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"Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most
by SpicyLemonZest 2y ago
"Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most early stage startups is an intentional attempt to deceive employees. There's a lot of founders out there telling early engineers they're getting "0.5%" when they know full well that a $1B acquisition down the line is not going to put 5 million dollars in the engineer's pocket.
- sudoshred 2y agoPlaying both sides with this comment
- SpicyLemonZest 2y agoI don't intend to be on the founders' side at all, I'm just not quite sure I'd throw them in jail over it. I'd definitely call it "cooking the books" comfortably.
- sudoshred 2y agoIntentional misrepresentation is fraud, but I understand pragmatically how the line could become blurred. What I object to is the idea that blurring that line is intentional, even if that is not acknowledged.
- fnbr 2y agoCan you explain? In most cases, preferences won’t come into play, assuming you raise at a standard 1x preference and sell for more than you have raised. In that case, owning 0.5% should roughly translate into $5M (modulo dilution).
- immibis 2y agoThat would be the naive mathematical interpretation and how the system would work if engineers designed it. Lawyers designed it, though, and they probably know some tricks to make that not happen.
- fnbr 2y agoLike what? All the examples people have said are where either 1) the company has Nx preferences, for N >1, in which case the company has essentially failed to fundraise or 2) the company sells for less than they raised, which again, is a polite form of failure.
- cyanydeez 2y agolets no degrade lawyers more than necessary. Business people hired lawyers to design means and methods to commit _implicit_ fraud and deceptive practices to improve the value of their capital assets. Those lawyers then go on to sell this product to others. I'm sure there's some lawyers out there that are going out there shopping this stuff around, but it's Capitalism and Business thats the active agent, not Lawyers.
- guappa 2y agoYou think engineers never scam?
- Der_Einzige 2y agoNot like lawyers, dentists, car salesmen, etc do!
- wrs 2y agoThere are plenty of valid scenarios where the company sells for a lot, but less than it raised. And 1x preferences are no longer standard post-ZIRP, afaik. People are often not aware that the value of common is nonlinear, so the value of 0.5% in this case is zero. (For the ML fans out there, the common price per share has one or more ReLU activation layers. :) )
- est31 2y agoEven with 1x preferences, the company might have raised $2 billion but sells for $1 billion because the investors don't want to get any further losses. The general rule of thumb is that acquisitions are bad for employees, and IPOs are good, especially if the share price is stable for 6 months.
- jaredsohn 2y agoAlso for acquisitions, often you'll have to work at the acquiring company for some time to get money from your options. Or might get options in the acquiring company instead (which again are worth nothing until some future possible equity event which hopefully translates into cash).
- pc86 2y agoHave 1x preferences become standard? When I worked in startups early investors often has 2x or 3x liquidation preferences, especially at seed.
- pdntspa 2y agoI am under the impression that an oversized cap table is pretty much standard. Am I wrong?
- jonas21 2y agoFounders will almost always have common stock too, so they're in the same boat - it's only investors who will have preferred stock. If you don't spend 10 minutes to understand liquidation preferences before accepting a startup offer, that's kind of your problem.
- fragmede 2y agoKinda? The underlying issue is someone you think you can trust not telling you the full details so they can fuck you later.
- lotsofpulp 2y agoThe underlying issue is trusting someone you should not trust, someone on the other side of the negotiating table who has interests opposite to yours.
- fragmede 2y agoYeah but I'm a programmer and don't innately understand that social power dynamics stuff. They're friendly and nice people and offer me drinks and snacks when I meet up with them. What do you mean they don't have my best interests at heart?
- __turbobrew__ 2y ago1. If the company is bootstrapped the founders can have preferred stocks with whatever clauses they want on it 2. Most (all?) companies will not show you their cap tables so it basically boils down to “trust me bro”
- lotsofpulp 2y agoThe logical conclusion to #2 is valuing the equity compensation at zero, and foregoing it and asking for extra cash.
- nirvdrum 2y ago