6 ms·

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares. To the very least, if companies

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares. To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it. Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock and the company sells at 100m. You are most likely not going to get 1m because of preferred shares. Preferred shares are truly a cancer on the system.

walshemj 9y ago
Or like in the uk for approved (ie tax friendly) enforce the issuing of the same shares to employees as the others.
- conanbatt 9y ago
  I'm not sure that is better. Extra provisions on capital might be adding more capital to the mix, which increase wages all around. It might be shooting yourself in the foot. But hiding the information is a way for investors to have more leverage over employees. That is an undoubtedly unfair surplus to them. Its not the only thing I'd change. I would do away with the restriccions of investing in startups as well. That would allow employees to buy stock whenever they want to (and the company is willing to sell them for) without this obscure negotiation. The minimum limits on investing in startups is a way to give higher returns to investors, while harming founders and employees.
  - walshemj 9y ago
    Why its to stop some shareholders being taken advantage of by companies with different share classes.
    - conanbatt 9y ago
      I think that effect is somewhat overrated. In the end, its best to let people get what they want. In that sense, not having information doesnt let people choose what they want. Limiting what can be offered is more likely to prevent people from being able to get what they want. Its possible that investors are very risk averse and so, are willing to pay a big premium for the preferred shares, one that employees are not willing to pay. In that case, employees actually win out on the deal, as they might not be as risk averse (as its only a small part of the compensation). But in that game, the employee is barred from buying unlimitedly (min 1mm in assets) and also from knowing what everyone else is getting (which investors know). I cant emphasize how big a loss it is to not let employees invest. Employees know a lot of things investors don't and share that information amongst each other, but can't give market signals because they cant buy or sell or disclose freely. I.E. if you saw a company where employees are all buying shares now, its great for both employees and the general public AND investing in general. Not only that, but not being able to sell and exchange shares between employees means you cant hedge bets as employee. For example, you could pool a bunch of startup shares that way. Thats only for investor groups today. Sometimes when I think the US is supposed to be the pinnacle of economic liberalism, I shed a few tears.
      - walshemj 9y ago
        Exactly and as a Union activist I shudder at some of the sharp practice and poor treatment of employees when it comes to share options by both employers and the govenment
GeneralTspoon 9y ago
It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity. For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-the-value-of-your-equity/ https://www.capshare.com/blog/how-preferred-stock-affects-th... They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO). It seems as though it just makes investing in any startup that's expected to at least be acquired at some point a 'risk-free' investment. Anyone have any thoughts on why this might be a good thing?
- deleted 9y ago
  [deleted]
- conanbatt 9y ago
  I made another comment about them below, but i will repeat in a different way. People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich. The existence of blue cheese sandwiches is moderately irrelevant to the existence of regular sandwiches. And banning them would only increase the price of regular sandwiches and also make those people less happy. Less sandwiches would be sold. Preferred shares don't really hit common shares. If you knew exactly how it went, then you would make an assessment of the value of the shares as they are. Your internal valuation of sandwiches will adjust to the existence of blue cheese sandwiches. The reason why they feel unfair, and they are unfair in this sense, is that the guys with preferred shares know what they are getting, and you dont. And also, as an employee you dont get to buy preferred shares. If you dont know the price of blue cheese sandwiches and you can't buy them, you will find them unfair. Banning sandwiches is not the solution to the problem.
  - GeneralTspoon 9y ago
    I'm not so sure about the analogy, but I get your point. I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares). The terminology surrounding this is quite misleading too - as you mentioned in the grandparent, having 1% of a company sold for 1M, doesn't mean you'll get 10k, which is pretty weird. Not sure what the solution is though - maybe it's just for everyone to be aware of how preferred stock works and make the cap table public. It would also be nice if there were a standardised way for a company to say "We won't offer preferred stock for at least X years". Something like that would make me much more confident in taking equity in a company. Which, in principle, is actually what I want to do - but all these kinds of tricks essentially mean I can't (because I can't properly estimate the value of what I'm offered). Public cap tables would help, but wouldn't protect against future investment rounds with preferred shares.

walshemj 9y ago

Or like in the uk for approved (ie tax friendly) enforce the issuing of the same shares to employees as the others.

conanbatt 9y ago
I'm not sure that is better. Extra provisions on capital might be adding more capital to the mix, which increase wages all around. It might be shooting yourself in the foot. But hiding the information is a way for investors to have more leverage over employees. That is an undoubtedly unfair surplus to them. Its not the only thing I'd change. I would do away with the restriccions of investing in startups as well. That would allow employees to buy stock whenever they want to (and the company is willing to sell them for) without this obscure negotiation. The minimum limits on investing in startups is a way to give higher returns to investors, while harming founders and employees.
- walshemj 9y ago
  Why its to stop some shareholders being taken advantage of by companies with different share classes.
  - conanbatt 9y ago
    I think that effect is somewhat overrated. In the end, its best to let people get what they want. In that sense, not having information doesnt let people choose what they want. Limiting what can be offered is more likely to prevent people from being able to get what they want. Its possible that investors are very risk averse and so, are willing to pay a big premium for the preferred shares, one that employees are not willing to pay. In that case, employees actually win out on the deal, as they might not be as risk averse (as its only a small part of the compensation). But in that game, the employee is barred from buying unlimitedly (min 1mm in assets) and also from knowing what everyone else is getting (which investors know). I cant emphasize how big a loss it is to not let employees invest. Employees know a lot of things investors don't and share that information amongst each other, but can't give market signals because they cant buy or sell or disclose freely. I.E. if you saw a company where employees are all buying shares now, its great for both employees and the general public AND investing in general. Not only that, but not being able to sell and exchange shares between employees means you cant hedge bets as employee. For example, you could pool a bunch of startup shares that way. Thats only for investor groups today. Sometimes when I think the US is supposed to be the pinnacle of economic liberalism, I shed a few tears.
    - walshemj 9y ago
      Exactly and as a Union activist I shudder at some of the sharp practice and poor treatment of employees when it comes to share options by both employers and the govenment

GeneralTspoon 9y ago

It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity. For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-the-value-of-your-equity/ https://www.capshare.com/blog/how-preferred-stock-affects-th... They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO). It seems as though it just makes investing in any startup that's expected to at least be acquired at some point a 'risk-free' investment. Anyone have any thoughts on why this might be a good thing?

deleted 9y ago
[deleted]
conanbatt 9y ago
I made another comment about them below, but i will repeat in a different way. People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich. The existence of blue cheese sandwiches is moderately irrelevant to the existence of regular sandwiches. And banning them would only increase the price of regular sandwiches and also make those people less happy. Less sandwiches would be sold. Preferred shares don't really hit common shares. If you knew exactly how it went, then you would make an assessment of the value of the shares as they are. Your internal valuation of sandwiches will adjust to the existence of blue cheese sandwiches. The reason why they feel unfair, and they are unfair in this sense, is that the guys with preferred shares know what they are getting, and you dont. And also, as an employee you dont get to buy preferred shares. If you dont know the price of blue cheese sandwiches and you can't buy them, you will find them unfair. Banning sandwiches is not the solution to the problem.
- GeneralTspoon 9y ago
  I'm not so sure about the analogy, but I get your point. I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares). The terminology surrounding this is quite misleading too - as you mentioned in the grandparent, having 1% of a company sold for 1M, doesn't mean you'll get 10k, which is pretty weird. Not sure what the solution is though - maybe it's just for everyone to be aware of how preferred stock works and make the cap table public. It would also be nice if there were a standardised way for a company to say "We won't offer preferred stock for at least X years". Something like that would make me much more confident in taking equity in a company. Which, in principle, is actually what I want to do - but all these kinds of tricks essentially mean I can't (because I can't properly estimate the value of what I'm offered). Public cap tables would help, but wouldn't protect against future investment rounds with preferred shares.