4 ms·

Startups define different classes of stock. The class A shareholders are the founders and investors. Everyone else gets class B shares. The A class shares don't

Startups define different classes of stock. The class A shareholders are the founders and investors. Everyone else gets class B shares. The A class shares don't get diluted, and they are inherently worth more anyway.

palata 1mo ago
So fundamentally, "everyone else" is scammed. Unless the class A scammers get so, so rich that everyone else gets rich as well. In which case it's still a scam, but the "everyone else" are happy anyway.
- sershe 1mo ago
  Why is that a scam? Nobody ever promises you any specific valuation or fraction of the company. When I joined a company relatively late but well before IPO, some funny number of shares at 12 cents or whatever each did not even enter my calculation any more than "oh and they also give me a free lottery ticket". In my case depending on when one sold after IPO they would have been in the range centered around about compensating for the salary differential I think, but nobody promises you they'd ever be worth more than Monopoly money
  - palata 1mo ago
    > Nobody ever promises you any specific valuation or fraction of the company Would you mind asking before saying what I have been promised? Also it feels like you have never been in a startup. The whole language of growth everywhere, the "billion-dollar startup", the "becoming a unicorn", this is all suggesting that "you're part of it and it matters to you if it becomes a unicorn". But it doesn't, really. Because you get diluted.
    - BeetleB 1mo ago
      > But it doesn't, really. Because you get diluted. At this day and age, if you don't understand dilution before you join, it's entirely on you. This isn't a new concept - it was the case decades ago. Even when I left school over 15 years ago, the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero." And class A vs class B isn't even a rich vs everyone else thing. I have class A shares in an LLC, where even the (richer) founders are class B. The operating agreement is that we class A folks are "guaranteed" a fixed rate of return on our investment, and the class B folks don't get anything unless we get at least that rate of return. This is very normal in that industry.
      - palata 1mo ago
        > At this day and age, if you don't understand dilution before you join, it's entirely on you. I don't know what to tell you. Young graduates get an offer to work at a startup, nobody tells them how it works. They are just excited, as I was. And they don't think about "what happens if the startup is successful" because they do know it probably won't be. And when the startup is successful (happened to me) is when they realise that they got scammed. But all they can do is see their founders become rich and tell everyone why THEY deserve it because it was THEIR idea and THEY are the best. > the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero." That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". Usually that salary is subpar.
        lotsofpulp 1mo ago
        >That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". That one is covered under the standard advice of "comparison is the thief of joy". >Usually that salary is subpar. If it was subpar, then the salary would not have been accepted.
        palata 1mo ago
        > If it was subpar, then the salary would not have been accepted. Turns out it was. Young graduate excited with the mission, and all that bullshit.
    - sershe 1mo ago
      I was given a very large number of very low value shares. The company was about 60 people iirc and I think the hr guy said well we won't IPO soon but when we do, these shares might be worth a lot! Companies often aim for shares to be worth 10, 20, 50 dollars at IPO! Something like that. But it's obviously just vague pep talk. They also sometimes say everyone is there to make the world a better place... It would be a scam if they promised you 0.2% of the company but then it was diluted to 0.1%. and nobody prevents you from asking i think. Otherwise it's no more a scam than a lottery ticket commercial showing the guy who won a Ferrari.
      - barchar 1mo ago
        It’s strange, every startup offer either is obviously a horrible scam or comes from a place of fairness and is sold like a total scam. I guess being honest brings about too many opportunities for people who don’t understand the finances to make (or be perceived to make ) promises they can’t keep. So you might as well just get into a race to present the most ridiculous stuff possible.
      - palata 1mo ago
        It is a scam to me because they imply "if the founders get rich, we all get rich" because "we're on the same boat". And it's not the same boat at all: the founders may get rich, the employees most likely not.
cyberax 1mo ago
Anti-dilution shares were extremely uncommon.
slowin 1mo ago
This is not standard. Normally founders and employees get common stock and investors get preferred stock. Founders may get more stock issued in a round, and VCs/founders can pretty much rework the cap table to their liking if they really want to. The difference in return between founders and employees is down to percentages. Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky.
- palata 1mo ago
  > Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky. So that's a scam by the founders to the employees, in my book. It's fine, it's just that I am not sure young professionals joining a startup know that. Said differently, if you join a startup, you should not work too much without compensation, and you should not care about making it super valuable, because you don't benefit from it. If you have a super good idea or realise you have expertise that would make the startup valuable, you should leave and become a founder yourself.
  - slowin 1mo ago
    I agree it's a scam. I just wanted to point out the way the scam works, by ownership percentage and new shares issued during new rounds (and cap table shenanigans), not generally through a different class of stock issued to founders vs employees. That's much more rare.
robocat 1mo ago
Founders get common stock - class A voting. VCs get preferential shares, not common. Preferential shares have economic rights to protect the investors, but more importantly they usually have extra control rights like veto abilities, board seats, IPO control, or ability to sack the founder (which may even cut out the founder's voting rights by sunsetting their class A common into class B common shares). Employees get a third tier of stock (e.g. options that convert to non-voting class B common shares). After IPO the preferential sheets becomes common shares. The dual A class may be removed or have sunset clauses because large public investors prefer one plain common share class. Not a VC - so take above as written by a student. Founders in zero sense have the same voting control as VCs. Edit: VCs play the same game over and over again, against different innocent founders. VCs know how to stack everything in their favour - especially using social cues and "norms" that benefit them. My favourite article on this is: https://siliconhillslawyer.com/2019/02/18/relationships-and-power-startup-ecosystems/ https://siliconhillslawyer.com/2019/02/18/relationships-and-...
- cratermoon 25d ago
  I got the details about classes of shares and preferential stuff technically wrong, it’s true. I still got the gist of the arrangement correct: VCs and founders get the pizza, everyone else gets the crusts
barchar 1mo ago
Pref shares do get diluted, they are however senior to common stock so they get money FIRST if there’s not enough to go around. There is some cap on this and sometimes it’s pretty high. Huge pref overhangs are, indeed, a problem. Pref shares with a 1x preference are still worth like 10x common stock in early stage companies and it’s common for employed to get fucked by this. Founders don’t get preferred shares (I think it’s really, really rare). There is founder pref stock, which is somewhat different. It’s common for founders to cash out some shares along the way, though.
- robocat 1mo ago
  Founders that take a pay cut from a high paying job should demand preferential shares to the value they are giving up. If they were in job where they were saving $50k a year, then after becoming a founder they should be getting $50k worth of preferential shares per year because they are investing that much in the business. Not that I've actually ever heard of founders getting preferential shares to match their dollars invested.

palata 1mo ago

So fundamentally, "everyone else" is scammed. Unless the class A scammers get so, so rich that everyone else gets rich as well. In which case it's still a scam, but the "everyone else" are happy anyway.

sershe 1mo ago
Why is that a scam? Nobody ever promises you any specific valuation or fraction of the company. When I joined a company relatively late but well before IPO, some funny number of shares at 12 cents or whatever each did not even enter my calculation any more than "oh and they also give me a free lottery ticket". In my case depending on when one sold after IPO they would have been in the range centered around about compensating for the salary differential I think, but nobody promises you they'd ever be worth more than Monopoly money
- palata 1mo ago
  > Nobody ever promises you any specific valuation or fraction of the company Would you mind asking before saying what I have been promised? Also it feels like you have never been in a startup. The whole language of growth everywhere, the "billion-dollar startup", the "becoming a unicorn", this is all suggesting that "you're part of it and it matters to you if it becomes a unicorn". But it doesn't, really. Because you get diluted.
  - BeetleB 1mo ago
    > But it doesn't, really. Because you get diluted. At this day and age, if you don't understand dilution before you join, it's entirely on you. This isn't a new concept - it was the case decades ago. Even when I left school over 15 years ago, the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero." And class A vs class B isn't even a rich vs everyone else thing. I have class A shares in an LLC, where even the (richer) founders are class B. The operating agreement is that we class A folks are "guaranteed" a fixed rate of return on our investment, and the class B folks don't get anything unless we get at least that rate of return. This is very normal in that industry.
    - palata 1mo ago
      > At this day and age, if you don't understand dilution before you join, it's entirely on you. I don't know what to tell you. Young graduates get an offer to work at a startup, nobody tells them how it works. They are just excited, as I was. And they don't think about "what happens if the startup is successful" because they do know it probably won't be. And when the startup is successful (happened to me) is when they realise that they got scammed. But all they can do is see their founders become rich and tell everyone why THEY deserve it because it was THEIR idea and THEY are the best. > the standard advice when trying to get a job with a startup was "Get a good salary and value the equity at zero." That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". Usually that salary is subpar.
      - lotsofpulp 1mo ago
        >That does not say AT ALL that the founder gets rich when you get nothing. It says "be careful, most startups fail, so make sure you get a salary". That one is covered under the standard advice of "comparison is the thief of joy". >Usually that salary is subpar. If it was subpar, then the salary would not have been accepted.
        palata 1mo ago
        > If it was subpar, then the salary would not have been accepted. Turns out it was. Young graduate excited with the mission, and all that bullshit.
  - sershe 1mo ago
    I was given a very large number of very low value shares. The company was about 60 people iirc and I think the hr guy said well we won't IPO soon but when we do, these shares might be worth a lot! Companies often aim for shares to be worth 10, 20, 50 dollars at IPO! Something like that. But it's obviously just vague pep talk. They also sometimes say everyone is there to make the world a better place... It would be a scam if they promised you 0.2% of the company but then it was diluted to 0.1%. and nobody prevents you from asking i think. Otherwise it's no more a scam than a lottery ticket commercial showing the guy who won a Ferrari.
    - barchar 1mo ago
      It’s strange, every startup offer either is obviously a horrible scam or comes from a place of fairness and is sold like a total scam. I guess being honest brings about too many opportunities for people who don’t understand the finances to make (or be perceived to make ) promises they can’t keep. So you might as well just get into a race to present the most ridiculous stuff possible.
    - palata 1mo ago
      It is a scam to me because they imply "if the founders get rich, we all get rich" because "we're on the same boat". And it's not the same boat at all: the founders may get rich, the employees most likely not.

cyberax 1mo ago

Anti-dilution shares were extremely uncommon.

slowin 1mo ago

This is not standard. Normally founders and employees get common stock and investors get preferred stock. Founders may get more stock issued in a round, and VCs/founders can pretty much rework the cap table to their liking if they really want to. The difference in return between founders and employees is down to percentages. Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky.

palata 1mo ago
> Founders get 25-75% where employees get 0.01-1%, maybe a bit more if they're lucky. So that's a scam by the founders to the employees, in my book. It's fine, it's just that I am not sure young professionals joining a startup know that. Said differently, if you join a startup, you should not work too much without compensation, and you should not care about making it super valuable, because you don't benefit from it. If you have a super good idea or realise you have expertise that would make the startup valuable, you should leave and become a founder yourself.
- slowin 1mo ago
  I agree it's a scam. I just wanted to point out the way the scam works, by ownership percentage and new shares issued during new rounds (and cap table shenanigans), not generally through a different class of stock issued to founders vs employees. That's much more rare.

robocat 1mo ago

Founders get common stock - class A voting. VCs get preferential shares, not common. Preferential shares have economic rights to protect the investors, but more importantly they usually have extra control rights like veto abilities, board seats, IPO control, or ability to sack the founder (which may even cut out the founder's voting rights by sunsetting their class A common into class B common shares). Employees get a third tier of stock (e.g. options that convert to non-voting class B common shares). After IPO the preferential sheets becomes common shares. The dual A class may be removed or have sunset clauses because large public investors prefer one plain common share class. Not a VC - so take above as written by a student. Founders in zero sense have the same voting control as VCs. Edit: VCs play the same game over and over again, against different innocent founders. VCs know how to stack everything in their favour - especially using social cues and "norms" that benefit them. My favourite article on this is: https://siliconhillslawyer.com/2019/02/18/relationships-and-power-startup-ecosystems/ https://siliconhillslawyer.com/2019/02/18/relationships-and-...

cratermoon 25d ago
I got the details about classes of shares and preferential stuff technically wrong, it’s true. I still got the gist of the arrangement correct: VCs and founders get the pizza, everyone else gets the crusts

barchar 1mo ago

Pref shares do get diluted, they are however senior to common stock so they get money FIRST if there’s not enough to go around. There is some cap on this and sometimes it’s pretty high. Huge pref overhangs are, indeed, a problem. Pref shares with a 1x preference are still worth like 10x common stock in early stage companies and it’s common for employed to get fucked by this. Founders don’t get preferred shares (I think it’s really, really rare). There is founder pref stock, which is somewhat different. It’s common for founders to cash out some shares along the way, though.

robocat 1mo ago
Founders that take a pay cut from a high paying job should demand preferential shares to the value they are giving up. If they were in job where they were saving $50k a year, then after becoming a founder they should be getting $50k worth of preferential shares per year because they are investing that much in the business. Not that I've actually ever heard of founders getting preferential shares to match their dollars invested.