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I don't think many employees have a 1 in 2000 chance of a $10M outcome. I'm OK with the 0.005% odds on a multi-billion exit. Let's stick with that. The probl

by hapless 11y ago

I don't think many employees have a 1 in 2000 chance of a $10M outcome. I'm OK with the 0.005% odds on a multi-billion exit. Let's stick with that. The problem isn't the odds, it's the returns. As another article on HN pointed out, currently, 100% of billion dollar startups (every single "unicorn") have significant investor liquidation preferences. As a result, for a non-founder, a 1% early-stage stake, at the exit of a billion dollar "unicorn", is quite likely to come out as a nice annual bonus at a "normal" firm: $10k to $100k. The one-two punch of dilution and liquidation preference eats up employee equity. a %0.005 chance at $100k comes out to an expected value of $500. Even after we consider the odds, that $100k is four years in the future, with a one year cliff and a lot of individual risks involved, unconnected to the firm's fortunes. The present value is conceivably much lower than the expected value of $500. It's essentially nothing. -- As a postscript: There's nothing intrinsically wrong with offering equity stakes with a negligible present value. Clearly, startups still find talent that satisfies them. The system is working.

alain94040 11y ago
As a result, for a non-founder, a 1% early-stage stake in the exit of a billion dollar "unicorn" is quite likely to come out as a nice annual bonus at a "normal" firm: $10k to $100k. The one-two punch of dilution and liquidation preference eats up employee equity. Your math has to be completely off. If you started with 1% of a company, even after a lot of dilution and liquidation preferences, a $1B exit will give you north of $3M. Not $10k to $100k.
- hapless 11y ago
  It is entirely possible for a $1B exit to leave you with literally $0. Let's say your company has accepted $500 million in funding, with a 2x LP, at a $1 billion valuation. The company exits for $1 billion. Investors take a their 2x LP, for the entire $1 billion. Founders and employees get $0, despite a "billion dollar exit." This is the trivial case. It is not even considering dilution, founders retention of "preferred" shares, the complicated ownership structures that can result from 3-5-10 rounds of funding, or lengthy employee lockouts after an IPO.
  - aetherson 11y ago
    Nobody raises $500M with a 2x liquidation preference at a $1B valuation. And if they did, they wouldn't exit at $1B. This is a complete fantasy scenario.
    - mahyarm 11y ago
      Well there is one company relatively recently that has raised $300M on a $1B valuation. I don't know the liquidation preference, but it happens.
      - aetherson 11y ago
        I guarantee you their liquidation preference is not 2x (or indeed above 1x). And 30% is not 50%. Even if for some unfathomable reason the liquidation preference was 2x, and even if for some even more unfathomable reason the company promptly exited at $1B, that would leave $400M to be distributed to everyone else who had stock.
aetherson 11y ago
Investor liquidation preferences should not affect the value of employee shares if the valuation of the company has gone up steadily. I mean, if you have a "$1B exit" from a company that raised money at a $10B valuation, then, well, yes. But that's not really a $1B exit.

by hapless 11y ago

alain94040 11y ago

As a result, for a non-founder, a 1% early-stage stake in the exit of a billion dollar "unicorn" is quite likely to come out as a nice annual bonus at a "normal" firm: $10k to $100k. The one-two punch of dilution and liquidation preference eats up employee equity. Your math has to be completely off. If you started with 1% of a company, even after a lot of dilution and liquidation preferences, a $1B exit will give you north of $3M. Not $10k to $100k.

hapless 11y ago
It is entirely possible for a $1B exit to leave you with literally $0. Let's say your company has accepted $500 million in funding, with a 2x LP, at a $1 billion valuation. The company exits for $1 billion. Investors take a their 2x LP, for the entire $1 billion. Founders and employees get $0, despite a "billion dollar exit." This is the trivial case. It is not even considering dilution, founders retention of "preferred" shares, the complicated ownership structures that can result from 3-5-10 rounds of funding, or lengthy employee lockouts after an IPO.
- aetherson 11y ago
  Nobody raises $500M with a 2x liquidation preference at a $1B valuation. And if they did, they wouldn't exit at $1B. This is a complete fantasy scenario.
  - mahyarm 11y ago
    Well there is one company relatively recently that has raised $300M on a $1B valuation. I don't know the liquidation preference, but it happens.
    - aetherson 11y ago
      I guarantee you their liquidation preference is not 2x (or indeed above 1x). And 30% is not 50%. Even if for some unfathomable reason the liquidation preference was 2x, and even if for some even more unfathomable reason the company promptly exited at $1B, that would leave $400M to be distributed to everyone else who had stock.

aetherson 11y ago

Investor liquidation preferences should not affect the value of employee shares if the valuation of the company has gone up steadily. I mean, if you have a "$1B exit" from a company that raised money at a $10B valuation, then, well, yes. But that's not really a $1B exit.