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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

#631

Post by bagels »

nine_k wrote: post #608
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…

If we talk about stock options , the company is still private, and no stock was issued. Paying taxes on options for stock that may never materialize, or never be worth much, sucks. I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery…

The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.

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

#632

Post by bagels »

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 completely disagree on the risk. What was the opportunity cost for you in founding? Are you taking a salary comparable to your FANG comp? Usually the early employees are getting paid a lot closer to their market rate than the founders are.

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

#633

Post by andrewmutz »

nine_k wrote: post #617
simonebrunozzi wrote: post #570

Earlier quoted context omitted.

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%.

No, in this example the person sold equity in order to get the 500K. They can't use the equity as collateral for the loan because they dont own it anymore

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

#634

Post by bagels »

geepeeyoudata wrote: post #316
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 worked at a Series A startup as an employee, and wont be doing that anymore. Early engineers have all the risk (lose job the second things go bad) but little upside. They would offer 500 options, or 1000 options, or 30,000 options -- but when you look at the prices, that was worth $100-$10,000. Why would anyone take all this risk, and lower base salaries for that lottery ticket?! Secondly, they wont share the cap t…

My early engineer story is a lot different than this. 0.7% sold shares for ~1M at the end of 4 years. There is a bit of luck, and a bit of picking the right one to join. Don't join the ones that don't tell you what your equity share is and what the last valuation was to start with.

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

#635

Post by lurking_swe »

skybrian wrote: post #611
PheonixPharts wrote: post #557

Earlier quoted context omitted.

> 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.

Yes that’s accidental gambling. Or what i like to call “at the right place at the right time”.

Ask a Yahoo employee how that same plan would have worked out for them.

That being said, good for you. :)

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

#636

Post by georgeecollins »

AlwaysBCoding wrote: post #622
georgeecollins wrote: post #610

Earlier quoted context omitted.

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 fin…

Isn't "some assurance of the same liquidity rights" just a way of saying "the same class of stock". The same class of stock will have the same liquidity rights.

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

#637

Post by fardo »

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…

Actual equity is hard cash, options are a potentiality of cash.

As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook.

Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.

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

#638

Post by dmitrygr »

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…

> when the startup ends up selling for $250M

s/when/in the statistically and historically very unlikely case that/g

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

#639

Post by corry »

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…

Regret is perhaps too strong of a word. But $5M is $5M even if you have $45M. Sure, it won't change your life since you have the $45M, but the incremental investing / philanthropy / estate / family help etc that it allows you is real in absolute terms.

The other thing I've noticed is that for people on the other side of this transaction, it's not like "smaller numbers" all of a sudden become immaterial. $1M is still $1M. $5M is still $5M.

Again, I'm with you, I don't think it's regret exactly. But post hoc you might choose differently, even if it's the rationale choice at the time.

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

#640

Post by blizkreeg »

bagels wrote: post #630
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?

Sells or shuts or goes public.

Those are the only three outcomes for a venture backed startup.

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