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> Again, let me emphasize, this is not inherently unfair. I guess our definitions of what is "unfair" are quite different. I think a better term here would be

> Again, let me emphasize, this is not inherently unfair. I guess our definitions of what is "unfair" are quite different. I think a better term here would be "illegal". It's most certainly not illegal - but I definitely would not consider it fair. Companies throw options at employees - or potential employees - like candy. They imply, explicitly or not, that when the company gets big and successful, these options are going to be worth tons of money. Most of us here know they're probably worthless. But executives/entrepreneurs/whoever most definitely suggest otherwise. So it's more like false advertising. Now is that "fair"? I don't personally think so. I think it's pretty dishonest. I think when sale time comes around, they most certainly realize that these employees think they're finally going to cash in, and they are more than happy to let them think, even though they know otherwise. Obviously there are exceptions. There are occasions where they actually do end up being worth something. Or where the seniors folks are very clear about how worthless these things actually are. But, in my opinion at least, those are most definitely the exception to the rule. I'm also pretty cynical for the most part, too. So there's that.

alteria 7y ago
When I received my most recent startup offer, I was handed a spreadsheet that outlined the size of my option, and what they would be worth under multiple hypothetical scenarios, including highly-optimistic >400M and >3B valuations. While it was nice for them to do the math for me, I do think that the scenarios presented were misleading and only represent the case where everything goes exceptionally well. Now they did caveat that these were based off of assumptions, and that I should consult my own professional advisers etc etc. But, they didn't name any of the factors that could significantly impact returns (liquidation preference, participation, caps, etc.).
- RandallBrown 7y ago
  I received something similar with my last offer, but it also included the caveat that the shares are currently completely worthless unless we have some sort of exit, which probably wouldn't be happening in the short term. It was pretty refreshing.
jeremyjh 7y ago
I think if a venture is unsuccessful employees shouldn't expect to make money from their options. A venture that raises $60MM and sells for $100MM 4 years later is a failure. Making nothing in a case like that seems fair to me. What is perhaps unfair, is if the employee worked for substantially below market wages all of that time, and particularly if they were given a much rosier picture than was accurate. But we shouldn't assume those things are always true.
- techslave 7y ago
  even that is not unfair. the employee knows, or should know, the risk. they likely aren’t being compelled to work at a risky startup.
  - NotSammyHagar 7y ago
    They never explain the risk, the unlikelihood of selling.
- alecbenzer 7y ago
  > if the employee worked for substantially below market wages all of that time For an engineer that could get a job at FAANG or similar, I think this is pretty much universally true for all startups.
- superqd 7y ago
  I think the problem is that it's often difficult to pinpoint the crux of the unfairness, but still feel it all the same. In my opinion, the unfairness is engendered by the realization that time and money are merely different units of the same thing. Which means the investors are getting guarantees on their invested time, but the folks who did all the work are completely unable to recoup any of the time they invested. When we cast the investments in the same units, it clarifies the nature of the inequity. Investors convert dollars into time (like a conversion from matter to energy), and workers convert time into dollars (energy to matter). Even in physics a seemingly small amount of matter has enormous power with respect to the energy it can unleash. But it can take a lot of energy to form the tiniest lump of matter. Investors are turning their matter, their dollars, into time. A lot of money, in that respect, is essentially lots of time -- more time than you have life, if you have enough of it. So you can do more, by buying someone else's time. For simplicity, if we ignore non-labor costs (labor is the largest expense in most software startups, e.g.), it would mean that the invested dollars purchased an EQUAL amount of invested time. That is, the investors dollars were converted, with perfect efficiency to time (unless they overpaid the workers, or the workers were underpaid), which means there was conservation of dollars/time. This implies a balance of the two sides of the equation, which means at best (again, for simplicity, only accounting labor costs) the investors could only be guaranteed a share of 50% of the purchase of the company. Or at least that is how it should work, in my opinion.
mcguire 7y ago
Back in the dotcom era, they called it "hanging paper."
nearbuy 7y ago
You cut off the quote too early: > Again, let me emphasize, this is not inherently unfair. [...] The problem is most companies hide it. The author is saying it's not inherently unfair if the company is honest and upfront about it.
- vast 7y ago
  It is unfair if a bridge loan is involved. If the preferred stakeholders have the chance they will remove the commons from the equation. In the end both sides take a risk with their shares and it is usually more meaningful to people with little money.
  - nearbuy 7y ago
    In the example, the common shareholders didn't make a profit because the company didn't make a profit. Ignoring the bridge loan for a moment, after all their expenses, the company just managed to make back what was put in. The hypothetical bridge loan in this case did earn a profit, but it was a high risk loan. The company was going to be insolvent in 60 days and they hadn't yet found a buyer. The lenders got a multiplier because they risked losing their $10 million loan. This bridge loan certainly could have been unfair, depending on whether the riskiness was worth the multiplier (for instance, if the company took a loan with 100x multiplier, it would clearly be abusive). If that were the case, the minority shareholders could sue and would win.
cascom 7y ago
I’ve seen a lot a options packages awarded - and most of the time the actual options agreement goes completely unread - it’s baffling - but I think most of time senior managers are too embarrassed to let people know they don’t understand
jariel 7y ago
She didn't say it was 'fair' she sad not 'inherently unfair' and that's reasonable: multipliers, loans etc. - this is all just financing. The company performed poorly, the 'buy out' was a kind of 'neutral sale', the VCs got a 2x return and the founders got something. To be clear: a '2x return' for the VCs is a loser - given the amount of risk they took on, they didn't get nearly the return they'd need to cover it. Imagine if you bet $1 on a long-shot that has 1/10 odds of winning, but if you win, you only 2x your money. Was that a good bet? No - terrible bet. That money could have been employed elsewhere. The deal that the founders got might be somewhat similar - out of $100M they probably didn't get that much at all. Maybe $1-2 Million? That's again a very small bonus for several years risk. Many founders of such companies are forgoing major salaries to found companies - forgoing years of income really before it starts, and then limited income during. My hunch is that it was a 'net loss' for them: they should have just stayed on developing, consulting, lawerying, or banking or whatever. Another way of saying this is that even at $100M valuation - there wasn't enough value created overall for it to be a real winner all around if you include risk, opportunity cost etc. etc.. At least employees got salaries, risk free - and money in the bank is worth a lot more than 'maybe future payoffs'. It would have been nice if staffers got 'something' but even if they did allocate several million in the transaction (for example, if the founders 'took nothing') it would have still amounted to very little.

alteria 7y ago

When I received my most recent startup offer, I was handed a spreadsheet that outlined the size of my option, and what they would be worth under multiple hypothetical scenarios, including highly-optimistic >400M and >3B valuations. While it was nice for them to do the math for me, I do think that the scenarios presented were misleading and only represent the case where everything goes exceptionally well. Now they did caveat that these were based off of assumptions, and that I should consult my own professional advisers etc etc. But, they didn't name any of the factors that could significantly impact returns (liquidation preference, participation, caps, etc.).

RandallBrown 7y ago
I received something similar with my last offer, but it also included the caveat that the shares are currently completely worthless unless we have some sort of exit, which probably wouldn't be happening in the short term. It was pretty refreshing.

jeremyjh 7y ago

I think if a venture is unsuccessful employees shouldn't expect to make money from their options. A venture that raises $60MM and sells for $100MM 4 years later is a failure. Making nothing in a case like that seems fair to me. What is perhaps unfair, is if the employee worked for substantially below market wages all of that time, and particularly if they were given a much rosier picture than was accurate. But we shouldn't assume those things are always true.

techslave 7y ago
even that is not unfair. the employee knows, or should know, the risk. they likely aren’t being compelled to work at a risky startup.
- NotSammyHagar 7y ago
  They never explain the risk, the unlikelihood of selling.
alecbenzer 7y ago
> if the employee worked for substantially below market wages all of that time For an engineer that could get a job at FAANG or similar, I think this is pretty much universally true for all startups.
superqd 7y ago
I think the problem is that it's often difficult to pinpoint the crux of the unfairness, but still feel it all the same. In my opinion, the unfairness is engendered by the realization that time and money are merely different units of the same thing. Which means the investors are getting guarantees on their invested time, but the folks who did all the work are completely unable to recoup any of the time they invested. When we cast the investments in the same units, it clarifies the nature of the inequity. Investors convert dollars into time (like a conversion from matter to energy), and workers convert time into dollars (energy to matter). Even in physics a seemingly small amount of matter has enormous power with respect to the energy it can unleash. But it can take a lot of energy to form the tiniest lump of matter. Investors are turning their matter, their dollars, into time. A lot of money, in that respect, is essentially lots of time -- more time than you have life, if you have enough of it. So you can do more, by buying someone else's time. For simplicity, if we ignore non-labor costs (labor is the largest expense in most software startups, e.g.), it would mean that the invested dollars purchased an EQUAL amount of invested time. That is, the investors dollars were converted, with perfect efficiency to time (unless they overpaid the workers, or the workers were underpaid), which means there was conservation of dollars/time. This implies a balance of the two sides of the equation, which means at best (again, for simplicity, only accounting labor costs) the investors could only be guaranteed a share of 50% of the purchase of the company. Or at least that is how it should work, in my opinion.

mcguire 7y ago

Back in the dotcom era, they called it "hanging paper."

nearbuy 7y ago

You cut off the quote too early: > Again, let me emphasize, this is not inherently unfair. [...] The problem is most companies hide it. The author is saying it's not inherently unfair if the company is honest and upfront about it.

vast 7y ago
It is unfair if a bridge loan is involved. If the preferred stakeholders have the chance they will remove the commons from the equation. In the end both sides take a risk with their shares and it is usually more meaningful to people with little money.
- nearbuy 7y ago
  In the example, the common shareholders didn't make a profit because the company didn't make a profit. Ignoring the bridge loan for a moment, after all their expenses, the company just managed to make back what was put in. The hypothetical bridge loan in this case did earn a profit, but it was a high risk loan. The company was going to be insolvent in 60 days and they hadn't yet found a buyer. The lenders got a multiplier because they risked losing their $10 million loan. This bridge loan certainly could have been unfair, depending on whether the riskiness was worth the multiplier (for instance, if the company took a loan with 100x multiplier, it would clearly be abusive). If that were the case, the minority shareholders could sue and would win.

cascom 7y ago

I’ve seen a lot a options packages awarded - and most of the time the actual options agreement goes completely unread - it’s baffling - but I think most of time senior managers are too embarrassed to let people know they don’t understand

jariel 7y ago

She didn't say it was 'fair' she sad not 'inherently unfair' and that's reasonable: multipliers, loans etc. - this is all just financing. The company performed poorly, the 'buy out' was a kind of 'neutral sale', the VCs got a 2x return and the founders got something. To be clear: a '2x return' for the VCs is a loser - given the amount of risk they took on, they didn't get nearly the return they'd need to cover it. Imagine if you bet $1 on a long-shot that has 1/10 odds of winning, but if you win, you only 2x your money. Was that a good bet? No - terrible bet. That money could have been employed elsewhere. The deal that the founders got might be somewhat similar - out of $100M they probably didn't get that much at all. Maybe $1-2 Million? That's again a very small bonus for several years risk. Many founders of such companies are forgoing major salaries to found companies - forgoing years of income really before it starts, and then limited income during. My hunch is that it was a 'net loss' for them: they should have just stayed on developing, consulting, lawerying, or banking or whatever. Another way of saying this is that even at $100M valuation - there wasn't enough value created overall for it to be a real winner all around if you include risk, opportunity cost etc. etc.. At least employees got salaries, risk free - and money in the bank is worth a lot more than 'maybe future payoffs'. It would have been nice if staffers got 'something' but even if they did allocate several million in the transaction (for example, if the founders 'took nothing') it would have still amounted to very little.