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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.

> The key is that they are all losing money so their fires are not self sufficient.

Can't speak for the others but Dropbox is not losing money. (To be clear they are free cash-flow positive but not profitable, however the point is they can survive indefinitely without raising more money.)

https://www.bloomberg.com/news/articles/2016-06-14/dropbox-c...

That is awesome. It puts them back in control of their destiny. Their larger investors could still screw them but at least they have some leverage. I would guess if they can put together 3 quarters in a row with positive growth and cash flow they will drop an S-1 to allow their major investors to liquidate their holdings.

And a lot of people are speculating they will IPO this year, see https://www.technologyreview.com/s/603204/dropbox-could-have...

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.

I certainly agree that reasoning by analogy can only go so far in conveying the complexity of the situation. Startups do not exist in a vacuum.

That said, while I agree with you that there are lots of reasons a perfectly functioning, operationally cash flow positive company might choose to stay private. None of those reasons apply to companies that are diluting themselves with additional investment in order to stay in business.

The money gets more and more expensive from investors, and more and more people get screwed, and then all that's left is to write the amazing journey blog entry.

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?!

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

It's a material risk to investors?

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.

I take issue with this statement. I think there's a confusion here between longevity and future risk. Yes, these companies have been around for a long time. That does not mean that they are low risk. The classic example here is something like Good Technology. It had been around for a while, and it had an extremely high valuation... right up until it didn't, and it was sold to RIM for a fraction of its peak. Or Twitter, for example. It debuted at $45. Now it's at $16. Imagine if a large portion of your compensation had been negotiated at that $45 price. Now that portion of your salary is worth less than half of what you were told it was going to be worth.

No, I agree with ChuckMcM. Valuing equity at $0 may seem overly conservative, but you at least have the assurance that you'll never make less money than that. Any positive equity on top is just gravy.

The Uber/Airbnb/Dropbox/(Facebook X years before IPO) type company give RSUs. They have the typical 4 year vesting schedule and an IPO condition. If you leave the company before IPO but have stayed long enough to meet the 1yr mark, then you will get that 1yr vested stock units when the IPO occurs.

They are like option grants that last about 7-10 years, that exercise on IPO/acquisition and don't let you exercise before then.

So with these companies, all of the tax complexity goes away, and you don't have the 'if I leave after 2 years, all of my stock options go away after 90 days' dilemmas. You don't have the rich man option of pre-exercising to potentially get some long term capitol gains tax savings although. If the trump administration gets rid of the AMT stock option trap, then you will also not have that advantage with ISO-type stock options.

Since IPO is the realistic condition for these companies, you also will have the 6 month SEC lockup period. The company might add their own additional lockup period afterwards too.

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The attraction about joining these companies a few years before probable IPO is you have not insignificant potential to increase your income above the average tech worker income level. Facebook is the success example, twitter, fitbit, etc are the not as successful example. You can also get similar effects by joining apple before the iPhone was released or during the early iPhone years.

It's definitely a risk, but isn't as risky as joining a startup where you can't see an IPO in it's future any time soon.

> So with these companies, all of the tax complexity goes away, and you don't have the 'if I leave after 2 years, all of my stock options go away after 90 days' dilemmas.

One Caveat: if your RSU terms are that you "vest" your vested RSUs when you leave the company before IPO, you'll have a substantial tax burden on a grant of illiquid equity. This will be effectively the same as the option lock in scenario we've been discussing here for several years now. I know that some companies don't have such a clause, but it's entirely conceivable that some do.

So yeah, read your RSU contract! :)

> The attraction about joining these companies a few years before probable IPO is you have not insignificant potential to increase your income above the average tech worker income level.

I would argue that it is more about having the power to make a big difference (however cliche that sounds) and working on new projects (as opposed to maintaining code)

Except that it's still totally possible to make a big difference working at Facebook, Google, Amazon, Microsoft, etc, if you choose the right team. And it's entirely possible to be marginalized or sidelined at a late-stage startup. The two concerns, to me, are almost orthogonal.

I would argue that it is more about having the power to make a big difference

The biggest difference I ever made was while working for a big established 10k+ employee firm. The smallest was while working for 10-15 employee startup.

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.

Wasn't there a post here recently about one of those companies having restrictions that made it more-or-less impossible to cash out your equity if you ever left?

Uber

For options employees; RSU employees don't have the 90-day expiration.

It is pretty egregious that options employees are in that predicament.

Edit: please correct my fact or otherwise respond. If I am incorrect I'd like to know; the drive-by downvote doesn't help.

Is the options employees vs RSU employees distinction simply dependant on their join date? (before and after the company switched from options to RSUs)

This is fascinating because at other companies, you can easily have the opposite: A company goes from having option with an extended option exercise period (say 2, 7, 10 years) to RSUs. The RSUs, whether they are on a delayed vesting with handoff when employee leaves, or outright confiscation upon departure, are both worse than the options scenario.

I'm guessing it's dependent on join date. I'll ask my friends.

The scheme with Uber is the options can be exercised up to 90 days after departure, but the RSUs are held until IPO, at which the employee/former employee takes possession of them and is responsible for paying taxes on the income.

Secondary share sales are essentially prohibited, only being authorized if the board approves them. Illiquid until IPO.

There are variants I've heard regarding illiquid RSU treatment.

1) Regular RSU vesting schedule. You'd get a tax hit on illiquid equity (I've never heard this happen at late stage startups so far).

2) RSU vesting is delayed until IPO. If you leave before IPO, you lose all your equity.

3) RSU vesting is delayed until IPO. If you leave before IPO, you get the equity you have vested on paper so far. You will owe ordinary income tax on the shares.

"more-or-less impossible to cash out your equity" seems to be somewhere in between (2) and (3). I'm interested to read the exact legal language used in the contract, if anyone can find said post.

> They're derisked to the point where the RSUs/options should have some value

Perhaps, but I value diversification of my investments. Investing my sweat and my equity into the same company is not diversifying. It'd also be easy for me to overestimate just how much they've derisked, underestimate the fine print, golden handcuffs, and generally fuck myself over.

Rounding to $0 is a useful and "safe" oversimplification. If they turn out to actually have value - hey, sweet, an unexpected bonus.

>Rounding to $0 is a useful and "safe" oversimplification.

Absolutely. It's never an accurate assessment, but when the vast majority of people are in no position to even ballpark estimate the value of their equity package, rounding down to $0 prevents a lot of heartache.

Assuming a robust job market, you won't have much exposure to a company's success/failure other than through equity, so I don't think diversification makes sense as a reason to avoid equity compensation.

I could see this being a valid argument if there were systemic risk to the industry that could have a simultaneous effect on your equity and salary compensation. e.g. if you're a truck driver and get equity in your company, then automated trucks could be disastrous and you'd want to diversify away from the equity.

The 'valid argument' is that if you're kicked out of your job as part of a large downsizing, all of that equity has essentially turned to scrap paper simultaneously. This is completely endemic to having equity in the company you work for: there's a tight linkage between the thing that pays you monthly and your investment portfolio.

Put another way, you're right that the equity is the only way that you are exposed to the company's success, but there are catastrophic ways you can be exposed to its failure.

> Assuming a robust job market

Bad assumption. I've known people who lost a large chunk of their retirement funds in the dot-com bubble, despite "diversifying" within it. More recently, there was the housing bubble. Both of these had implications for the job market - and salaries - at the same time.

Some people would argue we're in the middle of a tech, games, or VC bubble - and while they might be wrong, diversification is what you do to mitigate the risk in case they're right.

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

Yes - VCs use a 30-50% discounting rate on investments during the growth phase, so that's what employees should use. (Whether this is illiquidity or uncertainty is left for the holder)

IMHO - for the companies you've listed, they can actually be higher risk, as the employees will likely have much higher strike prices. If you're already there, you can have a better idea of if you're in the money. ("Mine strike at 20 cents, the last funding round was at a dollar, put in a discount and let's call it 50 cents, leaving me 30 in the money") If you're a later employee, you're more likely to wind up out of the money, and less likely to get a significant stake.

A corollary to your 20-30% "uncertainty discount" is that the expected value of a pre-IPO offer should be higher than an offer from a publicly traded company. It's the same reason that there is an excess return or risk premium (again, in expectation) for investing in stocks over bonds.

This makes some assumptions about risk-aversion and rationality – it's possible that the latter is an optimistic assumption, given the amount of koolaid-drinking inherent in joining startups. But as long as you're telling your friend to discount his startup offers, and articles like this are being written, I think it's logical to think that the pendulum will swing towards mid- and late-stage startups building in such a premium to their offers, especially if they're serious about getting good talent.