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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

#651

Post by AlwaysBCoding »

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…

It's also wrong because it's not the founders work in isolation that is providing the liquidity opportunity in the first place. The entire purpose of a joint-stock company is to align incentives for all shareholders to benefit from the value creation of the company. Founder secondaries are a work-around that hack money into the pockets of a couple people off the back of other's labor instead of collectively enriching the group performing the labor.

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

#652

Post by corry »

gwbas1c wrote: post #627
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…

I'm curious why you think these employees -- who are getting the worst end of the deal -- are working for startups in the first place?

Either they have the skills to be a founder themselves or to work at BigTech... or they are financially ignorant/disinterested enough to not understand how equity in corporations work? Or is the charming and misleading founder who is to blame?

My point is that considering the high avg intelligence of the typical startup employee, there must be something else going on.

Clearly, people like working at smaller companies that have potential to grow - maybe that's because there's more interesting work, less bureaucracy, smaller teams, more of a sense of a journey, etc. Easy to devalue these things, but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?

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

#653

Post by craftkiller »

riazrizvi wrote: post #645
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.

Using your analogy, this is Alice bought a cheap stretch of land in the middle of nowhere, and wanted to develop it, but she couldn't afford to pay Bob to develop it. Alice then offers to pay Bob a smaller portion of money and some of her land in exchange for developing it. Bob has other clients looking to pay him more money, but he decides to take Alice's contract because he wants the land.

Why is Bob not in the same situation? They both are taking a financial loss in the hopes of having more valuable land to sell. Why shouldn't Bob have the same right to sell his portion of the land that Alice has?

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

#654

Post by boringg »

pydry wrote: post #508
boringg wrote: post #497

Earlier quoted context omitted.

>>"Early employee is tough". ^^ Literally in my comment.

Yes and the people dismissing how hard it was to be a founder were comparing it to being an early employee. So, you're saying that it's hard but "not that hard actually".

Its a different risk profile and a different level set of responsibility. Founder has the entirety of the company on their shoulders. Early employee has a lot - but they can leave and join another firm if they want.

However my original comment was pushback about how easy it is to take VC money (comments I have seen) and how low-risk being a founder is - which is patently false.

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

#655

Post by fardo »

tomp wrote: post #644
fardo wrote: post #637

Earlier quoted context omitted.

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)…

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

This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1]

>company loses money because it gave equity to employees is nonsensical

You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans.

> You're not giving away equity

I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants

[1] See page 8 footer of https://www.gsb.stanford.edu/sites/default/files/publication...

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

#656

Post by user_7832 »

sashank_1509 wrote: post #380
throwailearner wrote: post #297

Posting from throwaway so I can be very open. I joined a YC startup as engineer #1 with close to $200k salary and 2% options vesting at the usual 4 years, with a 10 year window. I feel like this was bettern than usual, and for a while felt like I struck an awesome deal, but as time went on I realised I was building everything single-handedly, while getting (at best) 2%, which started to annoy me deep down. Over two y…

10% to a founding engineer almost never happens. You’re in cofounder territory. There really are 2 reasons to stay in the startup, 1. The startups reaches a great valuation. If it reaches a 1B valuation, then even assuming 50% dilution, you have 10M for 2+ years of work, almost 3-5M per year TC! Yes your founders are earning much more but comparison is the thief of joy, you just got a salary that no big tech company…

What seems weird/odd to me is (assuming I got it correct) OP seemed quite important/essential to the working of the company, if not the most important technical person. 10M is nothing to laugh at, but I'd much rather get 500k from a company valued at 5M than 10M from a 1B corp if I was the largest contributor.

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

#657

Post by 0xB31B1B »

efnx wrote: post #618
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…

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 sam…

its not done this way because the founders want to screw you, its done this way because of a bunch of arcane tax laws. Its complicated to explain, but the origin of all of these weird "options not equity" and "90 days to expire" type things are because of US tax law. If the startup could give you shares without putting the employee and the company both in a very puntantive tax situation they would.

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

#658

Post by betagammaxyz »

riazrizvi wrote: post #645
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.

It's hard to make this point without a normative argument, but by analogy to land, a company is not only the land but also the workers laboring on it. It's reminiscent of serfdom. The serfs are attached to the land, and they own very little of it (if at all, and with many strings attached), even though their continued work is a large reason why the land would be considered valuable in the market in the first place.

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

#659

Post by user_7832 »

knappe wrote: post #106

Look, I've worked for 5 companies, 1 of which I knew would never sell and I had inklings that one other probably wasn't going to sell and instead was a lifestyle business for the founders, and the other 3 had successful exits. I won the lottery 3 times but I quit the game because I was tired of making VCs and founders rich while taking home breadcrumbs, comparatively. My first startup I walked with a paltry sum and t…

> the owners suddenly went from being doctors with a side hustle to private investors.

Did the owners sell the company or get some sort of payout? I'd imagine if they were making decent money they'd have kept the business alive, right? Would you be okay sharing the name of the place?

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

#660

Post by AlwaysBCoding »

riazrizvi wrote: post #645
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.

what happens if the founders subsequently run the company into the ground, having personally enriched themselves off their employees work, who they then destroyed the upside for?

should the employees have a legal claim against the money that was taken in the secondary transaction?

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