Everybody gets an upvote button and a downvote button from day 1, and they'll downvote to oblivion anything they don't instantly resonate with. It turns every large-ish subreddit into an echo chamber pretty quickly
It’s a cliched observation but it really does remind me of the kids hoping to make it big in pro sports – there are way more who peak at the minor league level at best but the owners make a ton of money by encouraging everyone to think of the exceptions as the rule. Humans are prone to misjudging statistics in general and that’s really bad when one party has the best data and a strong incentive for other people to misjudge it.
The catch is usually when people are asking about RSUs of public companies or other relatively liquid and predictable compensation, in which case equity comp should definitely not be valued at $0.
I'm pretty sure I had the exact same experience. I've been a part of three startups. One took nothing more than seed money and has been chugging along for over 15 years. It's a lifestyle business for the owner, so it also hasn't grown at all in over 10 years. The other two startups were both acquired. I was even a VP at one with over 1% equity in the company. Net value of my options was $0 after investors, credit holders, and founders got paid.
Yes, some folks are going to make millions from IPOs, but the opportunity cost is far too high (IMHO). As a VP at the startup, my total compensation with 15 years of experience wasn't a whole lot more (and less, in many cases) than what a new college grad makes nowadays.
Now that I've got a family, college to pay for at some point in the near future, and a retirement to fund, I'll gladly take the sure thing vs. the gamble. I've bid goodbye to startups and have quadrupled my income in doing so.
In private companies, always remember: (1) control ≠ equity (2) equity ≠ profit (3) equity ≠ information.
If this is new to you read Brad Feld's Venture Deals book and do the online course, it's time well invested.
Note this is simply the nature of private equity. Companies go public to drink at the capitalisation trough of public markets, but the cost is regulation and increased transparency. Companies that stay private are rarely bound by significant rules in terms of board or management decisions redefining structure, equity, terms and so forth. There are at least four key firewalls (exercise, issue, share class, transfer) between "options" as issued or promised and meaningful equity value extraction for an employee. Good lawyers can probably name five more, and definitely dream up or deploy tens more at any time without breaking laws.
In the end, I walked away with less than I hoped but more than I think I deserved (for being so naive). But it's been an abject lesson since: nothing in a private company is fixed, it can all be changed according to who pulls the strings. Options and equity are very vulnerable to this. Having equity is no guarantee of power or even a seat at the table (or of future wealth).
People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%"
The reality is that all common shareholders have the same incentive to not dilute the outstanding shares. That almost always includes the founders. Outside of a money raise most of the people involved in the company are aligned in the desire to not dilute each other.
The major source of dilution is new fundraising and while it will effect your percentage of ownership it typically doesn't affect the value of your stake because the dilution is part of post-money valuation. So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change.
The things people should be worried about are all the shenanigans that happen around participating preferred multiples. Or, the worst, 30-day exercise windows along with the tax treatment of options exercise/AMT. But since those are much more opaque concepts it's way harder to get people riled up about it.
And if you have an unscrupulous CEO there's basically nothing you can do to protect yourself as a worker. But that's way different from the normal dilution you get as part of raising money.
If that is indeed true, then there's almost no reason not to demand being paid in real cash money rather than stock options. If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD?
This like saying, "don't worry, your lotto ticket won't be devalued: We'll make sure that even if those numbers win the jackpot, you'll still get the same $2 and it won't be diluted below that."
Huh? You should compare the current value of the options to their value at the last fundraising round, not between pre- and post-money in the same round.
The doubling in value happen between (e.g.) the Series A raise and the Series B raise, not at the time of the Series B raise, and when you compare the value of your options between the raises that's when you'll see the increase in value.
For example, imagine you have 10% of the company and after the Series A raise the company is valued at $1m, so your share is $100k. Now you go and work for two years and increase the value of the company to $20m (pre-money). Your 10% is worth $2m now. If the company raises $5m for 20% ($25m post-money) in a Series B you now have 8.3% of the company (you were diluted) but your 8.3% is still worth $2m.
The stock option reward happens while you're building the company.
To take your example: my hypothetical 10% isn't worth $2m -- it's worth an unknown amount (one hopes more than the $100k it started at). Only after somebody is willing to pay $5m for 20% of the company can one realistically say what my (now 8.2%) shares are worth.
The poster I was replying to seemed to think that the act of raising money is what should increase the value of your shares, which is not the case.
See here for more info on how the terms are used: https://www.investopedia.com/ask/answers/difference-between-...
Nope. If you are topped up (which means you still have political standing) then you start a new vesting schedule. So all those shares you worked for and vested — you can work for again!! Yay! Until another 4 years you are diluted. Yay! But likely there will be another round while you wait to vest the shares you already had!! Hahahaha!
Unless you're talking about the cap table being completely wiped but that's a different scenario and I wouldn't consider that to be part of dilution.
they only have the same incentive to not dilute if they are getting the same penalty for diluting, right?
I am not an expert in any of this but it seems they could just agree to issue a ton of shares to all the investors / founders but not to employees in a way where everyone except the employees benefit.
In retrospect I'm pretty sure all I did was buy myself a tax burden when they fold or pocket change when they exit.
The mistake I made was not realizing the parent comment: that I lack the information to make an informed decision or to be sure they don't just dilute to oblivion. The numbers I did have access to (above) communicated a very misleading story to me.
(BTW: Congress bailed out dot-com specu-vestors who claimed not to understand the tax event that occurrs when exercising options. https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re... )
This doesn't happen in the real world.
When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired.
New shares wouldn't go to the founders.
Yes, it's hypothetically possible, but it doesn't happen in the real world.
> In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before
Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low.
It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
Sounds like a bit of a moral hazard / principal agent problem for founders!
Usually in conjunction with a new round, but not always.
The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders.
That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime.
It's generally going to happen in negative situations, but that happens a lot.
Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.