7 ms·

For anyone thinking about working for startups: - don't treat verbal agreements seriously - common stock is 99.9% worthless, you want preferred stock - liqui

by bitL 7y ago

For anyone thinking about working for startups: - don't treat verbal agreements seriously - common stock is 99.9% worthless, you want preferred stock - liquidation preference is important, if company doesn't want to tell you, insist on market-rate salary - if a company tries to switch from an LLC to C-Corp and move you from being a minority owner of LLC (0.1-3%) into a common-stock owner of a C-Corp with the same %, block/sue them; you were working for thieves

theNJR 7y ago
In what universe is an employee getting preferred? Or do you mean, be an investor instead of an employee?
- bitL 7y ago
  Some companies tend to "promise" that. Then of course "rescind the offer".
brownkonas 7y ago
It's fine to want preferred stock, but it's pretty rare for employees to ever receive it (unless they put up cash) -- it's reserved for investors to avoid a sandbagging + abscond with the money raised scenario.
- Conan_Kudo 7y ago
  And employees deserve to be sandbagged? That seems monumentally unfair...
  - bitL 7y ago
    He who has the money sets the rules(tm) :shrug:
  - mlyle 7y ago
    Preferred stock (and specifically, liquidity preferences-- the common 1x, nonparticipating term) exists to ensure that if investors put in $10M for 20% of a company, you don't immediately sell the company for $10M and give them $2M back, and split $8M among yourselves. The deal is structured so that the investors have their option of either getting their original money returned or their share of the proportional share of the returns.
    - alecbenzer 7y ago
      This is a really good point that I hadn't considered. Employees are "investing" money in a startup too in the form of opportunity cost, but a founder can't turn around and "sell" the investment when it's just time; when it's actual cash they can. I wonder if there are stories about this happening in certain contexts that predated liquidity preferences?
      - CamelCaseName 7y ago
        You bring up a good rebuttle, to which I ask, why not have the preferred shares vest? Then your stake accurately matches the risk you've taken on at any given time.
        alecbenzer 7y ago
        The time still isn't liquid, though. Yes, if you worked for someone for a year, you've given them $X (where $X is the paycut you took), but the founder can't just turn around and sell that $X to someone else. To the extent that they can, it's (to some extent) because the founder was able to take your time and turn it into something valuable, which is like, what founders/CEOs are supposed to do. At that point these is some sense in which the founder has also "earned" the liquidity. With a direct cash infusion there's none of that. Any idiot can immediately sell $10M for $10M.
        ry454 7y ago
        I think time is quite liquid. Let's say I get 500k/year on my current job and someone asks me to join his company for peanuts, but with a good chunk of stock. We could calculate the difference between 500k and peanuts and say that instead of joining that company, I'd pay him this difference every year. That difference would be enough to hire a small team for a small salary, but with stock options. The problem that most founders have is the unspoken refusal to accept that my time is worth this much.
persistent 7y ago
Any equity that is offered with secret terms should be valued at zero. In my experience nobody will tell you, so always go for market rate salaries.
- alecbenzer 7y ago
  Does any startup give market rate salaries?
Florin_Andrei 7y ago
> common stock is 99.9% worthless, you want preferred stock TLDR: For the vast majority of folks, stock options are opium of the people. If you take a 100 steps back from the legalese garbage, all this is just a more nicely dressed version of the good old country fair scam.
mrnobody_67 7y ago
Never heard of an employee receiving preferred stock. Anybody seen this?
- adrr 7y ago
  Never seen it. Founder shares are common shares so it’s in their interest to preserve the value.

by bitL 7y ago

theNJR 7y ago

In what universe is an employee getting preferred? Or do you mean, be an investor instead of an employee?

bitL 7y ago
Some companies tend to "promise" that. Then of course "rescind the offer".

brownkonas 7y ago

It's fine to want preferred stock, but it's pretty rare for employees to ever receive it (unless they put up cash) -- it's reserved for investors to avoid a sandbagging + abscond with the money raised scenario.

Conan_Kudo 7y ago
And employees deserve to be sandbagged? That seems monumentally unfair...
- bitL 7y ago
  He who has the money sets the rules(tm) :shrug:
- mlyle 7y ago
  Preferred stock (and specifically, liquidity preferences-- the common 1x, nonparticipating term) exists to ensure that if investors put in $10M for 20% of a company, you don't immediately sell the company for $10M and give them $2M back, and split $8M among yourselves. The deal is structured so that the investors have their option of either getting their original money returned or their share of the proportional share of the returns.
  - alecbenzer 7y ago
    This is a really good point that I hadn't considered. Employees are "investing" money in a startup too in the form of opportunity cost, but a founder can't turn around and "sell" the investment when it's just time; when it's actual cash they can. I wonder if there are stories about this happening in certain contexts that predated liquidity preferences?
    - CamelCaseName 7y ago
      You bring up a good rebuttle, to which I ask, why not have the preferred shares vest? Then your stake accurately matches the risk you've taken on at any given time.
      - alecbenzer 7y ago
        The time still isn't liquid, though. Yes, if you worked for someone for a year, you've given them $X (where $X is the paycut you took), but the founder can't just turn around and sell that $X to someone else. To the extent that they can, it's (to some extent) because the founder was able to take your time and turn it into something valuable, which is like, what founders/CEOs are supposed to do. At that point these is some sense in which the founder has also "earned" the liquidity. With a direct cash infusion there's none of that. Any idiot can immediately sell $10M for $10M.
        ry454 7y ago
        I think time is quite liquid. Let's say I get 500k/year on my current job and someone asks me to join his company for peanuts, but with a good chunk of stock. We could calculate the difference between 500k and peanuts and say that instead of joining that company, I'd pay him this difference every year. That difference would be enough to hire a small team for a small salary, but with stock options. The problem that most founders have is the unspoken refusal to accept that my time is worth this much.

persistent 7y ago

Any equity that is offered with secret terms should be valued at zero. In my experience nobody will tell you, so always go for market rate salaries.

alecbenzer 7y ago
Does any startup give market rate salaries?

Florin_Andrei 7y ago

> common stock is 99.9% worthless, you want preferred stock TLDR: For the vast majority of folks, stock options are opium of the people. If you take a 100 steps back from the legalese garbage, all this is just a more nicely dressed version of the good old country fair scam.

mrnobody_67 7y ago

Never heard of an employee receiving preferred stock. Anybody seen this?

adrr 7y ago
Never seen it. Founder shares are common shares so it’s in their interest to preserve the value.