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Comment by alecbenzer | Hacker News Reader

This is a really good point that I hadn't considered. Employees are "investing" money in a startup too in the form of opportunity cost, but a founder can't turn around and "sell" the investment when it's just time; when it's actual cash they can.

I wonder if there are stories about this happening in certain contexts that predated liquidity preferences?

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Yup, that's the reason I've turned down all startup offers so far and some of them offered 2-3%. They like to hand wave about how much these 50,000 shares are going to cost or how rich I'm surely going to be even after dilution of these 2-3%, but when I tell them point blank that with my current compensation, over the course of 4 years I'm going to lose at least $1M, and ask them what I would get for a $1M investment, they suddenly struggle to find words. The reality is that, once you reach this level of miniature wealth and competence (and that happens quickly), the only next step is to start your own company. Startups don't really see employees as partners.

> They like to hand wave about how much these 50,000 shares are going to cost or how rich I'm surely going to be even after dilution of these 2-3%, but when I tell them point blank that with my current compensation, over the course of 4 years I'm going to lose at least $1M, and ask them what I would get for a $1M investment,

There's a thing you're missing here, and it's option value. You don't commit to the lost money over 4 years all at once, while a cash investor does immediately give up present-valued money. Instead, you commit to spending a year or so there (~$250k-valued), and only if your options look like they're going to be worth a whole lot do you stay beyond that point.

That's a valid point, but if we think about it, what does the founder do with that instant $1M grant? Most likely the founder spreads this $1M over the next few years on employees and other expenses according to his plan, hoping to get the next, bigger, grant. In other words, there is no advantage of having the entire amount upfront (except maybe the lost possibility to invest into short term treasuries with tiny return).

The investor has committed to the entire amount. If something materially bad happens the day after the raise that halves the value of the company, the investor can't flee and the management team can still spend the money if any business prospects at all remain.

You raise an amount that will get you to the next capital raise, and convince other entities that you are sufficiently capitalized (banks, lessors, contract counterparties, prospective employees), and deal with a moderate amount of contingency. You don't want to excessively raise, because it's excessively dilutive when capital is expensive. You also don't want to have to raise again with nothing to show for the spent cash.

Even if we grant your statement "there is no advantage of having the entire amount upfront"-- there would be a benefit to the investor of having option value about whether to continue to invest; option value that an employee has. It's easy to model this and see that option value is quite valuable. (Investors would really like it, so we do see things like efforts at tranched investments or leaving a round open... but entrepreneurs hardly want to have to sell an investor equity at the same price if the investor decides he wants it a year from now).

You bring up a good rebuttle, to which I ask, why not have the preferred shares vest? Then your stake accurately matches the risk you've taken on at any given time.

The time still isn't liquid, though. Yes, if you worked for someone for a year, you've given them $X (where $X is the paycut you took), but the founder can't just turn around and sell that $X to someone else. To the extent that they can, it's (to some extent) because the founder was able to take your time and turn it into something valuable, which is like, what founders/CEOs are supposed to do. At that point these is some sense in which the founder has also "earned" the liquidity.

With a direct cash infusion there's none of that. Any idiot can immediately sell $10M for $10M.

I think time is quite liquid. Let's say I get 500k/year on my current job and someone asks me to join his company for peanuts, but with a good chunk of stock. We could calculate the difference between 500k and peanuts and say that instead of joining that company, I'd pay him this difference every year. That difference would be enough to hire a small team for a small salary, but with stock options. The problem that most founders have is the unspoken refusal to accept that my time is worth this much.

I think you're making a fair but unrelated point.

Time isn't liquid. If instead of giving a startup time, you gave them literal cash, then it would make sense that you get preferred (instead of common) stock, to protect against the founder just selling the company immediately for the value of your cash (as was mlyle's point). If you give them your time instead, there's no risk of them immediately selling off "your time", and so it makes sense that you get common stock instead of preferred stock (at least for this one consideration).

The other general point I think you're making though, is that if we look at the value of the time being invested by a startup employee, their ROI is much worse than a literal investor in the company.

This is true, and somewhat unfortunate I think, but I think happens because VCs control larger amounts of capital and thus have more leverage. Both in terms of absolute amounts, but also how quickly they pay it out.

You taking a $400k paycut for 4 years and a VC investing $1.6M are numerically the same, but the VC gives up the $1.6M immediately, whereas you give it up over time, and can at any time decide to stop investing. When you first start, maybe your ROI is worse than a VC's, but three years in, maybe the ROI of the time your investing _then_ will have improved relative to a VC that tried to invest three years in.

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