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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

#621

Post by bluGill »

georgeecollins wrote: post #613
tomp wrote: post #607

Earlier quoted context omitted.

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…

There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket.

There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.

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

#622

Post by AlwaysBCoding »

georgeecollins wrote: post #610
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…

I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dil…

I'm not sure if you even need the same class of stock as it is needing some assurance of the same liquidity rights as founders. If the company charter ensured that any secondary liquidity event would have equal participation between shareholders (including employee stock options) it would be a lot healthier and prevent this class of fraud.

It's such a garbage situation right now for employees, because even if you find product-market fit, you do the work and your company is successful you can still get dumped on by your founders taking secondaries and subsequently checking out of the company.

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

#623

Post by dpe82 »

carbocation wrote: post #593
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…

I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.

A tiny, but *absolutely critical* detail!

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

#624

Post by dpe82 »

AlwaysBCoding wrote: post #601
gedy wrote: post #592

Earlier quoted context omitted.

Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.

The company is Phantom, and the VCs are Paradigm.

I think "this happened at a crypto company" is important context to your original post.

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

#625

Post by 1024core »

carbocation wrote: post #593
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…

I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.

I recognize some of those words....

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

#626

Post by blizkreeg »

Founder liquidity is wrong -- and not because employees don't get the same deal.

It's wrong because it is NOT uncommon for a founder to take chips off the table sometimes enriching themselves to the tune of millions only for the startup to then "fail" -- either go bankrupt, sell for peanuts, or sell for only a modest multiple.

You're not done until you're done. But founder liquidity has now become a path to getting rich when the outcome of the company is still unknown and up in the air. If venture backed founders don't want that risk, they should start bootstrapped companies.

At a minimum, there should be a cap on it (not % but $), and yes, it should be extended to early employees too.

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

#627

Post by gwbas1c »

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…

I think the most interesting part of the discussion is that the early employees almost always get the worst end of the deal:

Going in they have a lower salary than if they work for a more established company.

Then, either their shares end up being worthless, or at the final exit, they make less money than if they worked for a more established company the entire time. IE: Being an early employee in a startup is a lose-lose situation.

This is something founders need to understand when recruit their early employees: These are often the most critical hires for the business, and therefore it needs a high probability of upside.

IMO: A series of retention bonuses, and/or guaranteed bonuses at acquisition / funding events is a good solution. It's how I've sidestepped the equity issue when I was employed during an exit event.

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

#628

Post by matuszeg »

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…

I have received equity as an employee. When I started, the company was very early and their evaluation was still very low. The way it worked was that I had to pay for the equity grant upfront. I forget exactly how much but it wasThat same company eventually raised a sizeable equity round and then began issuing options for new employees. If they were to continue issuing equity grants, the cost to purchase the grant would be much more than $200 (likely tens or hundreds of thousands of dollars). Alternatively, if the company were to give employees equity grants directly instead of having to buy them then that would count as income and the employees would owe taxes on the equity gained. The tax bill could also easily be tens or hundreds of thousands of dollars.

Options avoid all of that and defer the upfront costs that come with an equity grant.

Imo, the real problem is that options can be clawed back once you no longer work for the company.

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

#629

Post by Finbarr »

flyinglizard wrote: post #603
Finbarr wrote: post #549

Earlier quoted context omitted.

Your daily reminder of the importance of maintaining board control.

Not realistic to maintain control past A unless you built a real rocketship. The board doesn’t usually want to run your company - they have enough other companies, some evidently better than yours as they don’t require this intervention.

> some evidently better than yours as they don’t require this intervention.

I’m not sure where that’s coming from.

Also plenty of companies out there have control past the A.

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

#630

Post by bagels »

blizkreeg wrote: post #626

Founder liquidity is wrong -- and not because employees don't get the same deal. It's wrong because it is NOT uncommon for a founder to take chips off the table sometimes enriching themselves to the tune of millions only for the startup to then "fail" -- either go bankrupt, sell for peanuts, or sell for only a modest multiple. You're not done until you're done. But founder liquidity has now become a path to getting r…

When is the outcome 'known'? Only when the business fails?
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