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Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1
by Finbarr 2y ago
Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures.
> As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR in two years) to become a founder and that is when it clicked - I expected to feel stressed, pressured, and the weight of all of the risk I was taking.
Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!
- Finbarr 2y agoThe bigger secret is that stock sold in secondary sales by founders and employees is usually common stock, and the purchasers will often get the right to convert this to preferred stock. This means that the company is instantly encumbered with a greater liquidation preference, without the increase in balance sheet to offset it.
- laser 2y agoHow is that legal and not considered self-dealing and unjust enrichment? If I was a minority common stock owner in a business I assume I would have standing to sue for damages if a majority owner or officer made my position materially worse while enriching themselves in such a manner? Are you sure such a right is typically granted? I mean even the gap between 409A valuations and preferred valuations, as well as a huge amount of precedent, give a different material value to preferred and common stock. Giving that right out of thin air in a sale by an insider is effectively theft from common holders and I have trouble believing what you’re saying as I’m not sure how that could be kosher, if perhaps infrequently litigated. But is it really standard like you make it sound? That would be a very dirty secret and I expect would and should lead to litigation.
- lancewiggs 2y agoFlip it around - it becomes a condition of the deal happening imposed by investors, who themselves are motivated to present the best deal to founders, and to have founders less economically stressed. No secondaries - no deal, and that doesn’t help anyone.
- deleted 2y ago[deleted]
- KingMob 2y agoIANAL, but if you only have options, and not stock, do you still have standing to sue?
- mountainb 2y agoWho has the cause of action? The majority shareholders. Who authorized the stock sale? The majority shareholders. Are they really likely to sue the founder for something that the shareholders authorized? Only in some states would minority shareholders have a cause of action. So there are some states in which the courts agree with you. As you might imagine, startups do not typically incorporate in those states.
- Finbarr 2y agoIt is very common and usually a condition of closing. Investors know that preferred is way better than common. They are buying highly speculative assets and want strong downside protection.
- red-iron-pine 2y ago> How is that legal and not considered self-dealing and unjust enrichment? because, ultimately, Capital writes the rules, and they chose to allow this
- anxman 2y agoI used Founders Preferred shares to get liquidity at the A (for a now defunct startup). In our case, we offered all vested employees the option of selling in the same round on the same terms. I personally don’t recall any disclosure requirements at 10 people; however, we didn’t have that many participate so perhaps it didn’t apply. In general, Founders Preferred does layer on the preference stack but also hopefully by a relatively trivial amount to the overall funding size.
- Finbarr 2y agoYes, as I mentioned it only applies when you have 10 sellers.
- throwaway-blaze 2y agoFounders never have preferred shares, at least not the same class of preferred (with the same preferences) as investors.
- janjongboom 2y agoNot never. E.g. all the capital we as founders put in the business before we raised our seed round was converted into Series Seed Preferred shares at the same rights as angels / seed VC. Small portion of total equity but still.
- anxman 2y agoFounder Preferred is a special class of stock that can convert into Preferred when sold. It’s different from Common as it doesn’t affect the 409A. IANAL.
- colordrops 2y agoI often hear about these SEC rules that explain why individual contributors get fucked, as if that's a good excuse. Either the requirements and disclosures should be fulfilled and more than 10 sellers allowed, or the rules should change, or both.
- llamaimperative 2y agoIt sounds like they could’ve fulfilled the requirements and had more than 10 sellers but chose not to.
- Finbarr 2y agoI didn’t comment on whether it was a good reason or not. My comment was just highlighting some of the complexities in what the blog author was hoping to achieve.
- sneak 2y agoWhere would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.
- angio 2y agoA lot of people (esp people that performed extremely well in school and in corporate environment) find "failing" and "losing reputation" very stressful.
- sneak 2y agoLandlords and supermarkets dgaf. There is no real risk, and if they stress over it, that’s more a founder’s own psychological failing than anything else. If you care what other people think that much, you probably don’t have sufficient quantities of the oft-cited “grit” that founders supposedly require.
- zztop44 2y agoI think if the idea of your company failing doesn’t cause you at least some stress then you probably shouldn’t be running a company?
- FactKnower69 2y agoI guess harden the fuck up?
- SOVIETIC-BOSS88 2y agoThank God someone said this. Of course it is stressfull, there is no free lunch. If you can't take the heat just dont enter into a such top-heavy game.
- verticalscaler 2y ago[flagged]
- burutthrow1234 2y ago> Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here! Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque. If you fail you get acquired and get golden handcuffs. If you start a real business you can expect to take on debt, and you'll be personally guaranteeing it because nobody cares about equity in your boutique ice cream parlour. Plus a 5-year lease (which you will also personally guarantee).
- p_l 2y agoRunning with VC funds? Oh god, that would be cakewalk compared to even just figuring out how to ensure there's food if you spend money on some necessities for prototype...
- joenot443 2y agoThe most common endgame for a startup is slowly running into the ground until the money runs out and you eventually shut the doors. Failing your way into a happy acquisition isn’t really something to expect as a contingency, I don’t think.
- BeFlatXIII 2y agoThen use those five years to enjoy the fanciest office equipment VC money can buy. Don't cry because it's over; smile because it happened.
- tmpz22 2y agoThe contingency isn't golden handcuffs its using one of the hundreds of C-level connections you made as a Founder doing sales and networking (and accelerator programs) to get you a cushy gig as a Product Lead, Operations Lead, or similar title with a strong paycheck and immediate authority.
- WarOnPrivacy 2y ago> Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.
- onlyrealcuzzo 2y agoEspecially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away. Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really want. You might have foregone your shot at a partner to build a company to mostly profit someone else who did nothing but write you a check. If you do have kids, you'll be old as hell raising them. All you'll have is extra stuff hardly anyone cares about - except maybe you - if you're the type of person chasing down a decimillion net worth. I hope these people truly enjoy their boats and their third homes in Aspen! It sure is a lot of work to get them.
- whynotminot 2y agoIt’s a shame you were forced to take on this burden and not allowed to be a regular engineer like your peers.
- Finbarr 2y agoNobody is forced to become a founder. A lot of people are naive to the sheer level of stress involved, and think it’s going to be easier than it actually is. You don’t find out just how stressful it is until you’re already super committed, have raised money, have employees, and there’s no easy way out without screwing a whole bunch of people over. Founders tend to only talk about the good things happening at their companies, and tech press tends to focus on the successes. These things contribute to more people starting companies.
- dclowd9901 2y agoCorrect me if I’m wrong, but my perception of most startups at series A is that they’re not usually more than ten-ish employees, and even then, you’d expect more balanced comp packages for employee number 11+, no?