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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

#781

Post by kelnos »

dheera wrote: post #740
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…

Exactly. As a former founder who dealt with hospitalization and thousands of dollars a year in medical bills on the sh!t insurance startups can afford, I too would rather have 500K now than 50M later. There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments. Plus, setting 100K aside for medical bills and even throwing the 400K into Bitcoin is a far less risky investmen…

> There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.

I would very much like to know where you can find low-risk investments that are likely to net you 10x-40x returns in the span of 10 years.

(But overall I very much agree with your point that $500k now and $45M later can be a much much much better deal for someone than $0 now and $50M later. I would likely take that deal every single time.)

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

#782

Post by kelnos »

bruce511 wrote: post #671
corry wrote: post #639

Earlier quoted context omitted.

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…

Your argument is treating the future as knowable and certain, while not accounting for the value of risk. I guess you'll feel pretty bad if you pay for car insurance for 40 years, and never have a crash. If the 100% upside is guaranteed, then sure, you should hang on. But if "anything can happen" then cashing out 10% now, and providing a "can't fail" safety net, is well worth it. The reduction of risk of "losing it a…

> If the 100% upside is guaranteed, then sure, you should hang on.

Overall agreed, but that's not even always true! If you're -- for example -- under crushing levels of debt today, you very well may want to take that $500k now, even if that $50M is 100% guaranteed in 5 or 7 or 10 years.

Or even if you aren't in debt, but would find it a huge quality of life improvement to be able to have a down payment for the house you'd really like to live in now, and not have to wait 5 or 7 or 10 years.

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

#783

Post by hdivider »

Bad founder behavior is quite prevalent and should be called out for sure.

I disagree though with the general notion that employees are taking similar or even greater levels of risk. If you get a stable monthly paycheck, and the reasonable worst case is you're laid off because the company runs out of money (or downsizes), then the risk is in finding a new job.

That situation exists in a job at a large company too. Founders however are so tied to their ventures, that getting a new job is effectively out of the question, because it very likely means the death of the company.

And starting a company is an exceedingly difficult, stressful, and sacrificial thing to do. There is a clear and significant asymmetry in risk, and frequently in blood, sweat, and tears. So the nonlinear rewards should be commensurate too.

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

#784

Post by onlyrealcuzzo »

sandclock wrote: post #751
onlyrealcuzzo wrote: post #596

Earlier quoted context omitted.

The vast majority of startup success is luck... There are literally thousands of people going from L5-L7 at the major tech companies per founder successfully exiting a >$100M company.

Thousands, you say? [source missing]

There are only ~2300 Series C companies.

You're going to need to be this size to have a ~$100M+ exit.

There's about ~5 years between funding Series C and Series D [1].

Only ~55 Series C companies got funding in Q1 [2].

Only ~39 Series D companies got funding in Q1 [1].

You're going to have a MAX of about ~.7 * ~2300 * 1/5 = ~322 successful > $100M VC exits per year.

Ultimately, you really need to IPO to have a successful exit - and there's only ~257 per year total, only ~65% of which are VC = ~167.

~5% of FAANG is L7+ - if you're including Microsoft, Nvidia, AirBNB and all the other companies with FAANG-like pay - you're at >2M employees.

That's ~100k If the average tenure is ~10 years before retirement - you're looking at ~10k per year.

Okay - it's about ~100 per successful exit.

[1] https://carta.com/blog/state-of-private-markets-q3-2023/

[2] https://www.mosaic.tech/saas-startup-funding/series-c

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

#785

Post by kelnos »

vl wrote: post #776
molyss wrote: post #620

Earlier quoted context omitted.

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.

At vesting time you are taxed (immediately) at ordinary income rates on the fair market value the day that it vests, and that's what the cost basis is set to. If you sell on that day, your capital gains from the sale will be (near) $0.

The only reason to wait for LTCG on RSUs is if you decided to hold it for some non-zero amount of time after vesting and then the stock price shot up. But then you're also taking on the risk that the stock price will drop again before the year has passed, and end up with less post-tax money than if you'd sold at short-term tax rates.

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

#786

Post by kelnos »

PheonixPharts wrote: post #557
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…

> 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'll agree that it's not super common that holding onto RSUs makes sense, but I think it's more common than "rare exceptions".

Ultimately it's an investing decision. If you believe the stock price is going up at a rate faster than the rest of the market, and are willing to accept the risk that a concentrated position like that entails, then that can make financial sense.

For people who want to hold their RSUs but still want to diversify to some extent, my usual recommendation is to pick some percent of the shares that vest every quarter to sell immediately, and hold the rest. And -- critically -- to stick with that commitment every single quarter, and not fall into the trap of thinking "oh, the stock seems to be doing so well, I'll skip the sale this quarter". (Of course, a measured re-evaluation of the plan is a reasonable and good thing to do every so often.)

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

#787

Post by kelnos »

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…

> they are financially ignorant/disinterested enough to not understand how equity in corporations work

Yes, definitely, I think we live in a bit of a bubble here where we actively read and think about these things. I think most early employees will see a 0.5% or even 0.1% equity offer and think that's incredible. It barely even registers that the founder sitting across the interview table from them holds 40% or whatever, and that while, yes, the founder has taken on more risk than they are about to take on, they certainly have not taken on 80x the risk or are putting in 80x the work.

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

#788

Post by myarr »

hdivider wrote: post #783

Bad founder behavior is quite prevalent and should be called out for sure. I disagree though with the general notion that employees are taking similar or even greater levels of risk. If you get a stable monthly paycheck, and the reasonable worst case is you're laid off because the company runs out of money (or downsizes), then the risk is in finding a new job. That situation exists in a job at a large company too. Fo…

Oh please. There’s definitely no blood. Most likely no tears. I’ve been burned by two startups. So done with this asymmetrical inequality

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

#789

Post by lumost »

throwaway98797 wrote: post #734
sleepingreset wrote: post #309

Earlier quoted context omitted.

OP wants to get PAID for their work and rewarded for the all-in effort they'd put in. re-read their comment

> Even if this tiny company somehow became worth a billion dollars, I’d still make less money than if I’d worked as a senior engineer at Google or wherever this is why they don’t belong in start up land running and working in a start up requires a certain type of insanity this individual is not a fit

The OPs complaint is not that the risk is high, the OPs complaint is that the risk relative to their market rate is not balanced. Often you can end up working for junior founders and would be better off as a founder yourself.

If the founder views you as replaceable, then why not work at a big tech which would pay you dramatically more? Successful startups are not often populated by the irrational.

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

#790

Post by lumost »

tinco wrote: post #512
etothepii wrote: post #409

Earlier quoted context omitted.

I think what you are actually describing is that you should value equity at zero. If to work at a startup you would need 28% equity you are describing a founder. That's fine but there is an enormous difference between these two things. There is also the question of where the $125k comes from to pay your base.

Value equity at zero? I am not sure what you mean by that. If an employee sacrifices $500k to work at your company, then it would make sense to compensate them with $500k worth of equity is my point. The 28% is tongue in cheek, if you're so early that the amount of equity needed to compensate your first hire adequately is 28%, your company hasn't really started yet, and maybe you should just consider them a founder.

Bingo - if you need the kind of person whose market rate would be 28% of your company. They are a founder, if your don’t need that person… fine, but the “this is the industry standard” line is bogus.
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