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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

#891

Post by gen220 »

kelnos wrote: post #865
gen220 wrote: post #564

Earlier quoted context omitted.

I often think about how if more people understood the median cap table life cycle from Seed to Acquisition/Shut-down/IPO, there'd be half as many VC-funded companies and twice as many bootstrapped companies every year. Thank you for sharing your experience towards that goal. Unless you're doing some niche b2b thing where you have no personal connections (in which case, why are you doing it at all?), the differential…

I think a part of the problem is that if you've chosen a market where VCs do want to invest, and you decide not to take their money, someone else is going to take it, build and grow faster than you, and out-compete you into the ground. Sure, maybe their longer-term trajectory is unsustainable growth and disappointing surprises for founders and employees, but by that point your bootstrapped company has already shut do…

> I think a part of the problem is that if you've chosen a market where VCs do want to invest, and you decide not to take their money, someone else is going to take it, build and grow faster than you, and out-compete you into the ground.

This is in the talking points for the VC value prop, but to be honest when you get to the bottom of all the qualifiers and explore all the examples in depth, it's a flimsy defense.

Of course you're not going to bootstrap a company with large, up-front capital requirements. That removes the risk factor "choose a market where (smart) VCs invest". It means you're fishing in $100mm up to maybe $1B markets.

Now you're left competing against the (dumb) VCs who are spinning their wheels trying to win in a market where capital doesn't actually help you grow.

That means all you have to do is survive and grow YoY – which is the default state of a sensibly-run company – until the VC-funded people give up and move on, (which they are contractually bound to do within 10 years). And even if they stick around, there are very few markets that are winner-take-all.

I think sometimes we fall prey to the mentality of thinking that things are harder than they are. The investor-funded universe completely dominates tech media, so it's perhaps not surprising. But yeah, if you think critically about each of these steps, we aren't as dependent on them as meets the eye. 100x more the case if you have good technical and business skills on your founding team.

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

#892

Post by gen220 »

stevesthrowaway wrote: post #675
gen220 wrote: post #454

Earlier quoted context omitted.

You should be candid with them that you're uncomfortable with the cash portion of your comp. 5% is an unusually high % of equity, the founders likely assumed you were happy to trade-off cash for equity. Series A is usually a dilutive round and it's normal to grant people like yourself more options to compensate for the dilution (i.e. to keep you at 5% of the new cap table). My 2¢: I know people in your position who h…

Thanks, I feel a little better about the situation. I pushed pretty hard for the equity. One of the founders knew me and sought me out, so I leveraged that a bit. When I signed on, the plan was to raise a new round within a 2 months, which would be accompanied by a bump. But for reasons not worth getting into, we waited about 9 months. I padded my bank account in preparation, and I'm just about to tap into savings, w…

That's good! As long as there's mutual trust, honesty and transparency are always the best strategy. Wishing you the best on your fundraise!

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

#893

Post by Finbarr »

kelnos wrote: post #839
tomrod wrote: post #445

Earlier quoted context omitted.

They don't control it.

If you, the founder, only own 20% of the company, the investors absolutely do control it (absent super-voting shares, anyway). You can propose shutting down the company, but the investors can fire you and bring in a CEO who will keep it going.

Not necessarily true. Most control is exerted at the board level through board director seats. You can have a low % and a majority of board director seats, depending on the leverage you had in each round raised.

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

#894

Post by wnolens »

kelnos wrote: post #875
wnolens wrote: post #500

Earlier quoted context omitted.

I almost left for an ultra early startup, still running on seed money. They offered a typical SDE2-Senior salary + 1%. I was kind of offended. I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them. Even IF they achieved a 100-300M exit, after dilution I would be compensated at best par with a FANG Senior over abou…

Oof. The CTO not having the chops to build the core technology would have been a huge red flag for me. At a 75-person startup the CTO should transition to be more of a manager and strategy person than a builder, but at time of founding they should be doing 100% of the building. Hiring the first engineer should be a way to increase the pace of tech work, not start it. If none of the founders are technical enough to bu…

It was my opinion, but yes. Highly technical founder CTO, but to me there's a chasm between "can write the code for a b+tree" and "can build and then operate a data platform service". They can build an MVP and impress an investor, but that's not a sellable product - not even remotely close.

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

#895

Post by Finbarr »

kelnos wrote: post #840
Finbarr wrote: post #379

Earlier quoted context omitted.

Nobody is forced to become a founder. A lot of people are naive to the sheer level of stress involved, and think it’s going to be easier than it actually is. You don’t find out just how stressful it is until you’re already super committed, have raised money, have employees, and there’s no easy way out without screwing a whole bunch of people over. Founders tend to only talk about the good things happening at their co…

> tech press tends to focus on the successes. On the flip side, though, any regular HN reader has likely seen dozens of accounts written by startup founders whose companies have failed. And there's quite a bit of overlap between the set of HN readers and the set of past, current, and likely-future startup founders.

Yes and optimism bias leads people to believe they won’t experience those negative events. Everyone must believe they are going to do better than the median outcome when they start a company.

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

#896

Post by vonmoltke »

scruple wrote: post #824
erik_seaberg wrote: post #793

Earlier quoted context omitted.

Some companies might make you hold for a few months until the next earnings report and trading window. After that it depends on your tolerance for risk and your attitude about the IRS.

How does that work?

Most (all?) public tech companies have policies that prohibit employees from trading the company's stock outside designated windows following a quarterly earnings release.

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

#897

Post by erik_seaberg »

scruple wrote: post #824
erik_seaberg wrote: post #793

Earlier quoted context omitted.

Some companies might make you hold for a few months until the next earnings report and trading window. After that it depends on your tolerance for risk and your attitude about the IRS.

How does that work?

Earnings reports happen once a quarter between the company and the public. A couple of business days after that, employees (without material nonpublic info) may trade company shares for the next month or so. Maybe you can't sell April shares until mid-July, and then you have to decide whether to wait until next July to minimize tax on gain.

Sometimes you can elect to sell every released share in a quarter, or file a 10b5-1 plan with a schedule, but you have to do that during a trading window.

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

#898

Post by Aerbil313 »

booleandilemma wrote: post #725
phone8675309 wrote: post #667

Earlier quoted context omitted.

> If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. Not really enough to de-risk your life although still might be welcome (and employees would appreciate having the choice). $20k would be a life changing amount of money for me right now

What would you do with $20k that would change your life?

People often forget how financially limited they were when they were young. There are even college freshmen reading your comment for whom $1k would change their lives. Such as this one who is currently contributing to Textadept on school machines from 2013 on NixOS installed on a USB drive (don't recommend, CPU I/O wait time is frequently >%50) because he spilled coffee on his laptop last semester.

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

#899

Post by [deleted] »

geepeeyoudata wrote: post #888
davedx wrote: post #882

Earlier quoted context omitted.

No liquidity? He said the company went public… I know people don’t get the best deals on startup equity but something doesn’t add up here

>> No liquidity? He said the company went public… >> I know people don’t get the best deals on startup equity but something doesn’t add up here Many startups stay private for 7-10 years. Most go broke, shut down, or have face-saving acqui-hires with no economic gain. If you leave at year 1,2,3,4,5, or 6 you have to pay UPFRONT to exercise the options and pay taxes UPFRONT. But you are stuck with private stock you can…

[deleted]

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

#900

Post by psandor »

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…

"mostly profit someone else who did nothing but write you a check"

There is quite a bit of work involved in reaching the point where you write a check for a Series A round. Also, the better VCs spend significant time with their portfolio companies.

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