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So people who work for a start up aren't taking risk? Employment is more than just the paycheck. It's security. It's a career trajectory. Otherwise, why do con

So people who work for a start up aren't taking risk? Employment is more than just the paycheck. It's security. It's a career trajectory. Otherwise, why do consultants get paid more than employees? You can see it that employees take no risk. That's fine. But then I wonder why start ups tout the stocks they give? And why is it acceptable to tout something that they know has no value? The SEC has a function. To avoid dishonest actions that would otherwise be legal under standard criminal law from eroding trust in security markets. The employee of the article we are discussing here received 1% for losing out on opportunities of growth in a larger company. Obviously he was worth something to the company, and more than they were willing to pay him in cash. He was betting on the future value of the offerings he was receiving. By being able to trust that, start ups could/would/should obtain labor at discounted rates. This is good for the market. Trust in securities. You can call him naive. But I will remind you that in the late 19th and early 20th century the stock market was not well capitalized. People presumed they were getting screwed. And anybody who placed trust in the system was called naive. "they shouldn't trust" is an easy argument. It's the old 'it's just the way it is' argument. It's arguable, but I'd say creating trust within the exchange of securities via systems like the SEC was a great advance in the allocation of resources. It's why we have well capitalized markets. Without trust, friction comes along. That is why I feel what was described in the article is deeply unfair and given that the entire structure of joint stock companies is a legislative creation, surely it could be changed. So basically, your view that "the big money goes to the people who risk" seems idiosyncratic and reflexive rather than based on any substantial analysis of the article or the situation. I'm hardly advocating for any revolutionary ideas. Overall, having read The Wealth of Nations, I'm a big supporter of Adam Smith's ideas. Which is why I can see how the system can be structured differently within the capitalist context.

WalterBright 7y ago
> So people who work for a start up aren't taking risk? Not at all like the risk of putting in a big chunk of your own money. When you lose it, it's gone. Too bad, so sad. Employees have the lowest risk position. They get first claim on the money owed for their paychecks and there are many legal protections for that. The investor is frequently last in line, and gets nothing if the company bankrupts. > described in the article is deeply unfair My reading of it was slightly different than yours. If the company hadn't gotten the overhang investment, they would have gone bankrupt and the employee would have lost their job sooner. If the overhang wasn't offered, the investors would not have invested. There was no path for the employee to cash in the stock - unless the value of the company was larger than $100m. But it wasn't.
- 4ntonius8lock 7y ago
  The key here is deceit. I have no problem with employment where money is exchanged for time. But that wasn't the case. The employee got paid for time in the form of money and stock. You are conveniently ignoring this part. If the stock is worthless, why offer it? The answer to me is obvious, they are being deceitful. As stated, the SECs' mission is so that people who deal with securities don't engage in deceitful behavior, since deceitful behavior removes trust from market participants which creates friction and increases costs and decreases participation. The argument that people's rewards, one who put in $50 in cash and another who accepted an offer that resulted in a decreased earnings of say $50 avg should be treated differently is anti-meritocratic. Both risked $50. If the employee wasn't accepting a decreased earnings potential, why offer the stock? You can't have it both ways. Just as the company would have failed if the investors didn't invest, it would have also failed if the employees left when they saw trouble. Many extensively won't because they have shares. That's why the shares are offered in the first place. To motivate the employee. But it turns out many times those offerings are done in a deceitful manner; the people offering stocks to employees many times know those stocks are extremely unlikely to be worth anything, yet they make a concerted effort to make it appear as if those stocks are worth something. Investors are protected from deceitful security offerings. Surely you think that's a good thing? Why not apply to all parties? Literally all I'm arguing for is a more honest (and therefore meritocratic) code in our system when handling the exchange of time for securities, especially in the face of a large liquidity event.
  - WalterBright 7y ago
    > If the stock is worthless, why offer it? It wasn't worthless when it was offered, the overhang deals did not come until much later, and it did not become worthless until the company sale price was agreed upon. The stock would still have been worth something if the sale price was higher than the overhang. Getting stock does not mean it can be diluted by further stock issuances. There is no deceit there. > Literally all I'm arguing for is a more honest (and therefore meritocratic) Honesty has nothing to do with meritocratic. For example, the person next to you on an airplane surely paid a different price. It's neither dishonest nor meritocratic. It is what both parties agreed upon. Each person has a different level of risk tolerance and desire for money. Everybody in a startup gets a different deal based on their ability to negotiate, what they want, their risk tolerance, and the desire of the company to get them on board.

WalterBright 7y ago

> So people who work for a start up aren't taking risk? Not at all like the risk of putting in a big chunk of your own money. When you lose it, it's gone. Too bad, so sad. Employees have the lowest risk position. They get first claim on the money owed for their paychecks and there are many legal protections for that. The investor is frequently last in line, and gets nothing if the company bankrupts. > described in the article is deeply unfair My reading of it was slightly different than yours. If the company hadn't gotten the overhang investment, they would have gone bankrupt and the employee would have lost their job sooner. If the overhang wasn't offered, the investors would not have invested. There was no path for the employee to cash in the stock - unless the value of the company was larger than $100m. But it wasn't.

4ntonius8lock 7y ago
The key here is deceit. I have no problem with employment where money is exchanged for time. But that wasn't the case. The employee got paid for time in the form of money and stock. You are conveniently ignoring this part. If the stock is worthless, why offer it? The answer to me is obvious, they are being deceitful. As stated, the SECs' mission is so that people who deal with securities don't engage in deceitful behavior, since deceitful behavior removes trust from market participants which creates friction and increases costs and decreases participation. The argument that people's rewards, one who put in $50 in cash and another who accepted an offer that resulted in a decreased earnings of say $50 avg should be treated differently is anti-meritocratic. Both risked $50. If the employee wasn't accepting a decreased earnings potential, why offer the stock? You can't have it both ways. Just as the company would have failed if the investors didn't invest, it would have also failed if the employees left when they saw trouble. Many extensively won't because they have shares. That's why the shares are offered in the first place. To motivate the employee. But it turns out many times those offerings are done in a deceitful manner; the people offering stocks to employees many times know those stocks are extremely unlikely to be worth anything, yet they make a concerted effort to make it appear as if those stocks are worth something. Investors are protected from deceitful security offerings. Surely you think that's a good thing? Why not apply to all parties? Literally all I'm arguing for is a more honest (and therefore meritocratic) code in our system when handling the exchange of time for securities, especially in the face of a large liquidity event.
- WalterBright 7y ago
  > If the stock is worthless, why offer it? It wasn't worthless when it was offered, the overhang deals did not come until much later, and it did not become worthless until the company sale price was agreed upon. The stock would still have been worth something if the sale price was higher than the overhang. Getting stock does not mean it can be diluted by further stock issuances. There is no deceit there. > Literally all I'm arguing for is a more honest (and therefore meritocratic) Honesty has nothing to do with meritocratic. For example, the person next to you on an airplane surely paid a different price. It's neither dishonest nor meritocratic. It is what both parties agreed upon. Each person has a different level of risk tolerance and desire for money. Everybody in a startup gets a different deal based on their ability to negotiate, what they want, their risk tolerance, and the desire of the company to get them on board.