[HN Gopher] Startup Equity 101
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Startup Equity 101
Author : surprisetalk
Score : 69 points
Date : 2025-06-05 03:54 UTC (3 days ago)
(HTM) web link (quarter--mile.com)
(TXT) w3m dump (quarter--mile.com)
| Oarch wrote:
| 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 wrote:
| Always treat startup equity as 0 until you've sold it.
| edoceo wrote:
| 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
|
| But searching, you'll find loads more studies on
| startup/angel/seed.
|
| It's like, optimistically, 1/20
| Oarch wrote:
| Good advice! Thankfully I do want to change the world (for
| the better I hasten to add) and so far so good.
| Aurornis wrote:
| 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 wrote:
| 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.
| PopAlongKid wrote:
| >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 wrote:
| 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.
| strangelove026 wrote:
| 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.
| dakiol wrote:
| 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 wrote:
| 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 wrote:
| 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.
| ldjkfkdsjnv wrote:
| 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 wrote:
| what's a generational startup?
| ldjkfkdsjnv wrote:
| cursor
| shishy wrote:
| They probably meant a "once in a generation" startup like a
| unicorn
| sdfasdfas134 wrote:
| 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 wrote:
| >> 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 wrote:
| 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 wrote:
| 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.
| CPLX wrote:
| > the 409a is only going to show you the maximum possible
| value
|
| While the points about uncertainty of options are quite
| accurate, this detail isn't really true.
|
| For the most part a 409a is the lowest reasonable valuation
| the company could talk the auditors into accepting. The lower
| it is the less tax paid and everyone knows that.
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