_______ __ _______ | |
| | |.---.-..----.| |--..-----..----. | | |.-----..--.--.--..-----. | |
| || _ || __|| < | -__|| _| | || -__|| | | ||__ --| | |
|___|___||___._||____||__|__||_____||__| |__|____||_____||________||_____| | |
on Gopher (inofficial) | |
Visit Hacker News on the Web | |
COMMENT PAGE FOR: | |
Startup Equity 101 | |
fathermarz wrote 1 hour 27 min ago: | |
Depending on the structure of the legal entity, even when the company | |
you work for gets acquired, it may be an asset purchase for the IP and | |
team instead of a stock purchase. I went through this last year and my | |
options became worthless. Itâs unfortunate because it came down to | |
decisions made years prior that affected the outcome at exit time. | |
gorgoiler wrote 17 hours 48 min ago: | |
I know too many people whoâve had their stock zeroed out through | |
dilution, preference vs common, partial buyouts where only some | |
founders and investors get to sell, spurious âbad leaverâ status | |
for people who work for so-called competitors, forced resignations | |
within particular timeframes that cause stock forfeiture, and on and on | |
and on. | |
It would be an interesting addition to this guid to see these scenarios | |
collected and enumerated with some tips around how to get caught out. | |
leguy wrote 15 hours 54 min ago: | |
I would have loved to see such a list when I joined a startup. I'm | |
not sure it's possible to make a comprehensive list, given all the | |
various startup structures and agreements, but still a "top 10" list | |
with some guidance on how to protect yourself would be valuable. | |
Or... an SLM where you feed the model your contract and it provides a | |
list with recommendations tailored to your situation. | |
windowshopping wrote 17 hours 58 min ago: | |
This guide leaves out something extremely important that just fucked | |
over a friend of mine: double-trigger RSUs. My friend thought he was | |
getting a certain amount of stock annually, but in fact he only got it | |
if he was still employed there when the company went public. So after | |
six years they fired him right before going public a month later, and | |
he got nothing. And in order to get any severance, he had to sign an | |
agreement giving up any right to pursue any legal claims against them. | |
I didn't even believe this was possible at first. Almost no startup | |
equity guides mention this. Read your contracts very carefully, people! | |
semitones wrote 16 hours 22 min ago: | |
The guide mentions double-trigger RSUs | |
windowshopping wrote 9 hours 57 min ago: | |
> If you have restricted stock units (RSUs), everything is pretty | |
straightforward. You do not have to purchase RSUs. You just get | |
them at no cost as they vest. Most private companies do something | |
called double-trigger vesting. That just means you are also not | |
taxed as they vest. Instead, you get taxed for your RSUs at some | |
second trigger date, which is usually set to be the date of the | |
future big liquidity event (at ordinary income). One big drawback | |
with double-trigger RSUs is that you are not really able to sell | |
them in tender offers or other pre-going-public liquidity events. | |
Doesn't exactly mention the important part, that you don't | |
necessarily get anything, does it? | |
atemerev wrote 19 hours 24 min ago: | |
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? | |
dgunay wrote 9 hours 15 min ago: | |
There are some non financial benefits. | |
Many early stage startups are a low oversight environment. This can | |
mean lots of things, beneficial to certain kinds of people: easily | |
push code to prod, touch production databases directly, work weird | |
hours, fix almost any problem you want yourself, know how everything | |
fits together, have more control over your work machine, etc. | |
Not all startups are grueling to work for. I've been at startups | |
where I barely worked 4 hours a day at times. Results matter more. | |
Finally, if you just really hate the big tech interview process, you | |
can get into many startups with minimal prep. Not saying it's a | |
financially optimal use of one's time, but it is a thing some people | |
value. | |
xboxnolifes wrote 12 hours 42 min ago: | |
Some people don't like the environment of big companies. There are | |
finite positions at big companies, not everyone can be there. Not | |
everyone is a founder. | |
arealaccount wrote 13 hours 31 min ago: | |
In my experience certain people enjoy working at startups. There are | |
benefits to them outside of max comp that make it desirable. | |
mvkel wrote 1 day ago: | |
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 of that is moot though, as an employee wouldn't have access to the | |
cap table or liquidation stack. The short answer is you'll have no idea | |
how much your equity is worth until you get the wire transfer into your | |
bank account. | |
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. | |
fatnoah wrote 14 hours 15 min ago: | |
>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. | |
phonon wrote 1 day ago: | |
409a valuations explicitly take into account share | |
classes/liquidation preferences. That's kind of the point. If the | |
Preferred last sold for $1.00, the 409a might value the Common at | |
$0.10 per share, which would then typically be the FMV strike price | |
set in the next round of issued options. | |
If the Common FMV has been steadily increasing from when you received | |
your options, that would typically be a positive sign. Of course, | |
409a valuations are based on mathematical models. Since Common shares | |
are so illiquid in a private start-up, you don't "really" know what | |
they're worth until a liquidity event. | |
mvkel wrote 2 hours 53 min ago: | |
Until the next financing round which might include more liq pref, | |
full-ratchet anti-dilution, new shares issued, etc. | |
Ultimately the 409a is for the IRS, not a mark for employees | |
fluorinerocket wrote 1 day ago: | |
I've concluded that options are a scam after owning them in many | |
companies. It's never amounted to anything | |
bravesoul2 wrote 1 day ago: | |
Sometimes they are not. I think for post startup companies it is | |
somewhat possible to put a value on ESOP then risk adjust for you | |
losing the job, leaving etc. I have been paid out but think bonus | |
cash for a holiday money not life changing. I kept it in post IPO and | |
got more but then anyone could have done that post IPO. | |
duped wrote 1 day ago: | |
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. | |
ipaddr wrote 1 day ago: | |
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. | |
duped wrote 14 hours 33 min ago: | |
Startup positions pay significantly better than everything but | |
FAANG and are easier to get than FAANG. | |
ipaddr wrote 1 hour 35 min ago: | |
Where would be a good place to look for these type of startups? | |
bravesoul2 wrote 1 day ago: | |
Obscene salary is almost an oxymoron. | |
Maybe CEOs get that. Most people who get obscene money get it from | |
some kind of investment. | |
lotsofpulp wrote 1 day ago: | |
Options at non publicly traded companies are worth zero. Or should | |
be valued the same as a lottery ticket. | |
duped wrote 1 day ago: | |
Tell that to the IRS | |
koolba wrote 1 day ago: | |
Whatâs there to tell? Option grants that are not exercised have | |
no tax consequence. | |
dilyevsky wrote 17 hours 22 min ago: | |
There's a 10y max ttl on ISOs to exercise or lose it. Also if | |
you leave the company it's 90d. You typically can convert ISOs | |
to NSOs but you lose some of the tax advantages of ISO (not a | |
tax/investment advice, etc etc) | |
wslh wrote 1 day ago: | |
They play their own game like a boss. | |
hamburglar wrote 1 day ago: | |
What you should understand is that they are a longshot. Like, worse | |
than 10 to 1. Iâve gotten lucky and made a truckload of money on | |
them, and know many people who have done the same. Iâve also had | |
them be an utter waste of money. Itâs very much a gamble and | |
itâs unlikely to pay off. This doesnât make it a scam. | |
fluorinerocket wrote 1 day ago: | |
A lottery ticket is legal but expected value is negative. Same with | |
casino games. Sure it's legal and sometimes people win but in my | |
book it's a scam, even if not technically one. | |
What I particularly resent is the pretence from companies that a | |
lower salary can be compensated by options. Such BS | |
bravesoul2 wrote 1 day ago: | |
No need to resent. Just don't take the job. There are jobs that | |
pay the low salary and no magic beans either! | |
takklz wrote 1 day ago: | |
Just something Iâve seen lately at all of the startups Iâve worked | |
at⦠| |
The founders, early investors, etc., will cash out way before you do | |
and you will not have the same ability to sell as they did. Iâve seen | |
it tear companies apart. YMMV | |
fluorinerocket wrote 1 day ago: | |
Yes in my experience they made out like bandits while employees were | |
locked out for a while after IPO. | |
vrosas wrote 1 day ago: | |
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. | |
tptacek wrote 14 hours 23 min ago: | |
I'm working for a founder with a previous successful exit and neither | |
of those statements are true of him. | |
spyspy wrote 9 hours 10 min ago: | |
OP is making broad statements, and you might even be right about | |
your guy. But even if your founder is not super wealthy from the | |
first exit, your current startup could go under and if that happens | |
employees will be left with absolutely nothing. Him, on the other | |
hand, will probably have a golden parachute to land with. Either | |
way he will be now be a "serial entrepreneur" and will be able to | |
utilize his VC friends to start the next thing in no time. He's | |
going to be fine. | |
And there's no telling what he will do if your startup does | |
actually end up being worth something. Transfer the IP to a new | |
company and fire everyone? Introduce new share classes for | |
investors and dilute everyone else to zero? Sell the employees | |
(acquihire) to some horrible BigCorp⢠and then retire to Hawaii? | |
No shortage of stunts they could pull once real money is on the | |
table. | |
tptacek wrote 7 hours 23 min ago: | |
I've been on HN since 2007 and believe I have seen literally | |
every possible permutation of this particular debate, and I don't | |
have a stake in it. Value your equity at $0 unless you have a | |
very good reason not to. The comment I replied to make | |
falsifiable claim, and I felt it was worth falsifying, so that's | |
what I did. | |
semitones wrote 16 hours 23 min ago: | |
This seems highly cynical. If the current company means practically | |
nothing to them, why would they be bothering with it at all, | |
especially given that they could be doing almost anything else they | |
wanted, given their generational wealth? | |
dymk wrote 15 hours 29 min ago: | |
Theyâre doing it for fun / dick waving contest / itâs all they | |
know / âsigma grindsetâ mentality | |
Why do dogs chase frisbees? | |
throwawaythekey wrote 1 day ago: | |
The first time founders I had couldn't keep 100% of the equity out of | |
the VCs pockets, so YMMV. | |
bravesoul2 wrote 1 day ago: | |
A special case of early stage share options aren't worth shit. | |
bradlys wrote 1 day ago: | |
> If you join an early stage company and you have a decent amount of | |
excess capital, early exercise everything and file an 83(b) election. | |
The reasons for doing this: starting the QSBS clock, starting the long | |
term capital gains clock, not needing to worry about your options | |
expiring. | |
I don't think this is ever worth the risk. If you're even thinking of | |
doing this for QSBS purposes... the amount of tax you'd incur is way | |
too much. Even if you have "excess" capital, you may as well put the | |
$50k+ into a shitcoin and you'd see a much quicker return (or lack | |
thereof). For most people where $50-100k+ in tax is a trivial amount to | |
worry about, why are you joining as an employee? Clearly you've made a | |
lot of money in the past... Just be a founder instead. You're taking on | |
just as much risk. | |
> If you join an early stage company and you donât have much | |
capital, donât do anything just yet. Try to negotiate for an extended | |
post termination exercise window. | |
For 99%+ of people joining startups as regular employees, this is what | |
you should be doing. If you leave the company before it becomes liquid, | |
exercising the shares can be super risky. We've been waiting on several | |
very well known companies to go public for a long time now. Who knows | |
when they'll go public. At that point, you've spent possibly hundreds | |
of thousands to exercise your shares, hundreds of thousands more in | |
taxes... and they might be worthless and you can maybe deduct $3,000/yr | |
for who knows how long. | |
> If you can get liquidity at some point, and you think liquidity | |
would improve your life, you probably should. | |
It is unlikely though. | |
IMO, until tax law (and especially market conditions) changes - I do | |
not believe in joining any private company unless you are convinced | |
they will IPO within the year. This is assuming you care about | |
compensation significantly. | |
woodrow wrote 1 day ago: | |
FYI the whole point of early exercise + 83b election is that you | |
"pay" all tax due, but the tax due is $0, so you don't pay anything. | |
There _is_ non-trivial risk of sinking liquid cash into illiquid | |
startup stock, but this risk has nothing to do with tax. | |
bradlys wrote 15 hours 44 min ago: | |
If youâre joining after thereâs been any money raised, youâ… | |
likely triggering some taxes. | |
How many people are joining startups that havenât had a 409A yet? | |
Iâve joined seed stage companies and even then - thereâs a FMV | |
that would trigger taxes. | |
My more general point is that you should be a founder (cause itâs | |
what you want to do) or join a pre-ipo (cause you need | |
employment/money). | |
TuringNYC wrote 1 day ago: | |
>> 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 theoretical. Further, if you | |
cannot see the cap table and the preference overhang -- and most | |
startups wont let you see it -- then you have no idea what the real | |
price is regardeless of a theoretical 409A value. | |
Even if you can see the cap table, spending today-dollars and | |
exercising options for the right to sell stock 5 or 10yrs into the | |
future almost never works out -- the cone of uncertainty across 5 or | |
10yrs is far too great. The better move would probably to be to use | |
that money to purchase long-dated LEAP call options on the Nasdaq | |
Composite | |
CGMthrowaway wrote 14 hours 15 min ago: | |
> 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. | |
Eridrus wrote 1 day ago: | |
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. | |
gen220 wrote 15 hours 3 min ago: | |
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 <100% of | |
invested capital), or negative cases, the three collapses into into | |
preferred holders vs common holders. | |
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% of | |
common shares" involves so much luck and non-determinism that's | |
beyond your influence as a <1% employee that you would be foolish | |
to write it off to anything other than zero. The same is not true | |
for >=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. | |
achillesheels wrote 14 hours 58 min ago: | |
Donât take a salary if youâre 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 //thatâs | |
meant to be an emoji | |
davedx wrote 16 hours 1 min ago: | |
IME picking a good startup is extremely difficult, because even the | |
ones with PMF and growing customers can so easily fail at | |
execution: the human factors are so huge there. You can definitely | |
narrow the field (use common sense: evaluate their business), but | |
long term itâs impossible to know. | |
andrew_lettuce wrote 16 hours 41 min ago: | |
Ok, now tell us how we differentiate across 10-person, pre-revenue | |
startups. This advice is like buy low, sell high. Thanks. | |
bix6 wrote 15 hours 15 min ago: | |
You conduct your own due diligence and make an educated decision. | |
You wonât necessarily pick a successful one but you can avoid | |
an obvious failure. | |
jiveturkey wrote 23 hours 13 min ago: | |
Not sure if you mean that seriously, or with tongue in cheek. It | |
takes a very healthy dose of luck and market timing to be | |
successful. Even the VCs, the experts, don't know how to pick | |
winners. They expect a 90% failure rate, and this is among the ones | |
they picked! | |
As an employee you don't have the same profit structure in play -- | |
you can only work at one startup at a time. You cannot spread your | |
bets around and let that one winner make the math work. You have to | |
be 10x better at selecting a startup than the experts, probably | |
100x better if you expect to beat a big tech salary. | |
usrnm wrote 19 hours 54 min ago: | |
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. | |
mlinhares wrote 15 hours 48 min ago: | |
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. | |
dml2135 wrote 13 hours 18 min ago: | |
I mean, it's still a pretty good way to make money, when | |
compared to other fields and not to other engineers at FAANG. | |
bradlys wrote 15 hours 39 min ago: | |
If a college grad is choosing between faang and no-name | |
startup, their career will likely go over much better than | |
no-name startup. Having the big name on your resume does | |
wonders. Even for experienced candidates, keep taking the big | |
name. The market rewards it. (Including startups - | |
compensation packages for people with faang resumes usually | |
are better) | |
fragmede wrote 1 day ago: | |
> spending today-dollars and exercising options for the right to sell | |
stock 5 or 10yrs into the future almost never works out | |
There are places that will, no recourse, loan you the money to | |
exercise and pay the tax, in exchange for some percentage of the | |
profit, provided it's for a company they like. | |
Meaning, they lend you the money, but if there's no IPO/liquidity | |
event, you don't owe them any money. 70% (say) of a big number may | |
not be as big as 100% of a big number, but 100% of zero is $0. Which | |
isn't financial advice, just a bit of math. | |
ipaddr wrote 1 day ago: | |
If you find a company they accept you should keep your shares if | |
possible. Most companies will not be accepted for good reason. | |
TuringNYC wrote 1 day ago: | |
>> There are places that will, no recourse, loan you the money to | |
exercise and pay the tax, in exchange for some percentage of the | |
profit, provided it's for a company they like. | |
Yes they do this, but only for select companies. They wont touch | |
most startup equity. | |
SkyPuncher wrote 1 day ago: | |
Correct, the 409a is only going to show you the maximum possible | |
value. | |
Realistically, investors get their money back first, so 50% (picking | |
an arbiter number) of that valuation value wonât ever been seen by | |
employees. Then it gets even worse with multipliers and preferences. | |
TuringNYC wrote 1 day ago: | |
>> Then it gets even worse with multipliers and preferences. | |
Yeah, and most companies wont share the cap table with you, so you | |
do not know the multipliers and preferences. Its like you get | |
$(409a/X) in value, but you dont know what X is and they wont tell | |
you -- but you still have to buy in or lose everything (you | |
typically have to exercise all options upon departure, or lose it!) | |
Then, once you exercise, you wait for 5yrs to 10yrs for a liquidity | |
event, if the company even survives that long. My annual discount | |
rate would be like 10% or higher. | |
CPLX wrote 1 day ago: | |
> the 409a is only going to show you the maximum possible value | |
While the points about uncertainty of options are quite accurate, | |
this detail isnât 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. | |
bcyn wrote 1 day ago: | |
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. | |
CPLX wrote 14 hours 14 min ago: | |
Any reasonable 409a will be fully aware of those preference | |
terms and will have factored them in. | |
x0xrx wrote 1 day ago: | |
Plenty of (non-VC backed) startups raise some money and then | |
sell privately; itâs often the case that preference does not | |
cause the common stock value to drop below the most recent 409a | |
in these cases. | |
(In my experience, the 409a is on the order of 20% of the most | |
recent raise, and preference is not more than 50%, in my area. | |
And obviously you hope to sell for more than the last raise!). | |
FreakLegion wrote 1 day ago: | |
It's the preference and its multiplier that gives investors their | |
money back first. These aren't different things, they're one thing, | |
and generally only matter if the company exits for less than the | |
valuation the investors invested at. The exception to this is if | |
any investors have a liquidation preference > 1x (you should avoid | |
companies where this is the case). | |
Preferences also don't stack with the rest of a liquidity event. | |
E.g. say an investor puts in $100m at a post-money of $1b with a 1x | |
liquidation preference. If the shares go for $900m, the investor | |
gets back their $100m, and that's all. They don't lose money, but | |
they don't make money either. If the shares go at a $1.1b | |
valuation, the investor converts their preferred shares to common | |
shares like everyone else has. The investor doesn't get their money | |
back first and sell more shares on top of that. It's either/or. | |
t0mas88 wrote 1 day ago: | |
Whether it's and vs either/or is the difference between a | |
liquidation preference or a participating liquidation preference. | |
And indeed the more than 1x cases are also problematic for common | |
stock holders. | |
But I do assume the 409A for the fair marker value of the common | |
stock takes these into account? Not a US tax expert :-) | |
FreakLegion wrote 1 day ago: | |
You can construct any arbitrary deal terms you like, of course, | |
but in the Silicon Valley ecosystem nobody you'd want to raise | |
money from does this. Deal terms are broadly standardized and | |
the desirable investors only do clean term sheets. Quoting | |
myself from another thread a couple years ago: VCs make their | |
money from outlier companies, so the competent ones don't | |
optimize for worst-case outcomes. You'll never see a dirty term | |
sheet (e.g. liquidation preference > 1x) from Sequoia, for | |
example, because they don't return 8x on a fund by squeezing | |
pennies out of failed startups. | |
To answer your question, yes, doling out company value to | |
different share classes is part of the 409A calculation. I've | |
used Carta and Pulley for this, but it looks like neither has | |
their docs posted publicly. Here's Pulley's overview page from | |
our last 409A, though: | |
Valuation Analysis | |
To determine the fair market value of the Subject Interest in | |
our analysis, the following steps were taken: | |
Step 1 - Determine the value of the Company using an | |
appropriate methodology(ies) | |
Step 2 - Allocate the value of the Company to the various share | |
classes taking into account share classes economic rights and | |
preferences | |
Step 3 - Apply a discount for lack of marketability | |
(âDLOMâ) to the resulting per share value of common | |
Step 4 - Analyze any secondary transactions that have incurred | |
in the past and determine to what extent they should be | |
considered relevant in determining the value of the Subject | |
Interest in the analysis | |
The system is built to handle non-standard liquidation | |
preferences, but anything more esoteric (e.g. your | |
participating preferred shares) probably needs a bespoke | |
valuation. You won't see this stuff from successful VCs, | |
though. It would be a bit like investing in SpaceX, but having | |
one of the terms be an increase in Earth's gravity. | |
TuringNYC wrote 1 day ago: | |
>>> VCs make their money from outlier companies, so the | |
competent ones don't optimize for worst-case outcomes. You'll | |
never see a dirty term sheet (e.g. liquidation preference > | |
1x) from Sequoia, for example, because they don't return 8x | |
on a fund by squeezing pennies out of failed startups. | |
Serious question -- if you are right, then why hide the cap | |
tables?! Typically cap tables are even hidden from employees | |
who have millions of theoretical dollars riding on the | |
company. | |
Transparency is usually an indicator of above-board terms, | |
and opaque things are usually opaque for a reason. | |
FreakLegion wrote 1 day ago: | |
The cap table is just a spreadsheet of who owns what. | |
Employees don't need to see that level of detail to | |
understand their shares, so there's no particular reason to | |
pass it around, and plenty of reasons not to. | |
Many startups are happy to give relevant details, though, | |
like the percentage of fully diluted shares you own, the | |
last preferred share price, whether any investors got | |
non-standard terms, etc. Rather than asking to see the cap | |
table, ask the questions you want the cap table to answer. | |
If they won't tell you, maybe pass on working there. | |
ldjkfkdsjnv wrote 1 day ago: | |
One thing no one told me: | |
When you cofound a company, its not the equity percent, but who is in | |
control that matters. If you have 40%, and they get 60%, but legally or | |
otherwise (you are the face of the company), then you have control and | |
the 40% is worth more than the 60. | |
If you leave early after cofounding a company, there is no saying what | |
happens to you shares, and likely they will be diluted to almost | |
nothing | |
Its all about control. | |
If you are an employee, either go for a company thats a few years from | |
IPO, a generational startup, or consider the equity worth 0. | |
sdfasdfas134 wrote 1 day ago: | |
This is true. Once you lose control, the VCs will start to appoint | |
their buddies in Atherton in as CEOs, VPs, SVPs, Chiefs of Staff, | |
etc. Eventually you get pushed out. You wont even know what half the | |
people do. | |
Or you get impossible performance plans placed on you (that their | |
buddies wont get) which will mean you either achieve the impossible | |
or you lose your founder stock. | |
If you are giving up voting control, ensure to get a secondary sale | |
to sell some of your stock (5-10mil) so you're set for life. Then you | |
can let the VCs burn the company down...if you really want. | |
leonhard wrote 1 day ago: | |
whatâs a generational startup? | |
shishy wrote 1 day ago: | |
They probably meant a "once in a generation" startup like a unicorn | |
ldjkfkdsjnv wrote 1 day ago: | |
cursor | |
ipaddr wrote 1 day ago: | |
Things are moving fast. Not sure how solid they will be next | |
year. Bigger players want that marketspace. | |
dakiol wrote 1 day ago: | |
Unless you work in SV, I think the advice for the rest of us is: take | |
equity/stocks/options as a lottery ticket. Very unlikely that youâll | |
cash something, therefore base compensation is king. | |
ipaddr wrote 1 day ago: | |
The problem becomes they (the company) talks/treats it as money paid | |
and expects a lower salary (or additional passion like being happy to | |
wake up at 4am to deal with an issue randomly) in exchange. They | |
also want people who buy into the lie. | |
fluorinerocket wrote 1 day ago: | |
Exactly | |
ptero wrote 1 day ago: | |
It's the same thing in the SV. Unless the company is doing liquidity | |
events the early, but post-founder equity is unlikely to pan out for | |
employees. | |
And it can motivate employees to stay at the company way beyond | |
what's good for them, as leaving the company means either abandoning | |
your equity or exercising your options and paying real money for a | |
very risky and illiquid asset. My 2c. | |
ghaff wrote 1 day ago: | |
If you work for a moderately large company, it probably won't go to | |
zero (though it could so you may want to hedge your bets). Not sure | |
what SV specifically has to to do with it. I agree in general about | |
focusing on cash on the barrel. | |
strangelove026 wrote 1 day ago: | |
At a startup where I've exercised 75% of my options because the company | |
seems to be going to a direction where maybe it's public in a little | |
while (and I've got some other investments which prevent me from being | |
over-invested here). I also want to dump all of the shares as soon as | |
they go public and I'm able (employee sale window-wise) as I anticipate | |
that there'll be a pop followed by a drop. This is all anecdotal given | |
what I've observed over the years. As a result of exercising everything | |
early (back into the S&P) on I'll be able to get long-term capital | |
gains which is a motivator. | |
So that all said I agree with the author's take of "maybe" exercising | |
before an IPO is worth it. This is my first time in a role where I've | |
actually got pre-IPO Options. My last role I joined right before the | |
company went public. The agreement there was that I'll get x$ worth of | |
shares where the quantity is determined by the price 3 months or so | |
after the IPO. They went from >$100 per share to like $30 a share which | |
coincided with when I was assigned my shares lol. Oh well. | |
dmitrygr wrote 1 day ago: | |
> I anticipate that there'll be a pop followed by a drop | |
You'll miss both. A 6-month lockup is typical. Sorry, do not pass go, | |
do not collect on the "pop" | |
PopAlongKid wrote 1 day ago: | |
>AMT is a pretty complicated calculation | |
Actually, it is not. It only seems complicated because it is backed | |
into after calculating the regular tax when you use the IRS tax forms. | |
In other words, first you calculate ordinary tax, then you make | |
plus/minus adjustments for the things that are different under AMT. | |
If there was a Form 1040-AMT which simply calculated the AMT the same | |
way we calculate regular tax, you would see that it is actually simpler | |
than ordinary tax. (depreciation is simpler, itemized deductions are | |
simpler, personal exemptions for kids go away, the standard deduction | |
is much higher, and so on). | |
If we did it the other way around - calculate AMT first, then make | |
adjustments to back into ordinary tax, then you'd say ordinary tax is | |
complicated. | |
Most people don't understand that under the TCJA temporary provisions | |
enacted in 2017 and expiring in 2025, most of the changes just involved | |
moving AMT provisions into the ordinary tax calculation. | |
hn_throwaway_99 wrote 1 day ago: | |
I agree AMT itself is not a particularly complicated calculation. But | |
I don't think that was really the point of that quoted statement. The | |
complicated part is figuring out if and when AMT applies to you, and, | |
essentially, for how long it can raise your taxes. | |
As you said, the tax code requires you to calculate your taxes twice | |
- once using the "normal" rules, and another time using the AMT | |
rules, and you pay whichever is higher. So, depending on your | |
individual circumstances, it's non-trivial to know if AMT will apply | |
to you when making particular money movements during the year. Also, | |
if you have to pay AMT in year one, but then in year two the | |
calculated AMT is below your normal tax calculation, you get a credit | |
for the excess amount (i.e. amount over the normal tax from year 1) | |
up to the delta between the normal tax and the AMT amount. In other | |
words, AMT can often times just cause tax to be paid earlier, but the | |
total amount of money (over years), ends up being the same. Of | |
course, the time value of money comes into play - paying a tax | |
earlier is losing money. | |
So, point being, there are complicated considerations to take into | |
account. | |
Oarch wrote 1 day ago: | |
I wonder how much longer this logic can hold. I have equity in the | |
startup I'm at. It's a very complex platform and in a niche / emerging | |
market. | |
Yet could AI feasibly generate a similar (or better) app in a few | |
years? It used to be unthinkable. Now, I'm not so sure. | |
The development cost of software could feasibly drop to negligible | |
levels. It no longer seems like sci-fi, more and more it seems like the | |
inevitable direction of travel. | |
What happens to my equity? Welp. Might not be great news. | |
Aurornis wrote 1 day ago: | |
Thereâs more to a successful business than masking an app. | |
A lot of acquisitions are made by companies that could re-build the | |
acquired product themselves. Theyâre buying the business, brand, | |
and customer base, not the app. | |
ldjkfkdsjnv wrote 1 day ago: | |
This isnt true, nobody knows what will happen when you can very | |
cheaply replicate software. The sales etc are valuable, but when | |
the cost of producing the product goes to zero, weird things will | |
happen. | |
lurk2 wrote 1 day ago: | |
This is magical thinking. If you could clone Facebook tomorrow | |
your platform wouldnât be worth anything without established | |
business processes, network effects, and goodwill. | |
ldjkfkdsjnv wrote 1 day ago: | |
line of business saas is absolutely vulernable. the biggest | |
companies on the planet are not under thread. SAAS companies | |
worth 100M-300M are absolutely vulnerable | |
lurk2 wrote 1 day ago: | |
This has nothing to do with your original claim. | |
henry2023 wrote 1 day ago: | |
Who says the cost of producing software is going to zero? | |
Oarch wrote 22 hours 0 min ago: | |
It's likely heading towards that direction. | |
Just seeing how Veo3 has taken huge chunks of value out of the | |
film/production space in the last week. It's going to be very | |
hard to justify many salaries going forward. | |
haxton wrote 1 day ago: | |
Always treat startup equity as 0 until you've sold it. | |
edoceo wrote 1 day ago: | |
Correct. The motivation for equity comp should be more of "I want | |
to change the world" than the "I want big money". The odds are very | |
against it. | |
Here's some older stats (2017) [1] But searching, you'll find loads | |
more studies on startup/angel/seed. | |
It's like, optimistically, 1/20 | |
[1]: https://berkonomics.com/?p=2899 | |
Oarch wrote 1 day ago: | |
Good advice! Thankfully I do want to change the world (for the | |
better I hasten to add) and so far so good. | |
<- back to front page |