I’m not from the bay area which may color my views. Even very early employees of successful companies are last in line to get paid. I don’t ever want to count on money when I’m last in line to get paid because I’ll only get paid if they are rolling in money and feeling generous. Here’s my reasoning: I’ve ran the numbers with friends who have worked at many startups that made it relatively big. Not Google or Microsoft, but 100million-1billion dollar companies acquired by behemoths. The numbers usually work out in my favor. But then again, I have a great paying remote golang job with a great work life balance. I think that’s the real unicorn.
The Silicon Valley crowd loves pointing out how many millionaires Microsoft, Google, and Facebook have created, but the reality is most employees at most companies will be lucky to pay off their car with the profit from their stock options, even if the company has a really good “exit.”
I know of a company that recently allowed some of its employees to cash out for a few million in a venture round, mostly to compensate for the future job of “streamlining” the company. So, sometimes significant cash payouts occur, but those are usually based in retention anxiety (i.e. to prevent departures of optically important people) rather than generosity. Usually, when people get paid in the startup world, it’s because of extreme leverage (i.e. the person can threaten the professional reputations of investors and founders in a severe way) or to compensate for having to do something very ugly (e.g. be a fall guy, lay off half the company).
You’re more likely to get fair bonuses in finance than a fair outcome from the startup world, the latter of which is so rare as to be exceptional. Banks screw people out of their work sometimes as well, but the upshot of the annual bonus system is that it’s only 11.9 months of work, rather than several years, that get thrown into the shredder. Also, you don’t have the tax complications and you don’t need to have cash on hand to pay your employer in order to participate.
Putting a significant fraction of your investable income into an illiquid asset that your employer controls is the absolute worst investment strategy possible, and yet it’s what startups encourage people to do.
There’s a repolarization in the startup ecosystem. It used to be that investors (the moneymen) were on one side, and founders and employees (both sets identifying as builders and workers, almost blue-collar in culture) were on the other. The social gulf between founders and critical employees was low, whereas that between them and the shared rival, “the VCs”, was high.
Now, founders and investors work together (along with an increasingly large, insufferable cadre of career startup executives) and it’s the workers who are on the other side. The multiple liquidation preferences and participating preferred used to be things that bad-apple investors imposed on founders because they had connections to other investors and could use the social proximity for extortion. These days, it seems to be something that founders willingly agree to because they want to pump up their valuations.
I’ve come to the conclusion that, quite possibly, VCs aren’t as bad as their reputation. So many of the awful things that investors supposedly do to companies– e.g. massive dilution, slaughter of common stock despite high acquisition prices, – if you look at how the deals were actually made, are things that founders accepted in exchange for (a) early cash-outs and personal bonuses, (b) mid-6 to 7-figure executive positions at acquirers, and (c ) guaranteed future funding. These days, founders have more in common with careerist private-sector politicians called “corporate executives” than roll-your-sleeves-up-and-build-it entrepreneurs. Honestly, I think that the negative reputation of VCs comes more from evil things founders (driven by greed) chose to do, and then blamed on their investors, than actual VC misbehavior. I’ve seen founders take deals that advantaged them, at the expense of their companies and employees, and then lie to their employees about various unpleasant or harmful decisions, blaming investor mandate for everything from firings and stack ranking to ill-advised pivots.
The good news is: 2015 seems to be a turning point. The change in culture happened at least 5 years ago, but now people are starting to realize that the founder class is the problem. VCs are at fault for the disastrous founder quality, but the biggest scumbags seem to be on the founder side of the divide, quite honestly. They seem to have become the hit-man class; they’re paid handsomely to manipulate perceptions, take unreasonable risks with others' careers, and possibly to be fall guys.
I wonder if a future downturn will lead to conflict between the investor and founder classes. One can hope.
Do I understand correctly that those facing a massive loss will only get to deduct their loss at $3,000 per year?
Some likely-wildly-inaccurate napkin math on the person who paid $150k in taxes indicates a paper gain of $500k at exercise at roughly 30% tax rate (probably off ±5%). If that purchase was at $4.32/sh and they got 44¢/share, that’s a ~90% loss, $450k lost on just the paper gain. $450k at $3k per year is 150 years of max losses. That’s a pretty raw deal, seems worth suing over if the cost of the suit can be spread across many affected people, which it clearly is.
Is the ratio of the $3/sh preferred price and 44¢/sh common price on par with normal? I’ve been through an acquisition as a shareholder, but we had only common stock: no preferred, etc.
I’m not from the bay area which may color my views. Even very early employees of successful companies are last in line to get paid. I don’t ever want to count on money when I’m last in line to get paid because I’ll only get paid if they are rolling in money and feeling generous. Here’s my reasoning: I’ve ran the numbers with friends who have worked at many startups that made it relatively big. Not Google or Microsoft, but 100million-1billion dollar companies acquired by behemoths. The numbers usually work out in my favor. But then again, I have a great paying remote golang job with a great work life balance. I think that’s the real unicorn.
Agree 100% with everything you said.
The Silicon Valley crowd loves pointing out how many millionaires Microsoft, Google, and Facebook have created, but the reality is most employees at most companies will be lucky to pay off their car with the profit from their stock options, even if the company has a really good “exit.”
I know of a company that recently allowed some of its employees to cash out for a few million in a venture round, mostly to compensate for the future job of “streamlining” the company. So, sometimes significant cash payouts occur, but those are usually based in retention anxiety (i.e. to prevent departures of optically important people) rather than generosity. Usually, when people get paid in the startup world, it’s because of extreme leverage (i.e. the person can threaten the professional reputations of investors and founders in a severe way) or to compensate for having to do something very ugly (e.g. be a fall guy, lay off half the company).
You’re more likely to get fair bonuses in finance than a fair outcome from the startup world, the latter of which is so rare as to be exceptional. Banks screw people out of their work sometimes as well, but the upshot of the annual bonus system is that it’s only 11.9 months of work, rather than several years, that get thrown into the shredder. Also, you don’t have the tax complications and you don’t need to have cash on hand to pay your employer in order to participate.
Putting a significant fraction of your investable income into an illiquid asset that your employer controls is the absolute worst investment strategy possible, and yet it’s what startups encourage people to do.
There’s a repolarization in the startup ecosystem. It used to be that investors (the moneymen) were on one side, and founders and employees (both sets identifying as builders and workers, almost blue-collar in culture) were on the other. The social gulf between founders and critical employees was low, whereas that between them and the shared rival, “the VCs”, was high.
Now, founders and investors work together (along with an increasingly large, insufferable cadre of career startup executives) and it’s the workers who are on the other side. The multiple liquidation preferences and participating preferred used to be things that bad-apple investors imposed on founders because they had connections to other investors and could use the social proximity for extortion. These days, it seems to be something that founders willingly agree to because they want to pump up their valuations.
I’ve come to the conclusion that, quite possibly, VCs aren’t as bad as their reputation. So many of the awful things that investors supposedly do to companies– e.g. massive dilution, slaughter of common stock despite high acquisition prices, – if you look at how the deals were actually made, are things that founders accepted in exchange for (a) early cash-outs and personal bonuses, (b) mid-6 to 7-figure executive positions at acquirers, and (c ) guaranteed future funding. These days, founders have more in common with careerist private-sector politicians called “corporate executives” than roll-your-sleeves-up-and-build-it entrepreneurs. Honestly, I think that the negative reputation of VCs comes more from evil things founders (driven by greed) chose to do, and then blamed on their investors, than actual VC misbehavior. I’ve seen founders take deals that advantaged them, at the expense of their companies and employees, and then lie to their employees about various unpleasant or harmful decisions, blaming investor mandate for everything from firings and stack ranking to ill-advised pivots.
The good news is: 2015 seems to be a turning point. The change in culture happened at least 5 years ago, but now people are starting to realize that the founder class is the problem. VCs are at fault for the disastrous founder quality, but the biggest scumbags seem to be on the founder side of the divide, quite honestly. They seem to have become the hit-man class; they’re paid handsomely to manipulate perceptions, take unreasonable risks with others' careers, and possibly to be fall guys.
I wonder if a future downturn will lead to conflict between the investor and founder classes. One can hope.
And this has only gotten worse over the past ~7 years. Watch out for those tax bills, they’re the biggest risk.
As seen on Twitter:
Do I understand correctly that those facing a massive loss will only get to deduct their loss at $3,000 per year?
Some likely-wildly-inaccurate napkin math on the person who paid $150k in taxes indicates a paper gain of $500k at exercise at roughly 30% tax rate (probably off ±5%). If that purchase was at $4.32/sh and they got 44¢/share, that’s a ~90% loss, $450k lost on just the paper gain. $450k at $3k per year is 150 years of max losses. That’s a pretty raw deal, seems worth suing over if the cost of the suit can be spread across many affected people, which it clearly is.
Is the ratio of the $3/sh preferred price and 44¢/sh common price on par with normal? I’ve been through an acquisition as a shareholder, but we had only common stock: no preferred, etc.