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But also know that if liquidation preferences are coming into play for the company’s exit, it’s almost certainly a giant failure and any late joining employees

But also know that if liquidation preferences are coming into play for the company’s exit, it’s almost certainly a giant failure and any late joining employees aren’t getting anything significant. If the startup is not growing extremely fast, the stock will likely not be worth very much regardless of how “clean” the terms are on the preferred stock. If you expect stock to be a big part of your compensation then leave after 2 years of the company’s growth is not sustained and rapid.

pclmulqdq 4y ago
It's not a giant failure if liquidation preferences are in play. Liquidation preferences help in literally every scenario that is not an IPO. It is very common that a startup exits in an acquisition, and usually when that happens, small common shareholders get a lot less than the "value" of their stock. The liquidation preference protects you (or pays out a bonus) in that case. It has a huge effect on the EV of a startup investment, and that's why VCs and founders use them.
- peter422 4y ago
  Help who? I’m specifically talking about an employee getting standard common stock. If liquidation preferences are coming into play, you’ve already lost as a common shareholder. But you should never be in that situation to begin with. If a company is struggling or growing slowly, quit and join one that isn’t.
  - pclmulqdq 4y ago
    Liquidation preferences advantage you compared to common stockholders in any situation that isn't an IPO. In a slightly disappointing acquisition (the most common outcome for a "successful" startup), it saves your butt. If you have double-dipping shares or a higher liquidation preference, you are going to make a lot of money in a bad acquisition situation. Liquidation preferences are cheap insurance against bad outcomes. Most startups have bad outcomes. However, people getting common stock are hurt by every share with a liquidation preference. It is in your interest, as a startup investor (or employee), to get a liquidation preference if you can.
    - peter422 4y ago
      There is not a single respectable startup in existence that will give a random employee options or stock with liquidation preferences. For 99.9% of startups that would involve making a new class of shares for you, which ain’t gonna happen. Investor is of course completely different for many reasons and I’m not speaking to that. And anyways unless you are leading the round, which you aren’t, you are just getting whatever preferences the lead is getting anyways.
      - pclmulqdq 4y ago
        Nobody would give you preferred stock, which is why you need to demand an absolutely absurd premium on the amount of common stock that they offer. Also, it generally doesn't need a new class of shares, just a vote by the board. Edit: Just to clarify, if you want to hire a mercenary, you can't do it expecting that they will take the same value of your stock that your true believer investors took without any of the guarantees that your investors got. They are investing time into your company and you need to make it worth it.
        peter422 4y ago
        This just doesn’t make sense though. A company is going to have some standard bands of compensation, and if you demand something way outside of the bands based on your own feelings of stock value, they aren’t going to hire you no matter how great you are. Part of the reason companies can give generous stock grants are precisely because they are the lowest tier of stock. This also is a stupid thing to bargain: if the company keeps growing, preferred and common will be worth the exact same thing. So instead of trying to extract better preferences on the stock (which you won’t), join a fast growing company and leave if it stops growing fast.
        lmm 4y ago
        > A company is going to have some standard bands of compensation, and if you demand something way outside of the bands... If you're joining early enough to get enough equity to matter, you're early enough that they don't have standard bands. You can absolutely negotiate. > if the company keeps growing, preferred and common will be worth the exact same thing. Only if it ends in an IPO. An acquisition, even a "successful" one, can easily end up with the preferences kicking in.
joshribakoff 4y ago
Some companies do tender offers (stock buyback) to give employees liquidity, but unfortunately the c suite and investors (those who typically have a more favorable liquidity preference) can cause the tender offer to be oversubscribed if they enter more sell orders than there are buy orders. Usually this means common stock owners do not get to participate. Preferred stock can also be converted to common, but not the other way around.
- peter422 4y ago
  Tender offers will only happen when somebody wants to buy stock, which means they think the stock price is lower than it will be in the future, which means they expect the company to grow or keep growing. The companies where liquidation preferences are going to screw you are not going to be having tender offers, because by definition nobody wants to buy the stock! If they did want to buy the stock at above the current price then liquidation preferences aren’t coming into play. (Note: I’m sure there are examples where a company did have a tender offer at some decent price before falling off a cliff and having a bad exit where the common stock was wiped out… but that is not common at all)

pclmulqdq 4y ago

It's not a giant failure if liquidation preferences are in play. Liquidation preferences help in literally every scenario that is not an IPO. It is very common that a startup exits in an acquisition, and usually when that happens, small common shareholders get a lot less than the "value" of their stock. The liquidation preference protects you (or pays out a bonus) in that case. It has a huge effect on the EV of a startup investment, and that's why VCs and founders use them.

peter422 4y ago
Help who? I’m specifically talking about an employee getting standard common stock. If liquidation preferences are coming into play, you’ve already lost as a common shareholder. But you should never be in that situation to begin with. If a company is struggling or growing slowly, quit and join one that isn’t.
- pclmulqdq 4y ago
  Liquidation preferences advantage you compared to common stockholders in any situation that isn't an IPO. In a slightly disappointing acquisition (the most common outcome for a "successful" startup), it saves your butt. If you have double-dipping shares or a higher liquidation preference, you are going to make a lot of money in a bad acquisition situation. Liquidation preferences are cheap insurance against bad outcomes. Most startups have bad outcomes. However, people getting common stock are hurt by every share with a liquidation preference. It is in your interest, as a startup investor (or employee), to get a liquidation preference if you can.
  - peter422 4y ago
    There is not a single respectable startup in existence that will give a random employee options or stock with liquidation preferences. For 99.9% of startups that would involve making a new class of shares for you, which ain’t gonna happen. Investor is of course completely different for many reasons and I’m not speaking to that. And anyways unless you are leading the round, which you aren’t, you are just getting whatever preferences the lead is getting anyways.
    - pclmulqdq 4y ago
      Nobody would give you preferred stock, which is why you need to demand an absolutely absurd premium on the amount of common stock that they offer. Also, it generally doesn't need a new class of shares, just a vote by the board. Edit: Just to clarify, if you want to hire a mercenary, you can't do it expecting that they will take the same value of your stock that your true believer investors took without any of the guarantees that your investors got. They are investing time into your company and you need to make it worth it.
      - peter422 4y ago
        This just doesn’t make sense though. A company is going to have some standard bands of compensation, and if you demand something way outside of the bands based on your own feelings of stock value, they aren’t going to hire you no matter how great you are. Part of the reason companies can give generous stock grants are precisely because they are the lowest tier of stock. This also is a stupid thing to bargain: if the company keeps growing, preferred and common will be worth the exact same thing. So instead of trying to extract better preferences on the stock (which you won’t), join a fast growing company and leave if it stops growing fast.
        lmm 4y ago
        > A company is going to have some standard bands of compensation, and if you demand something way outside of the bands... If you're joining early enough to get enough equity to matter, you're early enough that they don't have standard bands. You can absolutely negotiate. > if the company keeps growing, preferred and common will be worth the exact same thing. Only if it ends in an IPO. An acquisition, even a "successful" one, can easily end up with the preferences kicking in.

joshribakoff 4y ago

Some companies do tender offers (stock buyback) to give employees liquidity, but unfortunately the c suite and investors (those who typically have a more favorable liquidity preference) can cause the tender offer to be oversubscribed if they enter more sell orders than there are buy orders. Usually this means common stock owners do not get to participate. Preferred stock can also be converted to common, but not the other way around.

peter422 4y ago
Tender offers will only happen when somebody wants to buy stock, which means they think the stock price is lower than it will be in the future, which means they expect the company to grow or keep growing. The companies where liquidation preferences are going to screw you are not going to be having tender offers, because by definition nobody wants to buy the stock! If they did want to buy the stock at above the current price then liquidation preferences aren’t coming into play. (Note: I’m sure there are examples where a company did have a tender offer at some decent price before falling off a cliff and having a bad exit where the common stock was wiped out… but that is not common at all)