I don't understand most of the financial terms used in this article. Where do I start?
Liquidity preferences - Also described in the article as "investors escape safely on Preference stacks", investors usually have terms which state that when the company is sold, they get paid first so that they can at least recoup their investment before anyone else gets paid. Usually they get paid again with everyone else, resulting in a "double dip" into the sale proceeds.
Reverse-merger IPO - this is a rare (for tech companies) deal structure where private company A merges with public company B. The resulting merged company is now publicly listed because company B has already gone through the IPO process.
Dilution - described in the article as "over-dilution" and "dilutive financing", if there are X shares of a company and you own Y shares, then you own Y/X % of the company. If the company then creates Z shares to sell to investors, you own Y/(X + Z) % of the company. The difference between these percentages is dilution. Often, existing investors have anti-dilution provisions. They are able to buy additional shares in the round up to their existing percentage. Founders and employees usually have no such luck.
Ratchet in a down round - Admittedly, I don't know what a ratchet is. I would guess that it is a protection of some sort for investors from a down round and thus bad for founders and employees.
Non-liquid - (nearly) impossible to sell
Highly volatile - a plot of price over time looks like a rollercoaster
Anti-dilution provision - see the latter part of "dilution" above
IPO protections - Also have no idea what these could be. I would guess at something to protect investors who invest at a high valuation where the public valuation is lower.
409-A pricing - How the shares are assigned a value for tax purposes
Ratchet - when companies raise a down round, investors who invested at a higher valuation get issued additional shares. This effectively adjusts the price/valuation they paid. The number of shares issued depends on the type of 'ratchet' investors have. There are two main types of ratchets: 'weighted-average' and 'full-ratchet'; the latter is not company/employee friendly and is no longer common. For employees, what this means is that if there is a down round their equity will get more heavily diluted than they expect, because additional shares are issued to compensate investors who invested at a higher valuation.
IPO protections - you are correct. In late stage/pre-IPO financings, these protect investors from an IPO occurring at a lower valuation than they came in at, either through outright 'blocking rights' (preventing such an IPO from happening) or, as above, through ratchets that adjust their share price/valuation. Such IPO protection terms have increased in 2015/2016.
For an overview, see [1].
This is historically unusual. Up to the last decade, companies tended to become profitable and go public much earlier. Now we have round after round of private financing going into money-losing companies to fuel rapid growth, in hopes that, somehow, they'll dominate the industry and make the money back someday.
That may not happen. Twitter won on market share and still can't make money. Uber may be next.
[1] https://techcrunch.com/2011/10/13/understanding-how-dilution...
At most you have then option to buy into further rounds, so you keep your percentage the same.
They are probably extremely rare for general employees, but they are not rare for people who have negotiating power (eg: C level executives.)
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Apparently I am blocked from responding too often as a new account, so adding here because I can't add a new comment to the parents parent:
It really is quite shocking how often people act like these things are not the business of employees. On one hand they want you to take a lower salary, and they claim that options will make up for it, but on the other hand they think it is somehow unreasonable for you to ask basic questions necessary to value the options?
I recently had a CFO act incredulous when I requested a copy of the Stock Option plan. Like I didn't deserve to have a copy of it, even though he was requiring me to sign a contract agreeing to its terms.
At that point I basically wrote off the options, and have written off the company and am on my way out.
The reason they get away with this kind of obfuscation is, I think, that most engineers just go along to get along and aren't too demanding.
Unions would be worse, but we need to start sticking up for ourselves a lot more.
It's got advice on where to start, common gotchas to look out for (in the US), and definitions of everything.
Term sheets and contracts by investors usually contain things that benefits only them, especially when the company does not work as expected.
You would be right if the employees were getting market salary and working a market/normal work week of say 50 hours.