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> when the company sells, the upside goes entirely to management and investors But for early startups that's basically an unlikely outcome.
by ivalm 7y ago
> when the company sells, the upside goes entirely to management and investors
But for early startups that's basically an unlikely outcome.
- tptacek 7y agoI agree. Working for early startups is risky. I'm just saying, we're unlikely to mitigate the risk by eliminating preferred shares for investors.
- ska 7y agoWhat about the converse, giving preference constraints to early/founding employees? Early founders & execs handle this by a combination of a) large initial stake to survive dilution and b) the ability to cut a deal eventually to counteract impact of liquidity preference etc. ... but you can only extend that to so many people. I don't think it's insane to structure things in such a way that you are basically saying if anyone makes money off this, these people do in proportion to their relatively small stake. I suppose the real problems here are that 1) early round investors don't get this protection (but I think they can just accept that) and 2) at some point you get a different class of employee equity which could be hard to judge.
- tptacek 7y agoI don't understand the proposal. I don't see what problem preferred stock for employees solves. I do see what problem preferred stock for investors solves. I do think employees should care about the preferences investors get, and judge their opportunities accordingly.
- ska 7y agoIdea is risk management for early stage employees,as a mechanism to make it hard for the company to later write a deal where they are entirely (or nearly) shut out of an event that has at least some decent return for founders and late investors. I was just musing, haven't thought about it deeply. I suspect we agree on the real solution, which is work out your business plan so that you can pay real market rates (and give them a chance to participate in early rounds)
- tptacek 7y agoI suspect you're thinking about this in generalities, like "everyone is taking some risk so everyone should have comparable risk protections". But preferred shares for investors address a specific kind of risk, involving management's incentives, one not shared with employees. The rest of the protections VC gets for their shares are simply a result of market power. They have it; employees won't organize and don't.
- ska 7y agoMore specifically perhaps that very early employees should organize, and push for this. In particular, to counteract management incentives that may otherwise throw them under the bus. Agree it’s not identical to VC case, but similar enough that as a mechanism it could work.