5 ms·

You're missing how startup equity works. At these multi-billion dollar companies, employee shares are priced way less than the valuations you are seeing publish

by pbreit 11y ago

You're missing how startup equity works. At these multi-billion dollar companies, employee shares are priced way less than the valuations you are seeing published in the media. So you're almost guaranteed a nice payoff even if the company merely treads water.

birken 11y ago
A low strike price only matters if there is some eventual liquidity for the shares. For common stock this means IPO, acquisition or some other share buyback. Both IPOs and acquisitions generally don't apply to companies "treading water", only the extremely successful and growing ones manage to IPO (and even then it doesn't work out so great for shareholders: see YELP or BOX) or get acquired. Get acquired for less than your ultra-inflated valuation? Then the common shareholders get killed by liquidation preferences. And as for other share transactions, you'll need to find a buyer. Most savvy investors aren't going to be willing to pay huge valuation premiums for common stock. And if they aren't going to pay a premium, then you really haven't gained anything by issuing common shares at a lower strike price. So basically, common shares have lower strike prices because they are worth less.... It isn't some magic trick that automatically benefits employees.
- pbreit 11y ago
  Both YELP and BOX made a lot of people very rich.
  - adventured 11y ago
    Box clearly did not make a lot of people very rich. They made a tiny group of people richer (very early investors). Employees have not done well, as the stock has been a disaster. All of the big rounds that Box raised basically valued them at or above where their stock is now. They're worth $1.6 billion and raised $558 million; their last round was at $2.5 billion. Their latest quarter they did $73m in sales and lost $50m, with rapidly slowing growth. Even worse, they're bleeding significantly on an operating basis, implying the business may never be capable of making money. They might be lucky if they have four or five quarters of cash left before disaster hits. The near future returns for employees holding stock, is not likely to be pretty. Even the primary founder didn't get very rich in SV terms, after he had to be diluted down to a sliver of ownership to keep the lights on.
    - pbreit 11y ago
      Even the late stage investors probably made money. The only employees who didnt make money are the handful hired at the very end when the common valuation finally meets up with preferred.
- pbreit 11y ago
  Any equity compensation depends on future liquidity which unicorns have much more of.
adrianmacneil 11y ago
Incorrect. The employee shares are priced lower because they are for common stock. If the company merely "treads water", then ends up getting acquired for lower than its previous valuation, it's likely that your shares will be worth little if anything (after preferred stock liquidation preferences).
LukaAl 11y ago
That assumes that the company reaches the IPO and its value holds. And still I don't get how lower they must be priced to be comparable to a growing startup, even risk adjusted. (And consider that the IRS could have something to say...) If the company doesn't reach the IPO and get acquired, well check what liquidation preference means. Check this post to understand better how stocks in a startup works: http://heidiroizen.tumblr.com/post/118473647305/how-to-build-a-unicorn-from-scratch-and-walk http://heidiroizen.tumblr.com/post/118473647305/how-to-build... (it is focused on founders, but employee get the same treatment).
- pbreit 11y ago
  IRS wise, it's easy to demonstrate that common stock, which doesn't having voting rights and preferences, is much less valuable. The secondary market for unicorn shares is pretty vibrant these days.
kzhahou 11y ago
Just a couple of days we all dissected Square's upcoming IPO. Valued at $6 billion, the average employee () stock value is at $294K, or $73.5K per year of vesting. Not super awesome. () Not a founder or executive/director, who'll get up to 5000x that.
- hkmurakami 11y ago
  Average employee seems like a poor metric, considering that employee count increases exponentially. I'd be interested a breakdown based on "joined at funding stage X". From what I understand, if you joined Square in 2011, when it was already super hot, you're doing pretty well and could sell your stock on the secondary markets for a handsome windfall even well before this IPO.
  - kzhahou 11y ago
    I agree -- typical pitfall of average. Do you have any sense of what the equity numbers would have been like at year 0, 1, 2, 3... based on your general knowledge of startups (not necessarily Square)?
    - hkmurakami 11y ago
      exponentially decaying.
- AndrewKemendo 11y ago
  How is that not super awesome? All of those employees had market wages well before the IPO.
  - freditup 11y ago
    Agreed, if the employees negotiated fair cash compensation, a bonus equivalent to a $70K bonus/year for four years in a row is solid. If employees were told that the stock options were a significant portion of their compensation and thus salaries would be lower, it's less great, but probably still not unreasonable.

by pbreit 11y ago

birken 11y ago

A low strike price only matters if there is some eventual liquidity for the shares. For common stock this means IPO, acquisition or some other share buyback. Both IPOs and acquisitions generally don't apply to companies "treading water", only the extremely successful and growing ones manage to IPO (and even then it doesn't work out so great for shareholders: see YELP or BOX) or get acquired. Get acquired for less than your ultra-inflated valuation? Then the common shareholders get killed by liquidation preferences. And as for other share transactions, you'll need to find a buyer. Most savvy investors aren't going to be willing to pay huge valuation premiums for common stock. And if they aren't going to pay a premium, then you really haven't gained anything by issuing common shares at a lower strike price. So basically, common shares have lower strike prices because they are worth less.... It isn't some magic trick that automatically benefits employees.

pbreit 11y ago
Both YELP and BOX made a lot of people very rich.
- adventured 11y ago
  Box clearly did not make a lot of people very rich. They made a tiny group of people richer (very early investors). Employees have not done well, as the stock has been a disaster. All of the big rounds that Box raised basically valued them at or above where their stock is now. They're worth $1.6 billion and raised $558 million; their last round was at $2.5 billion. Their latest quarter they did $73m in sales and lost $50m, with rapidly slowing growth. Even worse, they're bleeding significantly on an operating basis, implying the business may never be capable of making money. They might be lucky if they have four or five quarters of cash left before disaster hits. The near future returns for employees holding stock, is not likely to be pretty. Even the primary founder didn't get very rich in SV terms, after he had to be diluted down to a sliver of ownership to keep the lights on.
  - pbreit 11y ago
    Even the late stage investors probably made money. The only employees who didnt make money are the handful hired at the very end when the common valuation finally meets up with preferred.
pbreit 11y ago
Any equity compensation depends on future liquidity which unicorns have much more of.

adrianmacneil 11y ago

Incorrect. The employee shares are priced lower because they are for common stock. If the company merely "treads water", then ends up getting acquired for lower than its previous valuation, it's likely that your shares will be worth little if anything (after preferred stock liquidation preferences).

LukaAl 11y ago

That assumes that the company reaches the IPO and its value holds. And still I don't get how lower they must be priced to be comparable to a growing startup, even risk adjusted. (And consider that the IRS could have something to say...) If the company doesn't reach the IPO and get acquired, well check what liquidation preference means. Check this post to understand better how stocks in a startup works: http://heidiroizen.tumblr.com/post/118473647305/how-to-build-a-unicorn-from-scratch-and-walk http://heidiroizen.tumblr.com/post/118473647305/how-to-build... (it is focused on founders, but employee get the same treatment).

pbreit 11y ago
IRS wise, it's easy to demonstrate that common stock, which doesn't having voting rights and preferences, is much less valuable. The secondary market for unicorn shares is pretty vibrant these days.

kzhahou 11y ago

Just a couple of days we all dissected Square's upcoming IPO. Valued at $6 billion, the average employee () stock value is at $294K, or $73.5K per year of vesting. Not super awesome. () Not a founder or executive/director, who'll get up to 5000x that.

hkmurakami 11y ago
Average employee seems like a poor metric, considering that employee count increases exponentially. I'd be interested a breakdown based on "joined at funding stage X". From what I understand, if you joined Square in 2011, when it was already super hot, you're doing pretty well and could sell your stock on the secondary markets for a handsome windfall even well before this IPO.
- kzhahou 11y ago
  I agree -- typical pitfall of average. Do you have any sense of what the equity numbers would have been like at year 0, 1, 2, 3... based on your general knowledge of startups (not necessarily Square)?
  - hkmurakami 11y ago
    exponentially decaying.
AndrewKemendo 11y ago
How is that not super awesome? All of those employees had market wages well before the IPO.
- freditup 11y ago
  Agreed, if the employees negotiated fair cash compensation, a bonus equivalent to a $70K bonus/year for four years in a row is solid. If employees were told that the stock options were a significant portion of their compensation and thus salaries would be lower, it's less great, but probably still not unreasonable.