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Startup Equity 101

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Re: Startup Equity 101

#81

Post by bix6 »

andrew_lettuce wrote: post #71
Eridrus wrote: post #52

Earlier quoted context omitted.

I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup. The details all matter, but they all matter far less than that fact. People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.

Ok, now tell us how we differentiate across 10-person, pre-revenue startups. This advice is like buy low, sell high. Thanks.

You conduct your own due diligence and make an educated decision. You won’t necessarily pick a successful one but you can avoid an obvious failure.

Re: Startup Equity 101

#82

Post by gen220 »

Eridrus wrote: post #52
TuringNYC wrote: post #12

>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price.... The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely th…

I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup. The details all matter, but they all matter far less than that fact. People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.

I don't think that's the main takeaway. IMO, the main takeaway is there are, in the best case (exit for >100% of latest 409a), ~three classes of shareholder in a startup: those with preferred shares (investors, occasionally founders if they have a lot of leverage), those with >=1% fully diluted common shares, and everyone else.

In the most common positive case (i.e. sale price is If you're in the lower class, you should assume your equity is worth zero. No matter what startup you're joining. You're here for the cash comp and to be surrounded by a growing cast of ambitious, upwardly-mobile people.

If you're in the "middle" class and highly value future wealth over present matters, you should act "like a founder" (sacrificing your life to, one day, make 1s or 10s of millions) if the company is on the ups, and you should act "like a mercenary" (leaving to some place where you can resume acting "like a founder") if the company is permanently plateauing or on the downs.

If you're in the "upper" class it's a different game entirely. That's not really the subject of this thread (valuing equity from a typical prospective employee's POV), so I won't go there.

Whether a "good startup" (great founders, great business, great investors) results in "a meaningful outcome for holders of =1% and founders, of course, so they should value their equity differently.

Edit: the "magic" that many startups try to get away with is convincing people in class X that they're actually in class X+1 (even X+2!) and that, you should therefore act like it!! Be wary.

Re: Startup Equity 101

#83

Post by achillesheels »

gen220 wrote: post #82
Eridrus wrote: post #52

Earlier quoted context omitted.

I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup. The details all matter, but they all matter far less than that fact. People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.

I don't think that's the main takeaway. IMO, the main takeaway is there are, in the best case (exit for >100% of latest 409a), ~three classes of shareholder in a startup: those with preferred shares (investors, occasionally founders if they have a lot of leverage), those with >=1% fully diluted common shares, and everyone else. In the most common positive case (i.e. sale price is If you're in the lower class, you sho…

Don’t take a salary if you’re in the upper. Live for the equity as a price of the pain of solving a real world problem. Not the vanity of launch parties or bell-rings X-D //that’s meant to be an emoji

Re: Startup Equity 101

#84

Post by duped »

ipaddr wrote: post #56
duped wrote: post #39

Earlier quoted context omitted.

We still get paid obscene salaries fucking around with the bonus of a shot to make even more obscene money. For all the complaining about options there's little acknowledgement of how little startup work contributes to society relative to the money we rake in from people willing to fund it.

Startup positions vs regular positions often pay much lower. Obscene salaries and startups (which are mostly bootstrapped) don't go hand in hand. Startup founder who raises gets to play with obscene money. If you come across obscene money startup jobs share them. Tons of unemployed developers lurking who would take % of obscene.

Startup positions pay significantly better than everything but FAANG and are easier to get than FAANG.

Re: Startup Equity 101

#85

Post by tptacek »

vrosas wrote: post #26

One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true: 1. the founder already has generational wealth and this current company means practically nothing to them. 2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.

I'm working for a founder with a previous successful exit and neither of those statements are true of him.

Re: Startup Equity 101

#86

Post by CGMthrowaway »

TuringNYC wrote: post #12

>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price.... The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely th…

> The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely theoretical.

This is not true in Australia, where they are proposing a new 15% tax on gains attributed to the portion of an individual's retirement account larger than $3 million, including unrealized gains. That means people must put a dollar value on each asset at the end of each income year, including startup shares or venture fund interests.

Re: Startup Equity 101

#87

Post by fatnoah »

mvkel wrote: post #61

So what is your equity really worth? "The difference between the most recent FMV (409A) valuation and your exercise price." This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. A better description would be "the most recent 409A valuation, minus preferred treatment, and your exercise price." All…

>This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares.

>Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name

I've worked at 4 different startups. Two were acquired and two are still going, with one making a small profit and being a lifestyle business for the founder, and the other having a great product and still growing.

For the two acquisitions, one of which I held 1% equity in, the value of my options was $0, which was very disappointing. In that case, I did get a cash bonus as the VP Engineering and an offer from the acquiring company that was 3X my cash comp, but the stock was worthless.

At this point in my career, I value stock in private companies at exactly $0 and treat it like a nice bonus should it ever amount to anything.

Re: Startup Equity 101

#88

Post by CPLX »

bcyn wrote: post #29
CPLX wrote: post #22

Earlier quoted context omitted.

> the 409a is only going to show you the maximum possible value While the points about uncertainty of options are quite accurate, this detail isn’t really true. For the most part a 409a is the lowest reasonable valuation the company could talk the auditors into accepting. The lower it is the less tax paid and everyone knows that.

You're correct about valuation, but the parent post was meant to address "how much liquid dollars should you expect to receive vs. 409a." You are likely to receive less in most cases (read: unless there are wildly successful public liquidity events) due to liquidation preferences.

Any reasonable 409a will be fully aware of those preference terms and will have factored them in.

Re: Startup Equity 101

#89

Post by arealaccount »

atemerev wrote: post #67

So basically being a startup employee is a very bad deal, and you should either be employed at big tech, or be a founder yourself. But how startups find early employees then?

In my experience certain people enjoy working at startups. There are benefits to them outside of max comp that make it desirable.

Re: Startup Equity 101

#90

Post by dml2135 »

mlinhares wrote: post #77
usrnm wrote: post #66

Earlier quoted context omitted.

That all is correct and leads to a very simple conclusion: working for a startup has a very low probability of making you rich. Doesn't mean that people shouldn't do it, but it's better to have healthy expectations.

I still think its good for college grads, gives you a lot of leeway and space to play around with many different hats and find one that fits you better. Incredibly lousy way to make money though, odds you will hit jackpot are none unless you're one of the founders and even then odds are still small.

I mean, it's still a pretty good way to make money, when compared to other fields and not to other engineers at FAANG.
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