10 ms·

Not joining one startup whose worth will be $0 in the long run is not enough. One needs to evaluate another type of exit that, in fact, is much more common that

• deleted 5y ago
  [deleted]
• engmgrmgr 5y ago
  You should do your due diligence on the business and financing to avoid this situation, and unless you have a ton of equity, you should hedge your bet on multiple companies if you’re trying to make high ROI and you aren’t feeling confident that’ll happen in your current gig. “Start-up” is a bit of a disingenuous term when using to compare with FAANG, because one refers to a class of high performing public tech companies, and the other is a catch all for small businesses. I know chronically broke start up folks, faang millionaires, and a group of people who seem to to know how to play the startup game and are extremely wealthy, so YMMV.
  • cheriot 5y ago
    I’ve received offers from a bunch of startups over the years. None of them would disclose their cap table. Most of them even refused to tell me the total number of shares outstanding. Are people getting enough info for any kind of due diligence? Do people know how to play the game or did they get lucky?
    • tptacek 5y ago
      Don't work for companies that offer equity as a significant component of their compensation and won't tell you shares outstanding. That used to be somewhat common, but I can't remember the last time a friend of mine got an offer where that was the case. It's a red flag.
      • JCM9 5y ago
        For a privately held company the number of shares outstanding, on its own, isn’t enough and really doesn’t tell you much. Your shares are almost certainly not the same as other people’s shares and you need to know what those differences are. Other people likely hold shares that have terms like “I get paid 3X my investment before anyone else gets paid.” Or other terms that make the total number of shares not that informative in knowing where you really stand. If someone’s not sitting down with you and laying everything out on the table then it’s almost certain there are things they don’t want you to know that make your offer significantly less attractive than what it might appear in face value.
        • tptacek 5y ago
          You can ask about liquidation preferences as well. Anything above 1X is above market and, again, a red flag.
      • throwawaysea 5y ago
        Is there a list of these red flags to watch out for or ask about for startups?
    • HWR_14 5y ago
      Do you need the whole cap table? Presumably, common shares outstanding, preferred shares outstanding and the total dollars of the overhang of the preferred shares should be sufficient. Assuming that options are correctly accounted for in that number (that is, if people cash in ITM options)
      • cheriot 5y ago
• dhruvrrp 5y ago
  A bunch of early engineers i knew made less than 100k when their company got acquired for $320m cash. Down rounds and preferential stocks are not fun
  • danrocks 5y ago
    I made $10k on a $138m sale and $50k on a $125m sale. I am that early Engineer you speak of.
    • leetrout 5y ago
      Did you know the cap tables at those companies?
      • danrocks 5y ago
        I don't think anybody knew the cap table for those companies. To be more precise: one of them didn't even have a cap table, the other was a secret between the lead investor and the original owner (an incubator). Needless to say nothing was disclosed to engineers, or any one of them for that matter. Even in this state, both companies raised a shitton of money.
        • leetrout 5y ago
          This is what had been surprising to me in my experiences... first few startups the cap table was shared info but no specifics (investor pool 33%, employee pool 7%, etc) so at least you knew the rough outlay. Then one recent startup was championing transparent salaries but wouldnt share anything about the cap table which seemed odd to me. My current company the CEO answers questions about the stock outlay but not specifics but also doesnt claim to be transparent. I just assumed from my earliest experiences most small companies were happy to explain the cap table and walk folks through dilution events.
          • bingohbangoh 5y ago
            Cap tables can change very quickly too. Even if you know at the beginning, you’re not privy to any changes later on.
• deleted 5y ago
  [deleted]
• fnord77 5y ago
  It seems to me that investors have figured out other ways of zeroing out startup employee equity, too. I think the days of people getting rich from working for a successful startup are over.
  • aerosmile 5y ago
    Some data to back up your argument would really help here. The VC market has never been more founder-friendly, and the amount of VC invested is at an almost all-time high. Additionally, last year was the 3rd highest in the last 20 years for the number of IPOs. So just because you found yourself in an overly negative HN thread shouldn't skew your view that the chances of doing well are higher now than ever before (which is not meant to imply that they are high on an absolute level, but certainly in comparison to prior years).
    • dan-robertson 5y ago
      Why does “The VC market has never been more founder-friendly” contradict the statement above that the outcomes are not so good for employees (who aren’t founders)? Perhaps the VC market became founder-friendly by transferring upside from employees to founders. Or perhaps some other mix.
      • aerosmile 5y ago
        A founder-friendly term sheet is not necessarily an employee-friendly term sheet, but a founder-unfriendly term sheet is 100% of the time bad for employees as well (low valuations, liquidation preferences, etc). All things being equal, as an employee you want to be in the company where the founder is laughing all the way to the bank.
    • fnord77 5y ago
      for starters, there's this for IPOs (or lack of IPOs) https://steveblank.com/2019/04/10/startup-stock-options-why-a-good-deal-has-gone-bad/ https://steveblank.com/2019/04/10/startup-stock-options-why-... also, anecdotal, I've seen it happen. I was at a recent startup that got bought. I was employee 15. Somehow, the ISOs got set to $0 worth but the founders made out like bandits with their preferred stock.
• twistedpair 5y ago
  Friend was the founding engineer at startup that did quite well. Eventually sold for 100s of millions, and yeah, he didn't see a dime. Always discount those options to 0, and make sure you're getting a good salary.
  • jeffwass 5y ago
    I’ve seen this term around lately. What exactly is a “founding engineer”? Is it a euphemism to give early non-founder employees a title that sounds like founder but with minimal corresponding equity?
    • ithrow 5y ago
      exactly
    • whymauri 5y ago
      It is completely arbitrary. Arguably, all roles at seed stage or earlier are arbitrary.
    • dudul 5y ago
      Yes, and usually pretty bad salary. I haven't seen any comment mentioning it, but it's another way to get screwed when joining a very early stage startup. The 1st engineers join pre-series A, get pretty low salary with the promise of making it big when the company goes public or is bought. Then more engineers come on board when the company has more resources after a few other rounds of funding and they get a salary much closer to the market.
    • nrook 5y ago
      A neat thing about the job is you probably get to exercise early and save taxes on your equity if it actually pays off. But yes, it's not worth that much more than joining a startup later, and it'd be foolish to evaluate it differently. It's fun, but if you don't have real founder equity don't trick yourself into working longer hours than you would at a regular job.
    • twistedpair 5y ago
• binbag 5y ago
  This is an oversimplification and, as written, is not quite right. It doesn't matter whether the company is acquired outright or floated on a stock market. If the company has a well-structured employee options scheme, then either of those events should be classed as an 'exit' event and the employees' options should be automatically exercised and sold, giving them the net gain in cash on that day. As for preference shares, most VCs try to get that. They can be negotiated away by the company management sometimes. If they remain, they come into play in situations where the company isn't successful - where the shares are sold at a lower value than they were bought for. The preference gives the VCs to get their money out first, and leave the scraps for the others. Usually the others includes the founders who are similarly shafted - but then again they evidently didn't build the value of their company very successfully and they signed the deals.
  • dan-robertson 5y ago
    VCs often get shares with (e.g.) 3x liquidation preference meaning that they should leave with max(3x value invested, num_shares x sale_price / total_company_shares), or less if the company didn’t sell for enough money to pay out that tranche and the more senior shares. For VCs, the point is that in a failed company, they get 0. In a medium-success they get up to 3x their investment a bit like buying a bond for 33¢ on the dollar, and in a massive success they get equity-like payout. The problem is that if a company has a lot of shares outstanding with a high liquidation preference then outcomes that look like success to employees or founders may not result in those employees making much money, and the employees generally don’t know the relationship between how much the company is sold for and how much they get paid because it is confidential to the senior executives or investors.
    • molsongolden 5y ago
      Often? I agree that liquidation preferences are often overlooked by startup employees but I wouldn't say 3x is common or generally acceptable. The National Venture Capital Association (NVCA) benchmarks[1] show that over 95% of term sheets across all funding rounds include a 1x liquidation preference. [1]https://nvca.org/model-legal-documents/ https://nvca.org/model-legal-documents/ (it's in the Enhanced Model Term Sheet v2.0)
• Seattle3503 5y ago
  It seems like there should be a law requiring this to be explained in plain terms at offer and each month to options holders. For example they should show you a graph with the x-axis as exit valuation and the y-axis as "your payout". Those are the numbers that really matter to most employees.
  • frenchie4111 5y ago
    There's no law, but do not accept an offer at a startup where the founders / leadership are not willing to explain this to you whenever you ask.
    • mathattack 5y ago
      Yes. There is a lot of confidentiality built into some of the financing terms. Befriend the CFO. A good one will say “If sell for X, you will own Y% of the company, which will be worth Z to you” and they can give another few scenarios too. “We need to clear A in valuation for employees to get anything, and at Y you get a little” Other rough heuristics: - Down rounds tend to punish employee shares. - Pivots that require large equity tend to be bad for employee shares. - Large rounds relative to valuation ($700mm for a post money valuation of a billion) make a much higher future hurdle to clear - bad for employee shares. - PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection) All of these general rules have many exceptions.
      • throwawaysea 5y ago
        > Large rounds relative to valuation ($700mm for a post money valuation of a billion) make a much higher future hurdle to clear - bad for employee shares. Is that a scenario where the company has a pre money valuation of $700m and accepts $300m in funding? Why is that a bad thing? Sorry if this is a naive question. > PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection) Is this a binary thing or do investors exist on a spectrum? I’ve also heard another label, “growth equity”, which sounded a lot like venture capital to me. And are those rounds necessarily worse? Is it about the PE firm selecting deals to fit their risk appetite or is it more about them inserting clauses that are harmful to common share holders (not sure what the right term is but I mean regular employees).
• d357r0y3r 5y ago
  Back around 2012, I made 10k cash + stock that would eventually net me around 30k on a ~50 million acquisition. I had been at the company for less than a year. I was employee #50 or something. This sounds like a much better deal than anything I've seen down thread, and it was actually serious money for me at the time. Honestly, I think this just comes down to the moral character of the founder(s) in the company. If you have a good way of assessing that in the interview process, then maybe take it into account? Doesn't sound easy to do though.