 3x the pay. I wouldn't call it a total waste of time in the sense that it made me a better engineer, but it certainly wasn't worth it financially. The company still exists and has had a relatively successful series A and "A extension" but I don't think my equity will ever be worth anything.

I really wouldn't recommend anyone work as an engineer at an early stage startup unless you're getting ~5% or more (this would be unprecedented) because the risk is barely less than the founders and the pay is generally terrible. Series B or later (growth stage) may be a sweet spot where the salaries are decent and there is still significant equity upside without the insane hours.

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

#617

Post by nine_k »

simonebrunozzi wrote: post #570
neilv wrote: post #503

Earlier quoted context omitted.

> 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…

You are not taking into account QSBS. [0] When you sell your stocks before 5 years of holding period has passed, you pay significantly higher taxes. So you don't get 500k net, you get 500k gross, or probably 300k net. Which makes the de-risking less compelling. [0]: https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...

This is when you immediately liquidate your stock position, instead of taking a loan using it as a collateral, which would likely cost you 10%-15% in interest, not 30%.

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

#618

Post by efnx »

tomp wrote: post #607
AlwaysBCoding wrote: post #585

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 "probl…

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your…

Because that’s the racket! They can’t pay you top dollar because they’re a lean startup, so they make up for it by adding “equity” to remuneration. But that equity is in the form of options which you have to buy with your not-top-dollar salary, so it’s unlikely you will. Then you leave the company before an event and those options expire after a month or so, going back into the pool for another engineer to do the same. The house always wins!

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

#619

Post by OJFord »

tomp wrote: post #607
AlwaysBCoding wrote: post #585

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 "probl…

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your…

They're not a subset no, but the two aren't mutually exclusive.

They can get options, they can get equity, they can get nothing (beyond salary).

Options are common probably because it gives (the company) more or easier control over what happens when.

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

#620

Post by molyss »

PheonixPharts wrote: post #557
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…

> hard not to regret the choice If you can't handle "regret" in these cases, then you probably shouldn't be in a position where you're deriving the vast majority of your income/weatlh from investments (which is fundamentally what a CEO does). It's astounding how many ICs can't wrap their heads around the concept that holding onto your RSUs make absolutely no financial sense. With rare exceptions, this doesn't make se…

I’m going to rebound on that and explain why it doesn’t make sense to hold on to RSUs.

Disclaimer: I’m an IC myself.

I worked for my 1st company for 15 years. Held to their RSUs most of the time. Then moved to another (public) company and stayed there for a year before leaving. Now in a startup with a lower salary and no immediate liquidity on my stock options.

When you work at a public company, you have multiple exposures to the company’s growth: the RSUs that have already vested, the RSUs that haven’t vested yet and through your own career growth and salary increase that goes with a successful company. If you were early enough, you also get market cred for having made the company successful. If the companies goes under (or shrinks, or lays people off), all those assets are at risk.

Usually, one has more in granted stocks than in vested stocks. If your company just went public, you might have a lote more sellable than in your pipeline, but even that is unusual. Usually, you’ll still have more in the pipeline than you’ve already vested.

If your company has been public for a while, you should get frequent refreshes, which means you still have a significant numbers of unvested shares.

Regardless, you should sell as soon as you can, because of the remaining exposure through unvested equity. Use the proceeds to place in an ETF, or in a high-yield savings account, or some more aggressive investment strategy. Or use it for the downpayment on your house, or fund your kid’s college funds, whatever floats your boat.

Anyways, keep in mind that you still have a significant exposure to the growth of the company through your unvested equities. If you’re worried about short-term cap gain, don’t be. If you sell immediately, there’s no growth between cost basis and selling price, so no cap gain. Another upside to selling is that you’re not bound by the blackout periods, so your assets are much more liquid. And remember you still have exposure

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