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> If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up se

• simonebrunozzi 2y ago
  You are not taking into account QSBS. [0] When you sell your stocks before 5 years of holding period has passed, you pay significantly higher taxes. So you don't get 500k net, you get 500k gross, or probably 300k net. Which makes the de-risking less compelling. [0]: https://www.investopedia.com/terms/q/qsbs-qualified-small-business-stock.asp https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...
  • nine_k 2y ago
    This is when you immediately liquidate your stock position, instead of taking a loan using it as a collateral, which would likely cost you 10%-15% in interest, not 30%.
    • andrewmutz 2y ago
      No, in this example the person sold equity in order to get the 500K. They can't use the equity as collateral for the loan because they dont own it anymore
      • nine_k 2y ago
        Yes. They should not have if they were to optimize taxes.
        • tyre 2y ago
          But then they’re paying interest and very few startups are going to have stock that a someone will lend against. I cannot imagine someone taking Series A stock as collateral for a loan.
      • kelnos 2y ago
        I think it'd be pretty rare for a bank to accept equity in a series A startup as collateral for a loan.
        • andrewmutz 2y ago
          And even if it did, it wouldn't really derisk much for the founder, which was the original purpose of taking money off the table.
    • rKarpinski 2y ago
      Not sure why you are getting downvoted. There are multiple ways of structuring what is effectively selling the shares early that are not tax disadvantaged.
  • lotsofpulp 2y ago
    I do not see the purpose of this nitpick. The numbers are made up anyway, adjust up by a few hundred thousand and the point that securing one’s shelter is worth foregoing winning the lottery still stands.
• brightball 2y ago
  Exactly. About 15 years ago I was offering equity in a good little startup. I didn't take it because I just wanted to go somewhere with a higher salary. When they finally sold about a decade later I ran the numbers and determined it would have been about $40,000 based on the actual sale price. There's no guarantee of a $50M exit for anybody.
  • scruple 2y ago
    Hear, hear. My one-time $10M (early employee) eventually cashed out at a low/mid 6-figures. Take the salary I earned multiplied by the years I spent there, add to it the IPO, and then divide by number of years I was there. I could've trivially surpassed that annual salary elsewhere. Lesson learned.
• remus 2y ago
  Not to mention that in reality there is no guarantee you'd end up selling for $250m. $500k now would look pretty damm good if the whole thing tanks and the other 90% of your shares become worthless.
• corry 2y ago
  Regret is perhaps too strong of a word. But $5M is $5M even if you have $45M. Sure, it won't change your life since you have the $45M, but the incremental investing / philanthropy / estate / family help etc that it allows you is real in absolute terms. The other thing I've noticed is that for people on the other side of this transaction, it's not like "smaller numbers" all of a sudden become immaterial. $1M is still $1M. $5M is still $5M. Again, I'm with you, I don't think it's regret exactly. But post hoc you might choose differently, even if it's the rationale choice at the time.
  • sarchertech 2y ago
    >$5M is $5M even if you have $45M The whole concept of diminishing marginal utility is that this isn’t true. The first $5M is worth far more to a given individual than the last $5M.
  • bruce511 2y ago
    Your argument is treating the future as knowable and certain, while not accounting for the value of risk. I guess you'll feel pretty bad if you pay for car insurance for 40 years, and never have a crash. If the 100% upside is guaranteed, then sure, you should hang on. But if "anything can happen" then cashing out 10% now, and providing a "can't fail" safety net, is well worth it. The reduction of risk of "losing it all" is well worth the 10% premium. And if the (somewhat unlikely) big exit ever happens you still have 90%.
    • kelnos 2y ago
      > If the 100% upside is guaranteed, then sure, you should hang on. Overall agreed, but that's not even always true! If you're -- for example -- under crushing levels of debt today, you very well may want to take that $500k now, even if that $50M is 100% guaranteed in 5 or 7 or 10 years. Or even if you aren't in debt, but would find it a huge quality of life improvement to be able to have a down payment for the house you'd really like to live in now, and not have to wait 5 or 7 or 10 years.
  • deleted 2y ago
    [deleted]
• neilv 2y ago
  Just to clarify about taking the $500K rather than even guaranteed additional $5M ($50M vs. $45M) years later... $500K is an immediate big quality of life boost for most people. For example: a condo/house downpayment, which lets you move out of cruddy ramen apartment, to routinely get a good night's sleep. And/or that relieves some of the various other startup salary level money stresses on your family. I think this can also be aligned with the goals of the startup. You don't want people so "hungry" that the stress is hurting their health and their home lives. You want them motivated by the mission, the work, the environment, and the possible big liquidity windfall in the future -- but not by desperation.
  • elevatedastalt 2y ago
    Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are. Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.
    • neilv 2y ago
      Maybe it depends on the area and kinds of properties one is looking at? Only a little anecdata, but the few times I've looked (affluent university town, once recommended as a place to do a tech startup)... if one could swing a downpayment on certain places, the monthly costs were lower than rent one would otherwise have to pay, on places not as nice.
      • elevatedastalt 2y ago
        In the zero interest era it could be. Much harder now.
• dheera 2y ago
  Exactly. As a former founder who dealt with hospitalization and thousands of dollars a year in medical bills on the sh!t insurance startups can afford, I too would rather have 500K now than 50M later. There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments. Plus, setting 100K aside for medical bills and even throwing the 400K into Bitcoin is a far less risky investment than me NOT being in a FAANG and accumulating 401K money which is absolutely critical if you want to keep up with the rising cost of life through retirement. When everyone else who joined Google or Meta out of college and now has a 10 million net worth at 40, that defines the cost of living in the area, and that's the bar you have to keep up with if you want to still live here at 40, 50, 60. Chipotle will cost $50 in a few years. A 1 bedroom apartment will cost $5000 in a few years. UberEats was $15 when it started, already costs $50 for lunch in my area, and at this rate, it will be $200 in a few years. Because those people can afford it, so greedy owners and greedy landlords will up their prices, so I will have to pay not just my $5000 rent, but also the Chipotle worker's rent, and the Chipotle franchise's rent, in order for their prices to stay profitable. The cost of living in the bay has tracked the S&P500, not the CPI. YOU will be priced out if you didn't have liquidity at a younger age to throw into some investments. I'm at a large company right now. Being compensated enough to be able to afford life in the bay area now, having enough income to afford a mold-free modern apartment in a place where I don't need to worry about getting mugged, and hedge the risks of all the crap that's going on in the world was a big part of my reason to join one. If I had enough saved to "feel safe", I would absolutely be doing a startup again.
  • kelnos 2y ago
    > There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments. I would very much like to know where you can find low-risk investments that are likely to net you 10x-40x returns in the span of 10 years. (But overall I very much agree with your point that $500k now and $45M later can be a much much much better deal for someone than $0 now and $50M later. I would likely take that deal every single time.)
    • dheera 2y ago
      > where you can find By doing homework and research every day and investing only in things you personally deeply understand. But if you don't want to do that ... passively investing in QQQ would have given you a 5.4X return in the past 10 years. If you just throw your money across some large, too-big-to-fail companies, you could have 10X'ed easily. AAPL, NVDA, MSFT, TSLA, NFLX have all >10X in the past 10 years. GOOG, META have come close. You could have split your money evenly across the biggest 5-10 companies in tech and 10X'ed. And if you actively invest and do day-to-day research it's fairly easy to beat 10X in 10 years. By the way my definition of "low risk" is calibrated to the risk of founding your own startup and making 100K/year hoping for a big payout later in the future vs. joining a big company and making 500K/year. My "startup founder calibrated" low risk stock investment means: - Reasonably high probability to 10X in 10 years - Some probability of losing money, but very low probability of losing most of your money - If you lose money, it's because of a major world situation, and holding for another 10 years will probably get you out of that - You also have skills and are hireable so you can hold the stocks
• kelnos 2y ago
  Yep; for the vast majority of people, the difference between $45M and $50M is not going to change their lives in any meaningful way. With that amount, you can live a fairly lavish lifestyle and still see the number in your brokerage account go up every year. I actually kinda think a founder that was otherwise already wealthy wouldn't mind this too much, either: say they already have $50M in the bank; the difference between $95M and $100M feels even less of a big deal than $45M and $50M. Granted, the founder with $50M already in the bank probably wouldn't bother with the $500k in the first place, though, especially if they believed in the likelihood (or guarantee, in your hypothetical) of a future larger exit.