Employee #1: Airbnb
themacro.com
themacro.com
If it was planned this way, it was very smart. If it was an unintended consequence, its very fortunate.
Has he even been allowed to keep his shares or sell them on a secondary market like early facebook employees did?
There is always a way to sell shares, although I don't know if Airbnb has made a formal offering available to employees.
There are always questions around how "successful" employees are versus founders, and the situations all are a bit different. For example, in my experience I was employee #9 at GolfWeb (a startup in 1995) and my stock was worthless when CBS Interactive acquired the company, I was employee 1990 at Sun and at Sun's peak valuation in 1998 the total stock I had owned would have been worth over $10M (I didn't have it all at that point :-), having sold much of it for mundane things like down payments on houses and cars and such, but the point was the equity from Sun was much higher than it was from the "startup" and I wasn't a founder in either case) People who joined Google (or Apple!) in 2009 and are still there, probably did quite well on their stock if they held it.
To answer your more basic question, when you exercise your option at a non-publicly traded startup, your shares will be covered by the purchase contract that is included in the option. That contract can (and often does) restrict to whom you can re-sell those securities. As the company keeps the books on who actually owns the shares, they have a lot of control over them. For example they can refuse to transfer them to a buyer when you and the buyer approach them to settle your transaction.
And since there aren't a lot of liquidity events where employees can sell stocks these days, its an interesting question to explore.
Why?
Power and incentives.
Power because when you have equity you are an owner, and founders and investors of private companies (and public companies for that matter) are concerned with who shares ownership.
Incentives because if they restrict your options, you might stay longer and work harder to have a liquidity event.
That said, I don't doubt that you might find someone with excess cash who would be willing to front you the money to exercise your stock and pay the taxes and a perhaps a premium on the stock, for a promissory note to hand them over the stock at the time it becomes publicly traded. That too it illegal under securities law but would be fairly difficult to prosecute.
On thing to add: early equity grants used to be much smaller in 2003, so I wouldn't be surprised if an early employee of Airbnb or Dropbox or a similar company will have more like 0.3%-0.5% after dilution at the time of IPO.
This. It's really easy to make money in hindsight. If you'd bought GOOG at the IPO in 2004 and held it until 2007 you would have had a 6.6x return. If you'd held it until today you would have had a 13x return, but a much lower IRR. On the other hand, if you'd bought Zynga at the IPO you'd be down 66% five years later and still waiting for it to bounce back.
It's a lot easier to make hypothetical money in the past than it is to make real money in the future.
On one hand, the only reason to work for a start up is to take the risk and go all or nothing. On the other hand, I would never invest in a start up.
I probably would sell off a huge portion (~70%) of equity before the start up reaches $500 million given the chance
We went out for $1B though (on raising < $2M of VC money)
Sadly I was not in that group of people
'Whereas with the Airbnb guys, they were super early and small but they had a product, a V1, that was up and running. And the product was working. I used it as part of my application process and was like “Yes, this is super cool, this works, I can totally envision this growing and taking over the world and I want to help do that.”'