Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Silicon Valley's best kept secret: Founder liquidity

stefantheard.com

Post reply on HN
Print view View original

681–690 of 943 posts

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

#681

Post by AlwaysBCoding »

0xB31B1B wrote: post #657
efnx wrote: post #618

Earlier quoted context omitted.

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.

This isn't true. Company executives don't owe a fiduciary duty to employees or holders of stock options in a company, they only owe a fiduciary duty to concrete shareholders. There are a lot of founders of less than high moral character who want to keep it this way.

I sent a Section 220 demand letter to the founders of this company to get transparency on the money that was taken during the secondary stock sale and they're currently fighting me on it because I wasn't a shareholder at the time the secondary sale took place, I only held options in the company at the time.

This anecdote is illustrating a real world situation in which it is being used as a way for founders to try to screw their employees, not because their hands are tied by some arcane tax law.

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

#682

Post by jedberg »

corry wrote: post #652
gwbas1c wrote: post #627

Earlier quoted context omitted.

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…

I'm in that position right now, and have done it a few times in the past (my entire career is switching between startups and public companies).

I work for startups because I get a ton of responsibility for things I would never get at a big company. I get a chance to learn a ton of new stuff.

Through my career, I've made all my money at the public companies, and had most of my skill growth from the startups (Netflix being the big exception, where I both made money and leveled up my skills).

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

#683

Post by mgfist »

lurking_swe wrote: post #635
skybrian wrote: post #611

Earlier quoted context omitted.

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. :)

Mostly agreed, but as an employee you do have some semblance of material non-public information that gives you a structural edge in assessing the stock. (This probably works better at a 1k-5k company than a Google/FB, but I can't say because I haven't worked at the big faangs).

I've benefited financially from having a good sense of how well things are going and holding/selling accordingly (within the confines of the law and blackout periods, of course).

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

#684

Post by mgfist »

onlyrealcuzzo wrote: post #348
Finbarr wrote: post #66

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures. > As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR i…

Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away. Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really w…

Yes but that's still better than early employees who share a lot of the stress and responsibility of company building, with at best 10% of the upside, but more likely around 0.1% - 1% of the upside that the founder has.

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

#685

Post by tyre »

nine_k wrote: post #661
andrewmutz wrote: post #633

Earlier quoted context omitted.

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

Yes. They should not have if they were to optimize taxes.

But then they’re paying interest and very few startups are going to have stock that a someone will lend against. I cannot imagine someone taking Series A stock as collateral for a loan.

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

#686

Post by [deleted] »

icedchai wrote: post #541
nlh wrote: post #532

Earlier quoted context omitted.

One of the greatest quotes I've ever heard from a founder buddy was when his startup was going through a particularly dark moment and struggling: One of the investors said to him "Maybe you should seriously think about shutting down and giving us our money back", to which he replied: "It's not your money anymore."

Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."

[deleted]

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

#687

Post by neilv »

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…

Just to clarify about taking the $500K rather than even guaranteed additional $5M ($50M vs. $45M) years later...

$500K is an immediate big quality of life boost for most people.

For example: a condo/house downpayment, which lets you move out of cruddy ramen apartment, to routinely get a good night's sleep. And/or that relieves some of the various other startup salary level money stresses on your family.

I think this can also be aligned with the goals of the startup. You don't want people so "hungry" that the stress is hurting their health and their home lives. You want them motivated by the mission, the work, the environment, and the possible big liquidity windfall in the future -- but not by desperation.

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

#688

Post by Matticus_Rex »

dayvid wrote: post #670
Matticus_Rex wrote: post #612

Earlier quoted context omitted.

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.

Would be interesting to see average founder who can fundraise large amounts and family income. I’d imagine they tend to come from higher income backgrounds, though could be wrong.

I'm sure the wealthy are overrepresented, whether or not they got financial help from their families while starting/building the business. But there's a long gap between "being rich makes it more likely to succeed" and "most people who succeed are rich."

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

#689

Post by 8f2ab37a-ed6c »

The other aspect that's not factored in here is that often founders can spend years in search mode, living on savings or some early stage pre-seed VC, with zero guarantee of success or ever even finding something to work on.

Took you 5 years to get to a concept that finally justified hiring someone to help you grow it? Equity is the only form of compensation you have for all that work, and it might still be worth $0 another 5 years later. In the meantime the ICs are getting paid, are getting benefits, are having a life beyond the company.

The rewards have to be deeply asymmetric for this system to work, otherwise nobody in their right mind would even consider it.

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

#690

Post by earnesti »

rybosworld wrote: post #590
earnesti wrote: post #573

Earlier quoted context omitted.

I don't think it needs any justification, really. The investor decides, whom to sell to and how much. If the founder doesn't want to organize a sale for employees, then he doesn't do that. He would probably have to pitch it and include it in to an already complicated funding round. I totally understand why a typical founder doesn't want to do that. If for you as an employee it is a deal breaker, then you can complain…

> I don't think it needs any justification, really From a founder's perspective sure, you can do what's best for you. That's not what this article is about. This article is highlighting that there's a tendency in SV for founders to cash out early, and secretly . And along with that, there's a tendency to paint a narrative that the founders haven't sold a share. It's hard to see that as anything other than deceptive.…

Lying to the employees is scammy and wrong. However regarding that we would need more information what has exactly happened. Not telling or not highlighting something is not the same as lying.

Personally I'm not in the SV scene but from Europe, and I don't know much cases of these early cashouts.

Post reply on HN