Start ups are a financial vehicle to transfer wealth generated by employees to founders and investors.
this. It's becoming clear that to maximize wealth, either !. join a public company that has RSUs or 2. be a startup founder
Readit Newsthrowaway23334 commented on Ask HN: Startup employees getting nothing after acquisition, is this normal? · Posted by u/throwaway23334
throwaway23334 commented on Ask HN: Startup employees getting nothing after acquisition, is this normal? · Posted by u/throwaway23334
The point is to share success and incentivize for success. Secondly, public companies can give compensation packages with high base salary and equity grants. These packages for engineers could be in the range $200k-500k and the equity piece is pretty much liquid. Startups cannot pay $500k but they can pay reasonable salary (50-90th percentile of the market) and equity options with a huge upside multiplier.
Startups are a venture. Join them if you want to join a venture. Don't join a startup for if you want stability or predictable outcomes.
In the past 12 months, there has been probably 20 tech ipos or more. These IPOs have been in the range of $5B to $100B. Each of these outcomes might net early and late employees anything from few hundreds of thousands to several millions or tens of millions.
The very first employees (first 1-5 employees) might get ~1-2% of the company for their 4 year vesting. That diluted over multiple rounds over the years might still mean the ownership is at least 0.1-0.2% or more. Company hitting $100B market cap after listing means the employee’s position is now worth $100-200M. That’s amount of money you can never earn with salaries. You can only earn it by starting a company or joining a startup early on with a good equity package. Both cases it's rare to achieve that but it does happen. Probably each IPO you see has a few of those.
The reality is that VC funded businesses need to be massively successful with maybe 10-1000x the returns to be considered a success and return something to the employees.
It’s called an option, so it’s an option for employees to buy the shares with ~1/5 of the preferred share price where it was when you joined the company. Investors pay higher price for the preferred shares and one of the things they get is the liquidation preference, so they get their money back first. Good rounds and VCs do 1x liquidation preference. Bad rounds or bad VCs companies might force company to n-x liquidation preference. As a founder, you don't lose with the liquidation preferences like everyone else, so it's not in your or in the company interest to do them.
This is also where the valuation comes in. A hot startup might raise a lot of money and have a high valuation early on but won’t be able to execute and scale to the level to meet the expected valuation. Now everything below and level of that valuation is considered a failure. Then if the company cannot keep executing, raise more money or just generally lose steam, they might have to sell the company to get something. Honorable founders and management would try to help to employees to keep their jobs or even see if there is way to give any of the proceeds.
Exercising options is always risky since the startup outcomes are risky. You shouldn’t exercise with money can't afford to lose.
Savy companies and savy employees join companies with extended exercises where employees can keep their options up to 10 years without exercising. This avoids the downside risk for employee but unfortunately doesn’t help with taxes. Exercising early can start the clock for long term capital gains and some cases QSBS (tax free treatment up to $10M).
Summary: options are definitely worth it if you join the right company. When considering joining the company, think how an investor would. Would you believe in team and business and invest? Check their investors, are they reputable? Join companies with extended exercise windows, exercise early if you have the means and belief the company will succeed.
a 10 year exercise window would've solved this, I hope this becomes the standard going forward.
throwaway23334 commented on Ask HN: Startup employees getting nothing after acquisition, is this normal? · Posted by u/throwaway23334
This is normal, and happens a bunch when founders over-raise. A somewhat canonical example is FanDuel selling for >$1B and the founders getting zero.
As far as the motive/"is it right": I'm going to take a somewhat contrarian viewpoint than those presented so far, having seen this happen on both sides of table in my life.
In my experience, and in most cases, the founders aren't necessarily doing anything shitty or sociopathic. They likely raised more than they needed at a higher valuation than was deserved -- for perfectly normal reasons, such as a frothy market or the simple fact that in startupland raising money is considered a win itself -- and it caused a set of benchmarks that ultimately became impossible to overcome and thus the common stock became worthless.
Transaction happens, founders are considered key to the successful merger and the acquiring company worries that the merger won't be fruitful if they bail so they receive some compensation as a sign-on bonus and/or an earnout.
If you want to argue that early-employee non-founders get disproportionately screwed in regards to their sweat equity vs. actual equity, you're absolutely right but that's a different argument altogether.
As a founder, let's say you can take home 15 million and your employees get nothing, or you can take home 14 million and your employees get 1 million. Is taking the 15 million because you can and it's totally legal not shitty and sociopathic?
throwaway23334 commented on Ask HN: Startup employees getting nothing after acquisition, is this normal? · Posted by u/throwaway23334
Yes. I worked for a company that was acquired and got peanuts afterwards. I’ve made orders of magnitude more in RSUs since. Work for a public company and don’t kill yourself for startups.
couldn't agree more
throwaway23334 commented on Ask HN: Startup employees getting nothing after acquisition, is this normal? · Posted by u/throwaway23334
> What would you do as a founder in this instance?
Laugh all the way to the bank, most likely.
This is sad but common. Stock options in a company that hasn't gone public should be treated as a lottery ticket: It's nice if they turn out to be worth something, but their most likely value is $0.
I agree with the lottery analogy. But in this instance, the lottery ticket kind of hit? There's an exit event happening, people are getting paid. All of the money that employees paid to exercise their options is literally going to pay out executive bonuses.
Wouldn't it benefit the founders more in the long term to make good with their employees for the benefit of working with them in future endeavours? I guess when you're getting a 7 figure payout, it doesn't matter because you can just retire?
The executives have a fiduciary duty to act in the best interest of shareholders. That means you. What that means in an acquisition can vary a lot depending on the specific details of the deal.
This is the extent of my legal knowledge on the subject, which is why you need to talk to a lawyer. The likely result of this avenue depends a lot on the amount at stake - if you paid like $5k to exercise, you probably pay the lawyer hundreds of dollars to send a letter and then negotiate a settlement that pays you 4 or 5 figures, avoiding the expense and risk of a lawsuit on both sides. Assuming of course, that you're already a former employee - current employees can and should have negotiated waiving their shareholder rights as part of the acquisition deal, assuming that their expertise is part of how the acquiring company is valuing the deal.