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When a Unicorn Startup Stumbles, Its Employees Get Hurt

nytimes.com

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Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#81

Post by woah »

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

Most of this seems like a reasonable comment, but are you actually angry that people are learning to code?

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#82

Post by rlucas »

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

> Tech employees need to wake up about common vs preferred shares, and that the former are worthless. > ... > They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference.

You've muddled orthogonal concepts together here.

1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Founder shares (unless purchased along side financial investors for hard cash) are always common shares; if your straw man were correct, then there would be no wealthy founders.

2. Liquidation preference is a negotiated term which does have a rational basis for existing. Whenever you're putting in a larger proportion of the company's cash than the ownership you're buying, it is crucial to have protection against someone essentially liquidating the company for the cash. Say investor X is putting in $8 into a company that has $2 in the bank, but X is only buying 10% of the company. If the company is liquidated for that $10 tomorrow, X gets back $1 and the common stockholders get $9. (There are other protections against a perverse liquidation incentive, too, but this is the economic one.)

3. The "real protection" from dilution is raising reasonable tranches of capital at a monotonically increasing series of valuations, which valuations actually correspond to a clearing price between bid and ask. Three key items here: "reasonable tranche," "monotonically increasing," and "clearing price."

a. Reasonable tranche: raise reasonable sized rounds, because huge rounds create weirdness (lopsided power, outsized compensatory "asks" by investors, etc.).

b. Monotonically increasing: needless to say, down rounds are the big dilution problems. Sometimes they happen because life isn't perfect and problems come up. Sometimes they happen because the company screwed up and raised too much at too high a valuation previously.

c. Clearing price: if the company and investor actually agree on the "true" valuation then it's easy. If they still try to force a deal where the company wants a crazy "optical" valuation that the investor doesn't really see, then you'll get layering-on of sweeteners to make the effective valuation much much lower than the notional, but all kinds of terrible side effects may accrue.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#83

Post by alttab »

tvladeck wrote: post #19
BlewisJS wrote: post #15

Earlier quoted context omitted.

You can't presume that they exercised early voluntarily. If you leave the company, you typically have 90 days to exercise options or they are forfeited back to the company. In other cases, they actually just expire after enough time passes, which again forces employees to exercise before a liquidity event.

Fair point. I did make that assumption.

To your point though, and to press it further - if companies require that you exercise your options in a window after they vest or they expire - they were never really options to begin with. In essence, the vesting schedule on expiring options is a timeline for you forking over risk-filled cash or forfeit part of your "compensation."

The advice seems to suggest if their options expire if you don't buy them at a certain point (except for leaving the company, which makes sense), say no and ask for cash. If they can't pay, now you know where you really stand.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#84

Post by Xcelerate »

nissimk wrote: post #78
ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

Information asymetry is the way people get screwed over in financial transactions. Most potential startup employees have no idea what common or preferred shares are. Let alone all of the other details like dilution, liquidation preference, tax implications of employee stock options and lack of liquidity in private securities. Potential startup employees should learn about these things and understand how to protect th…

Where can one learn about these?

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#85

Post by TDL »

mathgeek wrote: post #43
caseysoftware wrote: post #27

Earlier quoted context omitted.

Yes, this strikes me as very Enron-ish throughout.

Interesting. In what ways? Enron was a public company that committed fraud.

I believe before the collapse Enron's management would berate employees who sold stock in their 401-ks. Management actively mislead their own employees. I've heard this from a number of sources (including a family friend who left Enron a couple years before the collapse.) Obviously, take my comment with a grain of salt since it's mostly based on anecdote.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#86

Post by jonas21 »

alexatkeplar wrote: post #65

By joining a late stage (vs early stage) startup as an employee, you are trading execution risk for valuation risk. At an early stage startup, your shares are essentially free to purchase - especially if you join a company which hasn't had a formal external valuation event (like a fundraise) yet. All your risk is around the startup evolving into a successful business with a high value. Join a late-stage startup, and…

> The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events.

And, like a real unicorn, it doesn't exist. At least not in today's funding environment.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#87

Post by wdewind »

nemo44x wrote: post #51
ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now! I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds. The worst is I've seen people reject job off…

> Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble?

This is not an accurate heuristic for "how good is a company doing." There are many legitimate reasons you'd want to pay someone in stock instead of cash.

> And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable.

This is definitely something to consider. If your options agreement allows you to early exercise you can avoid all of the tax penalty and remove the golden handcuffs if you exercise immediately (before you have realized a gain) and file your 83-b with the IRS. If it doesn't allow early exercise you probably don't want anything to do with it.

> I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.

I'd recommend learning as much about business as possible, and consider working at a startup an investment, and you an investor. If you aren't comfortable investing then you shouldn't be working in startups. There is basically no reason to work at a startup if you aren't favoring the equity ($, work-life balance, perks etc. are all going to be better at BigCo).

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#88

Post by tptacek »

JonFish85 wrote: post #28
tvladeck wrote: post #19

Earlier quoted context omitted.

Fair point. I did make that assumption.

Again though nobody forced them to exercise. It accelerates the timeline, but it's not forcing anyone into anything more than having to make a decision.

Typically, when you leave a company that issued you incentive options, you are forced to execute within 90 days or forfeit the shares entirely.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#89

Post by ditonal »

woah wrote: post #81
ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

Most of this seems like a reasonable comment, but are you actually angry that people are learning to code?

Absolutely not! I do, however, think it's extremely questionable when VCs lobby for taxpayer money to fund for-profit bootcamps that they invest in to train people for the skills their companies need. It's outsourcing the cost of training to the taxpayer, all while driving up the value of their bootcamp investments. Instead, these companies should drop their "we're a poor startup that needs people who can hit the ground running", and actually train people themselves. These "startups" are funded by extremely well-off VCs who could afford it. They shouldn't ask the middle class to pay for it for them.

Democrats and VCs have a very tight nit relationship.

http://www.latimes.com/business/technology/la-fi-tn-obamas-1...

http://www1.nyc.gov/office-of-the-mayor/news/114-15/mayor-bi...

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#90

Post by tptacek »

davidu wrote: post #11
untog wrote: post #4

The fact that some employees have to pay taxes based on the valuations that VCs dream up terrifies me.

Only those who early exercise, or exercise their stock as it vests. They did this to try and optimize for long-term capital gains. For most employees who leave their option grants as options, there is nothing to worry about. When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value…

The premise of this argument is that the people who earned those options remain employees until the company gets liquid. If you leave, you're usually required to execute.
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