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Comment by aresant | Hacker News Reader

DataRobot is unusual in that the "money off the table" was geared for non-founder executives.

But the "secondary's for founders" is not that unusual - it's typically used as a tool by VCs who are in competition with other corporate development opportunities.

AKA Clubhouse had several suitors for acquisition (including Twitter it's rumored) but Andreesen added a few million bucks of liquidity for the founders to bridge the gap between "guaranteed liquidity" vs "non guaranteed but potentially greater upside" (1)

But then of course you have all sorts of eggregious examples over the past several years of Johnny Boufarhat @ Hoping taking $100m+ out or infamous Adam Neumann pulling out $700m+ from WeWork(2)

(1) https://www.forbes.com/sites/alexkonrad/2020/05/15/andreesse...

(2) https://sifted.eu/articles/secondaries-taboo/

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Definitely not unusual. I think it is pretty common for executive team in addition to founders. My feeling is that VCs and founders need to find a way to partially cash out rank and file employees along the way if they want start up model to succeed long term. Many senior engineers are reluctant to to join startups at this point as even if startup is successful it can be a long time before they have the money in their pocket. Employees at Reddit, Stripe, Instacart, Databricks, and many others have been waiting over a decade for company success to hit their wallet.

Sometimes the executive team gets stock options rather than RSUs so they own the stock and can sell to secondary parties. VCs and founders would like them to sell to known parties rather than sell on private market (Facebook crossing 500 investors threshold was one important reason for IPO timing [1]).

[1] https://web.archive.org/web/20120517045249/http://blogs.reut...

> My feeling is that VCs and founders need to find a way to partially cash out rank and file employees along the way if they want start up model to succeed long term.

They also need to adjust comp structure. I've had a few offers to be engineer #1 at this hot startup or that, some of which I thought had a good chance of success. Assuming the best case scenario I always found the following to be true:

1. Founders would outearn me 100:1

2. Given any reasonable assumptions around likelihood we fail, the E(V) of the offer was less than I make now.

3. Founders could, at any time before IPO, completely screw me out of my paper gains e.g. via an acquisition.

I've always pointed out it's possible to make me an offer I'll take, the resources are there, but no one bites. This is absolutely killing a lot of otherwise potentially great startups. I've seen some fantastic business ideas fall down in execution because neither founders nor investors could bear to let key employees share more of the spoils and be equally protected from the downsides.

Everyone feels this way. It feels like such a market inefficiency (which a company could arbitrage to get top talent). But the fact that this inefficiency never goes away makes me think I’m missing something. I usually just chalk it up to the majority of engineers not understanding the basics of startup equity (or expected value and failure risk… idk). Regardless, the end result seems to be that there’s an adequate supply of labor. So much so that the pressure which would correct this inefficiency is sufficiently mitigated. It makes no sense from a risk/reward perspective that an “founding” engineer is making 1/100th of a founder. They both have the same level of risk.

I think it's worth remembering that these kinds of inefficiencies can last for years, maybe decades before correcting, this post has some good examples: https://danluu.com/nothing-works/

I think there are a few things that explain the phenomena:

1. You're asking rich and powerful people to give up control. Everyone hates giving up control, but my experience is that people accustomed to control hate it more.

2. It's not familiar, which means it feels risky.

3. It objectively lowers total payout in the best and worst case scenarios for power, and it's not actually clear the E(V) for the capital class goes up. It might, but no one knows apriori, and it's expensive to test.

This mix of low information, a small number of potential actors, and feelings of anxiety around uncertainty and loss of control is a pretty potent mix for inefficiencies like this to persist IMO.

Alternatively (which is probably a variant of 3), you’re asking someone to give you 10x or more the shares of what they have reason to think their next-best alternative is.

If an employee #1 share grant isn’t for you (as it isn’t for me), there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.

> you’re asking someone to give you 10x or more the shares of what they have reason to think their next-best alternative is.

I don't think this is an accurate representation of my views. I'm happy to take more in the 2-3x range so long as I'm protected from the founders cashing out while screwing me out of my paper gains.

> there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.

Maybe, but they can't always find them! Businesses rarely fail for one reason but maybe 1/3 of the startups that approached me and failed were bogged down by poor technical decisions made early on (what's that? your engineering lead with 3 years of experience set up a totally custom kubernetes cluster and it's slowing down your execution? Man that's rough!)

That link is an interesting read. Thanks!

Investors and founders hate down rounds. You want a pricing to be as beneficial as possible to all involved. Startups are extremely risky and getting a deal done at any price is an accomplishment.

Now you want to give a lot of small shareholders liquidity. The pricing is far more often. The whims of the world plus poorly negotiated deals can make a small sale be far below the last investment price. Psychologically this is bad even for wealthy investors and investing is heavily based on psychology.

No one wants to let that happen except the employees. The founders, the board, and the earlier investors don’t want anything that can jeopardize their argument for what their shares are worth.

I don't think there is really a correctable inefficiency here for a number of reasons.

In regards to the very first 1-2 employees, from what I have seen is that they are either a) fairly inexperienced (and therefore willing to take lower compensation), b) very excited about the technology and willing to work for less compensation, or c) very experienced and compensated well and/or given a ton of shares to the point where they may even be considered a founder.

So if you are employee #1 and you are very experienced and can negotiate for a nice chunk of shares, you almost always will get pulled into the founding team. It is not uncommon for startups to have minority founders that have 5-10% of the shares.

And that means when you hear about an early employee complaining about their compensation, they are most likely going to be from category a or b. You aren't going to be hearing from category c, because they were treated well and might even consider themselves founders.

"Employees at Reddit, Stripe, Instacart, Databricks, and many others have been waiting over a decade for company success to hit their wallet."

And to add to that, should they decide to leave and have to exercise their options, they'll be on the hook for a huge tax bill had they not been allowed to early exercise and file 83b letters.

What has surprised me recently is how little equity founders have in mature startups. Its not unusual for heavily funded startups to have founders with under 10% equity between them. In India, so many startups that IPOed or raised late rounds are at 2-5% equity.

Groupon: $800 million.

https://allthingsd.com/20110602/where-did-groupons-billion-d...

VC: "if you give the founders a taste of blood, they won't sell out early, and they will want even more".

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