[HN Gopher] How to Evaluate Startup Offers
___________________________________________________________________
How to Evaluate Startup Offers
Author : mavelikara
Score : 194 points
Date : 2021-10-09 07:54 UTC (15 hours ago)
(HTM) web link (faingezicht.com)
(TXT) w3m dump (faingezicht.com)
| claudiusd wrote:
| As someone with experience as a startup employee and founder,
| having negotiated startup offers from both sides of the table and
| seen several unfavorable and favorable liquidity scenarios play
| out, here is the advice I give people:
|
| Treat stock options in an early stage startup as if they are
| worthless. Don't make salary/equity tradeoffs and instead,
| negotiate for both the "high salary" and "high equity".
|
| Stock options have a number of "gotchas" that may not be
| immediately obvious:
|
| 1. Exercise price and exercise window. It takes a lot longer for
| a startup to exit than than most people would like to think (if
| it exits at all). 10+ years is my experience. You're probably not
| going to stay with the company that long, so when you leave the
| company and want to keep your shares, you only have so much time
| to exercise them (this is the exercise window - typically 3
| months). It could cost you many $thousands to exercise and there
| is no guarantee your stock will be worth anything. You are
| essentially now an investor in the company and you are afforded
| none of the protections that the company's venture investors
| received.
|
| 2. Liquidation preference. In a liquidity event, the company's
| venture investors get paid back some multiple of their original
| investment (typically 1-2x) before any common shareholders get
| paid (which includes options holders). If the company is not
| valued above a certain threshold at liquidity, then common
| shareholders get nothing. As the company takes on new investors,
| this liquidation preference starts to add up, and as an employee
| you are not going to be told what this amounts to. You could
| exercise your shares, pay the company money, have the company
| exit for an apparently attractive amount, and then get nothing
| because the liquidation preference threshold wasn't met. The
| company exits, and you lose money.
|
| 3. Tax treatment. Assuming the company exits while you are still
| an employee (i.e. you have not exercised your shares) or the
| company has an attractive exercise window (10 years is not
| uncommon nowadays), and the valuation is high enough not to
| trigger liquidation preference, then you will make some money.
| Unfortunately, the amount you earn will get taxed as income, not
| capital gains, and the difference is significant. To be taxed as
| capital gains, you have to exercise your options and hold on to
| the shares for at least a year before selling them. Some
| companies offer early exercise benefits, but if you do this then
| you could potentially lose money as I described above.
|
| RSU's on the other hand (essentially just plain stock like
| founders get) do not have to be exercised and are taxed as income
| on their value the moment they are vested (or on the value of the
| entire grant on the data of issue, assuming you file an 83(b)
| election with the IRS). These have value, and I would be
| comfortable with a salary/equity tradeoff for them. This is
| something you should ask about during negotiation. If RSUs are
| off the table, then you can try asking the company to pay the
| [early] exercise price for you as a signing bonus.
| calbruin wrote:
| "If RSUs are off the table, then you can try asking the company
| to pay the [early] exercise price for you as a signing bonus."
|
| This is excellent advice, especially given the risk you
| described in (2).
| quadcore wrote:
| So, reading here what I understand is that startup
| stocks/options/whatever are worth nothing because this is a
| private company, an opaque box with many tools to screw you.
| Anyone with a different experience? If you had a positive
| experience/return, what was the cause, your negotiation or the
| founders/investors behaviour?
| nbzso wrote:
| Even cofounder position cannot guarantee successful exit. It is
| all about the small font things in contracts, understanding of
| the reality of the situation and not taking anything at face
| value.
|
| It is not impossible outside the "luck factor", but in this point
| in time things are refined and well executed and this "get lucky"
| is usually propagandist in his nature.
|
| I am on different spectrum. I live in 'qualified personal'
| territory. Everything that I fight for is measured in Hourly
| Wage. Nothing more, nothing less.
| ptero wrote:
| No one can guarantee a successful exit, but if it does happen a
| cofounder typically makes out very well, while engineers with
| options usually end up with a token amount.
| nbzso wrote:
| Young engineers need to grow up and learn from previous
| generations of professionals. The generational divide is
| funded by corporate and VC interests under HR classifications
| as "cultural fit".
|
| In reality we all are "just a cogs" in a somebody "value
| extraction" plan. And as such we must demand fair wages and
| clear career paths.
|
| P.S. Downvotes don't remove the reality of my statement.
| a_t48 wrote:
| You're saying they should just roll over and take what is
| offered?
| nbzso wrote:
| Not at all. This approach will make more effective salary
| or wage negotiations. As a side-effect this will lower
| the possibility of low payment for overtime work and will
| create more quality in the product pipeline etc.
| morelandjs wrote:
| This is a great article! I would add to the general discussion
| here that some big tech companies will surprise you in terms of
| culture.
|
| I joined a small but rapidly growing team at Amazon and it feels
| very different from my previous corporate job. I'm wearing many
| hats, learning lots of different technologies, and in many cases
| driving initiatives in a way I didn't expect.
|
| I was expecting a lot more red tape, meetings, silos and
| bureaucracy and thankfully that has not yet been the case.
|
| Even still, I'm not suggesting that the feeling of accomplishment
| would compare to building your own company. This article was
| informative to me should I ever go that route.
| ndonnellan wrote:
| I like the structure of the article and it's a good procedure for
| evaluation compensation, but my nitpick would be it could be more
| helpful if it included more realistic numbers.
|
| Do 5% of startups actually reach 1B valuation in 4 years? No.
| Uber took 10 years to IPO. I don't know the average, but I would
| imagine based on a cursory search that it's closer to 7 or 8
| years for highly valued companies in the past decade. And 5%
| seems extremely high for billion dollar IPOs.
|
| Also, only 2 startups are compared in the NPV calculation. What
| about joining a BigCo / FAANG? That would really put it into
| context.
|
| On the other hand, the math gets slightly better if you assume
| you leave after some amount of vesting. I thought danluu had a
| post about this, but can't find it. Staying in a startup until
| the bitter end is almost never the optimal choice, especially if
| you have inside knowledge of its progress.
|
| https://tldroptions.io/ - This was posted a few years back, and
| while it doesn't give tell you the likelihood of a particular
| size of exit, it does help give an idea of the type of dilution
| and final equity value (with no discounting though).
| avyfain wrote:
| Author here, thanks for the thoughts!
|
| > could be more helpful if it included more realistic numbers.
|
| Any ideas on where to find these? While there's a lot of info
| out there on valuations most datasets have the problem of
| hindsight bias, especially missing data at the pre-A round.
|
| > only 2 startups are compared in the NPV calculation. What
| about joining a BigCo / FAANG?
|
| My original model was actually a FAANG vs two startup model (I
| left Apple) but it gets too complex to try to explain it in a
| post that's aimed at the stock options 101 crowd.
|
| > the math gets slightly better if you assume you leave after
| some amount of vesting.
|
| 100%, although that's tough to model without just adding an
| arbitrary cutoff.
|
| > https://tldroptions.io/
|
| Thanks, I did not know about this tool!
| ndonnellan wrote:
| Thanks for the reply! Sorry I don't have any great sources
| off the top of my head. It makes sense that you'd want to
| restrict the scope of the article to make it more
| understandable.
|
| I've only been part of one startup, and it went nowhere, but
| it's very common (ubiquitous?) for prospective employees to
| be sold the "if we IPO for $1xB" line when that likelihood is
| laughably small; hence my suggestion to lower the
| expectations with some lower numbers.
|
| But props for getting this all down!
| matthewmacleod wrote:
| I don't mean to be terribly cynical, but wouldn't it be just as
| effective to simply ignore equity entirely when evaluating a
| startup offer?
|
| An offer from an established company has a fairly clear value - a
| chunk of cash and some relatively-well understood stock. A
| startup offer amounts to a chunk of cash and a box of lottery
| tickets. Given the wide variety of possible outcomes, it's
| essentially impossible to assign any value to them - so they
| might as well not exist for the purposes of evaluation.
|
| I tend to think of this kind of choice as one that you'd make
| based on the company and work environment, rather than the
| compensation - so long as the startup can pay enough cash to
| maintain a standard of living you want. Then it's a case of
| deciding if the work environment, team, product, mission etc. are
| something in which you're interested enough to give up the
| stability and income from an established company. If it does work
| out and you get rewarded through an exit, then that's great! But
| if you're going in to it with the expectation of becoming
| wealthy, you're almost certainly going to be disappointed.
|
| YMMV of course, I'm personally quite risk-averse!
| stonecharioteer wrote:
| Completely agree. I left Visa for an early stage startup and I
| didn't focus on the stock too much. Cash in hand matters more.
| rajin444 wrote:
| That's what I'm doing. Previously worked at a stable mid size
| company and I wanted to try a startup. The comp and other
| benefits were already pretty far above my stable company, so if
| I get anything from the equity it's a bonus.
|
| I feel a little dumb for not digging harder but the offer was
| already a big improvement.
| dasil003 wrote:
| This is the right way to think about it because at the end of
| the day startup success is rare.
|
| That doesn't mean you shouldn't due your due diligence and get
| all the info you can before joining a startup. IMHO the most
| important thing is the character and financial savvy of the
| founders, because it's one thing to fail but it's another thing
| to essentially succeed but then get screwed because of investor
| shenanigans. The founders are your only hope against this
| scenario.
| sgtnoodle wrote:
| I agree, you should join a startup for the experience of it
| rather than the risky upside. If you're leaving another company
| with an equity component, though, it's a good idea to try and
| quantify your options. Ideally you are lucky enough to find a
| company that will both definitely give you the work environment
| you want, and probably make you wealthy.
|
| For a small startup, I recommend asking the CEO tough questions
| about the viability of the business and planned exit strategy.
| If they get upset about it, walk away. If they don't get upset,
| that's good. At that point, ask them to get you in contact with
| an early investor to ask them questions. If they aren't willing
| to do that, then walk away. Once you do have an offer, do an
| analysis. Unless you think they are giving you an abundance,
| then do a round of negotiation. Negotiating can only help you.
| Keep it fair and reasonable, though. If it's your first job and
| you have no experience, for example, don't expect them to budge
| much if at all.
| sscarduzio wrote:
| Lol screw this stuff. Bootstrap a profitable company, grow it and
| either sell it or keep it forever. Zero bullshit.
| plow-tycoon wrote:
| In addition to these things, make sure the company who's hiring
| you, _if you 're located in another country_ knows how to do so,
| before wasting too much of your energy with them. I was recently
| burned by this _after_ receiving a good offer.
| avyfain wrote:
| Author here - happy to answer any questions!
|
| I'm planning to write a more advanced version of this article in
| a few months, discussing tax implications, the "should I exercise
| my options" question, etc.
| lostdog wrote:
| Omitting AMT's effect on exercising in a post about equity is
| pretty much blogging malpractice.
|
| Other than that, very good post.
| ssr2167 wrote:
| It's really amazing to view the comments section of Hacker News.
| Really finding a way to to find the problem about any situation.
|
| And when it comes to the idea of working at a startup that might
| be able to actually fix some of those said problems, instead of
| just taking money from big tech and chilling....the comments
| flood in with negativity here as well.
|
| Gotta give the community credit, because the one thing they are
| is consistent.
| gffa wrote:
| Bluntly... TC or GTFO.
| mkl95 wrote:
| Some thoughts about small startups. If the company is not legally
| obligated to eventually give me what they are promising, I have a
| simple criteria. I don't even evaluate it.
|
| For instance, a usual shady tactic to hire talented developers
| -that would otherwise be recruited by a larger company- is to
| claim that they are on their way to receive some substantial
| investment in the near future, which will improve your working
| conditions overnight. The CEO will then discuss your future
| salary by giving you some figures.
|
| Beware that usually these claims are complete bollocks, and the
| company is not even close to entering a seed round. Startups are
| fun and a great learning opportunity, but make sure their
| promises are actually binding.
| twistedpair wrote:
| Good point. I left my last startup for this reason. Kept
| telling the CEO "show me the money". After a half dozen times
| being told that the "funding is just around the corner" I left.
|
| Two months later they cut more than half the staff and becoming
| an IP bundle looking for a buyer.
| ludwigvan wrote:
| > As I was considering the switch, multiple people told me I was
| making a big mistake, losing out on both job stability and
| compensation. Those people had no idea what they were talking
| about.
|
| Maybe they had "some" idea? I guess time will tell and hope this
| sentence does not simply serve to cast one's own fears about
| having made the wrong choice.
| hnbad wrote:
| As I was considering dumping my savings into a video poker
| machine, multiple people told me I was making a big mistake,
| losing out both on a safe retirement and interest.
|
| World A: And they were wrong! I was able to turn those $100k
| into $5M.
|
| World B: And they were wrong! I may have lost all my savings
| but I still would have gotten a massive ROI if I had played my
| hand better.
| danrocks wrote:
| Author intends to present a rational, quantitative view of
| compensation yet begins by emotionally dismissing any advice
| contrary to his beliefs. Kind of defeats the purpose here.
| steve_adams_86 wrote:
| My interpretation is that he's saying they're right if the
| only priority is money, but otherwise they miss the point. He
| didn't go to the new job for money. However, money isn't
| totally irrelevant, so he wrote this article detailing what
| he knows about the process of assessing offers.
| avyfain wrote:
| Author here, that's exactly the case :)
|
| Left FAANG knowing that money would be better there. My new
| opportunity is (so far) a lot more fun, a I'm learning a
| lot more about the things I want to learn.
| hcta wrote:
| What's emotional about it?
| acjohnson55 wrote:
| The whole point of the article is that while the money may
| not be everything, it is important to understand. He says
| right in there that FAANG money is probably going to be the
| best, if that's your priority.
| ptero wrote:
| That is an awkward wording, but the author explains exactly
| what he means in the next sentence, agreeing that switching
| FAANG for a startup for financial reasons is stupid. If you
| switch, do it for other reasons.
| danrocks wrote:
| Not joining one startup whose worth will be $0 in the long run is
| not enough. One needs to evaluate another type of exit that, in
| fact, is much more common that an IPO: acquisition by another
| company. In that scenario, you've worked hard for a number of
| years, the company will be sold for hundreds of millions of
| dollars, and you still probably will end up with nothing. The
| name of the game is "liquidation preference".
|
| I have been through one of these scenarios and it's incredibly
| taxing and stressful: all that work, company selling for a
| boatload, and all I got was a lousy T-shirt.
|
| https://marker.medium.com/my-company-sold-for-100-million-an...
| engmgrmgr wrote:
| You should do your due diligence on the business and financing
| to avoid this situation, and unless you have a ton of equity,
| you should hedge your bet on multiple companies if you're
| trying to make high ROI and you aren't feeling confident
| that'll happen in your current gig.
|
| "Start-up" is a bit of a disingenuous term when using to
| compare with FAANG, because one refers to a class of high
| performing public tech companies, and the other is a catch all
| for small businesses.
|
| I know chronically broke start up folks, faang millionaires,
| and a group of people who seem to to know how to play the
| startup game and are extremely wealthy, so YMMV.
| cheriot wrote:
| I've received offers from a bunch of startups over the years.
| None of them would disclose their cap table. Most of them
| even refused to tell me the total number of shares
| outstanding.
|
| Are people getting enough info for any kind of due diligence?
| Do people know how to play the game or did they get lucky?
| HWR_14 wrote:
| Do you need the whole cap table? Presumably, common shares
| outstanding, preferred shares outstanding and the total
| dollars of the overhang of the preferred shares should be
| sufficient. Assuming that options are correctly accounted
| for in that number (that is, if people cash in ITM options)
| tptacek wrote:
| Don't work for companies that offer equity as a significant
| component of their compensation and won't tell you shares
| outstanding. That used to be somewhat common, but I can't
| remember the last time a friend of mine got an offer where
| that was the case. It's a red flag.
| JCM9 wrote:
| For a privately held company the number of shares
| outstanding, on its own, isn't enough and really doesn't
| tell you much. Your shares are almost certainly not the
| same as other people's shares and you need to know what
| those differences are. Other people likely hold shares
| that have terms like "I get paid 3X my investment before
| anyone else gets paid." Or other terms that make the
| total number of shares not that informative in knowing
| where you really stand. If someone's not sitting down
| with you and laying everything out on the table then it's
| almost certain there are things they don't want you to
| know that make your offer significantly less attractive
| than what it might appear in face value.
| tptacek wrote:
| You can ask about liquidation preferences as well.
| Anything above 1X is above market and, again, a red flag.
| engmgrmgr wrote:
| I'm not agreeing one way or another about needing cap table
| in detail, but if the company isn't giving you the
| information you need to evaluate an offer after you request
| it, then don't work there.
|
| As for luck, of course there's some risk component there,
| otherwise the ROI wouldn't be higher, but it's not a dice
| roll unless you let it be.
|
| I'm biased. I was part of lackluster exits, failed
| startups, and dead-end startups that will forever raise
| more money. I learned a lot of valuable lessons the hard
| way on how to evaluate companies, and have since been able
| to pick winners when I look to change jobs. The other thing
| that goes unmentioned is once you "win" once, your risk
| tolerance might change, or your patience to wait for the
| exact right next opportunity may increase significantly.
|
| I think you can ask yourself if you'd invest 500k in this
| company (or whatever assets you have up to that), and if
| you value your time more than your money, that should tell
| you something.
| d357r0y3r wrote:
| Back around 2012, I made 10k cash + stock that would eventually
| net me around 30k on a ~50 million acquisition. I had been at
| the company for less than a year. I was employee #50 or
| something. This sounds like a much better deal than anything
| I've seen down thread, and it was actually serious money for me
| at the time.
|
| Honestly, I think this just comes down to the moral character
| of the founder(s) in the company. If you have a good way of
| assessing that in the interview process, then maybe take it
| into account? Doesn't sound easy to do though.
| [deleted]
| dhruvrrp wrote:
| A bunch of early engineers i knew made less than 100k when
| their company got acquired for $320m cash.
|
| Down rounds and preferential stocks are not fun
| 6gvONxR4sf7o wrote:
| I was a late joiner at a near-IPO startup, and did better
| than I've ever done at an early stage one. Even then, I've
| done way better with post-IPO RSU refreshers than with the
| pre-IPO options. It took _years_ for our publicly traded
| price to hit what management delusionally (or dishonestly)
| messaged us as our options' worth pre-IPO.
|
| I remember a conversation when we got new ISO grants, that
| they might be worth $X, based on blah-blah-blah, but they'll
| be worth at least $2X soon because we're growing, so really
| you're getting $2X! Which doesn't even make sense to me if
| we're going to view today's price as a discounted future
| cashflow. Anyways, we're _finally_ trading at $X today, years
| and years after IPO.
|
| Moral of the story is that the people budgeting how much to
| pay you will engage with incredibly wishful thinking when
| deciding how much to pay you if they can. "Sure, Z shares
| seems super generous, right? We're a rocket ship!" But when
| the market decides how much a share is _really_ worth, they
| can't screw you by pretending they're paying out more.
|
| I'm only working for public companies from here out. And none
| of those 1 year grants that seem to be popping up.
| almost_usual wrote:
| Made 15k on a 100m+ sale, was at the startup for years.
|
| I'll stick to RSUs.
|
| Saying you helped exit a company seems to go over well in
| interviews though.
| anonymousDan wrote:
| Why is an RSU better than other types of shares, and how
| does it avoid this kind of dilution/backstabbing by
| founders? Honest question!
| potatolicious wrote:
| I take RSU to mean "RSUs in a publicly traded company" -
| i.e., the value of the shares is well known and the sort
| of "sell the IP and fuck the employees" shenanigans is
| much harder to pull off.
|
| You can get RSUs in private startups which doesn't
| mitigate the risks being discussed here. That said there
| are still benefits to having RSUs over options (i.e., 90
| day exercise window).
| 6gvONxR4sf7o wrote:
| I also take it to mean RSUs in a public company. I
| wouldn't want RSUs in a private startup because I
| couldn't sell them, but I'd still take the tax hit as
| they vest.
| travem wrote:
| The availability of double trigger RSUs help mitigate
| that
| sethammons wrote:
| RSUs are actual stock that can be sold on the market.
| Options are the ability to buy a share in the future at a
| given price. One is real money now and the other is maybe
| money later.
| dan-robertson wrote:
| But I think you're ignoring the liquidation preference
| discussed at the top of this thread: surely RSUs have the
| same junior rights as the shares from options if the
| company is acquired. One difference is that people are
| generally required to exercise options (and pay taxes on
| that) before they leave the company. But you also talk
| about selling RSUs on public markets so maybe you are
| thinking of something else?
| natchy wrote:
| Qualtrics gave engineers RSUs in 2015 when they were
| still private.
| tptacek wrote:
| Isn't this just a way of saying "work exclusively for
| public companies if you value equity"? You will not be
| able to sell private company shares on the market.
| dllthomas wrote:
| Private companies sometimes give out RSUs. For instance,
| Uber did pre-IPO.
| cj wrote:
| RSUs (restricted stock) can be granted to employees if
| the startup is very very early because the par value of
| each share rounds down to $0.
|
| If you join a company that just had a seed or Series A,
| the par value would be much higher, and if you were
| granted RSUs, you would need to buy the shares at
| whatever they're valued at, which can be a lot if you're
| buying 1% of a $10mm company (compared with a stock
| option which is simply the option to buy stock at a later
| date).
|
| RSUs have voting rights and is usually the same stock
| founders have.
|
| That's said, an investor (or a founder for that matter)
| can come in at any time and rework the whole ownership
| structure by simply increasing the authorized share pool
| in a company from (let's say) 10 million shares to 100
| million shares, and then grant all of the newly created
| shares to other entities, thereby cutting the value of
| all other shares by 1/10.
|
| A lot of it comes down to what investors force startups
| to do when they accept VC money, and also how ethically
| and morally the founders act from the perspective of
| employees with stock interest.
|
| I'm a CEO and when I hire people, I'm very generous with
| stock options, but I tell people upfront they're just
| lottery tickets. That's really what they are.
| boulos wrote:
| IANAL, but there are two "problems" with this claim.
|
| One is that "just create a bunch of shares and only give
| them to the founder" is true, but has tax consequences.
| (In your example, you just gave ~90% of the company to
| the founder at valuation $XM. Whether as options or as
| Restricted Stock, there's going to be a tax consequence
| to that either at grant or during vesting). A dishonest
| founder might do that, but they'd have to believe it was
| going to work out in their favor beyond just "I already
| have 40%, let's increase the value of the company".
|
| Second though is that the Founders, usually as CEO and
| Board Directors, have a fiduciary duty to their
| shareholders. Even if you have full control of the voting
| rights, reallocating all the equity is a violation of
| that fiduciary responsibility. The injured parties have
| to sue you for it, and that might make the company equity
| worthless, but just because a company is private doesn't
| mean "anything goes".
| throwawaysea wrote:
| Is there any kind of clause or legal structure that would
| prevent the kind of alteration to ownership structure you
| describe above? It seems like you're saying anyone can do
| anything at any time. That's scary and I feel like we
| need laws against that, or a different structure for
| representation of workers.
| cj wrote:
| > anyone can do anything at any time.
|
| This is largely true at any smaller seed maturity or even
| Series A maturity.
|
| As a sibling commenter mentioned, companies do have a
| fiduciary duty. But realistically, if the shareholders
| are composed of relatively unsophisticated
| investors/employees, you can do anything without being
| sued.
|
| I obviously don't subscribe to this kind of behavior at
| my own company, but being in the position it has opened
| my eyes the extent to which one could go if you were very
| greedy.
| danrocks wrote:
| I have learned my lesson. Been at large company with fat
| RSUs for 5 years now.
| mbesto wrote:
| Which is why it would be entirely reasonable for someone who
| is granted stock as part of compensation to do a full
| diligence on the company before accepting the terms.
| Companies deliberately offer options knowing most people
| simply won't and thats how they get away with it.
| geoduck14 wrote:
| I joined a private company a couple of months back. They
| gave me Options, but they made it clear they were "monopoly
| money" and gave me no ability to evaluate the value of the
| options - I accepted the offer EXCLUSIVELY based on the
| salary
| hijinks wrote:
| i know an early engineer who worked for a well known founder
| 10 or so years ago.
|
| The company was sold to a large tech company for like 350mil
| but what happened first is the VCs/founders created a new
| company and sold the IP from old company to new company and
| sold the new company for the 350mil leaving the employees
| with a worthless company.
|
| So also trusting the founders and the VCs they choose are in
| my opinion more important then any equity grant offer
| piinecone wrote:
| Hey, my old cofounder just did this to me!
| lelandfe wrote:
| Jesus, name and shame. That kind of behavior should follow
| those founders like a sign hanging from their neck saying
| "don't work for me."
| [deleted]
| treeman79 wrote:
| That would be a fairly straightforward lawsuit as a company
| cannot intentionally defraud its own shareholders.
| namdnay wrote:
| If the employees had options they weren't shareholders
| (yet)
| aerosmile wrote:
| That's a straw man argument. If you had an interest of
| any kind in a company, and someone screwed you, you can
| sue. In today's environment, companies will settle even
| if they have a good case, let alone if they are likely to
| lose. Plenty of lawyers will take such a case and get
| paid in a contingent fee arrangement.
| danrocks wrote:
| I made $10k on a $138m sale and $50k on a $125m sale. I am
| that early Engineer you speak of.
| binbag wrote:
| But was this a surprise to you? Did you expect to make more
| money from the sale of the company, and if so, why?
| aerosmile wrote:
| Because most of the shiny things in SF were paid for with
| equity. And there are plenty of shiny things in SF. I am
| not saying you should work for equity, but I think you
| should realize why the real estate is as expensive in SF
| as it is. There are plenty of times when people got
| screwed over, and there are also - fewer, but enough to
| move the market - people who didn't. So when you ask the
| question "how could you have been so incredibly stupid to
| believe that equity is not worth $0," you just have to
| look around yourself and ask "how come that zillow lists
| so many properties for over $10m?" You shouldn't count on
| your equity returning anything, but you also shouldn't
| listen to people who take an overly unhealthy view at the
| potential upside.
| binbag wrote:
| Sorry, I wasn't suggesting anyone was stupid for
| believing the hype that founders use to punt their
| stocks. What I was trying to get at was whether you had
| an idea of the valuation of the stock relative to your
| exercise price. If so, and that looked good, what
| happened to your company for it to sell at a low price?
| aerosmile wrote:
| Gotcha, I misunderstood.
| potatolicious wrote:
| I'm willing to bet good money that the real estate in the
| SFBA is driven much more heavily by FAANG stock than
| startup stock...
|
| Startups mint multi-millionaires. FAANG does it at scale
| day in and day out.
| aerosmile wrote:
| Even at FAANG, not enough people have the seniority for
| their base salary to turn them into buyers of $10m homes.
| I appreciate your point that RSUs are different from
| options, but I still think it's indicative that cash
| rarely comprises the majority of the wealthy people's
| income.
| bingohbangoh wrote:
| Were you given a signing bonus to stay on after the
| acquisition?
| leetrout wrote:
| Did you know the cap tables at those companies?
| danrocks wrote:
| I don't think anybody knew the cap table for those
| companies. To be more precise: one of them didn't even
| have a cap table, the other was a secret between the lead
| investor and the original owner (an incubator). Needless
| to say nothing was disclosed to engineers, or any one of
| them for that matter. Even in this state, both companies
| raised a shitton of money.
| sokoloff wrote:
| > To be more precise: one of them didn't even have a cap
| table
|
| A cap table is a representation of ownership. Saying a
| company doesn't have one is like saying I don't have a
| height.
| danrocks wrote:
| So you're infinitely short? Joking.
|
| What I meant is that the cap table was not disclosed and
| changed so often that nobody really knew what it was at a
| given moment in time.
| leetrout wrote:
| This is what had been surprising to me in my
| experiences... first few startups the cap table was
| shared info but no specifics (investor pool 33%, employee
| pool 7%, etc) so at least you knew the rough outlay.
|
| Then one recent startup was championing transparent
| salaries but wouldnt share anything about the cap table
| which seemed odd to me.
|
| My current company the CEO answers questions about the
| stock outlay but not specifics but also doesnt claim to
| be transparent.
|
| I just assumed from my earliest experiences most small
| companies were happy to explain the cap table and walk
| folks through dilution events.
| bingohbangoh wrote:
| Cap tables can change very quickly too. Even if you know
| at the beginning, you're not privy to any changes later
| on.
| leetrout wrote:
| Sure. More the reason to have a rough representation that
| is public in a transparent company.
|
| Cant make good decisions without full information.
| kabdib wrote:
| I lost $8K on a $40M sale. Lost another $10K when a company
| "extinguished" prior shares (they are now worth $7B).
|
| This is basically legalized gambling with a house that's
| allowed to have a rigged table. If you want to do well,
| become a senior engineer at a FAANG.
| binbag wrote:
| This is an oversimplification and, as written, is not quite
| right. It doesn't matter whether the company is acquired
| outright or floated on a stock market. If the company has a
| well-structured employee options scheme, then either of those
| events should be classed as an 'exit' event and the employees'
| options should be automatically exercised and sold, giving them
| the net gain in cash on that day.
|
| As for preference shares, most VCs try to get that. They can be
| negotiated away by the company management sometimes. If they
| remain, they come into play in situations where the company
| isn't successful - where the shares are sold at a lower value
| than they were bought for. The preference gives the VCs to get
| their money out first, and leave the scraps for the others.
| Usually the others includes the founders who are similarly
| shafted - but then again they evidently didn't build the value
| of their company very successfully and they signed the deals.
| dan-robertson wrote:
| VCs often get shares with (e.g.) 3x liquidation preference
| meaning that they should leave with max(3x value invested,
| num_shares x sale_price / total_company_shares), or less if
| the company didn't sell for enough money to pay out that
| tranche and the more senior shares. For VCs, the point is
| that in a failed company, they get 0. In a medium-success
| they get up to 3x their investment a bit like buying a bond
| for 33C/ on the dollar, and in a massive success they get
| equity-like payout.
|
| The problem is that if a company has a lot of shares
| outstanding with a high liquidation preference then outcomes
| that _look_ like success to employees or founders may not
| result in those employees making much money, and the
| employees generally don't know the relationship between how
| much the company is sold for and how much they get paid
| because it is confidential to the senior executives or
| investors.
| molsongolden wrote:
| Often? I agree that liquidation preferences are often
| overlooked by startup employees but I wouldn't say 3x is
| common or generally acceptable.
|
| The National Venture Capital Association (NVCA)
| benchmarks[1] show that over 95% of term sheets across all
| funding rounds include a 1x liquidation preference.
|
| [1]https://nvca.org/model-legal-documents/ (it's in the
| Enhanced Model Term Sheet v2.0)
| binbag wrote:
| In my (UK) experience, a 1x liquidation pref seems
| requested. 3x seems unpalatable. Maybe things are different
| in the US west coast. (It's certainly easier to raise money
| there, so perhaps the terms are harder as a compromise.)
|
| You're right that employees with options don't get enough
| information to understand the value and potential value and
| mechanisms of their options in private companies. That's
| what I was driving at (poorly) in a separate comment.
| askafriend wrote:
| No, even in the US West Coast, 1x is what's typical.
| Anything more is non-standard.
|
| 3x would mean something is wrong with the company.
| jandrewrogers wrote:
| A 3x liquidation preference is anomalous. Pretty much every
| term sheet I see is an eminently reasonable non-
| participating 1x, which is a _de facto_ standard term these
| days. If liquidation preferences are consistently higher
| across startups then it is a sign of an unhealthy
| investment market.
| throwawaysea wrote:
| I think there are two problems here. The first is that
| what is "standard" is not very well known, so candidates
| considering startups are operating with little in terms
| of default assumptions and expectations. Is there any
| resource that describes what the default even is?
|
| The second problem is that companies are never
| transparent about any of these things. If you ask, you
| get funny looks or continued evasiveness, and candidates
| are left with only part of the full picture anyways. From
| other comments here it seems that even if you run through
| a checklist of questions, the company's structure could
| drastically change in a subsequent funding round of some
| such event. And if that's the case, does knowing the
| _current_ state of affairs matter at all?
| fnord77 wrote:
| It seems to me that investors have figured out other ways of
| zeroing out startup employee equity, too.
|
| I think the days of people getting rich from working for a
| successful startup are over.
| aerosmile wrote:
| Some data to back up your argument would really help here.
| The VC market has never been more founder-friendly, and the
| amount of VC invested is at an almost all-time high.
| Additionally, last year was the 3rd highest in the last 20
| years for the number of IPOs. So just because you found
| yourself in an overly negative HN thread shouldn't skew your
| view that the chances of doing well are higher now than ever
| before (which is not meant to imply that they are high on an
| absolute level, but certainly in comparison to prior years).
| dan-robertson wrote:
| Why does "The VC market has never been more founder-
| friendly" contradict the statement above that the outcomes
| are not so good for employees (who aren't founders)?
| Perhaps the VC market became founder-friendly by
| transferring upside from employees to founders. Or perhaps
| some other mix.
| aerosmile wrote:
| A founder-friendly term sheet is not necessarily an
| employee-friendly term sheet, but a founder-unfriendly
| term sheet is 100% of the time bad for employees as well
| (low valuations, liquidation preferences, etc). All
| things being equal, as an employee you want to be in the
| company where the founder is laughing all the way to the
| bank.
| [deleted]
| Seattle3503 wrote:
| It seems like there should be a law requiring this to be
| explained in plain terms at offer and each month to options
| holders. For example they should show you a graph with the
| x-axis as exit valuation and the y-axis as "your payout". Those
| are the numbers that really matter to most employees.
| frenchie4111 wrote:
| There's no law, but do not accept an offer at a startup where
| the founders / leadership are not willing to explain this to
| you whenever you ask.
| mathattack wrote:
| Yes. There is a lot of confidentiality built into some of
| the financing terms. Befriend the CFO. A good one will say
| "If sell for X, you will own Y% of the company, which will
| be worth Z to you" and they can give another few scenarios
| too. "We need to clear A in valuation for employees to get
| anything, and at Y you get a little"
|
| Other rough heuristics:
|
| - Down rounds tend to punish employee shares.
|
| - Pivots that require large equity tend to be bad for
| employee shares.
|
| - Large rounds relative to valuation ($700mm for a post
| money valuation of a billion) make a much higher future
| hurdle to clear - bad for employee shares.
|
| - PE rounds tend to be worse than VCs. (VCs tend to worry
| more about upside, while PE firms push for downside
| protection)
|
| All of these general rules have many exceptions.
| throwawaysea wrote:
| > Large rounds relative to valuation ($700mm for a post
| money valuation of a billion) make a much higher future
| hurdle to clear - bad for employee shares.
|
| Is that a scenario where the company has a pre money
| valuation of $700m and accepts $300m in funding? Why is
| that a bad thing? Sorry if this is a naive question.
|
| > PE rounds tend to be worse than VCs. (VCs tend to worry
| more about upside, while PE firms push for downside
| protection)
|
| Is this a binary thing or do investors exist on a
| spectrum? I've also heard another label, "growth equity",
| which sounded a lot like venture capital to me.
|
| And are those rounds necessarily worse? Is it about the
| PE firm selecting deals to fit their risk appetite or is
| it more about them inserting clauses that are harmful to
| common share holders (not sure what the right term is but
| I mean regular employees).
| mathattack wrote:
| Good questions...
|
| Scenario 1 is $300mm pre, $700mm in investment, $1bln
| post. If there's are strong preference rights, you need a
| multi billion dollar exit for employees to get anything.
|
| PE vs VC isn't binary, it's a spectrum. VC firms
| generally don't care about so-so outcomes. So they give
| up downside protection for upside. (They give up
| preferences to get a higher share of the company, which
| reduces valuation)
|
| On the flip side, PE firms are trying to make as return
| on every investment. So they're ok with crazy high
| valuations as long as they get liquidity preferences.
| Which means in so-so exits they get most of the money.
| twistedpair wrote:
| Friend was the founding engineer at startup that did quite
| well. Eventually sold for 100s of millions, and yeah, he didn't
| see a dime.
|
| Always discount those options to 0, and make sure you're
| getting a good salary.
| jeffwass wrote:
| I've seen this term around lately. What exactly is a
| "founding engineer"?
|
| Is it a euphemism to give early non-founder employees a title
| that sounds like founder but with minimal corresponding
| equity?
| whymauri wrote:
| It is completely arbitrary. Arguably, all roles at seed
| stage or earlier are arbitrary.
| nrook wrote:
| A neat thing about the job is you probably get to exercise
| early and save taxes on your equity if it actually pays
| off.
|
| But yes, it's not worth that much more than joining a
| startup later, and it'd be foolish to evaluate it
| differently. It's fun, but if you don't have real founder
| equity don't trick yourself into working longer hours than
| you would at a regular job.
| ithrow wrote:
| exactly
| dudul wrote:
| Yes, and usually pretty bad salary. I haven't seen any
| comment mentioning it, but it's another way to get screwed
| when joining a very early stage startup.
|
| The 1st engineers join pre-series A, get pretty low salary
| with the promise of making it big when the company goes
| public or is bought. Then more engineers come on board when
| the company has more resources after a few other rounds of
| funding and they get a salary much closer to the market.
| twistedpair wrote:
| To clarify: first engineer.
| leroman wrote:
| One huge risk is people higher up change more often in startups
| in my experience, especially early ones, what usually follows is
| a domino restructuring and basically a different company. This
| happens a lot when a VC in a big round decides things are going
| too well, better put one of his own in charge to make sure its
| under his complete control going forward.
| JCM9 wrote:
| Too many people don't do their research and understand how
| preferred status on the cap table works, minimum payouts, and
| other things that are typically (sadly intentionally) withheld
| from employees receiving these offers. People hear about startups
| selling or being acquired for millions or even billions but too
| often nearly all that money is just paying back the original
| investors with some modest returns so they can move on. There can
| be little, or even nothing, for employees holding options. If the
| company is acquired you might get a nice stash package to welcome
| you onboard with a t-shirt.
|
| Obviously there are other stories that see employees become
| fantastically wealthy, but that's a rare exception not the norm.
| Equity comp at a publicly traded company (via RSUs) is very
| different than equity comp in a privately held venture. With RSUs
| you're still at the mercy of the market but you know how much
| they're worth literally second by second.
|
| At a startup as an employee you should generally assume those
| shares are worth nothing and be OK making what you'll be making
| then. Anything above that is a nice windfall bonus.
| danrocks wrote:
| Vast majority of startups will not disclose cap table,
| outstanding shares, liquidation preference, nothing. Try asking
| and see how it goes. The only one I've interviewed with that
| does disclose _some_ of it was Stripe.
| twistedpair wrote:
| Also watch out for a clause giving the buyer the right to buy
| back the employee shares, possibly at par value.
|
| That means you could have executed those options 5 years ago
| (to prevent a windfall tax), and just get you money back at
| acquisition time. Zero interest five year loan. Thanks!
| danrocks wrote:
| What the hell, is that a thing? Does it have a name?
| twistedpair wrote:
| More details:
| https://stockoptioncounsel.com/blog/standards-ownership-
| cant...
| 0x456 wrote:
| Drag-along rights, with a waiver of appraisal rights?
| JCM9 wrote:
| That's because there are still enough willing pawns that
| accept these offers without knowing what they're getting.
| That won't change until the market wakes up and enough people
| stop subjecting themselves to such nonsense to the point that
| companies can't hire. Until then, as the saying goes there's
| a sucker born every minute. If you think I'm being syndical,
| ask a typical startup to see everything people have described
| in this tread and watch them squirm.
| anonymousDan wrote:
| I agree. I think it would benefit all of us if we were more
| informed about the types of tricks startups use to lure
| people like this. If we were more informed, then they would
| have to start being more open about the actual value. I
| feel like this kind of thing could almost be taught to CS
| students in some kind of negotiation class!
| avyfain wrote:
| With the caveat that you don't need the full cap table - a
| company not disclosing outstanding shares, last preferred
| price and 409a/strike price are giving you a signal to run
| away.
|
| Agreed that liquidation preference would be helpful, too, but
| if at the time you're signing on you think the liquidation
| preference will come into play you shouldn't join them.
| willcipriano wrote:
| If you want someone to stop bothering you about working at
| their startup just ask for the cap table.
| ralston3 wrote:
| This is such good advice to filter out all the recruitment
| emails XD
|
| Instead of responding "not interested". I'm just gonna
| start saying "show me the cap table". Love this idea
| exdsq wrote:
| Not looking to get into a Cryptocurrency debate here, but one
| good thing about startups in that area is the share offering
| tends to be liquid from day 1 and the valuations can get very
| high. It feels a lot more likely to result in a payout than
| waiting for an acquisition or IPO.
| nemo44x wrote:
| I've been using a discounted cash flow model to evaluate work
| opportunities for years and it's great to see an article take
| that approach too.
|
| What I've found in my own analysis and with friends looking to
| join a new place is we tend to undervalue the established,
| current company and overvalue the startup. It's difficult to
| calculate the odds of success at a startup and everyone has a
| different current arrangement with their existing company but in
| many cases I've calculated that the startup would have to be
| valued at many billions 7 or 8 years down the road to break even
| in total compensation. Especially so if your current role is at a
| post-IPO success story (that will add a lot of value over the
| next 8 years) where the RSU's are fully charged, have great
| benefits (yay for matching 401k's!) and a very good salary.
|
| It not getting there means fairly bad returns so you really need
| to be going for the "right reasons". Seeing startup gold is not
| it.
|
| Of course the other side of it is the startup is a huge success
| in 8 years and your cumulative ISO's are worth a fortune. And
| that dream is so alluring to people. And so unlikely.
| sokoloff wrote:
| > great benefits (yay for matching 401k's!)
|
| Indeed yay for matching 401(k)s, but that benefit is only a
| high-four figure sum per year for most people. In the scheme of
| SWE comp, that's about a needle's width on the gauge.
| nemo44x wrote:
| It's a piece of the puzzle though. Consider you'll be at the
| startup for 8 years before moving on, letting all your ISO's
| vest after the IPO. In that time, the current company would
| have matched ~200k in funds when accounting for yearly
| appreciation of 8% in it. And of course the marginal tax
| savings you'll have from a higher a salary over that time.
|
| So you add that to the formula plus assumed salary
| differences in that time and whatever income you'll receive
| from RSU's and the increase in the current company's market
| cap over the time. You may even consider what your current
| salary allows you to invest after taxes and how that will
| compound and if the startups lower salary will still allow
| that or if you'd have to pause that.
|
| So add that all up and that is what you're discounting. In
| essence the ISO's from the startup need to at least equal
| that after 8 years (or however many you are assuming until
| exit. 8 is average) to break even. It's possibly in the many
| millions for some people.
|
| It's a hard calculation with a lot of variables and
| assumptions. But it's helpful to see how much of a risk you
| may really be taking.
| sokoloff wrote:
| My experience is that, tech companies who start to succeed
| and scale end up starting 401(k)s that are competitive with
| the market along the way so, in the success case, you
| aren't giving up 8 years of matching. (They more or less
| have to, or else they can't compete for talent for whom
| they can no longer give meaningful upside via options.)
___________________________________________________________________
(page generated 2021-10-09 23:01 UTC)