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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

#641

Post by AlwaysBCoding »

georgeecollins wrote: post #636
AlwaysBCoding wrote: post #622

Earlier quoted context omitted.

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.

you don't need the same voting rights, for example

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

#642

Post by ericd »

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…

The strongly diminishing marginal utility of money after $10M for most people makes that first $500k much more impactful than $5M would be after you have $45M.

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

#643

Post by jkelleyrtp »

throwaway-blaze wrote: post #61

I must be an idiot, I've been a cofounder or first hire in 6 startups (2 successful) over the last 25 years and have literally never been offered secondary during a Seed or Series A or B.

Secondaries have become more popular over the past few (5?) years but you need to know to ask.

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

#644

Post by tomp »

fardo wrote: post #637
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…

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 pr…

I think you're confusing a few things.

First of all, we're talking about pre-IPO startups, so you can't just sell the stock.

Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors".

You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).

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

#645

Post by riazrizvi »

joshuamerrill wrote: post #609

Founder liquidity events are done in secret in startup land. There's a simple reason for that. It's wrong. Startup employees, especially early ones, take on most of the risk that founders do. They take pay cuts. They work insane hours. They sacrifice. And they have the same liquidity needs, too. It's wrong to make them wait a decade for a fraction of the liquidity that founders got in the Series B. It's wrong to forc…

I don’t understand the framing here, where they need to justify why they get paid. They created and secured a thing and sell off chunks of it along the way when it suits them. What’s strange about that? If you buy a cheap stretch of land in the middle of nowhere and develop it and sell pieces of it off, that’s just understandable.

When you come on board as an employee, you’re just not in the same situation.

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

#646

Post by corry »

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.…

My point is that the situation will vary.

Yes, if $500k doesn't move the needle on your life then the question is moot anyways. Most first-time founders will be closer to the poor end of the spectrum than the wealthy side.

There are people reading this for which $20k will change their life (which in my example was the 'shouldn't matter' amount instead of the $500k).

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

#647

Post by cruffle_duffle »

geepeeyoudata wrote: post #330
xandrius wrote: post #156

Earlier quoted context omitted.

Yeah, that's my thought too. Many companies give ~$200/y for way less upward mobility, impact and voice, and without any equity. Maybe you'd lose our on some tiny perk/benefit but that's not always the case. So I'm not seeing what's wrong with this deal with the only caveat that the engineer has the experience not to overwork/burn out.

>> So I'm not seeing what's wrong with this deal with the only caveat that the engineer has the experience not to overwork/burn out. The startup can go bankrupt any moment, thats a big deal. You get crappy perks, often poor benefits.

And at a large corp you can get laid off just as easily. Any business can toss you out at a moments notice. It's not unique to startups.

At least with a startup you are going into it knowing that you have a higher probability of thing going south financially. With a big company, you might not get any warning at all.

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

#648

Post by georgeecollins »

bluGill wrote: post #621
georgeecollins wrote: post #613

Earlier quoted context omitted.

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 exceptio…

Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify.

However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.).

So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.

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

#649

Post by llmblockchain »

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…

This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one.

I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us.

Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales).

I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth.

One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop.

I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX).

I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations.

Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.

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

#650

Post by underwater »

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…

Another consideration is that employees are much less conscious of the real value of their stock than founders, and you don’t want to make the (lack of) value of their shares too obvious in the early stages.

If you tell them the value of their stock is $200k, and 90% of that is imaginary, then they might start thinking about that job offer with a 500k stock grant at a listed company.

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