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Thank you for the informative response. 1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But
by ditonal 11y ago
Thank you for the informative response.
1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on founders looking after common shares out of self-interest. If you read the article, it looks like that's extremely similar to what happened in this case.
2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe.
3) Real protection would also be voting rights, which generally preferred shares get a lot more of, and then less tangible things like invitation to board meetings, something mere employees accept is absurd to expect. As long as employees agree to sacrifice compensation while being told they're not investors and don't deserve to be treated like one, they're getting hoodwinked.
- balls187 11y agoLet's do a thought experiment, you have a pie that you need to allocate, and you need to allocate it to the following groups. Founders Investors Non-Founding Executives Non-Founding Employees How do you allocate the pie fairly? How how do you ensure that risk is properly rewarded?
- rlucas 11y agoI have several friends and acquaintances whose exits as founders were in the $5-500 M gross exit value range -- far from a Google / FB outcome. Those people all made an entire career's worth of money, or more, all at once* and with capital gains tax treatment to boot. (* well, after an earnout / lockup) They also exclusively held common shares. The deciding factor is whether their exit value was a meaningful multiple of the invested capital. If you raise $100 M and sell for $100 M then it's hardly fair to expect a windfall. If you raise $50k and sell for $5 M it's very fair to expect a meaningful personal outcome.
- Swannie 11y ago"> Tech employees need to wake up about common vs preferred shares" The important distinction is employee vs founder. You mention founders in your comment. Founders typically would hold a double-digit percentage of common shares. Employees that might get offered 0.1% if they are an early hire, or less assuming later stage (discounting exec hires here, because the OP of this thread was about engineers). Founders also typically got their common shares at a very low valuation - let's say they were issued pre-money, then their value to the tax man might be $200K (of a 2M pre-money valuation), but with a vesting schedule that makes them tax efficient. Employees typically get their common shares at a higher valuation, post money, with a 200M valuation. Their 0.1% is also worth $200K to the tax man. See how this is different?
- dasil003 11y agoYou're exaggerating for dramatic effect. First of all, 1-2% is not uncommon for truly early employees. Second, it's quite typical for founders to work for free for a significant length of time to get the company off the ground. If the founders got the company to a 200M valuation with money in the bank to pay salaries, explain to me why employees deserve to be in the same order of magnitude shareholders as founders?
- prostoalex 11y ago> 2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe. Liquidation preferences are not the default in startup financing. They show up when money on better terms is not available. Any management team is free to walk away from a term sheet that has liquidation preferences spelled out towards a term sheet that has VC buying common shares with no downside protection whatsoever, if such term sheet exists.