Liquidity Is Coming
henrysward.medium.com
henrysward.medium.com
In tech, there are many accredited (potential) investors who have product expertise but no finance experience. This "slack capacity" of capital is what Carta wants to profit from. (If you want a public VC fund, there's Forge. Maybe Carta wants to go here some day, too).
Why do tech employees join companies that doll out significantly better equity to investors? (In some cases, those investors even get dividends on their convertible debt). Why are there still startups who don't even have 83(b) elections yet, and why aren't all start-ups doing bonus-to-cover early exercise? Why are employees totally cool with dilution and a 10% employee pool?
Because employees earn just enough to compete with each other, but not with the house. This is Carta's business opportunity.
These equity transactions aren't as simple as buying and selling an ETF though. Moreover, most of the existing sales have been private, so sellers (e.g. accredited investors) and buyers (e.g. employees and founders) are at a steep information disadvantage when jumping into these deals-- Carta and Forge know the consequences, but the market participants do not. Moreover, the space isn't necessarily well-regulated. So that's a prime business opportunity: you have people who are too "dumb" to create a market themselves, but who want to transact. The snark in my narrative comes from personal observations that it's very easy to get burned (even in successful exits) and that these middlemen are typically even less trustworthy than big banks.
Any low hanging fruits you suggest we look at first?
The horror of asking a company to charge customers to finance their operations rather than running the VC treadmill.
I don't get how more founders don't realize it is in the VC's best interest to keep you on the treadmill, burning their money and giving away your equity.
* 83b election standard with employee on-boarding paperwork.
* Bonus of up to one year salary to cover 83b early exercise costs.
* Employee equity pool size disclosed along with 409a. Ideally contractual protection for the employee equity pool.
* Offer documents must include a 409a valuation and share price. (I have gotten multiple offers with just a number of shares. And in one case the company was literally peddling a false valuation in my offer).
* 401k with company match, even for a small company. Lottery ticket is not a retirement plan.
Ideally in my mind:
* Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.
* Double standard employee pool to 20%; keep 30% founder pool size.
* No ISOs or non-quals ever. Extremely tax toxic, and employees can actually get driven into debt from the job. Options should be outright forbidden for comp packages under $1m / year. The tax games are absolutely not worth it.
The main way any positive change can happen is for employees either to negotiate for it during offers or for founders to just start doing it to be more competitive. One might argue that Carta has made 83b easier by chasing a private stock marketplace... perhaps there are other mechanisms for change.
I don't think this is financially realistic. Most employees (especially non C-suite executive employees) do not want to loan money to a startup to receive a "convertible note/debt". Even if employees wanted to loan money, most don't have the discretionary play money in their bank account to risk on a startup.
It's the investors that have the money and risk appetite to pay for convertible notes.
If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.
How would you describe it? Note that the OP said "employees get convertible debt notes" not "employees buy convertible debt notes." Practically speaking the notes are indistinguishable from convertible debt that investors get, but they're compensation for employment rather than bought.
Agree with your point about 409(a) disclosures. As an ex-employee with outstanding options in two tech startups I find it crazy that nothing requires firms to annually disclose this information to options holders. And while I was working at these companies there was no mention of the #of shares outstanding and the % allocated to employees—even if you knew your personal percentage stake, you didn’t know how much was diluted with each subsequent round.
Small companies probably can't afford to pay taxes for everyone's 83b elections, nor can they afford the 401k match or the other missing perks. After all, if they could afford to compete on cash comp with big tech cos, surely the founders would rather do that and preserve their own equity stake.
But with exits taking longer and longer, such an exercise scheme lets rank and file employees preserve some small upside that they have earned themselves, and not worry about hurting their career by being forced to wait for an exit.
I think I generally agree that employees get a pretty bad deal. I think it used to look better, but these days you can make so much more money so much faster working at Google than you can at a random startup.
In addition employers are protected by a vesting cliff, and after that it is their fault if they keep underperforming employee around.
RSUs are probably better but the equity games are set up right now such that startups issue options.
In the case of an acquisition, options also can screw you. In my view, it’s always better to have either shares or equity most comparable to what the founders have. Be ready to sell early at any time.
> bonus-to-cover early exercise
Can you explain this in more detail? I'm a bit familiar with it, but it seems you might have more experience and could be able to describe it properly.
why oh why did I take that job where the hiring manager told me with a straight face my fraction of a fraction of a percent was “high” and couldnt tell me details about the common stock and preferred stock
why didnt I take that other job where that other red-but-most-likely-benign flag popped up when the interviewer asked an awkward question
why didnt I take the 83(b) election and cough up all the money for my shares right when I started
what is up with employees like me, can someone explain?
Don’t beat yourself up. Few if any make all the right choices. Just try to always avoid the worst choices (which it sounds like you’ve done so far).
And remember: one persons 83b triumph is another’s capital loss they get to carry forward for a while.
Out of my wider social circle, I know several people who I believe are underpaid but stay due to being afraid of interviews or due to loyalty to their company or their customers. I mean that's kinda also why nurses don't quit even though they are usually treated badly.
But I also know multiple people who negotiated a generous chunk of stocks as a signing bonus and/or who have agreements that allow them to convert employee stock options into convertibles debt notes (i.e. akin to seed investors).
Also, it depends on whether you contacted them directly, or if you were introduced by a headhunter, as the latter will charge them.
If you approach them directly, you have a good reputation, and they can see a clear way from your time to increased profits, I'd say you can get up to a year of salary as signing bonus, which for senior positions will be a lot more than $20k.
There's also the path of being acqui-hired, where the money that they pay for your past startup is kind of like your signing bonus.
That market is fragmented and disorganised and inefficient. But it’s deep, cross border and growing. Issuers write their own transfer policies which range from nope to fully permissive. The former aren’t interested in something like this because they aren’t focussed on shareholder liquidity. The latter don’t gain anything from forcing shareholders to only do business through Carta. (If they do want to do all that work, they can just do a tender. It is cheaper. And has no lock-in.)
This is a product in search of a problem.
Disclosure: I work in the private markets.
Sounds like you've found the problem
In my experience, spreads are closer to 1 to 5%. The upper end of that spectrum dominates in the trading employees' shares, however, so there is a fair point here.
That said, CartaX isn't comparable to the open secondary markets. The latter are continuous. CartaX is periodic.
The better comparison is Nasdaq Private Markets, who offer a similar tender offer platform. Last time I checked, they charge a fixed fee plus something like $500 per trade. Compared with this, the 2% CartaX charge is only competitive for <$25,000 transactions.
> won't do anything below $100K
This is generally correct for open market trades. (Though folks like EquityZen are pushing the envelope on minimum transaction sizes.) It is not true for tenders.
CartaX looks like a pricier Nasdaq Private Markets. Perhaps that premium--and the ongoing disclosure requirements and lock-in--is worth paying for some issuers.
Seems like senior execs don't have much incentive to accommodate that...
This ship has sailed a long time ago. Scribbling on a dead tree is not superior.
Investors can buy and sell small shares of private companies on a "private" market in public view?
Seems like the SEC would be grumpy about a public non-public market?
What are the listing requirements? Is there an equivalent of the 10-K?
This is formally true, but in practice, not so.
I have invested in a bunch of private equities funds over the last 8-10 years and the average life of an operation is about 3 years, which is about what they are aiming for:
>>> They would only have to hold positions for 2–3 years, instead of ten, and could recycle their cash back into early stage startups.
And I'm doing precisely this. Recycling my cash into private equity.
That's a pretty small list of startups that achieve that, no? So this doesn't help employees of a start-up with a post-money valuation of $50M or even $200M, where I assume the vast majority of start-ups spend their time (if they see some initial success).
And what are those requirements? If it’s anything like where Nasdaq is headed, with forced diversity quotas (https://www.npr.org/2020/12/01/940501693/nasdaq-pushes-to-re...), then no thanks.