3 ms·

I don't understand most of the financial terms used in this article. Where do I start?

by nibnib 10y ago

jfoutz 10y ago
Eh, the gist is employees take on very little risk. We get paid every two weeks up to layoff or retirement. It's different when you are looking for investors.
- tluyben2 10y ago
  I read it as; if you take shares instead of your marketvalue in cash then you need to understand what you are doing. A lot of people do not. Term sheets and contracts by investors usually contain things that benefits only them, especially when the company does not work as expected.
  - nibnib 10y ago
    This was my take, and I'm pretty sure I belong to the group that does not.
- 20yrs_no_equity 10y ago
  Employees take more risk. Each one is putting in an amount of money equal to an angel, often with options that give them far less compensation compared to that angel. You can't work for 10 companies so all your eggs are in one basket. You would be right if the employees were getting market salary and working a market/normal work week of say 50 hours.
Animats 10y ago
The basic thing to understand is the concept of "dilution". Companies can issue new stock in exchange for new investment funding, driving down the value of existing stock. Sizable dilution is rare in publicly held companies, but common in privately held ones. There are often contractual terms which protect some parties against dilution. Founders and early stage investors may be protected, while other employees are not. Sometimes founders don't have anti-dilution protection. For an overview, see [1]. This is historically unusual. Up to the last decade, companies tended to become profitable and go public much earlier. Now we have round after round of private financing going into money-losing companies to fuel rapid growth, in hopes that, somehow, they'll dominate the industry and make the money back someday. That may not happen. Twitter won on market share and still can't make money. Uber may be next. [1] https://techcrunch.com/2011/10/13/understanding-how-dilution-affects-you-at-a-startup/ https://techcrunch.com/2011/10/13/understanding-how-dilution...
- UK-AL 10y ago
  I think its rare to have any anti dilution protection for anyone in a high growth company. At most you have then option to buy into further rounds, so you keep your percentage the same.
  - 20yrs_no_equity 10y ago
    I've seen anti-dilution clauses in founder documents, and really you should have one that limits dilution under certain circumstances (so you don't get arbitrarily or selectively diluted out.) They are probably extremely rare for general employees, but they are not rare for people who have negotiating power (eg: C level executives.) ==== Apparently I am blocked from responding too often as a new account, so adding here because I can't add a new comment to the parents parent: It really is quite shocking how often people act like these things are not the business of employees. On one hand they want you to take a lower salary, and they claim that options will make up for it, but on the other hand they think it is somehow unreasonable for you to ask basic questions necessary to value the options? I recently had a CFO act incredulous when I requested a copy of the Stock Option plan. Like I didn't deserve to have a copy of it, even though he was requiring me to sign a contract agreeing to its terms. At that point I basically wrote off the options, and have written off the company and am on my way out. The reason they get away with this kind of obfuscation is, I think, that most engineers just go along to get along and aren't too demanding. Unions would be worse, but we need to start sticking up for ourselves a lot more.
uiri 10y ago
I hope the following is helpful rather than confusing - feel free to ask any clarifying questions. Also, I will preface this with the fact that I am an engineer and not a finance person. I may be subtly wrong on some points and I am happy to be corrected by those with more knowledge on these topics. Liquidity preferences - Also described in the article as "investors escape safely on Preference stacks", investors usually have terms which state that when the company is sold, they get paid first so that they can at least recoup their investment before anyone else gets paid. Usually they get paid again with everyone else, resulting in a "double dip" into the sale proceeds. Reverse-merger IPO - this is a rare (for tech companies) deal structure where private company A merges with public company B. The resulting merged company is now publicly listed because company B has already gone through the IPO process. Dilution - described in the article as "over-dilution" and "dilutive financing", if there are X shares of a company and you own Y shares, then you own Y/X % of the company. If the company then creates Z shares to sell to investors, you own Y/(X + Z) % of the company. The difference between these percentages is dilution. Often, existing investors have anti-dilution provisions. They are able to buy additional shares in the round up to their existing percentage. Founders and employees usually have no such luck. Ratchet in a down round - Admittedly, I don't know what a ratchet is. I would guess that it is a protection of some sort for investors from a down round and thus bad for founders and employees. Non-liquid - (nearly) impossible to sell Highly volatile - a plot of price over time looks like a rollercoaster Anti-dilution provision - see the latter part of "dilution" above IPO protections - Also have no idea what these could be. I would guess at something to protect investors who invest at a high valuation where the public valuation is lower. 409-A pricing - How the shares are assigned a value for tax purposes
- nibnib 10y ago
  Thank you. The jargon seems to be the biggest stumbling block here, the concepts make sense. If there is a "Finance for Hackers" out there I would love to read it.
  - cLeEOGPw 10y ago
    "Finance for Dummies"
kspaans 10y ago
This showed up on HN last year: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation It's got advice on where to start, common gotchas to look out for (in the US), and definitions of everything.

I don't understand most of the financial terms used in this article. Where do I start?

by nibnib 10y ago

I don't understand most of the financial terms used in this article. Where do I start?

Eh, the gist is employees take on very little risk. We get paid every two weeks up to layoff or retirement. It's different when you are looking for investors.

tluyben2 10y ago
I read it as; if you take shares instead of your marketvalue in cash then you need to understand what you are doing. A lot of people do not. Term sheets and contracts by investors usually contain things that benefits only them, especially when the company does not work as expected.
- nibnib 10y ago
  This was my take, and I'm pretty sure I belong to the group that does not.
20yrs_no_equity 10y ago
Employees take more risk. Each one is putting in an amount of money equal to an angel, often with options that give them far less compensation compared to that angel. You can't work for 10 companies so all your eggs are in one basket. You would be right if the employees were getting market salary and working a market/normal work week of say 50 hours.

Animats 10y ago

The basic thing to understand is the concept of "dilution". Companies can issue new stock in exchange for new investment funding, driving down the value of existing stock. Sizable dilution is rare in publicly held companies, but common in privately held ones. There are often contractual terms which protect some parties against dilution. Founders and early stage investors may be protected, while other employees are not. Sometimes founders don't have anti-dilution protection. For an overview, see [1]. This is historically unusual. Up to the last decade, companies tended to become profitable and go public much earlier. Now we have round after round of private financing going into money-losing companies to fuel rapid growth, in hopes that, somehow, they'll dominate the industry and make the money back someday. That may not happen. Twitter won on market share and still can't make money. Uber may be next. [1] https://techcrunch.com/2011/10/13/understanding-how-dilution-affects-you-at-a-startup/ https://techcrunch.com/2011/10/13/understanding-how-dilution...

UK-AL 10y ago
I think its rare to have any anti dilution protection for anyone in a high growth company. At most you have then option to buy into further rounds, so you keep your percentage the same.
- 20yrs_no_equity 10y ago
  I've seen anti-dilution clauses in founder documents, and really you should have one that limits dilution under certain circumstances (so you don't get arbitrarily or selectively diluted out.) They are probably extremely rare for general employees, but they are not rare for people who have negotiating power (eg: C level executives.) ==== Apparently I am blocked from responding too often as a new account, so adding here because I can't add a new comment to the parents parent: It really is quite shocking how often people act like these things are not the business of employees. On one hand they want you to take a lower salary, and they claim that options will make up for it, but on the other hand they think it is somehow unreasonable for you to ask basic questions necessary to value the options? I recently had a CFO act incredulous when I requested a copy of the Stock Option plan. Like I didn't deserve to have a copy of it, even though he was requiring me to sign a contract agreeing to its terms. At that point I basically wrote off the options, and have written off the company and am on my way out. The reason they get away with this kind of obfuscation is, I think, that most engineers just go along to get along and aren't too demanding. Unions would be worse, but we need to start sticking up for ourselves a lot more.

uiri 10y ago

I hope the following is helpful rather than confusing - feel free to ask any clarifying questions. Also, I will preface this with the fact that I am an engineer and not a finance person. I may be subtly wrong on some points and I am happy to be corrected by those with more knowledge on these topics. Liquidity preferences - Also described in the article as "investors escape safely on Preference stacks", investors usually have terms which state that when the company is sold, they get paid first so that they can at least recoup their investment before anyone else gets paid. Usually they get paid again with everyone else, resulting in a "double dip" into the sale proceeds. Reverse-merger IPO - this is a rare (for tech companies) deal structure where private company A merges with public company B. The resulting merged company is now publicly listed because company B has already gone through the IPO process. Dilution - described in the article as "over-dilution" and "dilutive financing", if there are X shares of a company and you own Y shares, then you own Y/X % of the company. If the company then creates Z shares to sell to investors, you own Y/(X + Z) % of the company. The difference between these percentages is dilution. Often, existing investors have anti-dilution provisions. They are able to buy additional shares in the round up to their existing percentage. Founders and employees usually have no such luck. Ratchet in a down round - Admittedly, I don't know what a ratchet is. I would guess that it is a protection of some sort for investors from a down round and thus bad for founders and employees. Non-liquid - (nearly) impossible to sell Highly volatile - a plot of price over time looks like a rollercoaster Anti-dilution provision - see the latter part of "dilution" above IPO protections - Also have no idea what these could be. I would guess at something to protect investors who invest at a high valuation where the public valuation is lower. 409-A pricing - How the shares are assigned a value for tax purposes

nibnib 10y ago
Thank you. The jargon seems to be the biggest stumbling block here, the concepts make sense. If there is a "Finance for Hackers" out there I would love to read it.
- cLeEOGPw 10y ago
  "Finance for Dummies"

kspaans 10y ago

This showed up on HN last year: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation It's got advice on where to start, common gotchas to look out for (in the US), and definitions of everything.