a lot of this sounds like three comma club problems, however, I'm' trying to connect the dots between the discounts offered to late stage investors and how that affects my one comma club friends and family ..help?
I.e., the early employees do a great job. The business has a value of $100M and their non-liquid shares are worth $0.5M. The business raises $100M with a 1x liquidation preference. The startup fails, and eventually sells for $50M. Instead of getting $0.1M-$0.25M, those early employees get nothing.
Further, never forget that employees are plebes, and your and my shares are subject to a 6 month lockup that, for example, founders aren't necessarily subject to. See Mark Pincus dumping 16.5m shares of stock for $11.64 ($190m) two months before, and for $3.18 more, than regular employees could [1]. Zuckerberg also sold 6% of fb at ipo, though since the price didn't cater investors don't seem to object. Founders often can also take cash off the table. Note that I don't necessarily think that's bad, but as in the cases of Secret and Digg, employees don't walk away from failed companies with millions.
edit: actually, Pincus appears to have sold at twice the price available to employees ($12 vs $6.09), not $11.64 vs $8.46.
On April 3, 2012, the secondary offering closed at a price of $12.00. Mark
Pincus, Zynga’s founder and a director, netted approximately $192 million in
proceeds; the other three selling Zynga directors sold several million
dollars each in the secondary offering. Zynga’s stock declined significantly
following the secondary offering to a closing price of $6.09 on the date
that the original lockup restrictions ended, and a closing price of $5.36
and $3.00 per share, respectively, on the two extended lockup periods
applicable to the selling Zynga directors. [2]
[2] http://www.law360.com/articles/608007/a-closer-look-at-delaw...
Did Kevin Rose sell shares in Digg?
It is ruined by a simple fact that this hypothetical startup earned just 50 cents for every dollar raised -- I don't think anyone should expect a nice payout here.