113 replies
13h34m
Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures.
As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR in two years) to become a founder and that is when it clicked - I expected to feel stressed, pressured, and the weight of all of the risk I was taking.
Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!
Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away.
Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really want. You might have foregone your shot at a partner to build a company to mostly profit someone else who did nothing but write you a check. If you do have kids, you'll be old as hell raising them. All you'll have is extra stuff hardly anyone cares about - except maybe you - if you're the type of person chasing down a decimillion net worth.
I hope these people truly enjoy their boats and their third homes in Aspen! It sure is a lot of work to get them.
Or, based on examples I've witnessed, 5 years down the road you own 20% of a $1M company because your forecasts were off by an order of magnitude. You've gone through a couple down rounds, where investors took at least 20% each time. You feel obligated to your investors and employees, while there is almost zero chance of walking away with anything.
One thing that is underappreciated in the startup mythos is just closing up shop and trying again.
do investors allow that
They don't control it.
One of the greatest quotes I've ever heard from a founder buddy was when his startup was going through a particularly dark moment and struggling: One of the investors said to him "Maybe you should seriously think about shutting down and giving us our money back", to which he replied:
"It's not your money anymore."
Yeah, then the investors call a board meeting and bring in a new CEO to provide adult supervision after a 2/3rds vote. The give that guy more equity than you to keep the ship afloat. "It's not your company anymore."
Your daily reminder of the importance of maintaining board control.
Not realistic to maintain control past A unless you built a real rocketship. The board doesn’t usually want to run your company - they have enough other companies, some evidently better than yours as they don’t require this intervention.
Reputation is a thing. You might need investors in your next startup.
That very much depends on the stage of the company and how much control has been given up at different points. Do you think the management team of a public company could just decide to shut it down? As you raise consecutive rounds, your control is eroded.
What a horrible fate. They only got five years of salary plus 200k extra. I'll include them in my prayers (just kidding, I don't pray).
They also probably worked many 100 hour weeks while they could've earned more and worked a lot less with less stress
That's how risk works. The FAANG employee friends have exactly a 0% chance at a 9-figure outcome. They'll easily be at top decile if they pull a nominal $10M+ post-tax in 20 years.
Except the "$200K" is purely paper, and has an expected value of closer to zero. Remember, common shareholders are the last ones to get paid. Investors have preferences and get paid back first (often with interest.)
Also realize you were probably forced to take a pay cut and have a below average salary due to cost-cutting measures from the board. We'll ignore the non-financial problems, like tons of stress, complaining employees demanding more equity because you couldn't give them raises...
No, it's not a good situation.
Can you say more on this? I didn't realize FAANG TCO was quite that high. Maybe it's time to swallow some pride and take the adtech money after all...
The average SUCCESSFUL founder is in their earlier 30s. At that point - you should be at least L4 (probably L5) at FAANG. Salaries are about ~$450k at that level and age.
In 5 years, if you work even a fraction of as hard as you need to be a successful founder, you should be L7 - salaries are usually >$800k at that point.
No, it is not like any average slacker straight out of college in 5 years can get to a $1M salary at FAANG. But if you're the type of person that could successfully grow a company to a multi hundred million valuation in 5 years - you can make $1M at FAANG.
Big caveats on these numbers:
1. You’ll have to be located in SF or Seattle.
2. Going from L5-L7 is _not_ trivial. It requires a somewhat miraculous combination of being on a productive team with a good boss, a lot of opportunities for showy work and your own gamesmanship around corporate politics.
Is it possible? Sure. But in my short stint at Amazon, I met a lot of people who should have been higher level and were simply not due to missing one of these factors.
It is trivial compared to growing a company successfully from $10M valuation to $100M valuation + an exit.
[citation needed]
Frankly, many more aspects of trying to grow your career from l5-l7 are out of your hands than they are when you're at a startup.
The vast majority of startup success is luck...
There are literally thousands of people going from L5-L7 at the major tech companies per founder successfully exiting a >$100M company.
Those aren't entirely overlapping skills. There are plenty of founders whose attitudes and generalist skill sets make them unhireable in the management ranks of FAANG.
The distribution of the ladder is logarithmic. Most never make L6. L5 is often terminal level IC without any “up or out” obligations. Lots of people spend a long time at L5 and retire.
Disagree. Totally different skill sets. Not saying there is no correlation at all, but probably less than one might think.
levels.fyi says Google L4 in the Bay Area is 306k total comp on average.
https://www.levels.fyi/companies/google/salaries/software-en...
You don't start there, but you can get there as you level up. A lot of that would be because the stock on your RSU grants goes up while you work there though. I don't think many SWE have 7 figure targeted comp (highest levels, yes). But plenty get there with refreshers and stock appreciation.
Explain the math on leveling up. Each year, Meta hires more Jrs than there exist L7+'s at the entire company.
Many people top out at a lower level because they don't play corporate politics games or because the L7s aren't moving on, so there's no real room for promotion among the L5s and 6s.
Microsoft in the Ballmer years (early/mid 2000s) had this problem. Promising L65/L66/L67 (probably equiv to L5/6 at AMZN) would leave because the next step was full. All the "partners" were hanging around and not making room for the next gen of leaders.
See levels.fyi. The pay levels for FAANG companies are fairly accurate. But you'd have to be something like L7/E7 level at a Meta/Google to break $1M.
Also note that some comp numbers get heavily inflated by people incorporating stock value increasing between the equity was first issued and the stock actually vested.
You’re obviously overstating the FAANG SWE lifestyle.
But beyond that, it’s interesting you picked FAANG SWE and not startup SWE as the basis of your comparison.
The whole premise of the article is that startup employees are often sold a bag of goods about equity and upside that’s simply a terrible deal. Not terrible in the sense that it’s highly risky, but that it doesn’t even come close to compensating for that risk premium. Its sold as FAANG is low risk medium upside but startup SWE is high risks high upside but really its extreme risk and almost no upside because VCs find dozens of ways to carve it out. And people will say startups pay “market” compensation but they almost always mean base salary only, and the equity is such a horrible deal, it’s borderline fraudulent scam on the part of founders to sell startup employees on the equity as a fair deal.
As an aside, when people think SWEs don’t need unions/ professional associations, they think of teachers unions or autoworker unions where pay is standardized on seniority. Instead, we could have something where our lawyers in our camp could review equity terms and we could collectively advocate for things like liquidity deals. That will never ever happen if you only trust the deals the VCs and founders offer.
Let's not forget that FAANG companies were all startups at one point. Early employees at those companies experienced significant upside. Startups can be very high risk, and in rare cases, extreme upside.
This is the “startup myth” that lets the scam perpetuate.
The world has changed. Google IPOed just a few years after it founded. Now Stripe, objectively one of the most successful startups ever, still hasn’t IPOed after 15 years.
Liquidity preference Dilution
Even the F in FAANG had a major movie made about early employees getting shafted by dilution!
FAANG is 5 companies founded a long time ago. Since then VCs have completely rewritten the rules of the game. But they’ll still point to extreme outliers in the old rules. The fairy tale of the Google masseuse has probably cost tens of thousands of engineers millions in compensation.
You need to get things in writing and do the math and startups make it as difficult as possible to do that and then the math never adds up. So they resort to fairy tales.
Many huge private companies, like Stripe, have found ways to provide liquidity to their employees without going public, e.g., through tender offers. Some more recent examples of companies where early employees did very well would be AirBnB, Coinbase and DoorDash.
Early executives at those companies did very well. Early employees did well, but risk-adjusted , not really. I know people who were fairly early at those companies and they own nice SFH in the Bay Area but they're still working as Directors or whatever.
Consider that if you could make 400k (including liquid stock) in compensation at FAANG but you take 180k at the startup, you're basically betting 220k a year on the company. Except unlike any other company you bet 220k on, you won't get a board seat, you won't get access to key metrics, your influence will be dominated by "real" investor's influence.
If your NW is less than 10M, which presumably it is, anyone who's heard even heard of the words "Kelly Criterion" would tell you your nuts for betting 220k a year on one startup. And yet, you get treated like "an employee" and not like "an investor" for taking that insane risk.
So YC has invested in 5000 companies, and you can name 3 that had top-notch outcomes, thats 0.06% success - and you had to work like a dog to realize it! And that money was locked up. Those same early employees could have taken that $220k/ year, put it on Bitcoin or Apple stock, and retired off that. And Bitcoin and Apple were much easier "picks" than an given startup.
The math simply does not add up and the whole system runs off mystique and naivety. And I've worked at startups that gave me a hard time about asking about outstanding shares, about asking about the cap table, about asking about liquidation preference. This is _critical_ information before you invest a significant portion of your life and net worth on a company and that they're guarded about and it should raise the ultimate alarm bells that they don't fall over themselves to explain every part of it.
There's a bunch of propaganda out there "Explaining ISOs, written by a16z" that's a smoke screen of the truth. The math does not add up.
The dream startup employee is really really good at Transformer architectures and really really bad at personal finance. Fortunately for startups, a shocking amount of these people exist. But it doesn't change that if sharp financiers looked at employee equity packages at startups objectively, every single one would agree it's a scam deal.
First of all, we're on the same page about the risk profile of working for larger companies being better for employees. But the reality is there aren't enough of those jobs for every single startup employee out there to get one. Some people also like the startup environment - move fast and break things, etc.
Your denominator (5000) is _all_ investments that YC has made. You need to look at investments of a certain vintage, e.g., 10 years or more. You also need to include all the other companies of that vintage where employees did well (way more companies in that cohort have sold or gone public). The result is 0.06% is a gross understimation of the success rate (where success is defined as successful enough for early employees to make a lot of money).
Can you please explain in what way VCs have completely rewritten the rules? Asking genuinely.
I don't agree it's a myth. Is it an extreme risk? Yes, of course. Do people view the risks to be way too low? Yes. But I worked at Cloudflare pre-IPO, got shares at 1.73, and at one point CF was at 200 a share. That was more or less what I was "promised" from the equity.
Stripe is one example of a successful startup not going public, but there are tons of startups that are going public. And there are many startups that wish they could go public, but they simply don't have the finances or business to do so.
I don't think VCs changed much from when Google went public until COVID. We were seeing massive overvaluations of tech companies for years. Once through 2020, VCs got scared and now the landscape is a bit different. But the AI craze has started to get VCs back out of their shells taking bets on risky projects.
So, yeah, idk what I agree with this assessment. At least it's not been my experience in tech over the last 8+ years.
The argument that a startup could be the next FAANG is anchored in lottery-like odds.
This 100%. Really the only reason to work at a startup as an engineer is if you really want to, because everyone pays low and the tiny bit of equity is essentially worthless in 99% of cases, which gives it a very low value.
And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options. If you've gotten laid off, eating into your savings while searching for a job is a pretty risky proposition. If you have an appreciable amount of equity, that bill can be rather high. Then there's AMT. Many end up letting the options expire. So, taking that pay cut for equity really didn't work out -- you had less money to exercise the options and because you couldn't, the option portion of your compensation was effectively clawed back.
I very much appreciate the startups pushing to extend the exercise window out to 5 - 10 years, but that's far from the norm. I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable, but that's certainly not the case when folks are laid off. And we commonly discuss people thriving in one particular phase of a company. If you're not in that phase, it's no good for either the company or the employee to continue the relationship just to defer having to exercise options.
The 90 day exercise window is the most obviously broken thing about startup equity in my opinion. We changed this to 5 years at Shogun.
Ok, please argue in good faith here. Maybe 1 or 2 people who aren’t executives are pulling in that kind of money from FAANGs.
Incorrect. See: https://www.levels.fyi/companies/facebook/salaries/software-...
I was under the impression we were talking about ICs here -- your link shows that an upper-middle IC that you'd expect to be choosing between early startup or FAANG will see something around 450 a year, which tracks much closer to what I'd expect.
You said 1 or 2 people who aren't executives. There's way more than 1-2 E7s at Meta, as an example.
If you're CEO at a $100MM company, your peers ARE executives at FAANG
It’s a shame you were forced to take on this burden and not allowed to be a regular engineer like your peers.
Nobody is forced to become a founder. A lot of people are naive to the sheer level of stress involved, and think it’s going to be easier than it actually is. You don’t find out just how stressful it is until you’re already super committed, have raised money, have employees, and there’s no easy way out without screwing a whole bunch of people over.
Founders tend to only talk about the good things happening at their companies, and tech press tends to focus on the successes. These things contribute to more people starting companies.
If you can't stomach screwing people over you shouldn't be a CEO.
You are completely detached from the real world. Even in super rich countries like the US there are a lot of people without savings, living paycheck to paycheck. Most/all software engineers outside the US can only dream of ever earning that much money. And yet here you are, worrying that you'll end up only slightly richer than people earning ~$1M per year.
onlyrealcuzzo is comparing 2 things:
* Being a founder and working mega hours and having no life (e.g. no spouse or kids) and having a decent chance of losing most of your money as the company fails.
* Working at FAANG and making a lot of money while not having to work too much.
onlyrealcuzzo is saying the second option is better.
I don't think you fully understand the context in which this was written, but you probably should before passing so much judgement.
Sir if you live in USA and do not take a dip into the VC money swimming pool, you are stupid, because crazy people with stupid ideas routinely get to $100 Million valuations, like no other place on earth.
Its like going to Disney Land and saying "Oh i'll just sit at the coffee shop". Some people are here for the ride. Some people like the 9 to 5. Like you, obviously. Why dont you go start corporate-drone-news.org, this board is for hackers and founders.
I don't mind the shit take, but please don't use underscores in your domains.
Good catch, fixed.
I highly doubt ALL your peers are making that much. And I think the people making $1M per year at FAANG tend to work much more than 6 hour days. You have to be very productive to get $1M per year.
The "Four Yorkeshiremen" sketch by Monty Python always lightens my mood when this kind of bragging comes up.
Well, some founders care about their employees and their idea, and the idea of the start up failing is much more than just money.
Unless you are a manager, in which case you are working more like 12 hour a day.
Yeah I feel like successful founders natural ambition and optimism is sort of weaponized against them by the VC industry here. From a VC perspective it's worth playing the odds for moonshots. As a founder though, if you can create a $100M company that you own 30% of, you can probably create a $20M company you own 70% of with a much more realistic and sustainable growth targets.
I can't help but feel this would be better for the founders, the employees and the customers of the company. It just doesn't make as much sense for the investors.
s/deci/deka/
"Sure, you've got a decent chance to rocket past them in wealth."
I might rephrase that as you have a non-zero chance. Odds are not that high and certainly not decent.
Where would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.
A lot of people (esp people that performed extremely well in school and in corporate environment) find "failing" and "losing reputation" very stressful.
I guess harden the fuck up?
Thank God someone said this. Of course it is stressfull, there is no free lunch. If you can't take the heat just dont enter into a such top-heavy game.
Harden The Fuck Up should have been the YC motto as really that's the whole program in a nutshell. Now take a glance at any thread here that is vaguely political.
In a big way there has never been a better time to start companies. It isn't the economy you need to outrun, just the competition.
And change.
Exactly. Or just don't do it.
I am sure enough that I would crumble under that specific kind of pressure that I don't put myself in situations where I would experience that specific kind of pressure. Works great!
Landlords and supermarkets dgaf. There is no real risk, and if they stress over it, that’s more a founder’s own psychological failing than anything else.
If you care what other people think that much, you probably don’t have sufficient quantities of the oft-cited “grit” that founders supposedly require.
I think if the idea of your company failing doesn’t cause you at least some stress then you probably shouldn’t be running a company?
Maybe risky ventures aren't for them.
cause if you fail you have to let people go
cause if you fail you have to tell your investors you lost money
cause if you fail is a thought that’s always running through your head as you live it
This is not a real risk you're talking about, but small inconveniences. A risk is losing your house for example, or losing the ability to rent.
Inconveniences are part of life anyway. Being the first engineer means you get all these inconveniences (tell your wife and your kids) plus real risks as above (taking a loan to buy the options and losing it)
“Letting people go” is taking on the risk of all of those people being let go losing the ability to rent or pay their mortgages. That seems like more than an inconvenience to me if you take one of the responsibilities of being an employer at all seriously.
No employee should join a startup with the expectation that the company will be around forever.
Compare startups to restaurants- their failure rate is absolutely massive. Working for a new company is simply always a risk for everyone involved, there's no getting around that.
If you are working a tech job and know how to program computers and have no savings slash the loss of a job costs you your house, you have deep and fundamental problems far beyond the loss of one job and it isn’t your former employer’s fault that your life is mismanaged.
My primary motivation as an employee of a startup is fear of personal financial ruin. That the company won't be able to make payroll and I won't be able to pay my rent, that I'll be evicted eventually or that if the company goes under I won't be able to find a new job. There is no mission or any other soft carrot that I care about. I also don't have any faith in stock options.
I can't imagine caring about reputational damage with rich people unless that reputation is in service of not starving in the streets.
Perhaps you shouldn’t be working in a startup because your lifestyle is unaffordable, or your company is paying you peanuts.
I have worked in startups in Silicon Valley and have had many friends working for them. Most startups pay a base salary of around 200k$ I reckon (for new grads, perhaps 150k). This might come down to 9-10k after taxes per month. A good 2 bedroom house to rent in a location like San Jose would be 3k$ per month, which leaves you 6k for other expenses. Assuming 1k for car, you should still have 5k in savings per month, in a year of working you will have saved up 20 months of rent, maybe 12 months of living without a job. I find it hard to believe anyone in SV startups, is in risk of “personal financial ruin”, or “starving in the streets” just because they lost a few months of paychecks while searching for another job. That may be true in another country, in another market, but all tech workers in the Bay Area are living well above subsistence and acting like they are living paycheck to paycheck is a fantasy. There is a cost to working in startups, and it is an opportunity cost of not working in a big tech company and cashing out your 200k+ RSU over 4 years and instead receiving paper money stock options that can be worth 0.
"cause if you fail you have to let people go"
This isn't the founder's risk. It's the employee's risk. And it has the added bonus of, if there is a liquidity event, the employee's don't get the upside.
I was like engineer #3 at a company that eventually was acquired for ~$250MM. My payout was $60,000, after 5 years of employment there. I could have made more by going and contracting at megacorp for a single year. There was never any upside for me.
Starting a company myself, I took 6 months with no salary. After we raised, my salary was massively cut from where it was (30-40% of what I made the year prior). Then you have the fact I gave up guaranteed raises & promotions (to the tune of hundreds of thousands in RSUs).
There’s a pretty large risk to family security. By year two of the startup I have made 15-20% the cash I could have made elsewhere. I have stock that I trust will be worth more in the future (so imo worth it). However, I can see liquidity events being useful if you’re tight on cash after that run
Investors do it so that the founder can better focus on increasing the value of the company. Having financial stress on top of everything else reduces the probability of liquidity events.
Hiring, firing, layoffs, making the wrong decisions with limited information and not finding out they were wrong until years later, huge shifts in the tech market around you undermining your business, competitor actions wrecking your business, pressure from investors, pressure from your family to earn more money, uncertainty about whether the business will ever succeed, and an endless list of other things.
Except all the money you lost by not having a proper job along the way. Also it’s not uncommon for founders to float the company at early stage until investment is raised, and they don’t always get a refund for this.
Exactly. I quit Google in 2017 to work on a promising start-up idea (generative AI chatbot for coding, a tad early on that one) and ended up raising barely any money, running up massive CC debt to finance cost of living and GPUs, and taking a huge compounding opportunity cost to not continue growing as a FAANG SWE (not to mention missing out on the stock market run with the extra money I didn't have). I spent the last several years paying off that debt instead of buying a house or investing, etc. I'm massively behind in earnings and net worth compared to my colleagues who talk about their future startup idea but never struck out on their own.
But I'm finally debt free and ready to risk my future yet again on another startup.
I think for a lot of founders, there is significant financial cost or opportunity cost upfront. Especially if you are bootstrapping.
I tend to have large stress in startups, more than in established companies. I won't get into some of the occasional toxic-element sources that can happen anywhere, but some reasons that happen more in startups:
1. Caring about the mission -- the real-world positive impact -- and potentially able to make or break that. Not just taking a shot at making money, for some opportunity cost that I could evaluate quantitatively on a napkin, and walk away from as soon as an option with a higher expected dollars number came along.
2. Livelihoods and investments of time&effort by colleagues hinge to a large degree on decisions I make, ideas I have, and things I have to pull off, and not wanting to let them down. (A bit similar with money investors, but I care more about personal connections, and involvements where it's not just someone buying lots of lottery tickets.)
3. Low "paychecks" for my HCOLA, at that startup and earlier, so personally needing a big win financial exit, and the startup is what I decided to invest my time&energy into. If that fails, it's starting over, and a lot of wading through various startup ickiness to get another good opportunity (or doing FAANG interview BS, and then their promotion-chasing BS).
I mean if you don't care about the company mission (if it's mission based), you don't compare about your employees, your word, you don't care about your time or care that you sold people that you were going to take their money to build something... then yes there might be no "personal" downside.
Though if you don't care about anything in the first place what are you doing trying to build a company?
Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque. If you fail you get acquired and get golden handcuffs.
If you start a real business you can expect to take on debt, and you'll be personally guaranteeing it because nobody cares about equity in your boutique ice cream parlour. Plus a 5-year lease (which you will also personally guarantee).
The most common endgame for a startup is slowly running into the ground until the money runs out and you eventually shut the doors. Failing your way into a happy acquisition isn’t really something to expect as a contingency, I don’t think.
The contingency isn't golden handcuffs its using one of the hundreds of C-level connections you made as a Founder doing sales and networking (and accelerator programs) to get you a cushy gig as a Product Lead, Operations Lead, or similar title with a strong paycheck and immediate authority.
Then use those five years to enjoy the fanciest office equipment VC money can buy. Don't cry because it's over; smile because it happened.
I don't know why you are trying to make this a me vs them situation. Both situations are difficult in different ways and they are all real businesses.
"Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque." - Sounds like you are trolling or alternatively incredibly naive.
"If you start a real business you can expect to take on debt". ... Real business? Come on.
No one in this thread is saying starting a business is easy - ice cream business is debt funded because you have a very definitive range of outcomes. Venture funding is completely different animal - failing to see that limits the value of your comment significantly.
In terms of economic disparity it _is_ very much an us vs them situation.
Consider the optics over the last 20+ years. The middle class and their small businesses have been decimated while former VC funded companies hoover up their futures on Wall Street.
The level of risk involved starting an average small business is much closer to home compared with a startup seeking VC funding. The former can literally lose his shirt, the latter has to settle for a high six figure salary somewhere else.
Failing to see that limits the value of your comment significantly.
This isn't a me vs them. Who is hoovering up the ice cream futures? Different business model, different businesses. Both are difficult. Being a founder of a VC based company is difficult and being a builder of a retail brick and mortar is difficult. It isn't zero sum and both can exist in the same economy trying to make this a Me Vs Them narrative is totally BS.
Making a wedge where there isn't one is disingenuous.
Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.
This is a comment about brick and mortar businesses, I literally talked about having to personally guarantee a multi-year lease in the post.
And yes, some businesses are even harder due to regulatory requirements
Running with VC funds? Oh god, that would be cakewalk compared to even just figuring out how to ensure there's food if you spend money on some necessities for prototype...
Not that people with VC need defending, but:
Sure, if you magic up a startup with VC funds you suddenly have it easier than a small, bootstrapped business.
Startups almost never start with a round of VC though. There are almost always months or years of the same experience as a bootstrapped business (ie: extreme uncertainty, no money to pay yourself, etc).
Most startups don't manage to raise VC, and most startups that raise VC fail with no acquihire.
The bigger secret is that stock sold in secondary sales by founders and employees is usually common stock, and the purchasers will often get the right to convert this to preferred stock. This means that the company is instantly encumbered with a greater liquidation preference, without the increase in balance sheet to offset it.
How is that legal and not considered self-dealing and unjust enrichment? If I was a minority common stock owner in a business I assume I would have standing to sue for damages if a majority owner or officer made my position materially worse while enriching themselves in such a manner? Are you sure such a right is typically granted? I mean even the gap between 409A valuations and preferred valuations, as well as a huge amount of precedent, give a different material value to preferred and common stock. Giving that right out of thin air in a sale by an insider is effectively theft from common holders and I have trouble believing what you’re saying as I’m not sure how that could be kosher, if perhaps infrequently litigated. But is it really standard like you make it sound? That would be a very dirty secret and I expect would and should lead to litigation.
because, ultimately, Capital writes the rules, and they chose to allow this
Who has the cause of action? The majority shareholders. Who authorized the stock sale? The majority shareholders. Are they really likely to sue the founder for something that the shareholders authorized?
Only in some states would minority shareholders have a cause of action. So there are some states in which the courts agree with you. As you might imagine, startups do not typically incorporate in those states.
Flip it around - it becomes a condition of the deal happening imposed by investors, who themselves are motivated to present the best deal to founders, and to have founders less economically stressed. No secondaries - no deal, and that doesn’t help anyone.
IANAL, but if you only have options, and not stock, do you still have standing to sue?
It is very common and usually a condition of closing. Investors know that preferred is way better than common. They are buying highly speculative assets and want strong downside protection.
I used Founders Preferred shares to get liquidity at the A (for a now defunct startup).
In our case, we offered all vested employees the option of selling in the same round on the same terms.
I personally don’t recall any disclosure requirements at 10 people; however, we didn’t have that many participate so perhaps it didn’t apply.
In general, Founders Preferred does layer on the preference stack but also hopefully by a relatively trivial amount to the overall funding size.
Founders never have preferred shares, at least not the same class of preferred (with the same preferences) as investors.
Not never. E.g. all the capital we as founders put in the business before we raised our seed round was converted into Series Seed Preferred shares at the same rights as angels / seed VC. Small portion of total equity but still.
Yes, as I mentioned it only applies when you have 10 sellers.
I often hear about these SEC rules that explain why individual contributors get fucked, as if that's a good excuse. Either the requirements and disclosures should be fulfilled and more than 10 sellers allowed, or the rules should change, or both.
It sounds like they could’ve fulfilled the requirements and had more than 10 sellers but chose not to.
I didn’t comment on whether it was a good reason or not. My comment was just highlighting some of the complexities in what the blog author was hoping to achieve.
Correct me if I’m wrong, but my perception of most startups at series A is that they’re not usually more than ten-ish employees, and even then, you’d expect more balanced comp packages for employee number 11+, no?