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Comment by corry | Hacker News Reader

Three interesting part of the discussion:

(1) The opportunity cost to the founder of taking early liquidity:

If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time.

(2) Meaningful vs. not-meaningful amounts:

From my prev example, the founder sells 10% of their position for $500k. Well, if all employees were allowed to sell up to 10% of their positions too, would that even matter to them? If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. Not really enough to de-risk your life although still might be welcome (and employees would appreciate having the choice).

(3) Sellers need buyers:

In order for there to be a seller of shares, there needs to be a buyer. The founder is effectively choosing his buyer and future business partner by taking investment and choosing to give that buyer more control over the corp by selling him even more shares (his personal shares). The buyer wants to make the founder happy and de-risk their downside so they can be more aggressive or big-picture or whatever, plus is happy to own more of the company assuming it's a hot round.

But what does the buyer want to achieve by purchasing the employees shares? Just to own a little bit more % of the corp? For amounts that might not even matter for the employees and may de-incentivize them?

It's all very complicated and perhaps there are nuances that make every situation unique.

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> If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time.

IMHO, it's very easy not to regret, with those particular numbers.

I'd take $500K now plus possibly $45M later -- over $0 now and possibly $50M later.

I'd take that deal even if "possibly" were "guaranteed".

(Who might regret that is a founder who was otherwise already wealthy.)

You are not taking into account QSBS. [0]

When you sell your stocks before 5 years of holding period has passed, you pay significantly higher taxes. So you don't get 500k net, you get 500k gross, or probably 300k net. Which makes the de-risking less compelling.

[0]: https://www.investopedia.com/terms/q/qsbs-qualified-small-bu...

This is when you immediately liquidate your stock position, instead of taking a loan using it as a collateral, which would likely cost you 10%-15% in interest, not 30%.

No, in this example the person sold equity in order to get the 500K. They can't use the equity as collateral for the loan because they dont own it anymore

Yes. They should not have if they were to optimize taxes.

But then they’re paying interest and very few startups are going to have stock that a someone will lend against. I cannot imagine someone taking Series A stock as collateral for a loan.

I think it'd be pretty rare for a bank to accept equity in a series A startup as collateral for a loan.

And even if it did, it wouldn't really derisk much for the founder, which was the original purpose of taking money off the table.

Not sure why you are getting downvoted. There are multiple ways of structuring what is effectively selling the shares early that are not tax disadvantaged.

I do not see the purpose of this nitpick.

The numbers are made up anyway, adjust up by a few hundred thousand and the point that securing one’s shelter is worth foregoing winning the lottery still stands.

Exactly. About 15 years ago I was offering equity in a good little startup. I didn't take it because I just wanted to go somewhere with a higher salary.

When they finally sold about a decade later I ran the numbers and determined it would have been about $40,000 based on the actual sale price.

There's no guarantee of a $50M exit for anybody.

Hear, hear. My one-time $10M (early employee) eventually cashed out at a low/mid 6-figures. Take the salary I earned multiplied by the years I spent there, add to it the IPO, and then divide by number of years I was there. I could've trivially surpassed that annual salary elsewhere. Lesson learned.

Not to mention that in reality there is no guarantee you'd end up selling for $250m. $500k now would look pretty damm good if the whole thing tanks and the other 90% of your shares become worthless.

Regret is perhaps too strong of a word. But $5M is $5M even if you have $45M. Sure, it won't change your life since you have the $45M, but the incremental investing / philanthropy / estate / family help etc that it allows you is real in absolute terms.

The other thing I've noticed is that for people on the other side of this transaction, it's not like "smaller numbers" all of a sudden become immaterial. $1M is still $1M. $5M is still $5M.

Again, I'm with you, I don't think it's regret exactly. But post hoc you might choose differently, even if it's the rationale choice at the time.

>$5M is $5M even if you have $45M

The whole concept of diminishing marginal utility is that this isn’t true. The first $5M is worth far more to a given individual than the last $5M.

Your argument is treating the future as knowable and certain, while not accounting for the value of risk.

I guess you'll feel pretty bad if you pay for car insurance for 40 years, and never have a crash.

If the 100% upside is guaranteed, then sure, you should hang on.

But if "anything can happen" then cashing out 10% now, and providing a "can't fail" safety net, is well worth it. The reduction of risk of "losing it all" is well worth the 10% premium. And if the (somewhat unlikely) big exit ever happens you still have 90%.

> If the 100% upside is guaranteed, then sure, you should hang on.

Overall agreed, but that's not even always true! If you're -- for example -- under crushing levels of debt today, you very well may want to take that $500k now, even if that $50M is 100% guaranteed in 5 or 7 or 10 years.

Or even if you aren't in debt, but would find it a huge quality of life improvement to be able to have a down payment for the house you'd really like to live in now, and not have to wait 5 or 7 or 10 years.

Just to clarify about taking the $500K rather than even guaranteed additional $5M ($50M vs. $45M) years later...

$500K is an immediate big quality of life boost for most people.

For example: a condo/house downpayment, which lets you move out of cruddy ramen apartment, to routinely get a good night's sleep. And/or that relieves some of the various other startup salary level money stresses on your family.

I think this can also be aligned with the goals of the startup. You don't want people so "hungry" that the stress is hurting their health and their home lives. You want them motivated by the mission, the work, the environment, and the possible big liquidity windfall in the future -- but not by desperation.

Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are.

Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.

Maybe it depends on the area and kinds of properties one is looking at?

Only a little anecdata, but the few times I've looked (affluent university town, once recommended as a place to do a tech startup)... if one could swing a downpayment on certain places, the monthly costs were lower than rent one would otherwise have to pay, on places not as nice.

In the zero interest era it could be. Much harder now.

Exactly. As a former founder who dealt with hospitalization and thousands of dollars a year in medical bills on the sh!t insurance startups can afford, I too would rather have 500K now than 50M later. There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.

Plus, setting 100K aside for medical bills and even throwing the 400K into Bitcoin is a far less risky investment than me NOT being in a FAANG and accumulating 401K money which is absolutely critical if you want to keep up with the rising cost of life through retirement. When everyone else who joined Google or Meta out of college and now has a 10 million net worth at 40, that defines the cost of living in the area, and that's the bar you have to keep up with if you want to still live here at 40, 50, 60. Chipotle will cost $50 in a few years. A 1 bedroom apartment will cost $5000 in a few years. UberEats was $15 when it started, already costs $50 for lunch in my area, and at this rate, it will be $200 in a few years. Because those people can afford it, so greedy owners and greedy landlords will up their prices, so I will have to pay not just my $5000 rent, but also the Chipotle worker's rent, and the Chipotle franchise's rent, in order for their prices to stay profitable. The cost of living in the bay has tracked the S&P500, not the CPI. YOU will be priced out if you didn't have liquidity at a younger age to throw into some investments.

I'm at a large company right now. Being compensated enough to be able to afford life in the bay area now, having enough income to afford a mold-free modern apartment in a place where I don't need to worry about getting mugged, and hedge the risks of all the crap that's going on in the world was a big part of my reason to join one. If I had enough saved to "feel safe", I would absolutely be doing a startup again.

> There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.

I would very much like to know where you can find low-risk investments that are likely to net you 10x-40x returns in the span of 10 years.

(But overall I very much agree with your point that $500k now and $45M later can be a much much much better deal for someone than $0 now and $50M later. I would likely take that deal every single time.)

> where you can find

By doing homework and research every day and investing only in things you personally deeply understand.

But if you don't want to do that ... passively investing in QQQ would have given you a 5.4X return in the past 10 years.

If you just throw your money across some large, too-big-to-fail companies, you could have 10X'ed easily.

AAPL, NVDA, MSFT, TSLA, NFLX have all >10X in the past 10 years. GOOG, META have come close.

You could have split your money evenly across the biggest 5-10 companies in tech and 10X'ed.

And if you actively invest and do day-to-day research it's fairly easy to beat 10X in 10 years.

By the way my definition of "low risk" is calibrated to the risk of founding your own startup and making 100K/year hoping for a big payout later in the future vs. joining a big company and making 500K/year.

My "startup founder calibrated" low risk stock investment means:

- Reasonably high probability to 10X in 10 years

- Some probability of losing money, but very low probability of losing most of your money

- If you lose money, it's because of a major world situation, and holding for another 10 years will probably get you out of that

- You also have skills and are hireable so you can hold the stocks

QQQ would have turned your 500k into 2.56M

AAPL, NVDA (even without the recent events), MSFT, TSLA, NFLX, yeah sure. But out of those, only Apple and Microsoft were reasonable companies to put that kind of money into. I think you're not realizing that you're cherry-picking.

I mean I think your point still stands with just looking at QQQ, but I'm just saying over embellishing hurts your argument, not helps.

Meh, this isn't a me vs. you situation. If you take value from my overall comment, great. If you think my whole comment is invalidated by one statement that you do not believe, I'm not interested in defending it.

I was just trying to help you make a better argument because you were arguing with people.

>There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.

Please tell me more about these 25-37% pa low risk 10 year investments.

I meant low risk in the sense of doing some basic homework and investing, and investing in large publicly-traded companies, I consider it low risk compared to everything in startup land. I'm pretty confident I could 10X in 10 years with ~80% probability by investing actively and doing homework.

Joining a startup is extremely high risk from an opportunity cost standpoint. Literally any profitable company's stock is low-risk in comparison.

But ... if you don't want to do homework, you could just buy a smattering an equal distribution of the biggest names in tech (MSFT, NVDA, AAPL, GOOG, META, TSLA, etc.) and you would have easily gotten 25-37% pa averaged over the past 10 years. It's highly unlikely all these companies suddenly fail, all together.

And if you want to protect yourself against that, write covered calls at ~15-20% per week and use the proceeds to buy protective puts on all of your stocks.

(Disclaimer: not investment advice blah blah blah)

Yep; for the vast majority of people, the difference between $45M and $50M is not going to change their lives in any meaningful way. With that amount, you can live a fairly lavish lifestyle and still see the number in your brokerage account go up every year.

I actually kinda think a founder that was otherwise already wealthy wouldn't mind this too much, either: say they already have $50M in the bank; the difference between $95M and $100M feels even less of a big deal than $45M and $50M. Granted, the founder with $50M already in the bank probably wouldn't bother with the $500k in the first place, though, especially if they believed in the likelihood (or guarantee, in your hypothetical) of a future larger exit.

> hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time

in the scenario you outline the founder sells the remaining 90% of their position for $45MM?

I don't think many people would experience any real regret at "only" getting $45.5MM instead of $50MM, due to declining marginal utility of money

> hard not to regret the choice

If you can't handle "regret" in these cases, then you probably shouldn't be in a position where you're deriving the vast majority of your income/weatlh from investments (which is fundamentally what a CEO does).

It's astounding how many ICs can't wrap their heads around the concept that holding onto your RSUs make absolutely no financial sense. With rare exceptions, this doesn't make sense for anyone. And yet, fear for "regret" keeps people holding.

But it's not shocking that even in tech many ICs are not good at reasoning financially. But if you want to be a co-founder, and hold a lot of your wealth in investments it's essentially that you learn to reason, plan and accept outcomes accordingly. Otherwise you're more-or-less a professional gambler.

I believe in diversification and index funds for most people, but this seems overdone.

The issue here is that sometimes if you procrastinate about diversifying, it pays off very well. As a Google employee (who joined after IPO), it was by far my best investment and funded my retirement.

I guess that's accidental gambling. I did have other investments.

Yes that’s accidental gambling. Or what i like to call “at the right place at the right time”.

Ask a Yahoo employee how that same plan would have worked out for them.

That being said, good for you. :)

Mostly agreed, but as an employee you do have some semblance of material non-public information that gives you a structural edge in assessing the stock. (This probably works better at a 1k-5k company than a Google/FB, but I can't say because I haven't worked at the big faangs).

I've benefited financially from having a good sense of how well things are going and holding/selling accordingly (within the confines of the law and blackout periods, of course).

> non-public information that gives you a structural edge in assessing the stock

This can also cut the other direction too. I had a slightly negative sentiment about Google during my tenure there due to the organization I was in. When earnings call season rolled around it didn't matter since the ads revenue line always dominated everything else.

The way you can test if it's accidental gambling is by answering the following:

If you had worked at a different company with pure cash comp equivalent to your RSUs, would you have invested the same $$ in Google stock? Or would you have invested it instead in an aggressive but diversified portfolio (e.g. 100% S&P 500 or even just a bucket of blue-chip tech stocks).

I am confident that for the vast majority of tech employees they would choose the latter if they were operating in a pure cash regime.

No, I definitely wouldn't have invested so much in Google. However, I'm not sure how much to attribute to it being a default choice, versus the differences between an inside versus an outside view.

It's easier to be comfortable investing long-term in something you know well. While there's a lot I'll never know about Google, I think I understand the company somewhat better than others. For example, I can discount a lot of news articles as being written by people who don't really understand the culture. If I hadn't worked there, I might worry more.

That's less and less true, though, as much has changed since I left. And for investment purposes, maybe that bias only seemed to be helpful, versus an outside view?

I’m going to rebound on that and explain why it doesn’t make sense to hold on to RSUs.

Disclaimer: I’m an IC myself.

I worked for my 1st company for 15 years. Held to their RSUs most of the time. Then moved to another (public) company and stayed there for a year before leaving. Now in a startup with a lower salary and no immediate liquidity on my stock options.

When you work at a public company, you have multiple exposures to the company’s growth: the RSUs that have already vested, the RSUs that haven’t vested yet and through your own career growth and salary increase that goes with a successful company. If you were early enough, you also get market cred for having made the company successful. If the companies goes under (or shrinks, or lays people off), all those assets are at risk.

Usually, one has more in granted stocks than in vested stocks. If your company just went public, you might have a lote more sellable than in your pipeline, but even that is unusual. Usually, you’ll still have more in the pipeline than you’ve already vested.

If your company has been public for a while, you should get frequent refreshes, which means you still have a significant numbers of unvested shares.

Regardless, you should sell as soon as you can, because of the remaining exposure through unvested equity. Use the proceeds to place in an ETF, or in a high-yield savings account, or some more aggressive investment strategy. Or use it for the downpayment on your house, or fund your kid’s college funds, whatever floats your boat.

Anyways, keep in mind that you still have a significant exposure to the growth of the company through your unvested equities. If you’re worried about short-term cap gain, don’t be. If you sell immediately, there’s no growth between cost basis and selling price, so no cap gain. Another upside to selling is that you’re not bound by the blackout periods, so your assets are much more liquid. And remember you still have exposure

I would say that for most RSU lots it's better to wait for long-term capital gain taxes to kick in before selling.

At vesting time you are taxed (immediately) at ordinary income rates on the fair market value the day that it vests, and that's what the cost basis is set to. If you sell on that day, your capital gains from the sale will be (near) $0.

The only reason to wait for LTCG on RSUs is if you decided to hold it for some non-zero amount of time after vesting and then the stock price shot up. But then you're also taking on the risk that the stock price will drop again before the year has passed, and end up with less post-tax money than if you'd sold at short-term tax rates.

Some companies might make you hold for a few months until the next earnings report and trading window. After that it depends on your tolerance for risk and your attitude about the IRS.

How does that work?

Most (all?) public tech companies have policies that prohibit employees from trading the company's stock outside designated windows following a quarterly earnings release.

Earnings reports happen once a quarter between the company and the public. A couple of business days after that, employees (without material nonpublic info) may trade company shares for the next month or so. Maybe you can't sell April shares until mid-July, and then you have to decide whether to wait until next July to minimize tax on gain.

Sometimes you can elect to sell every released share in a quarter, or file a 10b5-1 plan with a schedule, but you have to do that during a trading window.

That's the incorrect belief that causes so many people to hold their RSUs. The day you vest the RSU is the day someone decided to:

   (1) give you the amount in cash (as regular income) 
   (2) take that cash and buy that stock on your behalf
   (3) turn around and give you the stock

and somehow you decide to let (2) and (3) happen without returning to the cash position in (1) and buying whatever else you would prefer to hold. The LTCG clock starts on that day, and all you're doing by holding your vested RSU is let someone else decide to buy stuff on your behalf and make the decision for you.

(that's assuming that there's an ability to liquidate the RSU on the vest date)

I'll agree that it's not super common that holding onto RSUs makes sense, but I think it's more common than "rare exceptions".

Ultimately it's an investing decision. If you believe the stock price is going up at a rate faster than the rest of the market, and are willing to accept the risk that a concentrated position like that entails, then that can make financial sense.

For people who want to hold their RSUs but still want to diversify to some extent, my usual recommendation is to pick some percent of the shares that vest every quarter to sell immediately, and hold the rest. And -- critically -- to stick with that commitment every single quarter, and not fall into the trap of thinking "oh, the stock seems to be doing so well, I'll skip the sale this quarter". (Of course, a measured re-evaluation of the plan is a reasonable and good thing to do every so often.)

I think the most interesting part of the discussion is that the early employees almost always get the worst end of the deal:

Going in they have a lower salary than if they work for a more established company.

Then, either their shares end up being worthless, or at the final exit, they make less money than if they worked for a more established company the entire time. IE: Being an early employee in a startup is a lose-lose situation.

This is something founders need to understand when recruit their early employees: These are often the most critical hires for the business, and therefore it needs a high probability of upside.

IMO: A series of retention bonuses, and/or guaranteed bonuses at acquisition / funding events is a good solution. It's how I've sidestepped the equity issue when I was employed during an exit event.

I'm curious why you think these employees -- who are getting the worst end of the deal -- are working for startups in the first place?

Either they have the skills to be a founder themselves or to work at BigTech... or they are financially ignorant/disinterested enough to not understand how equity in corporations work? Or is the charming and misleading founder who is to blame?

My point is that considering the high avg intelligence of the typical startup employee, there must be something else going on.

Clearly, people like working at smaller companies that have potential to grow - maybe that's because there's more interesting work, less bureaucracy, smaller teams, more of a sense of a journey, etc. Easy to devalue these things, but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?

Or they want to work at a small startup and have the technical skills, but don't necessarily want to manage people, work insane hours, and meet with customers and potential hires instead of building the product.

An early stage startup is a bad place to avoid working insane hours.

Chances are higher that those hours won't feel like "work" though.

I'm in that position right now, and have done it a few times in the past (my entire career is switching between startups and public companies).

I work for startups because I get a ton of responsibility for things I would never get at a big company. I get a chance to learn a ton of new stuff.

Through my career, I've made all my money at the public companies, and had most of my skill growth from the startups (Netflix being the big exception, where I both made money and leveled up my skills).

No Reddit f-u money?

I did not get any stock in reddit when I worked there. I worked there between when they were first acquired and when they were spun back out. The guys I hired got f-u money and I couldn't be happier for them, they deserve it for how hard they worked and how long they waited!

I think the other thing to realize is that the change in this "startup calculus" has happened only relatively recently.

The "old" calculus was that, being an early employee in a startup, you'd make less cash money than at a "big corp", but if the company "hit" you'd end up doing much better. Just look at the stories of early Microsoft employees, or the Google chef whose stock options ended up being worth tens of millions. Obviously those are outliers, but it was still common that early employees of "home run" startups would be doing great.

But the thing that really changed the calculus is that the FAANGs started paying extremely well, especially as the value of their RSUs skyrocketed. So the new problem was that even if your startup hit, you'd be doing about as well as a senior engineer who was at Google for 5 years.

I know in the past YC itself has commented about this dynamic, basically arguing that early startup employees deserve more equity.

Part of vacuum up the talent strategy that made it more expensive to launch any competition.

Other part, buying out any promising startups and letting them rot on the sidelines of the main business.

This is absolutely true. I remember Dan Luu [1] and patio11's [2] blog posts from 9 years ago and 13 years ago respectively, which were widely shared, arguing essentially that you should always prefer to join a FAANG. With FAANGs all downsizing to varying degrees, or at the very least not in growth mode, this advice seems less clear-cut. For better or worse, I think we're starting to see the pendulum swing a bit towards startups with the AI gold rush.

(This is not to imply that compensation is now fair for early startup employees; it's not.)

[1]: https://danluu.com/startup-tradeoffs/

[2]: https://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-pr...

For me I understand perfectly well that my EV cash-wise is lower working for a startup. I just don’t care past a certain income and working at a startup is more rewarding in other ways.

> they are financially ignorant/disinterested enough to not understand how equity in corporations work

Yes, definitely, I think we live in a bit of a bubble here where we actively read and think about these things. I think most early employees will see a 0.5% or even 0.1% equity offer and think that's incredible. It barely even registers that the founder sitting across the interview table from them holds 40% or whatever, and that while, yes, the founder has taken on more risk than they are about to take on, they certainly have not taken on 80x the risk or are putting in 80x the work.

> but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?

That's the wrong question to ask.

The right question to ask is: "How does an early stage startup attract the people it needs to be successful."

Money isn't the only metric, and there are good reasons to say "if you want top dollar, go work for a FAANG."

On the other hand, I was once approached to be employee #1 of a rather interesting startup, and the risk/reward ratio just wasn't there. The company was more likely to fail, and I was more likely to find myself unemployed after 24 months. Now that I have children and a mortgage, I can not do this.

In contrast, the company severely needed someone like me: Significant experience and knowledge; AND active interest in their product, with a mildly personal stake. Relying on someone young and cheap would be risky for them.

Maybe its the "romance" and "excitement" of it? I worked for a startup in Seattle, 20+ yrs ago. It had a fun exciting buzz, and... something special about it... the possibility of being part of something big... and having interesting, excitingly intelligent coworkers, that you can learn a lot from, but then of course , it all went to s** (less customers due to market bust). Ultimately we were all laid off, the options I'd bought at 5c each were worth nothing. I didn't expect any riches, it was just an adventure. And importantly, 30 mins drive to the ski hill which was open at night after work.. so.. not a bad time ;). Some of the early employees were bitter. Some had tried being early employees several times in a row, tried to make it big. To me, they were intelligent people so why they didn't they see it as just a gamble which is largely out of their control? Maybe people like to kid themselves? Its the dream of America to make your fortune out of something new and exciting. Why am I even reading this discussion and commenting here? ;) Becos' there's something intangible but exciting about it all. But a lot of it is fantasy. Maybe people like to work for startups for the same reason they like a good book or movie, you can suspend your disbelief and escape from the boring hum-drum where you do a 9-5 that can be similar year after year?

For me, it's always regret:

1. If I buy stock, and the stock goes down, I regret buying

2. If I buy a stock, and the stock goes up, I regret not buying more

There's no winning :-/

I find that it sometimes easier to accept this as this is just how life is when I read people with experience write about this. If this is true for you as well:

There is a good book review about it on SSC https://www.astralcodexten.com/p/your-book-review-the-laws-o...

> Whether or not you make money, you have regrets! If you profited, you could have made more. If you lost money, you shouldn’t have made the trade at all. Like death and taxes, you can’t avoid adverse selection.

The simplest strategy is to buy index funds and hold. I never look at the price of any stock every day. I don't plan to sell any index funds either until I retire.

Buying the S&P500 etf or index fund is the equivalent of the Blackjack "Dealer Strategy". It's perfect for "fire and forget".

None of this is very good justification for founders being the only employee that have the option to sell part of their stake.

> If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k.

It obviously depends on your financial situation, but having the option vs not will certainly matter to some employees. Not to mention that the stake could well be worth $0 in the future.

I don't think it needs any justification, really. The investor decides, whom to sell to and how much. If the founder doesn't want to organize a sale for employees, then he doesn't do that. He would probably have to pitch it and include it in to an already complicated funding round.

I totally understand why a typical founder doesn't want to do that. If for you as an employee it is a deal breaker, then you can complain about it, change company or whatever. It is not like the founder owes anything to the employees (unless he has promised that). Everyone in the equation are adults and have to decide themselves, if the position they are in makes sense for them with the terms they have.

> I don't think it needs any justification, really

From a founder's perspective sure, you can do what's best for you.

That's not what this article is about. This article is highlighting that there's a tendency in SV for founders to cash out early, and secretly. And along with that, there's a tendency to paint a narrative that the founders haven't sold a share. It's hard to see that as anything other than deceptive.

It's one thing to join a startup that you know may not succeed in the long run. It's another to join a startup that has a founder whose been secretly cashing out along the way.

Justification does seem necessary in that second scenario, at least from a morality perspective.

Lying to the employees is scammy and wrong. However regarding that we would need more information what has exactly happened. Not telling or not highlighting something is not the same as lying.

Personally I'm not in the SV scene but from Europe, and I don't know much cases of these early cashouts.

I mean I think it depends, why is it needed, the founder is not working for his employees, it's the other way around and he has the most risk involved, founders don't make a lot of money in cash anyway and this is not pre COVID, investment rounds r smaller, so u r basically saying that a founder should only think about making company and his team rich and if he fails he can die poor while his employees can always jump ship with the cash incentives they got

Also bake in the fact in your calculations that 9/10 startups will not see the kind of success you are talking about. And the authors point still stands.. the founder made some money at liquidity event at round A vs … making even more money later if he doesnt sell?

Bird in hand is better than 3 in the bush

The strongly diminishing marginal utility of money after $10M for most people makes that first $500k much more impactful than $5M would be after you have $45M.

$500K right now would pay off my home and do a good job of setting me up for retirement in the future.

$5M when you already have $45M doesn't move the needle much.

> If you were an employee and had $200k total value in your options, and you could sell 10%, you're getting $20k. Not really enough to de-risk your life although still might be welcome (and employees would appreciate having the choice).

$20k would be a life changing amount of money for me right now

What would you do with $20k that would change your life?

Let me complete a down payment on a house and stop renting.

People often forget how financially limited they were when they were young. There are even college freshmen reading your comment for whom $1k would change their lives. Such as this one who is currently contributing to Textadept on school machines from 2013 on NixOS installed on a USB drive (don't recommend, CPU I/O wait time is frequently >%50) because he spilled coffee on his laptop last semester.

Regarding your point (1), there's more to it than just the dollar amounts now and later. If we believe the over-leveraged founder story where that founder has mortgaged their home and maxed out their credit cards, being able to sell that equity at series A for $500k could mean the founder is able to pay those debts, and doesn't end up losing their home and being hounded by creditors. (Even if it doesn't get that bad, having that debt over your head is stressful, and running a small startup is already stressful enough.)

If we also believe that founders are important to a company's success as it grows from a small startup into something more mature, I'm pretty sure that unfortunate financial (and housing) situation would drastically reduce the chances that the company would make it to that $250M exit later.

So taking that $500k may increase the chances that the startup later gets sold for $250M, rather than, say, $50M... or just failing entirely, returning whatever small amount of money is left to investors.

Another consideration is that employees are much less conscious of the real value of their stock than founders, and you don’t want to make the (lack of) value of their shares too obvious in the early stages.

If you tell them the value of their stock is $200k, and 90% of that is imaginary, then they might start thinking about that job offer with a 500k stock grant at a listed company.

This is basically arguing "It's good to deceive your early employees about the value of their compensation" This is morally repugnant to me, and I hope you're not an executive at a company. If you are, I would not work for you.

Great points... as to #3, investors are often happy to be buyers. They are buying shares anyways that would otherwise have to be created. Allowing founders and employees to sell shares lowers dilution vs. creation of new shares... usually this is not a large effect, but still not bad for current & future investors.

I mean it effectively means that the amount of cash going into the business is less than it otherwise would have been. The company wanted $5M of cash. With the owner selling $500k worth of shares it means they had to find $5.5M to be invested.

The only reason it happens is that the founder is negotiating both on behalf of the business and a bit for themselves.

I mean it basically means that the founder is not some dude in early 20s who can crash on a couch and work off coffee shops, they r going thru life as well and they r the one's who drove success so they rightfully expect a piece of that success

> when the startup ends up selling for $250M

s/when/in the statistically and historically very unlikely case that/g

to put it bluntly asf, you're being poor (and I'm being insensitive). what's $500k going to do for you if you come from a rich family? you already have your rent paid for until you die, and vacations paid for. all you have to do to do is put up with your annoying family, which isn't the worst if you've been through therapy. your mom or dad's abusive? if you've been through enough family therapy, that's not a problem.

if you ask you mom or dad, whichever believes in you, they have enough money to fund your dreams (if you care enough to ask) of joining or starting a startup to become an (x) CEO/salesman/builder/marketer/whatever for whatever you want to build, and that includes signing onto some startup that won't pay you a living wage until it fail-exists for $5 million and everyone goes to burning man/Berlin/ibiza on the founders dime (including rent for everyone N months).

Yes, there are people who won't get the same benefit from hedging like this.

But they're a small minority. Not that many people meet your description here.

Would be interesting to see average founder who can fundraise large amounts and family income. I’d imagine they tend to come from higher income backgrounds, though could be wrong.

I'm sure the wealthy are overrepresented, whether or not they got financial help from their families while starting/building the business. But there's a long gap between "being rich makes it more likely to succeed" and "most people who succeed are rich."

my goal isn't that someone who is in that position reads this. as you said, they're a small minority. they already know this. but people who aren't in that position might want to know how the world is shaped for other people

My point is that the situation will vary.

Yes, if $500k doesn't move the needle on your life then the question is moot anyways. Most first-time founders will be closer to the poor end of the spectrum than the wealthy side.

There are people reading this for which $20k will change their life (which in my example was the 'shouldn't matter' amount instead of the $500k).

> what's $500k going to do for you if you come from a rich family?

Perhaps not much, but most people -- even most startup founders -- don't come from a rich family.

Elon Musk's father owned an emerald mine, Bill Gate's father was a high-powered lawyer and his mother was on the board of directors for United Way, Mark Zuckerberg's parents are a dentist and a psychiatrist. I don't know the numbers of "even most", but I think it'd be interesting to get some numbers.

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