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>Effectively what you are saying is that venture capital funds (correctly) think that percentage of shares aren't very valuable when they are equal preference t

>Effectively what you are saying is that venture capital funds (correctly) think that percentage of shares aren't very valuable when they are equal preference to the employees. That's not quite right - instead, he's implying that vc funds (correctly) think that the chance that this company's shares standing alone will suffice to return a multiple of the fund is low if they are of equal preference to the employees. That's not the same thing as "not very valuable", and the very counterintuitiveness of vc math should tell you that an asset a vc may not want (say, 5% of a company that sells for 75M after 3 years) may in fact be pretty valuable for the median employee. >It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!" Not at all - look, there are lots of good resources where you can learn more about how your equity works, and good founders will probably point you to them (e.g [0] and [1], although if you need a pointer to this instead of doing the 2-second google search yourself, you're probably not a great startup candidate anyway). Deception need not and should not enter into it. Not to say that there aren't scammy founders, but it's not best practice, and I don't believe Fred Wilson or most other reputable VCs would claim otherwise. [0] https://blog.dweek.ly/introduction-to-stock-options-startup-founder-entrepreneur-employee/ https://blog.dweek.ly/introduction-to-stock-options-startup-... [1] https://foundersgrid.com/employee-equity/ https://foundersgrid.com/employee-equity/ ...

esrauch 9y ago
I don't believe VC math actually has the property you are saying: the thing about most preferred shares isn't just protection from routine dilution (which makes you more likely to 'win big' if the company becomes a unicorn), they also tend to be much less likely to receive actually zero (better protection from recap), right? The idea that regular employees are somehow better served by shares that rational investors won't touch takes a lot of justification.
- jasode 9y ago
  >most preferred shares isn't just protection from routine dilution There's some misinformation there. Preferred shares do not have protection from "routine dilution". In fact, dilution is the very mechanism to sell more equity to subsequent investors at a higher price. (E.g. When Accel Partners invested $12 million for 15% equity of Facebook in 2005, they got diluted when Microsoft later invested $240 million to buy 1.6% equity in 2007.) The "anti-dilution" provision that VCs get is not for "routine dilution". Instead, it's for a really bad event called a "down round"[1] where the next investor pays less than the current investor. We could ask The Universe why employees don't get the same anti-dilution protection but I think it's a moot point... If the company is getting devalued, employees are gonna worry way more about finding a better job somewhere else instead of staying employed on a sinking ship. In other words, a "down round anti-dilution" protection for employees is kind of mathematically pointless. On the other hand, the type of favorable "anti dilution" for employees that most people are thinking about such as as a 1% grant at hire, and staying at 1% through all subsequent positive "up rounds", and finally at IPO -- is something even VCs don't get. Nobody has that type of dilution protection. Not the founders, nor angels, nor any investors. The closest approximation would be a provision for VCs to pay for more shares to keep their % ownership the same. That's more like "pay to play" rather than "anti dilution". In any case, people don't need that type of dilution protection because what matters is the #_of_shares_ multiplied by _price_. [1] https://www.feld.com/archives/2005/03/term-sheet-anti-dilution.html https://www.feld.com/archives/2005/03/term-sheet-anti-diluti...
- deleted 9y ago
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esrauch 9y ago

I don't believe VC math actually has the property you are saying: the thing about most preferred shares isn't just protection from routine dilution (which makes you more likely to 'win big' if the company becomes a unicorn), they also tend to be much less likely to receive actually zero (better protection from recap), right? The idea that regular employees are somehow better served by shares that rational investors won't touch takes a lot of justification.

jasode 9y ago
>most preferred shares isn't just protection from routine dilution There's some misinformation there. Preferred shares do not have protection from "routine dilution". In fact, dilution is the very mechanism to sell more equity to subsequent investors at a higher price. (E.g. When Accel Partners invested $12 million for 15% equity of Facebook in 2005, they got diluted when Microsoft later invested $240 million to buy 1.6% equity in 2007.) The "anti-dilution" provision that VCs get is not for "routine dilution". Instead, it's for a really bad event called a "down round"[1] where the next investor pays less than the current investor. We could ask The Universe why employees don't get the same anti-dilution protection but I think it's a moot point... If the company is getting devalued, employees are gonna worry way more about finding a better job somewhere else instead of staying employed on a sinking ship. In other words, a "down round anti-dilution" protection for employees is kind of mathematically pointless. On the other hand, the type of favorable "anti dilution" for employees that most people are thinking about such as as a 1% grant at hire, and staying at 1% through all subsequent positive "up rounds", and finally at IPO -- is something even VCs don't get. Nobody has that type of dilution protection. Not the founders, nor angels, nor any investors. The closest approximation would be a provision for VCs to pay for more shares to keep their % ownership the same. That's more like "pay to play" rather than "anti dilution". In any case, people don't need that type of dilution protection because what matters is the #_of_shares_ multiplied by _price_. [1] https://www.feld.com/archives/2005/03/term-sheet-anti-dilution.html https://www.feld.com/archives/2005/03/term-sheet-anti-diluti...
deleted 9y ago
[deleted]