
Don’t Get Trampled: The Puzzle for “Unicorn” Employees - prostoalex
https://medium.com/positiveslope/dont-get-trampled-the-puzzle-for-unicorn-employees-8f00f33c784f
======
ChuckMcM
I agree that people should ask questions, but my advice remains for employees
which is to consider shares, or rights to shares, held for a private company
to have zero value.

If you are going to get enough out of working for a company then great, go for
it. Conversely if your _only_ motivation for working for the company is that
they have offered you a lot of shares then you should take a step back and
think long and hard about that.

That flips of course for a publicly traded company, those shares have
recognizable value right from the start and you can use Black-Sholes or other
future value estimators to get a handle on how much you should be swayed by
those shares.

As the article points out, it is particular corrosive around the c-suite (CEO,
CTO, Cx0 what ever) of people who founded the company. They will often hold a
solid number of shares already and even though they shouldn't, will often do
the math that if they had sold their shares in this round rather than
generating new shares they would be multi-millionaires. Sometimes protecting
that illusion becomes more important than making good decisions.

~~~
hkmurakami
I tend to give people the same advice, especially for early stage companies.

But what advice would you give someone who has an offer from
Uber/Airbnb/Dropbox/Pinterest/Palantir? They're derisked to the point where
the RSUs/options should have some value, and their offers to employees
definitely reflects this. In addition, many of these very late stage
companies' employment offers are very heavy on the equity side. Would you
still just tell someone who has an Airbnb offer who's weighing it against say,
one from Microsoft, to consider the options to be worth $0?

I had a friend who was in a similar predicament and the friend didn't seem to
want to believe the steep discounts I told him he needs to apply to the
RSUs/Options. At the very least 5%/year compound discounting for the
illiquidity premium, as well as a steep 20-30%+ discount for uncertainty for
actual exit. Not just business metrics, but macro market conditions as well as
the random whims of the board.

I personally value liquidity _a lot_ , and made a strong case that a
comparable offer from a publicly traded tech firm to blow a late stage
startup's equity heavy package out of the water.

~~~
ChuckMcM
Long lived unicorns are especially troublesome.

Businesses are like camp fires, camp fires need heat, fuel, and oxygen to
burn, if you run out of any one of those three things they go out. By the act
of burning, the camp fire can warm the air above it, forcing it to rise which
pulls in new oxygen from the surrounding air. They can increase in size which
allows them to reach fuel "on their own", and the heat they generate can dry
otherwise wet an unsuitable wood and turn it into fuel.

Startups burn cash which as their "fuel", their "heat" is goods and services
with which they can change the way a market operates which pulls in more
customers giving them more "oxygen" to work with.

As a result, startups and camp fires, share an interesting similarity. The
longer you have to work to keep them going the less likely it is that then can
survive on their own.

From what is available to the public, it seems that any one of
Uber/Airbnb/Dropbox/Pinterest/Palantir would be sold for scrap if they were
unable to raise money from private (or public) placement. The key is that they
are all losing money so their fires are not self sufficient.

So a really good question is, why not go public?

My experience is that risk is a big factor here. And a number of unicorns have
huge risk factors, whether it is bad labor judgments against Uber or sweeping
hospitality laws against AirBnB, they have some unresolved 'nut' in their
operation which prevents them from showing a risk tolerance that the public
would be able to look past. So to evaluate a company that has been around for
a while but hasn't shown it can be a profitable business, you have to find the
unresolved systemic change that is keeping them unprofitable, and then you
have to evaluate whether or not the odds are in favor of that issue being
resolved in the company's favor. Which, given their longevity, suggests it is
not going so well.

~~~
swyman
I have a really hard time putting much stock in metaphors that have so many
components and work backwards from the metaphor to the real world. Too easy
for the truth and usefulness of the advice to get stretched out to make the
comment as a whole flow properly.

Uber/Airbnb/et al aren't still private just because there's some uncomfortable
risk they're afraid will push away public investors. There's a whole host of
reasons to stay private (lawyers, executive time/energy, SEC compliance,
public investors are generally more myopic than private ones, etc, etc, etc).
The "nut" you mention might be an inconvenience, but it's surely not even
close to the most important reason to stay private.

~~~
droopyEyelids
Wait. What? Uber and AirBnB are _the_ examples of companies with an
uncomfortable skeleton in their closet!

Aren't they both founded on the principle of flounting the law?!

~~~
afarrell
Yes, but that is no secret, so how is it a skeleton?

~~~
droopyEyelids
It's a material risk to investors?

------
birken
Towards the end he makes the comment: "Can you please let me know how much
money I’d make from my options if the company were to sell or IPO for $100m,
200m, 300m, 400m, etc?"

Here is a simple open-source site (FD: which I wrote) which handles this for
you: [https://friendlyoptions.org/](https://friendlyoptions.org/)

Give the site to your prospective employer, ask them to fill it out with the
details of your stock option grant and then share the link with you (all the
information is stored in the URL so no data leaks to the site --- or just run
it locally if you are paranoid). The site asks for the minimum amount of
information possible for you to start valuing your stock options so if they
can't fill it out, you essentially have no way to value your options.

\----

With that advertisement out of the way, I disagree with this article a little
bit. I think questions about the past/present are all completely fair game and
should be asked and answered:

* How much money have you raised and at what terms?

* What is the current stock option plan and what are the details of my stock option grant?

* Have their been any secondary sale transactions in the past? Who participated?

But once you get into the future, prepare to be sold a very optimistic vision
of the future that may or may not coincide with reality. And this isn't
necessarily anybody doing anything wrong, generally the people who run these
types of companies are very optimistic people who believe that what they are
saying is true. However, this doesn't mean it is likely to happen. I'm not
saying you shouldn't ask, get all the information you can, but a company will
never tell you a pessimistic view of the future (and nor should they). They
may say they'd never take debt and are shooting for an IPO in 2 years, but I
guarantee you if something changes in a year those plans might all go out of
the window.

~~~
econner
Is a secondary sale good or bad? Why ask this question?

~~~
hkmurakami
Some scenarios:

1) If there has been one in the past, you may reasonably expect another one in
the future. They may even reveal that they have secondary sales at regular
intervals. This derisks your equity illiquidity somewhat.

2) If there was a secondary sale where only part of the "leadership"
participated, then that's at least a yellow flag for management's attitudes
towards its workforce.

~~~
birken
haha I just get finished writing my response and see you wrote the same thing
more concisely and before me :)

------
pfarnsworth
> You’d be shocked to learn how many companies raising money at a billion-
> dollar valuation are doing so with financials that have never been
> checked/audited by a third-party.

I would love to hear examples. Otherwise I'm calling bullshit on this one.

~~~
venantius
Indeed. A 409A valuation should be being done by an independent auditor at
each fundraising step, and most investors will only invest if they know the
auditor is independent.

------
jorblumesea
If you are working for any startup you will inevitably be disappointed when
you're not some rich uber millionaire. The last people to get paid out are the
workers. Investors, CEOs all get their cut first.

My pay is about equal to Big 4/Corporate goonshop, and I do way more
interesting work. That's enough for me :) If I get paid out, realistically it
may be only 100k, perhaps even less. Maybe nothing. Maybe more.

~~~
hilbertseries
I've talked to people at Facebook building their own NoSQL databases for large
scale internal use at facebook, working on HHVM, GRAPHQL, working on stuff
like their location services that serve billions of queries per second. I'm
curious, what is it that you've managed to find that's way more interesting
than the type of problems only the big four companies have.

~~~
gaius
Big 4 in this context is Accenture, PwC, Deloitte and KPMG.

------
pmorici
Isn't the fundamental problem here that companies just don't provide the
information to prospective employees that would be required to fully
understand the value of the equity component of their offer?

Sure they try to turn it around and say that the employees aren't "asking the
right questions". In reality, companies don't want to give that info out
because it's to their advantage not to since w/o it you will almost certainly
over value their offer unless you subscribe to the it's probably worth zero
mantra.

~~~
zenlikethat
That's why you shouldn't ever buy into rhetoric that the company has your best
interests at heart or it's a "family". It's a business transaction, one which
they probably do a lot of, and they have a million problems on their plate
probably more important than educating you on this. Not saying that's great,
but it's the way it is.

------
logicallee
"You know why they call them Unicorns, don't they?"

"Cuz' they're really, really, really, really GREAT?"

(looks at employee; doesn't have the heart to tell them.) "Uh, yeah. That's
exactly why."

Mumbles to himself: 'poor kid.'

~~~
logicallee
you guys didn't get my joke :) It's because they're mythical; they don't
exist.

So since they're originally mythical, if you see an actual Unicorn - well,
there's a good chance it's a horse with a cone taped to its forehead...

It doesn't originally just mean very great: it originally means basically
mythical.

------
abalone
_> Another interesting idea to reduce complexity for employees came from Brian
Neider at Lead Edge Capital, who suggested a single question for employees to
ask management: “Can you please let me know how much money I’d make from my
options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?”_

Is that really the best single question to ask? It's actually a complex
question as it depends on subsequent funding rounds and terms such as dilution
and liquidation prefs. You should not need to run a simulator to figure out if
you're getting a decent grant.

If the goal is to compare grant sizes to other offers, how about a simple
objective metric like _percentage ownership?_ That will give you a general
sense of how sizable a chunk you are getting. It will of course vary by growth
stage, but within stages it's closer to apples-to-apples than anything I can
think of (even FMV).

------
ditonal
I've always been baffled that asking these questions are not incredibly
obvious to anyone. I could not agree more that not knowing the outstanding
shares, the liquidiation preference, etc with the "it's like getting paid
without knowing the currency." What's interesting, at my first startup job I
had the CEO push back when I asked how many outstanding shares there were,
amazingly, even though otherwise it makes the stock compensation literally a
meaningless number. The second place I work that gave me options gave me a bit
more info, but there was still so much uncertainty compared to a company that
just paid public RSUs or cash, especially because I had no insight into the
financials like burn rate. Both of these places ended up having worthless
options, and in both cases I couldn't even "wait and see" because by leaving I
was forced to choose to exercise.

Not only are options often worth less then you think, you get all the tax
complications, all the exercise window complications - how do people not
discount their value even more?

I think a company like Uber should just offer cash. They are not a rocket
ship, they are already in space but haven't IPOed for weird reasons. They
raised enough money to just pay cash. If the financiers want to play financial
games, they should play them amongst themselves, not with employees
livelihood. All of this advice pops up, "Get an (expensive) lawyer to review
it", "Take this online seminar" etc. It's like writing a job offer in a
foreign language and suggesting someone take a few Duolingo classes so they
can read it and make sure it doesn't screw them. And if you need a lawyer to
review it, reimbursing an independent one should be part of the job offer,
full stop.

Nowadays people are saying don't join startups for money.

But it seems that the founders and VCs are very interested in money. It seems
they think _you_ are the only one who shouldn't be worried about money. Work
yourself to the bone because "we're a startup", don't expect to get paid
because you're "changing the world", but excuse me while I drive off in my
ferrari I bought.

Yes, the startup will "change the world", almost always in the sense that
every company changes the world by offering goods and services. But if you
want to work for charity, work for a non-profit, why do people think it makes
sense to sacrifice their own income so some rich VC can get richer?

The tune has changed recently as well. Because pg used to say startups were
the way to get rich, by compressing your work years. Zach Holman used to say
the same thing. Nowadays you do the compressing your working years in terms of
work output, just not in terms of compensation. And Zach Holman is now writing
every other blog post on how startups don't pay out and they "move fast and
break people."

With the crappy salaries startups offer, it's almost impossible to buy a house
in the Bay Area, yet somehow you get looped into the anti-tech villinization.
If I'm going to be the big bad evil rich bogeyman, might as well actually try
to get paid like one.

Startups were romanticized. These billion dollar companies that are clearly
not startups tried to retain the startup "brand". And even the early-stage
startups are really just product areas of the VC firm. You are still working
for a big company. The VCs call the shot, your "CEO" is the PM. But it's great
for the VCs since they can screw you over, screw the customer over, screw the
public over, and it doesn't matter because each one of these dinky startups is
their own brand you can shut down tomorrow.

They rode the waves of a lot of romanticism from pg essays, the Social
Network, Airbnb/Uber/Snapchat, but now bigger companies are paying more, too
many engineers have gotten screwed by equity grants, and I think we're seeing
a general trend away from startups. Maybe it will eventually restart, but VC
companies will not be appealing until VCs fix these issues.

~~~
zenlikethat
Nothing will change until folks start negotiating more savvy or building their
own companies where this is handled better. My experience has been that if
people over-value equity it's something they've done to themselves, whether
it's through the groupthink in the air or their own tendency to be over-
optimistic. Articles like this are a step in the right direction in that
regard, but many people will never do their homework.

~~~
acjohnson55
> Nothing will change until folks start negotiating more savvy or building
> their own companies where this is handled better.

I'm not holding my breath. The only thing that would fix this is regulation.
The information asymmetry and power differential between founders and
employees all but ensures that in the average case, the employees get the
shaft. Since "regulation" is such a bad word, let's say "incentivization".
Give employers a tax-advantaged way of offering equity in standard,
comprehensible ways.

The current tax rules do the opposite by forcing employees to navigate the
complex world of options. If employers could simply grant common stock on a
vesting schedule, that would be a start. And then add in some rules to
incentivize not screwing over the employees and ironing out any other quirks.

~~~
traviscj
> standard, comprehensible ways

I am not convinced that the problem is exactly the lack of comprehension --
it's that startups going public are a probabilistic thing, not a deterministic
thing. Given a population you can talk about the distribution of this or that
happening, but you can't know if this particular one will get to milestone X.
(See also cancer 5 year survival rates.)

You could get around this if you could do a ton of startup jobs, because then
it starts getting likelier that you actually hit on a winner. But you can't do
many in a lifetime, because of the option / tax due on exercise / long pre-IPO
/ vesting schedule.

Even if you could come up with something crystal clear, like "X% chance that
you get $Y", and even if you could agree on those probabilities, you still
only get to sample that distribution, not enjoy the big-N expected value.

I think my best attempt at a solution here probably is forcing the light of
public trading onto a company sooner rather than later, via regulation. My
understanding is that usually the going public forcing function is the value
of assets and the number of shareholders; perhaps some additional constraint
on the number of (company-issued) option holders or volume thereof or amount
of debt or ... something? as well? (Stupid risk-brain is just inventing
loopholes for every rule I can think of.)

~~~
acjohnson55
I think we agree. I'm mostly just talking about removing some of the pitfalls
and vulnerabilities startup employees face, so that _if_ their business is
successful, they are more likely to actually share in the windfall. Today,
employees face a very complex path to liquidity, as well as all the
possibilities for being plundered by founders and investors that the article
mentions. No one is looking out for the most vulnerable, least informed
constituency in the deal. In my experience, the vast majority of startup
employees don't have a thorough understanding of their equity, and given the
complexity of the situation, I think it's an unreasonable expectation that
they would.

------
suchitpuri
A good article indeed, i see that a lot of employees are confused about their
stock options specially in emerging markets like India, where we have seen
quite a few unicorns come up in last 3-5 years.

I also really like the advice about privately held companies, who want to
remain private. Things get very tricky there and on top of that mostly no one
understands what to do with the stock options.

Unless you are able to do a secondary sale of the stock options they dont
carry any value and i don't think a lot of privately help companies allow
that. Not to ignore the tax you have to pay when you want to buy stocks, even
though you cannot sell it.

------
mifeng
Startup equity is just an at-the-money call option. Worth something but not a
ton on day 1.

Due to tax guidelines, companies are highly incentivized to grant employees
options struck at the last 409A valuation price. For companies who have raised
multiple institutional rounds, this is usually the last round's post money
valuation. This number is essentially the market valuation for the company, so
an employee option is just a security with a strike price at fair market
value. It has value due to optionality but only due to that.

~~~
hueving
>Startup equity is just an at-the-money call option. Worth something but not a
ton on day 1.

It's very different from an option that you can sell on the open market
though. I would take an at the money call option (with an expiration years in
the future) for any publicly traded company over a startup.

~~~
traviscj
Maybe the stock market just needs to introduce a new "Martian Stock Option"
(along with American and European) that has an expiration date of the
company's choosing, to be decided at a future date, with a penalty for or
prohibition against selling the option before some other future date. Then we
can just let the day traders play this game for us, and see if they can make
any sense of it.

------
somic
Good article. Bottom line is employees need to be aware what can happen and
how future rounds of financing, among other things, could affect their equity
comp. The more articles and blog posts about it, the better.

There is no one-size-fits-all recommendation though. Everybody is different,
and everybody's situation is different. What works for me won't necessarily
work for you.

Equity comp, especially in non-publicly-traded companies, indeed is closer to
a lottery than a lot of people think, and articles like this are helpful
because they are educating people about it.

I also once wrote a blog post about this topic -
[http://www.somic.org/2015/12/28/on-employees-investing-in-
th...](http://www.somic.org/2015/12/28/on-employees-investing-in-their-
startups/)

------
option_skeptic
Let's put down some actual numbers here. Too many people get screwed by
information assymetry. If you are capable of getting offers at the top public
companies, I would not work for a unicorn unless they are offering 500k+ in
options (which has expected value similar to 200k-500k of public company
RSUs). And to be clear, unicorns actually do sometimes make offers like this.

~~~
mathattack
Of course - it's a matter of seniority, outstanding shares (the denominator)
and how much cash they're planning on paying. 500K+ in options could carry a
value of 200K, which is equivalent to 50K per year which you may (or may not!)
give up in salary.

------
dbg31415
This is a dupe.

Original -
[https://news.ycombinator.com/item?id=13305066](https://news.ycombinator.com/item?id=13305066)

Best -
[https://news.ycombinator.com/item?id=13313550](https://news.ycombinator.com/item?id=13313550)

------
msoad
Bigger unicorns like Uber, Airbnb, Dropbox and Lyft stopped giving options are
giving RSUs like public companies. The employee know how much each RSU worth
based on last round. Total number of shares are known. Of course it's all
confidential.

~~~
hkmurakami
FWIW Palantir is still on options, and they're valued at $20B or whatever. So
being super late stage is no guarantee for your equity being in RSUs.

------
dilemma
You never know who the unicorn employees are until it's too late - they're
working for someone else and either don't want to leave or know what their
market value is so they are no longer a "deal" to hire.

If you want to find talent, you must find a way to develop it in-house.

~~~
sathackr
Did you read the article? It's about employees of "Unicorn" companies, not
"Unicorn" employees.

~~~
Kinnard
I'd love to see information on the latter.

~~~
eschutte2
I much preferred the brief moment in time when "unicorn" was used to mean
"someone who does both code and design really well," because it made sense:
something rumored to exist but nobody's seen it, hard to capture, has magical
powers to make things better. The only thing VC companies and unicorns have in
common are: fairy tale, extinction? Is it really just "something rare?" Not a
very deep metaphor.

~~~
Kinnard
Hmmm, I've developed both skills in tandem . . . maybe I should start calling
myself a unicorn . . .

