
My company sold for $100M and I got zilch – how can that be? - rmason
https://medium.com/help-me-heidi/my-company-sold-for-100-million-and-i-got-zilch-how-can-that-be-f7be0563f1f8
======
nostrademons
This matters more now that the current crop of tech companies have taken _so
much_ money.

In the old days, when software companies sold software rather than traditional
services enhanced by software, it was common to get to profitability around
the B round and then never take any more investment after that. Google took
$25-35M and then nothing until IPO, running the company from 2001-2004 off
cashflow. Microsoft took nothing except a small mezzanine round (to align
incentives with the I-bankers) right before IPO. Github took a $50M Series A
on a valuation of $500M; VCs owned 10% of the company, and the 3 founders +
employees split the remaining 90% of its $7.5B acquisition. Indeed took a
Series A and is profitable. Atlassian took a $60M Series A 8 years after
starting the company, when it was already profitable. PlentyOfFish, HotOrNot,
Reddit, Wufoo all raised either nothing or just angel money before being
acquired.

When you're capital efficient, you get to keep the majority of any sale price.

The current crop of unicorns like Uber, Lyft, WeWork, Postmates, DoorDash,
Instacart, AirBnB, and Stripe have all taken massive amounts of capital
though, sometimes in the multi billions of dollars. That has to be returned to
the investors before the common shares (founders & employees) make _anything_.
If they hit on hard times before a liquidity event, there's a good chance that
the common will be wiped out, and investors effectively own the company. Why
shouldn't they, when they put up all the money that the company's been
burning?

~~~
bcrosby95
All the companies you're talking about have 1 thing in common: they're
considered successes. You're going back in time and cherry picking companies
that made it out alive. The early 00s/late 90s were full of companies that
took Google levels of money that crashed and burned. There were also tons of
companies that took little-to-no outside funding that crashed and burned.

~~~
nostrademons
For brevity I omitted all of the dot-com flameouts and also the Web 2.0
startups that never got off the ground, but IMHO they support my larger point.

In the late 90s we had a lot of companies that took _a lot_ of money, and the
founders and employees got nothing out of them other than painful experiences.
When you look at one of the successful "fat" startups (PayPal), Max Levchin's
take ($34M) of the $1.6B acquisition was on the same order as the Wufoo
founder's take of their $35M acquisition, or the Viaweb founders take of their
$49M acquisition. Even Amazon - probably the most successful "fat" startup in
history - languished below its dot-com peak until AWS came out in 2007.

Margins matter. Capital efficiency matters. If you want to actually make
money, you should make lots of profits on small amounts of invested capital,
not lose lots of money on large amounts of invested capital.

~~~
mattmaroon
But what if your competitor is willing to lose lots of money on large amounts
of invested capital until you are out of business?

Uber and Lyft have it tough in that regard. At the end of the day they've got
product market fit in a profitable industry. I mean the very worst case is
they become more efficient cab companies, and cab companies have been making
money for a very long time.

Their prices are artificially low due to competition, and they are in sort of
a prisoner's dilemma. eventually one of them will go broke and the other will
raise prices, or something will change about the market (such as driverless
cars coming). But if one of them passes up raising and losing money they lose.

~~~
vanniv
Then you have a lousy business model, and you aren't going to make lots of
money, and you aren't going to create lots of value, and, as a result,
probably won't get a massive payout.

~~~
mattmaroon
I don't think that's true. Uber's business model is the same as every cab
company, but better. It's just a temporary problem (competition forcing them
to sell below market value) that they need to overcome.

Their financial struggles are due to them pricing well below what taxi cabs
do. But if Uber priced the same as cabs they'd still be an infinitely better
service and make lots of money, once Lyft isn't there undercutting.

It reminds me a lot of airlines. They were all hemorrhaging money similarly,
even for a decade or two after deregulation, until they consolidated down into
a few and raised prices.

~~~
shess
Are you arguing that the US airline industry spins profits? I mean, sure, you
have some carriers like Southwest which do, but as a friend of mine once put
it, the US airline industry exists mainly as an outlet for Boeing to sell
airplanes...

~~~
mattmaroon
That was true for a long time but hasn't been for awhile. They now are mostly
profitable. Delta makes almost as much as Southwest and the other majors are
still in the billions.

------
testfoobar
As a former founder, I am often surprised by the incredible spend at some
startups I've visited. The biggest is headcount - so many fluff jobs.

How many designers does an early stage startup really need? 1, 2, 10, 20, 50?
How many SREs do you need when your site is just a handful of AWS instances?
How many sales people do you need when your product isn't ready for sale yet?

Each employee fully loaded in the bay area is what like $150-$300K? 20 people
like that will chew through your Series A before you know what happened.

Bad (for startups) deals get done when you start running out of runway. Once
you're out of runway, you'll sign a 4x liquidation preference at a low
valuation because it gets you an infusion of cash now. Now the VCs own you.

~~~
dmix
Instagram had what, 12 employees when it got bought for 1 billion?

I worked for a small company that fired half the employees (10->5, mostly
marketing/sales execs) and absolutely nothing changed. Our revenue actually
increased over the next year, not to mention gross sales not paying those
salaries. We were originally going to replace them but decided to wait it out
for a full year because we realized we didn't need them.

They were all expert busy-workers, who used to try hard when they first joined
but got lazy about 2yrs in and started phoning it in. Startups and small
businesses have no time for those types of people.

The other massive expense VC-backed companies waste money on are high-paid
consultants (and lawyers) from the big business corporatey world.

~~~
draw_down
> Instagram had what, 12 employees when it got bought for 1 billion?

Which was really a pittance.

I acknowledge hindsight is 20/20, but it's interesting to see posts here
lamenting that startups hire too many people, when selling for much too little
is surely a more grievous financial mistake.

Or to put it another way, if they had 75 engineers when they sold for a
billion, the tragedy would still not be that they had too many engineers.

~~~
dmix
A billion dollars for a 2yr old company in a highly competitive mobile space
is a pretty good deal...

They probably saw the risk in FB or Snapchats or w/e competing with them. It
was just photos with filters at that point. Not a massive social network like
it's become.

------
CalChris
Heidi Roizen, VC, most definitely does _not_ feel Former Millionaire's pain.
Yes, liquidation preference overhang is the mechanism. However, the company
got sold for $100M. Who sold the company? The founders + the VCs and they got
theirs. They could have structured the deal to give the employees something.
They didn't.

The advice here is simple. Walk. Former Millionaire owes absolutely nothing to
the new company. Staying rewards this screwjob. If the founders + VCs want
this Engineering VP to stay then they have to pay the VP to stay.

This could have been handled better if the founders and VCs had left something
on the table for the workers. That was a choice they made.

~~~
nostrademons
She mentions this in the article - most deals are structured with carve-outs
so that _specifically those employees you want to stay_ get multi-million
payouts (over multiple years) as long as they stay with the employer. If there
was no such carve-out for the VP, it means the acquirer doesn't want them.

The answer is still "walk", but the acquirer is not going to care. The reason
to walk is that there's no sense staying in a job where your employer doesn't
want you and isn't going to reward you. It's for your own self-respect, not to
stick it to the man.

~~~
CalChris
I'm going to plead guilty to giving up after I saw the preference overhang
thrust of the article. She in fact gives a good outline of the issues
involved. Maybe I had Travis Kalanick and Adam Neumann in the back of my mind.

Still the element of unfairness about is that _Certain key employees were
incentivized with a “ carve-out “ in order to stay through the transaction and
make sure it would happen_. Using the example, four years is a long time to be
rewarded with squat. However, Roizen also points out that common stock is
priced lower than preferred.

Usually someone like an engineering VP or a senior contributor will figure
things out well before that and bail. The idea that this was somehow a
surprise is difficult to accept.

Yes, it is definitely for your own self respect.

------
harryh
FWIW, I kind of don't believe that this question is real. Questioner clams
that he is a VP but also:

> He has no idea how liquidation preferences work

> He was "told" that the company was being acquired (instead of being involved
> in the sale)

> No one at the company walked him through how his stock was valued, even
> after the acquisition. To the point that he thinks he needs to hire a
> lawyer.

It's a fine question to use as a lead in to explaining how stock options work,
and that's a fine thing to write about. But I'd bet money that the author made
up the question.

~~~
blihp
The title is not a meaningful gauge of a person's knowledge or experience. It
wouldn't be unheard of for a VP at a company with 50 employees to have similar
responsibilities as a manager at a company with 1000 employees. They could
also be VP of Engineering/Customer Service/etc. which would typically not be
expected to have much, if any, legal or finance knowledge.

~~~
harryh
Ya, I'm not saying I'm 100% confident in my assessment. Just saying that
reading it feels pretty fishy.

Just my opinion.

------
jammygit
I feel like legal manipulation is very bad for the startup ecosystem. Even
here, at the YC forums, people assume their startup equity is worth $0 and
advise you to go with a FAANG (or day that they broke even with friends at
faangs after their exits). How is a legitimate startup supposed to recruit the
best people under these conditions?

~~~
landryraccoon
> How is a legitimate startup supposed to recruit the best people under these
> conditions?

Easy. Disclose the preference of the terms you got from investors to your
early employees.

This problem is self created. If you don't tell them the terms of your deal,
they rightfully assume the terms will screw them, since otherwise why wouldn't
you be transparent? Good workers rationally and rightfully go to FAANG instead
of a startup if it doesn't feel like the startup is being fair.

Honestly, startups should be more transparent, because they can't compete on
money. If they can't even offer trust and upside, they are offering literally
nothing over an established public company.

~~~
bb88
So many people flock to startups because they didn't want to go work for a
large soulless corporation (often taking a pay cut in lieu of equity) -- only
to discover that startups can also be soulless corporations that focus on
greed more than anything else.

Edited to add:

It would be nice if there was an equity dashboard inside each and every
startup that basically said, "If the company is sold today at $100M, you get
$X." Not only would it serve as motivation, but it would also show every
effect every VCO demand on the corporation to your equity.

Ideally it would be a graph over time so you can see if your equity stake is
going down or up in value, and you can make an informed decision about
leaving. Also many of the VCO shenanigans might stop if people know ahead of
time what it means.

~~~
koolba
The comparison of “soul” at startups vs established companies reminds me of
the old joke about capitalism vs. communism:

 _In capitalism man exploits man, in communism it’s the other way around._

------
mark-r
One thing to remember is that the acquirer has probably done this before while
the acquiree is a first-timer. The details are almost certainly going to favor
the party with the most experience.

I once worked for a company that was acquired. At the first all-hands meeting
after the acquisition closing, the CEO was practically gloating about how
cheaply he was able to get us. All because he knew how to structure the deal
in a way that wasn't transparent to our company owner.

~~~
buzzdenver
Your company should have retained investment bankers. Just like you get a
lawyer to represent you in court.

~~~
jacquesm
Probably not a company with any professional investors on board.

~~~
mark-r
Correct. The founder probably retained 90% or more of the stock, its growth
was completely organic. I was very lucky to be part of it.

~~~
jacquesm
If there is one way a small shareholder can ensure that they are going to be
treated well it is to see to it that they hold the exact same kind of stock as
a much larger shareholder. That way a bigger fish will fight for your rights
with a lot more power than you ever could do by yourself. There are then still
quite a few ways in which you could be screwed but far fewer than without that
precaution.

~~~
einarvollset
Indeed. This is also why you should make sure any equity you get in the
acquirer as part of the deal is as high up the preference stack as possible.

------
altmind
I highly recommend reading Venture Deals by Brad Feld - this book alone lays
out perfectly how minuscule are your chances of getting rich, working for a
startup.

The areas to lose money are: liquidation preferences, insuficient voting
rights, dilution, different stock classes, general benefits to investor's
equity compared to staff equity, investor drag-along, 409A valuation, options
expiration or company staying private forever.

~~~
Balgair
[https://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitali...](https://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitalist/dp/1119594820)

Book is here

------
bitL
For anyone thinking about working for startups:

\- don't treat verbal agreements seriously

\- common stock is 99.9% worthless, you want preferred stock

\- liquidation preference is important, if company doesn't want to tell you,
insist on market-rate salary

\- if a company tries to switch from an LLC to C-Corp and move you from being
a minority owner of LLC (0.1-3%) into a common-stock owner of a C-Corp with
the same %, block/sue them; you were working for thieves

~~~
brownkonas
It's fine to want preferred stock, but it's pretty rare for employees to ever
receive it (unless they put up cash) -- it's reserved for investors to avoid a
sandbagging + abscond with the money raised scenario.

~~~
Conan_Kudo
And employees deserve to be sandbagged? That seems monumentally unfair...

~~~
mlyle
Preferred stock (and specifically, liquidity preferences-- the common 1x,
nonparticipating term) exists to ensure that if investors put in $10M for 20%
of a company, you don't immediately sell the company for $10M and give them
$2M back, and split $8M among yourselves. The deal is structured so that the
investors have their option of either getting their original money returned or
their share of the proportional share of the returns.

~~~
rossjudson
I've been in the middle of the opposite. All numbers are synthesized. Founders
set up company, initially fund it themselves, take some rounds of investment
with preferred, gives up some control. Company runs low on cash, finds new
investment from "trustworthy" investors, all preferred. The founders hit 49%,
the investors gain control, and make a purchase offer for the precise value of
the preferred shares to themselves, which they decide to accept. All common
shareholders are instantly out in the cold, with nothing (including the
founders, who were utterly screwed).

The first thing they did was fire the founders, of course.

So...foolish founders? Yes. But wait! Foolish investors? YES!!

Because they absolutely screwed _every_ employee, almost all the employees
walked the afternoon we were informed.

I've never been prouder of the people I worked with. I think there were four
people (tech support/admin) left out of 20 or so. Hard to remember now...so
long ago.

For several hours the shitball investors were exceptionally proud of
themselves...and then they realized they'd bought a pile of PCs they had no
idea how to use. Plus bonus shitty furniture! And goodbye investment, of
course.

We all formed a new company within a few weeks. The original founders somehow
got money to get us started again...which we did, from absolutely nothing. We
rewrote a similar product suite (but better!) in about 9 months, and went to
the next big industry show with it.

Shitball investors found out, and promptly sued us (mild shock), claiming
without evidence that we must have stolen the code on the way out. Since I was
there for every single line of code we wrote the second time around, it was
infuriating.

The ball bounces through the courts...they continued to harass us...and all
does not necessarily end well.

In any case, don't lose control ;)

~~~
mlyle
> I've been in the middle of the opposite. All numbers are synthesized.
> Founders set up company, initially fund it themselves, take some rounds of
> investment with preferred, gives up some control. Company runs low on cash,
> finds new investment from "trustworthy" investors, all preferred. The
> founders hit 49%, the investors gain control, and make a purchase offer for
> the precise value of the preferred shares to themselves, which they decide
> to accept. All common shareholders are instantly out in the cold, with
> nothing (including the founders, who were utterly screwed).

Usually you structure your board in a way that prevents this-- not to mention
that you could likely prevail in litigation if these are the facts because the
board has a fiduciary duty to all investors, not just preferred: only if there
is no reasonable prospect for common to get something can you accept an offer
like this. Not to mention that when a controlling shareholder enters into a
transaction with the corporation they have the duty of showing that the
transaction is fair for all involved.

------
xingped
Is there any good book for explaining all of these startup evaluation,
fundraising, etc. terms, how they work, what to ask about, etc.?

~~~
x0x0
Very briefly: for employees to have a good outcome, the company must be a
success _relative to the funding_. I'd love to say that founders are in the
same boat as employees, but it's not true. Unethical founders can engineer
situations where they alone get millions of dollars and no other employees do.
That can be somewhat justifiable (eg taking $1m or something off the table in
a round B for a company that eventually fails), or it can be poisonous (Adam
from wework getting north of a billion in cash for a company that will
probably go bankrupt).

With respect to the article:

$100m exit on $10m funding? Employees should do well. $100m exit on $110m
funding? You can't expect a good outcome for the employees in that case. They
may get some sort of retention bonus in an acquisition, but that's about it.

Another thing all employees should know is that, as a rule of thumb, you need
to triple your valuation between funding rounds. That is not as true late, ie
when you have enormous $100m + rounds that are raised in lieu of going public
with more of a debt structure than an investment structure.

You should be skeptical of companies that have raised too much money. Eg if a
company raises a $100m round B, they are basically saying their metrics have
to justify a multibillion dollar valuation.

Anyway, there's a bunch of good links, but (and I'm a company founder), I'd
tell you to keep a couple crucial things in mind:

First, don't work for dodgy founders. I understand that's not easy for you to
evaluate, but there are ways you can figure out. eg have the founders hired
lots of people they're previously worked with? That's a good sign.

Second, if you want a good outcome, the company must be growing. At a startup,
you are comped on growth. You should be unafraid to fire founders and execs
(by quitting) that are unable to grow the company. That's not to say quit at
the first rough patch, but every year when you are deciding if you re-up for
another year or not, you should evaluate the metrics over the last year.

Third, understand the runway and the metrics that get you the next round or an
exit. Be unafraid to demand to know all the above, and expect positive
performance on all those things.

~~~
thekingofh
"they're previously worked with? That's a good sign."

As in good, or bad?

~~~
code_duck
I think the intent to say is that if people they previously worked with are
willing to work with them again, that is positive because it shows that
previous employees/partners haven't been screwed over.

------
peterlk
I have had this conversation with so many people now. If your (private)
company has taken VC money, options are toilet paper. Treat them as valueless
scraps. Now, maybe you'll get lucky, and make something off of them, but that
should be a pleasant surprise, not an expectation. Cash is king. If you're in
it for the money, go work at MegaCorp, and take a sizeable, steady paycheck.

------
awinder
“In fact, one of my kids was recently interviewing at a startup and I told her
to ask about the preferred overhang — she said the interviewer looked at her
like she was asking about his sex life! She didn’t get a call-back.”

I’ll do you one better. This is like asking someone you’re about to have sex
with if they have an STD and then having them act indignant and not answer.
And you should do the same thing in both cases and run away.

~~~
gnicholas
It’s also not the most polite/politic way to ask about it. A neutral way to
get the same information is to ask about the cap table and then go from there
if needed.

~~~
H8crilA
Salary negotiation (which is what this is) is not the time to be super polite
and dance around important topics.

~~~
gnicholas
Actually, it wasn't salary negotiation because it was pre-offer. It was during
an interview, and the author lamented that " _She didn’t get a call-back_ ".

I agree that during salary negotiations it is less important to tiptoe around
things. Perhaps it was a bit premature to have even inquired about the cap
table in any way during an interview, unless the interviewer had just
mentioned how many options would be offered to a selected candidate (which
would be oddly specific, pre-offer).

~~~
H8crilA
Discussing your stock/option grant is salary negotiation, even if it happens
out of the standard order :)

------
moron4hire
The comment on "founders getting offended when asked about the preferred
overhang" is a point I think that is getting missed. Yes, there is the whole
"caveat emptor" of being an equity employee, but there is clearly a culture of
hiding all of the necessary information for making an informed decision.

In a lot of ways, I think the over-emphasis on "startups change the world" has
been a contribution to this. There is a greater supply of people who "want to
work in a startup" (or rather, think they like the whatever idea they have in
their head of what a startup means) than there is demand for early stage
employees. So any founders who might have something to hide will have their
pick of people to fleece. They can easily pass on anyone who asks the the
probing questions about the real value of the company and just wait for a
shmuck to come along who doesn't ask.

What can we do to educate the general populace enough to dry up that pool of
shmucks? In the long run, the way things are has to be terrible for investors,
too. They put their money into founders who aren't being up front with their
employees, and probably not getting the best employees because of it.

------
joekrill
> Again, let me emphasize, this is not inherently unfair.

I guess our definitions of what is "unfair" are quite different. I think a
better term here would be "illegal". It's most certainly not illegal - but I
definitely would not consider it _fair_.

Companies throw options at employees - or potential employees - like candy.
They imply, explicitly or not, that when the company gets big and successful,
these options are going to be worth tons of money.

Most of us here know they're probably worthless. But
executives/entrepreneurs/whoever most definitely suggest otherwise. So it's
more like false advertising.

Now is that "fair"? I don't personally think so. I think it's pretty
dishonest. I think when sale time comes around, they most certainly realize
that these employees think they're finally going to cash in, and they are more
than happy to let them think, even though they know otherwise.

Obviously there are exceptions. There are occasions where they actually do end
up being worth something. Or where the seniors folks are very clear about how
worthless these things actually are. But, in my opinion at least, those are
most definitely the exception to the rule. I'm also pretty cynical for the
most part, too. So there's that.

~~~
jeremyjh
I think if a venture is unsuccessful employees shouldn't expect to make money
from their options. A venture that raises $60MM and sells for $100MM 4 years
later is a failure. Making nothing in a case like that seems fair to me. What
is _perhaps_ unfair, is if the employee worked for substantially below market
wages all of that time, and particularly if they were given a much rosier
picture than was accurate. But we shouldn't assume those things are always
true.

~~~
superqd
I think the problem is that it's often difficult to pinpoint the crux of the
unfairness, but still feel it all the same. In my opinion, the unfairness is
engendered by the realization that time and money are merely different units
of the same thing. Which means the investors are getting guarantees on their
invested time, but the folks who did all the work are completely unable to
recoup any of the time they invested. When we cast the investments in the same
units, it clarifies the nature of the inequity.

Investors convert dollars into time (like a conversion from matter to energy),
and workers convert time into dollars (energy to matter). Even in physics a
seemingly small amount of matter has enormous power with respect to the energy
it can unleash. But it can take a lot of energy to form the tiniest lump of
matter. Investors are turning their matter, their dollars, into time. A lot of
money, in that respect, is essentially lots of time -- more time than you have
life, if you have enough of it. So you can _do_ more, by buying someone else's
time.

For simplicity, if we ignore non-labor costs (labor is the largest expense in
most software startups, e.g.), it would mean that the invested dollars
purchased an _EQUAL_ amount of invested time. That is, the investors dollars
were converted, with perfect efficiency to time (unless they overpaid the
workers, or the workers were underpaid), which means there was conservation of
dollars/time. This implies a balance of the two sides of the equation, which
means at best (again, for simplicity, only accounting labor costs) the
investors could only be guaranteed a share of 50% of the purchase of the
company. Or at least that is how it should work, in my opinion.

~~~
jeremyjh
If the worker is paid for their time, they aren't owed anything for it. If
they are taking below market - as I said that may be unfair - then at most
their investment is the delta to market compensation.

Also, investors puts in all the money upfront; there is a concept called time
value of money that applies here, and what it means is that money paid upfront
is worth more than a distribution of the same amount over time. The higher the
cost of borrowing (cost of capital), the more valuable that upfront investment
is.

~~~
superqd
If the investor is paid for their dollars, then they aren't owed anything for
them either by the same logic. And they most definitely are paid. Investors
are _compensated_ for their dollars because they exchange those dollars for
time, just as the worker exchanges their time for dollars.

Whether an investor puts money up front or not is irrelevant, as it is only
converted to time incrementally as the time is traded for it. Any excess
dollars in the bank can, and frequently are, returned to the investor in an
exit. Hence they only trade in dollars to match what is invested in time (when
only accounting for labor).

------
antiviral
I have found that in job negotiations, many startup founders are highly
reluctant to discuss what the value of their stock option grant is worth, much
less what other conditions may impact the payout.

Has anyone else had this experience and what do they advise others to do when
faced with the dilemma of turning down an offer due to a lack of transparency
into the option grant?

~~~
sjg007
Yep very little transparency. Ask these questions!! Don’t take the job? Take
another job? Hope that the company will IPO? Or that an IPO is the path?

~~~
antiviral
Good advice. However, from a negotiation POV, it’s difficult since there are
so many alternative people who only ask how many shares they will get, and
think that more shares is better than less, rather than what they are worth.
It’s comical. This makes it easy to just pick one of those people and skip the
few who know what’s going on. For a founder or VC, this is like free money,
since you can promise whatever you want ( 100 zillion shares) and pay them
whatever is convenient. Eventually, this will erode the trust needed for
Silicon Valley to work.

------
riazrizvi
Simply, the 1% ‘shares’ were actually shares in a company that only begins
existing if the company you worked for surpasses some value $X. Example, if
the company is sold for $X + $50 million then you have 1% of $50mm. The con
with these agreements is that you, the little-person-with-no-leverage, you are
not told the X while you are working there. Ask your CFO, they will say in a
practiced tone, “We don’t give out that information”.

IMO the best way to tell if the company is a winner, is to see big growth in
sales/market size, especially after funding rounds. If the company is on its
third funding round with no revenue and no clients then it’s one of these
weird VC zombie dogs that manage to get funding because of spectacular
bullshit artistry by the CEO (likely with a sales background). In which case
your shares are worthless but the pay/gig might be interesting.

------
vonseel
There should be a simpler way. All this crap is too complicated.

Even if you manage to somehow do the research and understand it well at some
point, unless your working with options grants on a regular basis, you'll
probably forget it all before you ever leave the company.

People don't have time to do all this stuff and not get fucked over.

~~~
harryh
It's not that complicated.

If a company exists for less money than the amount invested in the company
then common stock is worth nothing.

If it exists for more than the amount invested then common stock will (almost
always) be worth something.

If you exit for 3X the amount invested you've done allright and will generally
see a modest return on your stock.

If you exit for 10X the amount invested you've done real good and will
generally see a pretty good return on your stock.

If you're smart enough to learn how to code, you're smart enough to understand
this stuff. I promise.

------
bbulkow
We usually called it the liquidation stack.

Because of different trigger points, whether different investors are
participating or non participating, you needed a spreadsheet to figure out
what common gets, for each potential outcome. There is no way to have a
conversation with a potential employee about the liquidation stack, it is
usually far too complex.

More insideously, the buyer can change the rules. As long as the sellers vote
for it, you can do things like wash out common, recap common, give new grants
that are incentive grants with a one year cliff.

Option holders don't vote, so you won't even see what they are voting on.

That kind of stuff invites shareholder lawsuits, but it is ill advised to sue
because then you are a trouble maker. Otoh, not suing means you are a
pushover.

An example of a shareholder wash out was when jobs took over pixar, so i was
told by a friend who had shares.

------
librish
This article is really weird, because the person in Dogpatch says they were
granted OPTIONS not stock. So it's possible that this doesn't even touch on
liquidation preferences and the strike price was just higher than the sale
price.

But if we assume that this was RSUs, or that the strike price was just a
fraction of the sale price, I still think the common advice of "consider
start-up equity to be worthless" is a little overzealous. Unless the founders
accepted some outrageous terms it's probably the case that your options are
worth a lot _in a company that 's doing well_. If the company stops growing or
takes a down round that's when you should start thinking of your shares as
useless.

------
kovek
Why is it that the common shares holders are not properly informed that a
certain investment round basically reduced their cash-out to 0? The incentives
to invest more time into the company is greatly reduced. The person affected
who is asking to Heidi said that they were working very hard, considering that
they owned 1% of the shares of the company.

------
tempsy
Even as a very early employee (say number 20) of a unicorn probably will not
make that much...you'd be lucky to get $2M if it sold for $1B...

Most people are better off just working at a big company if they want to build
wealth.

~~~
notimetorelax
That’s what I thought. The OP was hoping to receive 1mm for 4 years of work.
VP role will give that easy in any sizable company.

~~~
nikanj
Much easier to become a senior programmer at a 3-person startup than a VP at a
sizable company.

~~~
charwalker
Which is partially why the VP makes several times more at a stable firm vs
options/stock/equity that are a lottery ticket, more or less. The VP won't get
paid if the company sells but they can by a new car each year.

------
deogeo
A lot of words to say something very simple - information asymmetry via
contractual complexity is being abused to profit those writing the contracts.

~~~
harryh
What information asymmetry? Liquidation preferences are perfectly fair, and
not at all a mystery. Especially in the year 2019 when there has been an
enormous amount written about them on the internet.

~~~
deogeo
The parasites writing these contracts are counting on people not taking the
time to become experts in shady startup contracts. As evidenced by this
article, it's working.

~~~
harryh
The contracts in question aren't shady in the majority of cases.

Again, liquidation preferences are perfectly fair.

~~~
ElKrist
Honest question here:

as an employee (non-founder) do you have a say in liquidation preferences of
future rounds of investment?

~~~
harryh
It depends on whether your role in the company means that you are part of
negotiating the deal. If you are the CEO: then probably yes. If you're an IC
engineer: then probably not.

Relatedly, most of these deal terms are pretty standardized. In the vast
majority of cases there aren't a lot of negotiations around liquidation
preferences, only negotiations around valuations. The exceptions to the rule
tend to happen for very large or late stage fundraises.

------
drtillberg
From a 40,000 foot view, it's odd that employees who are investing their
professional effort are relegated to a lower equity tier. I think the person
asking the question in the article makes a valid point: why is it _fair_ for
human capital to be devalued in this way?

~~~
harryh
It's not odd at all.

If you start a company and you turn $200 million of investment into an exit of
$100 million dollars you _haven 't done anything valuable._ Why would you
expect your stock to be worth anything?

~~~
lostdog
Why should investors expect their full investment back when they did a bad job
choosing who to invest in?

I don't think it's reasonable to pretend that the current system exists
because it's the fairest. Investors exert more negotiating power than
employees, and that's the reason they get better terms.

~~~
Gibbon1
I once stumbled on a rant by a post doc CS student. In addition to an essay
why being able to do type erasure is good and why actually doing type erasure
is terrible. He had an essay with the observation that while capital has the
ability to pull their money and reinvest it elsewhere if they dislike returns
and risk, skilled workers are kinda stuck with whatever skill they've invested
in. And capital can diversify while a worker usually is stuck with exactly one
investment. Given that it seems shitty to give capital better tax preferences
than earned income.

------
WheelsAtLarge
"It's all in the fine print," and the fine print can say anything.

I would say that this is a learning lesson for all who think options will make
them rich. If you're at a company make sure you get paid what you're worth in
money. Don't count on options as part of your compensation. You are unlikely
to get rich because of them. As we have seen over and over again.

~~~
habnds
in a perfect world options would (literally) be a bonus. In the real world
people are playing stock market with their careers.

------
hogFeast
This is going to happen more and more often. Companies chased jazzy
valuations, they made crazy deals, and now values are starting to drop (and
stuff like liquidation preferences come into play).

I know of a company that was sold for $1bn+ and common equity got almost zero.
It happens, it is a very silly thing to angry about though (because the
valuation was never $1bn+).

------
harel
This is why, for me, VC money is a last resort and an admission of defeat of
sorts. If my business cannot be a business, i.e., an entity that earn's it's
keep and makes profit, then maybe it's not meant to be. VC money might prolong
it's life, but at that point, they are the real owners of this "entity".

~~~
charwalker
With that, the founders/core group can deploy VC cash injections to stay paid
and in charge vs closing shop. Quitting can be really hard for highly driven
people or those thinking their idea is going to work even when the numbers say
it isn't making money.

There's an incentive mismatch then for them to pursue VC funding and keep
going while employees with stock won't notice their probably worthless options
becoming definitely worthless options or at best a bonus when all is sold.
Like my own performance/holiday bonus at a stable firm, options are nice and
possibly count toward total compensation but aren't hard cash and should not
be relied upon as an investment or in your budget. Bird in hand and all that.

~~~
harel
I decline any offer that puts equity instead of pay. Options, equity etc. is
worthless. The only way it's statistically worth anything is if it's your
business.

On a side note, I wish Pud would revive fuckedcompany.com (with the last
snapshot of the db before it went down). It's still relevant.

------
fogetti
I find it "funny" that the whole sharing and startup economy is basically
built on top of something that resembles a Ponzi-scheme (not in terms of the
actual operation of the scheme, but in the way how unfair the scheme is for
different people in different roles). And the fact that the software industry
happily embraces this modus operandi is simply mind boggling.

As far as I am concerned this scheme with the stock options (some people call
them opportunity or investment) never should be substitute to social
contracts, like a monthly pay check.

I find it especially nefarious the fact that people who invest time are
penalized over people who invest money. This is especially true when the 4-5
year long time investment of a developer today can be easily worth millions.
And a dozen developers' time investment can easily reach tens of millions.

------
jacquesm
That's a nice answer but the question really needed a lot more information for
it to be the right answer. There are quite a few ways in which small
shareholders can get screwed, this article illustrates just one of them and
quite possibly not the one that bit the questioner.

~~~
appleiigs
This is exactly my thought. The author is just guessing. There are 95 comments
here, and they are just guessing too.

The real reason of why the employee got zilch would be found by just reading
the documentation - the legal agreements awarding the stock options, the
purchase and sale agreements, incorporation docs...

~~~
jacquesm
There is some chance that the questioner doesn't even exist and that question
was just written to be able to write the article in response to it.

~~~
harryh
I very strongly believe this to be the case. The details don't feel right.

[https://news.ycombinator.com/item?id=21359698](https://news.ycombinator.com/item?id=21359698)

------
qaq
Basically if you are working at startup value your options at 0 and you will
be right 99% of the time.

~~~
harryh
If anyone reading this is working at a startup and values their options at
zero please get in contact with me (contact info in my profile) and we'll find
a way for you to sell me your equity for $1.

~~~
mamon
And if the seller in turn uses your $1 to buy a lottery ticket you both would
have roughly equal chance of getting rich :)

~~~
harryh
I think that you are wrong and am demonstrating that with my willingness to
put my money where my mouth is.

~~~
Canada
Are you really putting your money where your mouth is? Even if I have shares I
think are worthless, your offer to buy them is also worthless, so why bother?
Actually, your offer is worse than nothing, as I would spend hours dealing
with the share purchase agreement without assurance you will follow through
and it would send a clear signal to the company that pays me that I believe
it's worthless.

------
readhn
2 start ups behind, shares worth 0. both companies took on half a billion
(!!!) in funding combined - from VCs, gov etc. Revenue = close to nothing.

I feel that start ups mostly are cash burn machines built to pay cushy
salaries to C-level execs and build "impressive" resumes again for the execs.
For most other folks, they are a just stepping stone to a "real" world job in
a stable corporation.

assume, your shares are worthless, basically a lottery ticket! In both
companies i knew that some people put in real money to buy out options, 100s
thousands of dollars amounts. Now they are sitting on a bunch of 0s.

Learn from others mistakes! They are free!

------
badrequest
As a normal individual contributor not at the C-level or even management
level, I just assume the value of any options/shares I receive is zero unless
an accountant or the IRS tells me I should believe otherwise. Too many goofy
fine-print shenanigans like this to keep track of.

~~~
x0x0
This doesn't sound like shenanigans. Reading between the lines:

 _> While it hasn’t ended up becoming the unicorn I was hoping for_

it sounds like the company wasn't a success. It could be the preference
overhang, or it could be a difficult acquisition.

Fundamentally, if the company isn't a success _relative to the funding_ ,
employees aren't going to get paid. Employees can get paid quite well on a
$100m exit if eg the funding structure was correct for the exit size.

~~~
pc86
Unicorn refers only to a billion dollar startup, and they sold it for 1/10 of
that.

~~~
x0x0
Right, but my guess is people start talking about being a unicorn _probably_
means they did a unicorn-sized funding round. So total raised is comfortably
north of $0.1B.

------
guelo
Investor are short-sighted when they steal all the money from startup
employees. Equity used to be the one way that startups could compete for
talent but the more the word gets out that it's a scam the less that startups
are able to compete.

~~~
ry454
The funny thing that all this might be funded by the big corps who don't
really need any startups and competitors around: it's easier to invest 20-30
billions into destroying the reputation of the startup concept, than to
continue buying them at 1-15 billions each.

------
a13n
Because your company raised money from VCs.

This will never happen at a bootstrapped company.

------
tibbon
What questions (specifically) should have this person asked upfront when
having their options offer prior to employment?

What should have they asked long the way to check on when there were
fundraising rounds?

~~~
qroshan
You'll almost never get preferred shares unless you at C-level or put your own
money.

The only thing you negotiate is more salary in cash and assume your options
are just lottery tickets with very high odds

------
sabujp
It's stupid that startups don't tell people going in what the overhang is, or
that you won't get called back or get weird looks. Everyone is looking out for
their bottom line, wtf would a startup expect any less from an employee that's
about to spend 60+ hours a week toiling on the product? In any case, this is
good info and I'll pass it onto my kids if they ever decide to join or build a
startup. Hopefully they decide to be their own founders. I'll supply the
garage :) .

~~~
dudul
Based on my XP, getting details about options is real difficult. HR and hiring
managers are used to people who barely understand the vesting schedule, so
when you start asking about percentage, strike price, etc etc it's kind of
unusual. And yeah, companies tend to not be transparent simply because they
play on people's ignorance to make attract them with options while in 99% of
cases you will never see a penny from these.

------
pgrote
How does owning the 1% stock that doesn't get a pay out when the purchase
occurs affect taxes? Do you have to pay taxes on the perceived value of the
1%? Can you consider it a loss?

~~~
harryh
Questioner probably owned options for which he paid no money. Therefore there
is no loss. Nor is there a gain on which they owe taxes.

------
gshakir
My former company got acquired for $150 million after raising $87 million. I
am not expecting anything. If at all I can expect a tax write off for the
shares that I bought

------
carlallison
It's not uncommon employees got nothing. Some even need to pay tax when
exercising the options. Remember Good Technology?

[https://www.nytimes.com/2015/12/27/technology/when-a-
unicorn...](https://www.nytimes.com/2015/12/27/technology/when-a-unicorn-
start-up-stumbles-its-employees-get-hurt.html)

------
denton-scratch
I feel for you.

I don't know how old you are, but my guess is that you are young, and you get
another shot. Don't be dismayed. Try again.

$100M is an awful lot of money - I'd consider $1M to be a lot. I I understand
that you got zilch, and if I were you, I'd be angry too. But you seem to be
clever - get over it, and have another go.

/me just another employee. Never been an entrepreneur. Not smart enough.

------
dgudkov
OK, what I understood from the article is that the guy owned 1% not of the
company's acquisition price (as he thought), but 1% from (price - X) where X
was unknown and turned out to be greater or equal to the price.

The fact that he didn't realize it until the very end makes the author's
advise very correct - "make sure you understand exactly what you own".

------
Aloha
This is why I've been saying for years that stock grants/options/RSUs are like
playing the lotto, and salary/benefits are more important. Particularly when
dealing with privately held firms where you have no ability to sell on the
open market.

They're also a tool to keep people in roles they no longer want, because of a
promise of a great payoff someday.

------
persistent
This is why you should get a proper salary even if you are working at a "hot
startup". Were you expecting a $1m gross payout from owning 1% of a $100m
company? That's the kind of gross income you'd get every 2 years of working at
Googbookagramazon. Consider opportunity costs carefully.

------
rozhok
Just in case anyone wants to visualize all the things in the article here's
the good tool for it: [https://dlopuch.github.io/venture-
dealr/](https://dlopuch.github.io/venture-dealr/)

------
z3t4
Check what the owners got, and if they got any payout with the 50% dilution
event. If the owners also got nothing, then the investors took it all. But if
the owners got say $50 from the deal and you got nothing for your 2% you got
screwed.

------
code4tee
Options holders are not shareholders. Options holders are not owners of the
company. Options holders are not investors in the company.

Too many forget these things and are shocked when then find out some event
doesn’t treat them like one of the above.

------
justapassenger
If you work in startup business, you should really take some finance classes
to learn how it works.

Your chances of getting any money out of the equity are basically 0%, no
matter if company succeeds or not

------
dudul
I had never heard of this "carved-out" money. Is anyone familiar with this? It
sounds a little like retention bonus based on the provided example.

------
farrarstan
Honestly the only business I would be comfortable accepting options or even
stock in lieu of adequate compensation is the guillotine factory.

------
thatthatis
I’m of the opinion that the scariest words to a startup founder/employee
should be “exit below the liquidity preference”

------
waynecochran
This is the sentence that is the core reason:

"if you raised more than your company is now being sold for, you will get
nothing"

------
aSplash0fDerp
The comments were a very informative read!

I'm sure they'll explain it to their kids as a ponzi scheme with a paycheck.

------
jpeg_hero
Yeah, if your company raises $200m and your sell for $100m you don’t make any
money.

------
Cherian
Someone should make a tshirt “Liquidation Pref: the most dangerous word”

------
heyflyguy
I just love reading this on the day I signed my options package.

~~~
randyrand
renegotiate.

“though I’ve signed my offer I’m having second thoughts about joining”

If they want you, they’ll talk.

------
tabtab
Is there a benefit in asking to get "paid" in both preferred stock and regular
stock to spread the risk out? It seems "preferred" stock is really "preferred
but with lots of dangerous caveats" stock.

------
campfireveteran
Obscene liquidation preferences for investors?

------
rb808
blah blah options blah preferred blah series A/B/C blah blah

The real reason they got shafted is that they weren't important enough or they
didnt follow what is going on. If you have a $1m asset you shouldn't be hoping
its OK when there are so many sharks in the building. Yeah it would be nice if
you could trust management and VCs but you can't.

------
fisherjeff
Unless your options or equity are publicly traded, chances are you’re probably
going to get screwed. I much prefer the 37signals approach:

[https://signalvnoise.com/posts/2987-an-alternative-to-
employ...](https://signalvnoise.com/posts/2987-an-alternative-to-employee-
optionsequity-grants)

------
geggam
Welcome to common stock

------
cj
Liquidation Preference.

In very simple terms:

"Liquidation Preference" is an agreement between a company and an investor
that when the company is acquired or IPOs, the company will pay the investor
some specific amount of money BEFORE any other shareholders get paid. If the
company negotiated the funding well, the liquidation preference might be 1x
(basically saying the company promises to pay back, in full, the investor's
original investment if the company is ever sold)

Things get scary when the liquidation preference creeps up to 2x, 3x, or
higher. It's possible to raise $5mm with a 3x liquidation preference... which
means that the investor will get $15mm payout BEFORE any other shareholders in
the event of an exit (which means that, after raising that $5mm, the company
can not have an exit less than $15mm without 100% all the proceeds going to
the original investors).

Raising $5mm with a 3x liquidation preference, then selling your company for
$15mm, is an easy example of how (even founders) can walk away with $0 after a
$15mm sale.

~~~
tyrust
It always baffles me when the top comment isn't discussing the article, but
provides a response to the headline as if the article doesn't even exist.

~~~
dgzl
What's baffling about it? If someone were to only read the title and not the
article and came to the comments section, a summary about the title would be
desired. What you're probably baffled about is why do people only read the
title and not the article.

~~~
nighthawk648
I’m not sure... HN is supposed to be real time discussions of articles.
summarizing the article not only is not discussion (read it is regurgitation /
bastardization) but any argument / discussion had based on the summary will be
inaccurate as they are going off of the words of another, who more than likely
integrated logical fallacies that did not exist before the comment.

~~~
sand500
FWIW this happens on reddit too as so many posts have clickbait titles, people
are trained to go directly to the comments to find out the non clickbait
version.

------
jdjjdflknfjj
It sounds like an easy way to screw holders of common stock out of their
money. Don't they have any protection at all? Like at least, does the
agreement for "liquidation preference" have to be reasonable (like, they could
go to court and challenge it, and the company would have to prove that it was
a necessary deal)?

~~~
qroshan
Employees that are paid common stock didn't put any money. They are also paid
decent salary. It is like playing a lottery, but only with opportunity cost.
Not sure what needs to be protected here.

~~~
alecbenzer
> Employees that are paid common stock didn't put any money.

> It is like playing a lottery, but only with opportunity cost.

So, they did put in money. It's "opportunity cost" money as opposed to literal
cash, but logically it's still value being invested in the company (the
company has $X more in the bank because the employee was willing to take a $X
pay cut).

Compared to VCs, engineers are making a lot _more_ of an investment in terms
of % of their potential value for a less favorable return.

I think VCs get better terms because A) they control an amount of capital
that's rarer and have more leverage, B) they do this professionally and are
better at negotiating things. But probably mostly A?

------
fqw3b58w4n6
I understood none of those words.

~~~
loblollyboy
That's the point

