6 ms·

Startup Equity 101

200 points by surprisetalk 1y ago

Oarch 1y ago
I wonder how much longer this logic can hold. I have equity in the startup I'm at. It's a very complex platform and in a niche / emerging market. Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure. The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable direction of travel. What happens to my equity? Welp. Might not be great news.
- haxton 1y ago
  Always treat startup equity as 0 until you've sold it.
  - edoceo 1y ago
    Correct. The motivation for equity comp should be more of "I want to change the world" than the "I want big money". The odds are very against it. Here's some older stats (2017) https://berkonomics.com/?p=2899 https://berkonomics.com/?p=2899 But searching, you'll find loads more studies on startup/angel/seed. It's like, optimistically, 1/20
    - Oarch 1y ago
      Good advice! Thankfully I do want to change the world (for the better I hasten to add) and so far so good.
- Aurornis 1y ago
  There’s more to a successful business than masking an app. A lot of acquisitions are made by companies that could re-build the acquired product themselves. They’re buying the business, brand, and customer base, not the app.
  - ldjkfkdsjnv 1y ago
    This isnt true, nobody knows what will happen when you can very cheaply replicate software. The sales etc are valuable, but when the cost of producing the product goes to zero, weird things will happen.
    - henry2023 1y ago
      Who says the cost of producing software is going to zero?
      - Oarch 1y ago
        It's likely heading towards that direction. Just seeing how Veo3 has taken huge chunks of value out of the film/production space in the last week. It's going to be very hard to justify many salaries going forward.
    - lurk2 1y ago
      This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.
      - ldjkfkdsjnv 1y ago
        line of business saas is absolutely vulernable. the biggest companies on the planet are not under thread. SAAS companies worth 100M-300M are absolutely vulnerable
        lurk2 1y ago
        This has nothing to do with your original claim.
PopAlongKid 1y ago
>AMT is a pretty complicated calculation Actually, it is not. It only seems complicated because it is backed into after calculating the regular tax when you use the IRS tax forms. In other words, first you calculate ordinary tax, then you make plus/minus adjustments for the things that are different under AMT. If there was a Form 1040-AMT which simply calculated the AMT the same way we calculate regular tax, you would see that it is actually simpler than ordinary tax. (depreciation is simpler, itemized deductions are simpler, personal exemptions for kids go away, the standard deduction is much higher, and so on). If we did it the other way around - calculate AMT first, then make adjustments to back into ordinary tax, then you'd say ordinary tax is complicated. Most people don't understand that under the TCJA temporary provisions enacted in 2017 and expiring in 2025, most of the changes just involved moving AMT provisions into the ordinary tax calculation.
- hn_throwaway_99 1y ago
  I agree AMT itself is not a particularly complicated calculation. But I don't think that was really the point of that quoted statement. The complicated part is figuring out if and when AMT applies to you, and, essentially, for how long it can raise your taxes. As you said, the tax code requires you to calculate your taxes twice - once using the "normal" rules, and another time using the AMT rules, and you pay whichever is higher. So, depending on your individual circumstances, it's non-trivial to know if AMT will apply to you when making particular money movements during the year. Also, if you have to pay AMT in year one, but then in year two the calculated AMT is below your normal tax calculation, you get a credit for the excess amount (i.e. amount over the normal tax from year 1) up to the delta between the normal tax and the AMT amount. In other words, AMT can often times just cause tax to be paid earlier, but the total amount of money (over years), ends up being the same. Of course, the time value of money comes into play - paying a tax earlier is losing money. So, point being, there are complicated considerations to take into account.
dakiol 1y ago
Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.
- ghaff 1y ago
  If you work for a moderately large company, it probably won't go to zero (though it could so you may want to hedge your bets). Not sure what SV specifically has to to do with it. I agree in general about focusing on cash on the barrel.
- ptero 1y ago
  It's the same thing in the SV. Unless the company is doing liquidity events the early, but post-founder equity is unlikely to pan out for employees. And it can motivate employees to stay at the company way beyond what's good for them, as leaving the company means either abandoning your equity or exercising your options and paying real money for a very risky and illiquid asset. My 2c.
- ipaddr 1y ago
  The problem becomes they (the company) talks/treats it as money paid and expects a lower salary (or additional passion like being happy to wake up at 4am to deal with an issue randomly) in exchange. They also want people who buy into the lie.
  - fluorinerocket 1y ago
    Exactly
strangelove026 1y ago
At a startup where I've exercised 75% of my options because the company seems to be going to a direction where maybe it's public in a little while (and I've got some other investments which prevent me from being over-invested here). I also want to dump all of the shares as soon as they go public and I'm able (employee sale window-wise) as I anticipate that there'll be a pop followed by a drop. This is all anecdotal given what I've observed over the years. As a result of exercising everything early (back into the S&P) on I'll be able to get long-term capital gains which is a motivator. So that all said I agree with the author's take of "maybe" exercising before an IPO is worth it. This is my first time in a role where I've actually got pre-IPO Options. My last role I joined right before the company went public. The agreement there was that I'll get x$ worth of shares where the quantity is determined by the price 3 months or so after the IPO. They went from >$100 per share to like $30 a share which coincided with when I was assigned my shares lol. Oh well.
- dmitrygr 1y ago
  > I anticipate that there'll be a pop followed by a drop You'll miss both. A 6-month lockup is typical. Sorry, do not pass go, do not collect on the "pop"
ldjkfkdsjnv 1y ago
One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing Its all about control. If you are an employee, either go for a company thats a few years from IPO, a generational startup, or consider the equity worth 0.
- leonhard 1y ago
  what’s a generational startup?
  - ldjkfkdsjnv 1y ago
    cursor
    - ipaddr 1y ago
      Things are moving fast. Not sure how solid they will be next year. Bigger players want that marketspace.
  - shishy 1y ago
    They probably meant a "once in a generation" startup like a unicorn
- sdfasdfas134 1y ago
  This is true. Once you lose control, the VCs will start to appoint their buddies in Atherton in as CEOs, VPs, SVPs, Chiefs of Staff, etc. Eventually you get pushed out. You wont even know what half the people do. Or you get impossible performance plans placed on you (that their buddies wont get) which will mean you either achieve the impossible or you lose your founder stock. If you are giving up voting control, ensure to get a secondary sale to sell some of your stock (5-10mil) so you're set for life. Then you can let the VCs burn the company down...if you really want.
TuringNYC 1y ago
>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price.... The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely theoretical. Further, if you cannot see the cap table and the preference overhang -- and most startups wont let you see it -- then you have no idea what the real price is regardeless of a theoretical 409A value. Even if you can see the cap table, spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out -- the cone of uncertainty across 5 or 10yrs is far too great. The better move would probably to be to use that money to purchase long-dated LEAP call options on the Nasdaq Composite
- SkyPuncher 1y ago
  Correct, the 409a is only going to show you the maximum possible value. Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.
  - FreakLegion 1y ago
    It's the preference and its multiplier that gives investors their money back first. These aren't different things, they're one thing, and generally only matter if the company exits for less than the valuation the investors invested at. The exception to this is if any investors have a liquidation preference > 1x (you should avoid companies where this is the case). Preferences also don't stack with the rest of a liquidity event. E.g. say an investor puts in $100m at a post-money of $1b with a 1x liquidation preference. If the shares go for $900m, the investor gets back their $100m, and that's all. They don't lose money, but they don't make money either. If the shares go at a $1.1b valuation, the investor converts their preferred shares to common shares like everyone else has. The investor doesn't get their money back first and sell more shares on top of that. It's either/or.
bradlys 1y ago
> If you join an early stage company and you have a decent amount of excess capital, early exercise everything and file an 83(b) election. The reasons for doing this: starting the QSBS clock, starting the long term capital gains clock, not needing to worry about your options expiring. I don't think this is ever worth the risk. If you're even thinking of doing this for QSBS purposes... the amount of tax you'd incur is way too much. Even if you have "excess" capital, you may as well put the $50k+ into a shitcoin and you'd see a much quicker return (or lack thereof). For most people where $50-100k+ in tax is a trivial amount to worry about, why are you joining as an employee? Clearly you've made a lot of money in the past... Just be a founder instead. You're taking on just as much risk. > If you join an early stage company and you don’t have much capital, don’t do anything just yet. Try to negotiate for an extended post termination exercise window. For 99%+ of people joining startups as regular employees, this is what you should be doing. If you leave the company before it becomes liquid, exercising the shares can be super risky. We've been waiting on several very well known companies to go public for a long time now. Who knows when they'll go public. At that point, you've spent possibly hundreds of thousands to exercise your shares, hundreds of thousands more in taxes... and they might be worthless and you can maybe deduct $3,000/yr for who knows how long. > If you can get liquidity at some point, and you think liquidity would improve your life, you probably should. It is unlikely though. IMO, until tax law (and especially market conditions) changes - I do not believe in joining any private company unless you are convinced they will IPO within the year. This is assuming you care about compensation significantly.
- woodrow 1y ago
  FYI the whole point of early exercise + 83b election is that you "pay" all tax due, but the tax due is $0, so you don't pay anything. There _is_ non-trivial risk of sinking liquid cash into illiquid startup stock, but this risk has nothing to do with tax.
  - bradlys 1y ago
    If you’re joining after there’s been any money raised, you’re likely triggering some taxes. How many people are joining startups that haven’t had a 409A yet? I’ve joined seed stage companies and even then - there’s a FMV that would trigger taxes. My more general point is that you should be a founder (cause it’s what you want to do) or join a pre-ipo (cause you need employment/money).
vrosas 1y ago
One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true: 1. the founder already has generational wealth and this current company means practically nothing to them. 2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.
- bravesoul2 1y ago
  A special case of early stage share options aren't worth shit.
- throwawaythekey 1y ago
  The first time founders I had couldn't keep 100% of the equity out of the VCs pockets, so YMMV.
- semitones 1y ago
  This seems highly cynical. If the current company means practically nothing to them, why would they be bothering with it at all, especially given that they could be doing almost anything else they wanted, given their generational wealth?
  - dymk 1y ago
    They’re doing it for fun / dick waving contest / it’s all they know / “sigma grindset” mentality Why do dogs chase frisbees?
- tptacek 1y ago
  I'm working for a founder with a previous successful exit and neither of those statements are true of him.
  - spyspy 1y ago
    OP is making broad statements, and you might even be right about your guy. But even if your founder is not super wealthy from the first exit, your current startup could go under and if that happens employees will be left with absolutely nothing. Him, on the other hand, will probably have a golden parachute to land with. Either way he will be now be a "serial entrepreneur" and will be able to utilize his VC friends to start the next thing in no time. He's going to be fine. And there's no telling what he will do if your startup does actually end up being worth something. Transfer the IP to a new company and fire everyone? Introduce new share classes for investors and dilute everyone else to zero? Sell the employees (acquihire) to some horrible BigCorp™ and then retire to Hawaii? No shortage of stunts they could pull once real money is on the table.
takklz 1y ago
Just something I’ve seen lately at all of the startups I’ve worked at… The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV
- fluorinerocket 1y ago
  Yes in my experience they made out like bandits while employees were locked out for a while after IPO.
fluorinerocket 1y ago
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
- hamburglar 1y ago
  What you should understand is that they are a longshot. Like, worse than 10 to 1. I’ve gotten lucky and made a truckload of money on them, and know many people who have done the same. I’ve also had them be an utter waste of money. It’s very much a gamble and it’s unlikely to pay off. This doesn’t make it a scam.
  - fluorinerocket 1y ago
    A lottery ticket is legal but expected value is negative. Same with casino games. Sure it's legal and sometimes people win but in my book it's a scam, even if not technically one. What I particularly resent is the pretence from companies that a lower salary can be compensated by options. Such BS
    - bravesoul2 1y ago
      No need to resent. Just don't take the job. There are jobs that pay the low salary and no magic beans either!
- lotsofpulp 1y ago
  Options at non publicly traded companies are worth zero. Or should be valued the same as a lottery ticket.
  - duped 1y ago
    Tell that to the IRS
    - wslh 1y ago
      They play their own game like a boss.
mvkel 1y ago
So what is your equity really worth? "The difference between the most recent FMV (409A) valuation and your exercise price." This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. A better description would be "the most recent 409A valuation, minus preferred treatment, and your exercise price." All of that is moot though, as an employee wouldn't have access to the cap table or liquidation stack. The short answer is you'll have no idea how much your equity is worth until you get the wire transfer into your bank account. Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name.
- phonon 1y ago
  409a valuations explicitly take into account share classes/liquidation preferences. That's kind of the point. If the Preferred last sold for $1.00, the 409a might value the Common at $0.10 per share, which would then typically be the FMV strike price set in the next round of issued options. If the Common FMV has been steadily increasing from when you received your options, that would typically be a positive sign. Of course, 409a valuations are based on mathematical models. Since Common shares are so illiquid in a private start-up, you don't "really" know what they're worth until a liquidity event.
  - mvkel 1y ago
    Until the next financing round which might include more liq pref, full-ratchet anti-dilution, new shares issued, etc. Ultimately the 409a is for the IRS, not a mark for employees
    - phonon 1y ago
      The next financing round might also include a lot more money on the balance sheet too!
- fatnoah 1y ago
  >This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. >Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name I've worked at 4 different startups. Two were acquired and two are still going, with one making a small profit and being a lifestyle business for the founder, and the other having a great product and still growing. For the two acquisitions, one of which I held 1% equity in, the value of my options was $0, which was very disappointing. In that case, I did get a cash bonus as the VP Engineering and an offer from the acquiring company that was 3X my cash comp, but the stock was worthless. At this point in my career, I value stock in private companies at exactly $0 and treat it like a nice bonus should it ever amount to anything.
atemerev 1y ago
So basically being a startup employee is a very bad deal, and you should either be employed at big tech, or be a founder yourself. But how startups find early employees then?
- throwaway29812 1y ago
  [dead]
- arealaccount 1y ago
  In my experience certain people enjoy working at startups. There are benefits to them outside of max comp that make it desirable.
- xboxnolifes 1y ago
  Some people don't like the environment of big companies. There are finite positions at big companies, not everyone can be there. Not everyone is a founder.
- dgunay 1y ago
  There are some non financial benefits. Many early stage startups are a low oversight environment. This can mean lots of things, beneficial to certain kinds of people: easily push code to prod, touch production databases directly, work weird hours, fix almost any problem you want yourself, know how everything fits together, have more control over your work machine, etc. Not all startups are grueling to work for. I've been at startups where I barely worked 4 hours a day at times. Results matter more. Finally, if you just really hate the big tech interview process, you can get into many startups with minimal prep. Not saying it's a financially optimal use of one's time, but it is a thing some people value.
windowshopping 1y ago
This guide leaves out something extremely important that just fucked over a friend of mine: double-trigger RSUs. My friend thought he was getting a certain amount of stock annually, but in fact he only got it if he was still employed there when the company went public. So after six years they fired him right before going public a month later, and he got nothing. And in order to get any severance, he had to sign an agreement giving up any right to pursue any legal claims against them. I didn't even believe this was possible at first. Almost no startup equity guides mention this. Read your contracts very carefully, people!
- semitones 1y ago
  The guide mentions double-trigger RSUs
  - windowshopping 1y ago
    > If you have restricted stock units (RSUs), everything is pretty straightforward. You do not have to purchase RSUs. You just get them at no cost as they vest. Most private companies do something called double-trigger vesting. That just means you are also not taxed as they vest. Instead, you get taxed for your RSUs at some second trigger date, which is usually set to be the date of the future big liquidity event (at ordinary income). One big drawback with double-trigger RSUs is that you are not really able to sell them in tender offers or other pre-going-public liquidity events. Doesn't exactly mention the important part, that you don't necessarily get anything, does it?
gorgoiler 1y ago
I know too many people who’ve had their stock zeroed out through dilution, preference vs common, partial buyouts where only some founders and investors get to sell, spurious “bad leaver” status for people who work for so-called competitors, forced resignations within particular timeframes that cause stock forfeiture, and on and on and on. It would be an interesting addition to this guid to see these scenarios collected and enumerated with some tips around how to get caught out.
- leguy 1y ago
  I would have loved to see such a list when I joined a startup. I'm not sure it's possible to make a comprehensive list, given all the various startup structures and agreements, but still a "top 10" list with some guidance on how to protect yourself would be valuable. Or... an SLM where you feed the model your contract and it provides a list with recommendations tailored to your situation.
fathermarz 1y ago
Depending on the structure of the legal entity, even when the company you work for gets acquired, it may be an asset purchase for the IP and team instead of a stock purchase. I went through this last year and my options became worthless. It’s unfortunate because it came down to decisions made years prior that affected the outcome at exit time.
laylower 1y ago
None of this applies for start-ups outside the US.

200 points by surprisetalk 1y ago

I wonder how much longer this logic can hold. I have equity in the startup I'm at. It's a very complex platform and in a niche / emerging market. Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure. The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable direction of travel. What happens to my equity? Welp. Might not be great news.

haxton 1y ago
Always treat startup equity as 0 until you've sold it.
- edoceo 1y ago
  Correct. The motivation for equity comp should be more of "I want to change the world" than the "I want big money". The odds are very against it. Here's some older stats (2017) https://berkonomics.com/?p=2899 https://berkonomics.com/?p=2899 But searching, you'll find loads more studies on startup/angel/seed. It's like, optimistically, 1/20
  - Oarch 1y ago
    Good advice! Thankfully I do want to change the world (for the better I hasten to add) and so far so good.
Aurornis 1y ago
There’s more to a successful business than masking an app. A lot of acquisitions are made by companies that could re-build the acquired product themselves. They’re buying the business, brand, and customer base, not the app.
- ldjkfkdsjnv 1y ago
  This isnt true, nobody knows what will happen when you can very cheaply replicate software. The sales etc are valuable, but when the cost of producing the product goes to zero, weird things will happen.
  - henry2023 1y ago
    Who says the cost of producing software is going to zero?
    - Oarch 1y ago
      It's likely heading towards that direction. Just seeing how Veo3 has taken huge chunks of value out of the film/production space in the last week. It's going to be very hard to justify many salaries going forward.
  - lurk2 1y ago
    This is magical thinking. If you could clone Facebook tomorrow your platform wouldn’t be worth anything without established business processes, network effects, and goodwill.
    - ldjkfkdsjnv 1y ago
      line of business saas is absolutely vulernable. the biggest companies on the planet are not under thread. SAAS companies worth 100M-300M are absolutely vulnerable
      - lurk2 1y ago
        This has nothing to do with your original claim.

PopAlongKid 1y ago

>AMT is a pretty complicated calculation Actually, it is not. It only seems complicated because it is backed into after calculating the regular tax when you use the IRS tax forms. In other words, first you calculate ordinary tax, then you make plus/minus adjustments for the things that are different under AMT. If there was a Form 1040-AMT which simply calculated the AMT the same way we calculate regular tax, you would see that it is actually simpler than ordinary tax. (depreciation is simpler, itemized deductions are simpler, personal exemptions for kids go away, the standard deduction is much higher, and so on). If we did it the other way around - calculate AMT first, then make adjustments to back into ordinary tax, then you'd say ordinary tax is complicated. Most people don't understand that under the TCJA temporary provisions enacted in 2017 and expiring in 2025, most of the changes just involved moving AMT provisions into the ordinary tax calculation.

hn_throwaway_99 1y ago
I agree AMT itself is not a particularly complicated calculation. But I don't think that was really the point of that quoted statement. The complicated part is figuring out if and when AMT applies to you, and, essentially, for how long it can raise your taxes. As you said, the tax code requires you to calculate your taxes twice - once using the "normal" rules, and another time using the AMT rules, and you pay whichever is higher. So, depending on your individual circumstances, it's non-trivial to know if AMT will apply to you when making particular money movements during the year. Also, if you have to pay AMT in year one, but then in year two the calculated AMT is below your normal tax calculation, you get a credit for the excess amount (i.e. amount over the normal tax from year 1) up to the delta between the normal tax and the AMT amount. In other words, AMT can often times just cause tax to be paid earlier, but the total amount of money (over years), ends up being the same. Of course, the time value of money comes into play - paying a tax earlier is losing money. So, point being, there are complicated considerations to take into account.

dakiol 1y ago

Unless you work in SV, I think the advice for the rest of us is: take equity/stocks/options as a lottery ticket. Very unlikely that you’ll cash something, therefore base compensation is king.

ghaff 1y ago
If you work for a moderately large company, it probably won't go to zero (though it could so you may want to hedge your bets). Not sure what SV specifically has to to do with it. I agree in general about focusing on cash on the barrel.
ptero 1y ago
It's the same thing in the SV. Unless the company is doing liquidity events the early, but post-founder equity is unlikely to pan out for employees. And it can motivate employees to stay at the company way beyond what's good for them, as leaving the company means either abandoning your equity or exercising your options and paying real money for a very risky and illiquid asset. My 2c.
ipaddr 1y ago
The problem becomes they (the company) talks/treats it as money paid and expects a lower salary (or additional passion like being happy to wake up at 4am to deal with an issue randomly) in exchange. They also want people who buy into the lie.
- fluorinerocket 1y ago
  Exactly

strangelove026 1y ago

At a startup where I've exercised 75% of my options because the company seems to be going to a direction where maybe it's public in a little while (and I've got some other investments which prevent me from being over-invested here). I also want to dump all of the shares as soon as they go public and I'm able (employee sale window-wise) as I anticipate that there'll be a pop followed by a drop. This is all anecdotal given what I've observed over the years. As a result of exercising everything early (back into the S&P) on I'll be able to get long-term capital gains which is a motivator. So that all said I agree with the author's take of "maybe" exercising before an IPO is worth it. This is my first time in a role where I've actually got pre-IPO Options. My last role I joined right before the company went public. The agreement there was that I'll get x$ worth of shares where the quantity is determined by the price 3 months or so after the IPO. They went from >$100 per share to like $30 a share which coincided with when I was assigned my shares lol. Oh well.

dmitrygr 1y ago
> I anticipate that there'll be a pop followed by a drop You'll miss both. A 6-month lockup is typical. Sorry, do not pass go, do not collect on the "pop"

ldjkfkdsjnv 1y ago

One thing no one told me: When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60. If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing Its all about control. If you are an employee, either go for a company thats a few years from IPO, a generational startup, or consider the equity worth 0.

leonhard 1y ago
what’s a generational startup?
- ldjkfkdsjnv 1y ago
  cursor
  - ipaddr 1y ago
    Things are moving fast. Not sure how solid they will be next year. Bigger players want that marketspace.
- shishy 1y ago
  They probably meant a "once in a generation" startup like a unicorn
sdfasdfas134 1y ago
This is true. Once you lose control, the VCs will start to appoint their buddies in Atherton in as CEOs, VPs, SVPs, Chiefs of Staff, etc. Eventually you get pushed out. You wont even know what half the people do. Or you get impossible performance plans placed on you (that their buddies wont get) which will mean you either achieve the impossible or you lose your founder stock. If you are giving up voting control, ensure to get a secondary sale to sell some of your stock (5-10mil) so you're set for life. Then you can let the VCs burn the company down...if you really want.

TuringNYC 1y ago

>> So what is your equity really worth?... >> ... >> The difference between the most recent FMV (409A) valuation and your exercise >> price. ... >> The difference between the Preferred Price and your exercise price.... The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely theoretical. Further, if you cannot see the cap table and the preference overhang -- and most startups wont let you see it -- then you have no idea what the real price is regardeless of a theoretical 409A value. Even if you can see the cap table, spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out -- the cone of uncertainty across 5 or 10yrs is far too great. The better move would probably to be to use that money to purchase long-dated LEAP call options on the Nasdaq Composite

SkyPuncher 1y ago
Correct, the 409a is only going to show you the maximum possible value. Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.
- FreakLegion 1y ago
  It's the preference and its multiplier that gives investors their money back first. These aren't different things, they're one thing, and generally only matter if the company exits for less than the valuation the investors invested at. The exception to this is if any investors have a liquidation preference > 1x (you should avoid companies where this is the case). Preferences also don't stack with the rest of a liquidity event. E.g. say an investor puts in $100m at a post-money of $1b with a 1x liquidation preference. If the shares go for $900m, the investor gets back their $100m, and that's all. They don't lose money, but they don't make money either. If the shares go at a $1.1b valuation, the investor converts their preferred shares to common shares like everyone else has. The investor doesn't get their money back first and sell more shares on top of that. It's either/or.

bradlys 1y ago

> If you join an early stage company and you have a decent amount of excess capital, early exercise everything and file an 83(b) election. The reasons for doing this: starting the QSBS clock, starting the long term capital gains clock, not needing to worry about your options expiring. I don't think this is ever worth the risk. If you're even thinking of doing this for QSBS purposes... the amount of tax you'd incur is way too much. Even if you have "excess" capital, you may as well put the $50k+ into a shitcoin and you'd see a much quicker return (or lack thereof). For most people where $50-100k+ in tax is a trivial amount to worry about, why are you joining as an employee? Clearly you've made a lot of money in the past... Just be a founder instead. You're taking on just as much risk. > If you join an early stage company and you don’t have much capital, don’t do anything just yet. Try to negotiate for an extended post termination exercise window. For 99%+ of people joining startups as regular employees, this is what you should be doing. If you leave the company before it becomes liquid, exercising the shares can be super risky. We've been waiting on several very well known companies to go public for a long time now. Who knows when they'll go public. At that point, you've spent possibly hundreds of thousands to exercise your shares, hundreds of thousands more in taxes... and they might be worthless and you can maybe deduct $3,000/yr for who knows how long. > If you can get liquidity at some point, and you think liquidity would improve your life, you probably should. It is unlikely though. IMO, until tax law (and especially market conditions) changes - I do not believe in joining any private company unless you are convinced they will IPO within the year. This is assuming you care about compensation significantly.

woodrow 1y ago
FYI the whole point of early exercise + 83b election is that you "pay" all tax due, but the tax due is $0, so you don't pay anything. There _is_ non-trivial risk of sinking liquid cash into illiquid startup stock, but this risk has nothing to do with tax.
- bradlys 1y ago
  If you’re joining after there’s been any money raised, you’re likely triggering some taxes. How many people are joining startups that haven’t had a 409A yet? I’ve joined seed stage companies and even then - there’s a FMV that would trigger taxes. My more general point is that you should be a founder (cause it’s what you want to do) or join a pre-ipo (cause you need employment/money).

vrosas 1y ago

One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true: 1. the founder already has generational wealth and this current company means practically nothing to them. 2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.

bravesoul2 1y ago
A special case of early stage share options aren't worth shit.
throwawaythekey 1y ago
The first time founders I had couldn't keep 100% of the equity out of the VCs pockets, so YMMV.
semitones 1y ago
This seems highly cynical. If the current company means practically nothing to them, why would they be bothering with it at all, especially given that they could be doing almost anything else they wanted, given their generational wealth?
- dymk 1y ago
  They’re doing it for fun / dick waving contest / it’s all they know / “sigma grindset” mentality Why do dogs chase frisbees?
tptacek 1y ago
I'm working for a founder with a previous successful exit and neither of those statements are true of him.
- spyspy 1y ago
  OP is making broad statements, and you might even be right about your guy. But even if your founder is not super wealthy from the first exit, your current startup could go under and if that happens employees will be left with absolutely nothing. Him, on the other hand, will probably have a golden parachute to land with. Either way he will be now be a "serial entrepreneur" and will be able to utilize his VC friends to start the next thing in no time. He's going to be fine. And there's no telling what he will do if your startup does actually end up being worth something. Transfer the IP to a new company and fire everyone? Introduce new share classes for investors and dilute everyone else to zero? Sell the employees (acquihire) to some horrible BigCorp™ and then retire to Hawaii? No shortage of stunts they could pull once real money is on the table.

takklz 1y ago

Just something I’ve seen lately at all of the startups I’ve worked at… The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV

fluorinerocket 1y ago
Yes in my experience they made out like bandits while employees were locked out for a while after IPO.

fluorinerocket 1y ago

I've concluded that options are a scam after owning them in many companies. It's never amounted to anything

hamburglar 1y ago
What you should understand is that they are a longshot. Like, worse than 10 to 1. I’ve gotten lucky and made a truckload of money on them, and know many people who have done the same. I’ve also had them be an utter waste of money. It’s very much a gamble and it’s unlikely to pay off. This doesn’t make it a scam.
- fluorinerocket 1y ago
  A lottery ticket is legal but expected value is negative. Same with casino games. Sure it's legal and sometimes people win but in my book it's a scam, even if not technically one. What I particularly resent is the pretence from companies that a lower salary can be compensated by options. Such BS
  - bravesoul2 1y ago
    No need to resent. Just don't take the job. There are jobs that pay the low salary and no magic beans either!
lotsofpulp 1y ago
Options at non publicly traded companies are worth zero. Or should be valued the same as a lottery ticket.
- duped 1y ago
  Tell that to the IRS
  - wslh 1y ago
    They play their own game like a boss.

mvkel 1y ago

So what is your equity really worth? "The difference between the most recent FMV (409A) valuation and your exercise price." This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. A better description would be "the most recent 409A valuation, minus preferred treatment, and your exercise price." All of that is moot though, as an employee wouldn't have access to the cap table or liquidation stack. The short answer is you'll have no idea how much your equity is worth until you get the wire transfer into your bank account. Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name.

phonon 1y ago
409a valuations explicitly take into account share classes/liquidation preferences. That's kind of the point. If the Preferred last sold for $1.00, the 409a might value the Common at $0.10 per share, which would then typically be the FMV strike price set in the next round of issued options. If the Common FMV has been steadily increasing from when you received your options, that would typically be a positive sign. Of course, 409a valuations are based on mathematical models. Since Common shares are so illiquid in a private start-up, you don't "really" know what they're worth until a liquidity event.
- mvkel 1y ago
  Until the next financing round which might include more liq pref, full-ratchet anti-dilution, new shares issued, etc. Ultimately the 409a is for the IRS, not a mark for employees
  - phonon 1y ago
    The next financing round might also include a lot more money on the balance sheet too!
fatnoah 1y ago
>This will almost never be the case. This doesn't account for different share classes, liquidation preferences, preferred stock, all of which get exercised before common shares. >Equity as an incentive truly favors the employer. With vesting, equity rarely works out to be better than having a market rate salary, unless the company becomes a household name I've worked at 4 different startups. Two were acquired and two are still going, with one making a small profit and being a lifestyle business for the founder, and the other having a great product and still growing. For the two acquisitions, one of which I held 1% equity in, the value of my options was $0, which was very disappointing. In that case, I did get a cash bonus as the VP Engineering and an offer from the acquiring company that was 3X my cash comp, but the stock was worthless. At this point in my career, I value stock in private companies at exactly $0 and treat it like a nice bonus should it ever amount to anything.

atemerev 1y ago

So basically being a startup employee is a very bad deal, and you should either be employed at big tech, or be a founder yourself. But how startups find early employees then?

throwaway29812 1y ago
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arealaccount 1y ago
In my experience certain people enjoy working at startups. There are benefits to them outside of max comp that make it desirable.
xboxnolifes 1y ago
Some people don't like the environment of big companies. There are finite positions at big companies, not everyone can be there. Not everyone is a founder.
dgunay 1y ago
There are some non financial benefits. Many early stage startups are a low oversight environment. This can mean lots of things, beneficial to certain kinds of people: easily push code to prod, touch production databases directly, work weird hours, fix almost any problem you want yourself, know how everything fits together, have more control over your work machine, etc. Not all startups are grueling to work for. I've been at startups where I barely worked 4 hours a day at times. Results matter more. Finally, if you just really hate the big tech interview process, you can get into many startups with minimal prep. Not saying it's a financially optimal use of one's time, but it is a thing some people value.

windowshopping 1y ago

This guide leaves out something extremely important that just fucked over a friend of mine: double-trigger RSUs. My friend thought he was getting a certain amount of stock annually, but in fact he only got it if he was still employed there when the company went public. So after six years they fired him right before going public a month later, and he got nothing. And in order to get any severance, he had to sign an agreement giving up any right to pursue any legal claims against them. I didn't even believe this was possible at first. Almost no startup equity guides mention this. Read your contracts very carefully, people!

semitones 1y ago
The guide mentions double-trigger RSUs
- windowshopping 1y ago
  > If you have restricted stock units (RSUs), everything is pretty straightforward. You do not have to purchase RSUs. You just get them at no cost as they vest. Most private companies do something called double-trigger vesting. That just means you are also not taxed as they vest. Instead, you get taxed for your RSUs at some second trigger date, which is usually set to be the date of the future big liquidity event (at ordinary income). One big drawback with double-trigger RSUs is that you are not really able to sell them in tender offers or other pre-going-public liquidity events. Doesn't exactly mention the important part, that you don't necessarily get anything, does it?

gorgoiler 1y ago

I know too many people who’ve had their stock zeroed out through dilution, preference vs common, partial buyouts where only some founders and investors get to sell, spurious “bad leaver” status for people who work for so-called competitors, forced resignations within particular timeframes that cause stock forfeiture, and on and on and on. It would be an interesting addition to this guid to see these scenarios collected and enumerated with some tips around how to get caught out.

leguy 1y ago
I would have loved to see such a list when I joined a startup. I'm not sure it's possible to make a comprehensive list, given all the various startup structures and agreements, but still a "top 10" list with some guidance on how to protect yourself would be valuable. Or... an SLM where you feed the model your contract and it provides a list with recommendations tailored to your situation.

fathermarz 1y ago

Depending on the structure of the legal entity, even when the company you work for gets acquired, it may be an asset purchase for the IP and team instead of a stock purchase. I went through this last year and my options became worthless. It’s unfortunate because it came down to decisions made years prior that affected the outcome at exit time.

laylower 1y ago

None of this applies for start-ups outside the US.