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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

#771

Post by intelVISA »

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…

Yep, don't think it pays to go the middle ground in this case.

There isn't much point sweating for another person's dream, go big with your own startup or rest and vest at FAANG and live life.

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

#772

Post by rKarpinski »

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%.

Not sure why you are getting downvoted. There are multiple ways of structuring what is effectively selling the shares early that are not tax disadvantaged.

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

#773

Post by elevatedastalt »

neilv wrote: post #687
neilv wrote: post #503

Earlier quoted context omitted.

> 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…

Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are.

Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.

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

#774

Post by elevatedastalt »

WalterBright wrote: post #553
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…

For me, it's always regret: 1. If I buy stock, and the stock goes down, I regret buying 2. If I buy a stock, and the stock goes up, I regret not buying more There's no winning :-/

The simplest strategy is to buy index funds and hold. I never look at the price of any stock every day. I don't plan to sell any index funds either until I retire.

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

#775

Post by kelnos »

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…

Regarding your point (1), there's more to it than just the dollar amounts now and later. If we believe the over-leveraged founder story where that founder has mortgaged their home and maxed out their credit cards, being able to sell that equity at series A for $500k could mean the founder is able to pay those debts, and doesn't end up losing their home and being hounded by creditors. (Even if it doesn't get that bad, having that debt over your head is stressful, and running a small startup is already stressful enough.)

If we also believe that founders are important to a company's success as it grows from a small startup into something more mature, I'm pretty sure that unfortunate financial (and housing) situation would drastically reduce the chances that the company would make it to that $250M exit later.

So taking that $500k may increase the chances that the startup later gets sold for $250M, rather than, say, $50M... or just failing entirely, returning whatever small amount of money is left to investors.

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

#776

Post by vl »

molyss wrote: post #620
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’m going to rebound on that and explain why it doesn’t make sense to hold on to RSUs. Disclaimer: I’m an IC myself. I worked for my 1st company for 15 years. Held to their RSUs most of the time. Then moved to another (public) company and stayed there for a year before leaving. Now in a startup with a lower salary and no immediate liquidity on my stock options. When you work at a public company, you have multiple exp…

I would say that for most RSU lots it's better to wait for long-term capital gain taxes to kick in before selling.

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

#777

Post by kelnos »

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…

Yep; for the vast majority of people, the difference between $45M and $50M is not going to change their lives in any meaningful way. With that amount, you can live a fairly lavish lifestyle and still see the number in your brokerage account go up every year.

I actually kinda think a founder that was otherwise already wealthy wouldn't mind this too much, either: say they already have $50M in the bank; the difference between $95M and $100M feels even less of a big deal than $45M and $50M. Granted, the founder with $50M already in the bank probably wouldn't bother with the $500k in the first place, though, especially if they believed in the likelihood (or guarantee, in your hypothetical) of a future larger exit.

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

#778

Post by wait_a_minute »

extragood wrote: post #135
selestify wrote: post #95

Earlier quoted context omitted.

Why the disparity? Especially with Canada - no language barrier and no time zone differences. Why doesn’t the free market equalize Canadian dev wages with American ones?

I am convinced that the WFH movement is responsible for the recent offshoring trend. Before 2020, it was fairly uncommon to work remotely and most employees were expected to physically come to the office. You would relocate if you got a job in another state, and employers had to go through a painful visa process to access foreign workers or set up expensive international satellite offices. The great WFH experiment ki…

That will change once legislation gets passed requiring remote workers who are not located in the same country to need to go through the work visa process. The outsourcers are shooting themselves in the foot. Once the law drops and they cannot bring over the cheap remote labor due to visa limits, they will end up with skeleton crew teams that cannot maintain the spaghetti systems that are being built.

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

#779

Post by kelnos »

andrewmutz wrote: post #633
nine_k wrote: post #617

Earlier quoted context omitted.

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

I think it'd be pretty rare for a bank to accept equity in a series A startup as collateral for a loan.

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

#780

Post by neilv »

elevatedastalt wrote: post #773
neilv wrote: post #687

Earlier quoted context omitted.

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…

Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are. Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.

Maybe it depends on the area and kinds of properties one is looking at?

Only a little anecdata, but the few times I've looked (affluent university town, once recommended as a place to do a tech startup)... if one could swing a downpayment on certain places, the monthly costs were lower than rent one would otherwise have to pay, on places not as nice.

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