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Comment by gjem97 | Hacker News Reader

> The average unicorn, the researchers note, has eight stock classes for different types of investors, including founders, employees, venture capitalists, mutual funds, and others.

As an aside, this is why I think that any effort of a prospective employee to divine the value of a stock option package is likely in vain. Without a detailed accounting of the ins and outs of the preferred stock that is senior to your common shares, it is nigh impossible to tell how much the common shares (and options thereon) are worth.

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This is why I always recommend to individuals that when a startup offers equity in lieu of cash compensation to ask every financial/equity question imaginable. (what are you valued at today? how much investment have you taken? what's been diluted? etc etc)

People don't like to have that conversation because they think it's inappropriate. However, it's more inappropriate for a founder to tell you that you're getting equity in lieu of compensation and explain nothing about the value of that equity and potential future value of that equity based on the current state and future state assumptions.

90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like, and even if they had a list of them, they'd have no clue about how to interpret any of the results, or how to tell if the company is feeding you BS.

I mean, I was the first employee at a startup, involved with fund raising, and then founder at a startup, and even I would have a hard time with that.

Not to mention that even if you have a very solid understanding of what things are like when you get hired, it can all change dramatically in subsequent fundraising.

This is just one of many instances where the employee/employer relationship is heavily biased against the employee. And unless clear disclosure requirements understandable by the average worker are put in place, it'll stay that way. As an employee, your options are inscrutable lottery tickets which value can be redefined in many ways at many points in time, and there's not much you can do against that.

> 90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like

Totally - I've been thinking about actually putting on a "equity master class for engineers looking to join startups" type seminar in the bay area if people are interested.

Not bay area (though there fairly often) but if you do it please have it recorded and posted somewhere. Would be a great resource.

Seems like there's some interest for this. If people legitimately want to know more, please let me know here:

https://goo.gl/forms/j70V7ew5Dds7AoOt1

If there's enough interest I'll put something on.

PS - By way of background, I work in tech M&A and regularly see cap tables, equity packages, salaries etc. both in and out of SV.

You mean biased agains the employee? Anyway, I guess the obvious thought is that situations of information asymmetry like this are not really biased against anyone but just lead to worse outcomes for everyone. Startups would prefer to compensate in equity, but the value of their equity is depressed because potential employees can't tell how much it is worth. I suspect the obvious thought is right although maybe it could be bad for employees if they systematically tend to overvalue equity. (And then it would work against even the rare employee who can tell how much it is worth because he or she will have to compete against a bunch of suckers.)

> You mean biased agains the employee?

Yes, thanks for spotting the typo. Fixed.

I completely agree. An employee should be optimizing for maximum salary, the equity should just be considered a token reward.

If founders and investors really want to align their goals with employees, then start handing out rev share, otherwise, the employee is just deluding themselves.

I just don't accept equity in lieu of compensation. There's far too many ways to screw you over.

The only thing I would value is participation in a trust designed to make it as difficult as possible for the founder to receive cash from their ownership stake without paying out to all minor participants. "If he's worth $1B, I'm worth $1M" is something I can value.

Are trusts like this commonly setup? Enforceable?

Commonly set up? Depends on what you mean by "like this" - for this exact purpose, probably not at all. Enforceable? Absolutely. The entire point of a trust is to give out flows of cash to beneficiaries while restricting certain rights you may not want those beneficiaries to have. Usually this is more along the lines of "can't use the assets to pay down debts" than ensuring that the wealth generated from founding a start-up gets distributed fairly.

The last time I was interviewing was my first experience at evaluating non-public company offers. My recruiter at Docker setup a 30+ minute phone call just to explain what each of the terms meant, and helped me research and understand the offer much better.

I remember one time negotiating an offer with StartupXYZ and they claimed a bunch of things about their stock options (company valuation, overall stock package value, etc). When I asked them various questions about the options, in particular the total amount of shares available, about class, etc, they told me "we can't share that information".

You've heard of this company.

And to add to this, it's impossible to predict the future. Even if you are privy to all relevant details to come up with an accurate "value" to attach to your shares, you have no idea what sort of deals will be made in the future (stock-backed loans or later equity rounds come to mind). All it takes is one bad-for-common deal and you're wiped out, and common is usually the first to get the short end of the stick (and the last to find out).

This is part of what makes cryptocurrency "ICOs" appealing. Depending on how the token sale is set up, you can usually be sure of exactly what portion of the equity you are getting. Whether or not it will be worth anything in the future is another question of course.

> Depending on how the token sale is set up, you can usually be sure of exactly what portion of the equity you are getting.

You also trade off any ordinary protections as a consumer.

I completely agree with this. While I could (and have) done due diligence into a valuation of privately held companies in order to understand the value of a stock option, once you get to the later rounds there can be so much change to make any previous valuation calculation moot.

I really enjoyed the TL;DR stock option visualization earlier but for unicorns it would be a really interesting exercise to walk through various 'liquidity events' and their value and see the various percentages that went to which investors.

In theory, an external 409A valuation should serve this purpose: determine the FMV of common stock options, while accounting for all the nuances of existing preferred stock, liabilities, cash flows, and comparables.

Where is the disconnect...?

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