Silicon Valley's best kept secret: Founder liquidity | Hacker News Reader

Silicon Valley's best kept secret: Founder liquidity

stefantheard.com

1,811 pointsmooreds914 comments

Secondary at Series A is very rare. Part of the reason more early employees don't get included in secondary sales is because of the Securities Exchange Act of 1934 14e-2. If you have more than 10 sellers involved, the transaction can be considered a tender offer, which triggers additional regulatory requirements and disclosures.

> As of 4 months ago I left a very successful stealth startup (which grew to 40M in ARR in two years) to become a founder and that is when it clicked - I expected to feel stressed, pressured, and the weight of all of the risk I was taking.

Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!

The bigger secret is that stock sold in secondary sales by founders and employees is usually common stock, and the purchasers will often get the right to convert this to preferred stock. This means that the company is instantly encumbered with a greater liquidation preference, without the increase in balance sheet to offset it.

How is that legal and not considered self-dealing and unjust enrichment? If I was a minority common stock owner in a business I assume I would have standing to sue for damages if a majority owner or officer made my position materially worse while enriching themselves in such a manner? Are you sure such a right is typically granted? I mean even the gap between 409A valuations and preferred valuations, as well as a huge amount of precedent, give a different material value to preferred and common stock. Giving that right out of thin air in a sale by an insider is effectively theft from common holders and I have trouble believing what you’re saying as I’m not sure how that could be kosher, if perhaps infrequently litigated. But is it really standard like you make it sound? That would be a very dirty secret and I expect would and should lead to litigation.

I used Founders Preferred shares to get liquidity at the A (for a now defunct startup).

In our case, we offered all vested employees the option of selling in the same round on the same terms.

I personally don’t recall any disclosure requirements at 10 people; however, we didn’t have that many participate so perhaps it didn’t apply.

In general, Founders Preferred does layer on the preference stack but also hopefully by a relatively trivial amount to the overall funding size.

Especially 5 years down the road when you own ~30% of a $100M company - but you know there's a decent chance you'll walk away with very little, if not nothing - while your peers are all making ~$1M per year working 6 hour days at FAANG with a life partner, maybe kids, and a sizable net worth that isn't going away.

Sure, you've got a decent chance to rocket past them in wealth. But they've got everything they really want. You might have foregone your shot at a partner to build a company to mostly profit someone else who did nothing but write you a check. If you do have kids, you'll be old as hell raising them. All you'll have is extra stuff hardly anyone cares about - except maybe you - if you're the type of person chasing down a decimillion net worth.

I hope these people truly enjoy their boats and their third homes in Aspen! It sure is a lot of work to get them.

You’re obviously overstating the FAANG SWE lifestyle.

But beyond that, it’s interesting you picked FAANG SWE and not startup SWE as the basis of your comparison.

The whole premise of the article is that startup employees are often sold a bag of goods about equity and upside that’s simply a terrible deal. Not terrible in the sense that it’s highly risky, but that it doesn’t even come close to compensating for that risk premium. Its sold as FAANG is low risk medium upside but startup SWE is high risks high upside but really its extreme risk and almost no upside because VCs find dozens of ways to carve it out. And people will say startups pay “market” compensation but they almost always mean base salary only, and the equity is such a horrible deal, it’s borderline fraudulent scam on the part of founders to sell startup employees on the equity as a fair deal.

As an aside, when people think SWEs don’t need unions/ professional associations, they think of teachers unions or autoworker unions where pay is standardized on seniority. Instead, we could have something where our lawyers in our camp could review equity terms and we could collectively advocate for things like liquidity deals. That will never ever happen if you only trust the deals the VCs and founders offer.

Or, based on examples I've witnessed, 5 years down the road you own 20% of a $1M company because your forecasts were off by an order of magnitude. You've gone through a couple down rounds, where investors took at least 20% each time. You feel obligated to your investors and employees, while there is almost zero chance of walking away with anything.

>while your peers are all making ~$1M per year working 6 hour days at FAANG

I highly doubt ALL your peers are making that much. And I think the people making $1M per year at FAANG tend to work much more than 6 hour days. You have to be very productive to get $1M per year.

"Sure, you've got a decent chance to rocket past them in wealth."

I might rephrase that as you have a non-zero chance. Odds are not that high and certainly not decent.

It’s a shame you were forced to take on this burden and not allowed to be a regular engineer like your peers.

> while your peers are all making ~$1M per year working 6 hour days at FAANG

Unless you are a manager, in which case you are working more like 12 hour a day.

You are completely detached from the real world. Even in super rich countries like the US there are a lot of people without savings, living paycheck to paycheck. Most/all software engineers outside the US can only dream of ever earning that much money. And yet here you are, worrying that you'll end up only slightly richer than people earning ~$1M per year.

> our peers are all making ~$1M per year working 6 hour days at FAANG

I think you overestimate median pay at the FAANGs by quite a lot.

Yeah I feel like successful founders natural ambition and optimism is sort of weaponized against them by the VC industry here. From a VC perspective it's worth playing the odds for moonshots. As a founder though, if you can create a $100M company that you own 30% of, you can probably create a $20M company you own 70% of with a much more realistic and sustainable growth targets.

I can't help but feel this would be better for the founders, the employees and the customers of the company. It just doesn't make as much sense for the investors.

Yep, don't think it pays to go the middle ground in this case.

There isn't much point sweating for another person's dream, go big with your own startup or rest and vest at FAANG and live life.

"mostly profit someone else who did nothing but write you a check"

There is quite a bit of work involved in reaching the point where you write a check for a Series A round. Also, the better VCs spend significant time with their portfolio companies.

> making ~$1M per year working 6 hour days at FAANG

Can you say more on this? I didn't realize FAANG TCO was quite that high. Maybe it's time to swallow some pride and take the adtech money after all...

Yes but that's still better than early employees who share a lot of the stress and responsibility of company building, with at best 10% of the upside, but more likely around 0.1% - 1% of the upside that the founder has.

> there's a decent chance you'll walk away with very little

Well, some founders care about their employees and their idea, and the idea of the start up failing is much more than just money.

Your comment suggests people making 1M in FAANG and somehow a stable job. Did you hear about the thousands of layoffs in recent years?

Ok, please argue in good faith here. Maybe 1 or 2 people who aren’t executives are pulling in that kind of money from FAANGs.

s/deci/deka/

Sir if you live in USA and do not take a dip into the VC money swimming pool, you are stupid, because crazy people with stupid ideas routinely get to $100 Million valuations, like no other place on earth.

Its like going to Disney Land and saying "Oh i'll just sit at the coffee shop". Some people are here for the ride. Some people like the 9 to 5. Like you, obviously. Why dont you go start corporate-drone-news.org, this board is for hackers and founders.

> Please let us all know how that's working out for you in 5-10 years. 4 months in and no stress? Must be easy riding from here!

Honestly VC-funded startups seem like a cake walk compared to actually starting a small business. Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque. If you fail you get acquired and get golden handcuffs.

If you start a real business you can expect to take on debt, and you'll be personally guaranteeing it because nobody cares about equity in your boutique ice cream parlour. Plus a 5-year lease (which you will also personally guarantee).

The most common endgame for a startup is slowly running into the ground until the money runs out and you eventually shut the doors. Failing your way into a happy acquisition isn’t really something to expect as a contingency, I don’t think.

Not that people with VC need defending, but:

Sure, if you magic up a startup with VC funds you suddenly have it easier than a small, bootstrapped business.

Startups almost never start with a round of VC though. There are almost always months or years of the same experience as a bootstrapped business (ie: extreme uncertainty, no money to pay yourself, etc).

Most startups don't manage to raise VC, and most startups that raise VC fail with no acquihire.

Running with VC funds? Oh god, that would be cakewalk compared to even just figuring out how to ensure there's food if you spend money on some necessities for prototype...

> Honestly VC-funded startups seem like a cake walk compared to actually starting a small business.

Make this about any brick/mortar businesses and the stresses multiply by another factor. If they're in a federally regulated biz (compliance) or an insurance dominated state (rates, inspections), then multiply again.

I one time tried to do a normal startup with 20-30 owners all financially liable. There are other challenges tho.

I don't know why you are trying to make this a me vs them situation. Both situations are difficult in different ways and they are all real businesses.

"Your biggest challenge is walking into a room full of rich dudes and schmoozing for your pay cheque." - Sounds like you are trolling or alternatively incredibly naive.

"If you start a real business you can expect to take on debt". ... Real business? Come on.

No one in this thread is saying starting a business is easy - ice cream business is debt funded because you have a very definitive range of outcomes. Venture funding is completely different animal - failing to see that limits the value of your comment significantly.

I often hear about these SEC rules that explain why individual contributors get fucked, as if that's a good excuse. Either the requirements and disclosures should be fulfilled and more than 10 sellers allowed, or the rules should change, or both.

Correct me if I’m wrong, but my perception of most startups at series A is that they’re not usually more than ten-ish employees, and even then, you’d expect more balanced comp packages for employee number 11+, no?

Where would the stress come from? You get a paycheck and there is no personal downside except opportunity cost (and perhaps reputation). You don’t lose any money if your startup fails.

The best startups have a concept which is summed up thusly:

“We all go to the pay window at the same time.”

It’s ok for founders to take a little bit of money off of the table if they extend that to their employees as well. Asymmetry is where things get weird.

I’ve seen many founders who got deep into the fundraising cycles without ever realizing they could take a cent out. VCs will constantly tell you to let it all ride, and sometimes that works out, but for most people, having a little bit of financial security while you’re trying to change the world is necessary.

The best startups figure out how to manage liquidity through financing in a way that aligns incentives, keeps the goalposts at the mission, while allowing their teams to thrive.

It’s about alignment. If everyone is pulling in the same direction you’re going to execute the vision. Whether you win in the startup lottery is up to the threads of fate, but alignment is the straightest path towards a result.

I have seen a lot of companies, a lot of rounds. I have known zero founders who have turned down an option to take money off the table (and zero A raises that offered that to employees). I love the idea of your universe, though.

All you’re saying is that in the contemporary context it’s exceedingly foolish to be an employee at an early startup. The VCs and founders have optimized away all the incentive. Eventually the message will reach even naive 22 year olds.

It happens.

I was offered the option to liquidate up to 20% of my vested shares at my last company's Series A. It was restricted by tenure though (3 years), so it wasn't available to everyone. In retrospect, I should have liquidated the full amount, but it was a new concept to me at the time and I was more conservative with the amount.

I more recently interviewed with a pre-series A company and they said that they'd include me in a liquidity event when I brought up compensation.

The very first startup I joined after grad school allowed all employees to cash out significant chunks of their stock in the Series A round.

Also Elon famously put 200 million of his own money into Tesla and SpaceX to keep it afloat, which is the opposite of cashing out early.

This assumes that the founders are aware of, or offered, the option. If anything this is an argument for why founders should be represented by a banker or lawyer at the closing of every investment round. Let the founders do the negotiating, but once it comes time to sign the papers, bring in the sharks.

  A: I’ve seen many founders who got deep into the fundraising cycles without ever realizing they could take a cent out.

  B: I have known zero founders who have turned down an option to take money off the table [...] I love the idea of your universe, though.

Fortunately, our universe is massive with varied different views. Even OP implied that they have experienced both sides firsthand.

> I have known zero founders who have turned down an option to take money off the table (and zero A raises that offered that to employees).

Have seen companies offer this to employee's

And companies that let employee's take money off the table at series A are also likely to be generous with meaningless titles; that is they will let early employee's call themselves founders.

VCs will go along with or sometimes even encourage founders to take a little bit out, but employees rarely don’t have the same level of bargaining power.

I’m sorry, I think the era of “change the world” motivation in tech was eclipsed by “make 42 tons of money” about a decade ago.

Along that line, I would be very surprised that there are founders who don’t seek an opportunity to set aside their nest egg to “de-risk”.

You say you have seen such guileless dedication to the founding first hand, can you share what industry or type of company? Perhaps I’m just exposed to the wrong crowd.

It's not in the interest of the VC that the founders have financial security. Well at least the type of VC's that have come up in since the dot com boom where it was not about building viable businesses but getting sold to the highest bidder when the founder is under financial pressure to sell they can strong arm him into easily compared to a founder that is financially secure and interested in building and running a business

It’s not binary. Enough financial security that they don’t care what their investors think, no. Enough that they’re thinking of how to grow the company rather than how they’re going to pay their mortgage, yes.

> It's not in the interest of the VC that the founders have financial security.

It's also not in the interest of the VC that the founders are worried about making their rent or mortgage payments, or paying off the credit cards they maxed out paying their AWS bills in the early stages of their company.

The VCs want their founders to be hungry for more, and see their company's growth as a vehicle for that. But they don't want founders to be stressing over basic human needs, either.

Any VC that would refuse to let you take some liquidity in these situations is not a VC you want to make a deal with. And if you can only find VCs like that, your company is probably doing poorly enough that you might want to rethink what you're doing.

It’s literally the opposite to what you suggest. Someone who hasn’t eaten for days isn’t thinking about eating healthy when they walk by a McDonalds.

Assymetry makes a certain amount of sense. Employees don’t take $0 for a long time and generally aren’t having as large a pay cut as founders afterwards. Most of the founders I’ve worked with have had the seniority to justify the top salary in the company and have typically had pay at or near the bottom. Someone operating at that extreme getting to trade equity doesn’t necessarily mean that everyone should get to.

Asymmetry is common in startups, though. Consider one of the complaints from the article, and discussed here: founders get to keep several tens of percent ownership of their companies (at least initially), while early employees get a small fraction of a percent. Founders are generally not taking two orders of magnitude more risk, or doing two orders of magnitude more work.

I think giving founders liquidity but not employees is maybe ok for series A: the founders may have been working for $0 for a couple years at that point, and may have taken out a second mortgage or ran up a bunch of credit card debt to keep things going. An early employee is not going to do any of that once they join, even if they're getting paid a below market rate salary. That is definitely an asymmetry! Getting some liquidity at the series A allows the founders to pay down debt and replenish their savings, financial issues that are probably directly related to their time working on their company.

But after the series A, founders should be able to pay themselves a livable salary. The founders and employees should be on much more equal (or at least comparable) footing when it comes to their regular income. By the time the series B comes along, if the founders are going to get some (more) liquidity, the employees should get some too. That only seems fair.

I agree with the core of your point, and would extend it to any post-IPO lock in periods.

>>It’s ok for founders to take a little bit of money off of the table if they extend that to their employees as well. Asymmetry is where things get weird.

Yeah, if the founders don't do this I wouldn't want to work for them (not that I'm the target demographic anyway).

It’s like trading windows and blackout periods for employee RSUs, but equity selloff on a schedule for the c suite.

That's not quite how it works. Certain people are required (or strongly encouraged) to sell on a 10b5-1 plan. These plans can trade outside of open trading windows, but they have a meaningful cooldown period before they go into effect and can only be entered into during open trading windows. So it's not necessarily "better."

That’s really about not falling foul of insider trading laws. Regular employees are free to set up limit orders within their trading windows (eg sell if stock hits $200) if they want. Can’t subsequently cancel it though! It makes way more sense to just sell on the day of vesting and then trade shares that you’re not restricted from trading. No tax or other reason not to do this.

Regular employees can also make scheduled trading plans. ETP.

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.

> 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.)

> 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 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.

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 :-/

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.

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?

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

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.

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.

> 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).

Many companies don’t get to Series A and very few companies get to Series B. Even if they do get to Series A or B, they won’t be able to raise the amounts you see in the news and have heavy dilution.

Very few founders have double digits percent ownership by Series B and Series C.

Liquidity of $400k or more is a lot and isn’t available for many founders.

All of this after 7 to 10 years of working 80+ hours week, no social life, loosing family, sacrificing health, taking less than $100k/year salary, constant worry of failure, dealing with ups and downs of employees, being a support system of everyone in the company while not being one for their own families, and no guarantee of success. All of this for seeing their dream come true because failure would be worse.

I think the OP should work on his company for more than 4 months and have more than 10 employees for at least a year to truly understand what it is to be a founder.

Also 20% option pool and exercising options up to 10 years are not uncommon.

Source: 2nd time founder.

> All of this after 7 to 10 years of working 80+ hours week, no social life, loosing family, sacrificing health, taking less than $100k/year salary

If you are taking less than $100k/year salary for 7 to 10 years while also absolutely no-lifing then that’s on you.

It’s true that early on you prob take ramen salary, but that’s for one or two years. You can prob scale to 200k by year 3 if your thing is viable. No-lifing when your startup is in year 5 is just a personal choice. If by year 5 you aren’t on a path of unicorn then prob it’s time to evaluate if it’s worth so much sacrifice or if you should run it as a lifestyle business (or just go do something else).

> I think the OP should work on his company for more than 4 months and have more than 10 employees for at least a year to truly understand what it is to be a founder.

Have you been an employee in a startup? Because in my experience it has a lot of the downs of the founder, but none of the ups.

I often think about how if more people understood the median cap table life cycle from Seed to Acquisition/Shut-down/IPO, there'd be half as many VC-funded companies and twice as many bootstrapped companies every year. Thank you for sharing your experience towards that goal.

Unless you're doing some niche b2b thing where you have no personal connections (in which case, why are you doing it at all?), the differential financial returns of going with VC are often negative, if not neutral. The main diff is you can "fail up" into the investor class if you prove your worth but the business goes sideways. But even that is a dissatisfying career for most founder-type people.

To whoever needs to read this: start your own company, avoid raising money.

I don't the the author is saying that founders don't deserve 400k after 7 years of hard work.

He is saying that it is sketchy that this is hidden from employees.

After the Series B for my last company the three founders owned something like 45% of the outstanding shares, and when they sold took out something like 40% of the price. What were the rounds like that led to less than 10% after 3ish rounds?

> exercising options up to 10 years are not uncommon

10 year expiration is the standard, yes, but only if you stay with the company. Most still kill your options 90 days after you quit or are laid off or fired. There's been a small but noticeable trend of companies not pulling this garbage, including the article author.

> I think the OP should work on his company for more than 4 months and have more than 10 employees

Yeah, I thought it was funny that the author seemed to be speaking so authoritatively after so little experience as a founder. I've never been a founder myself, but I would put much more weight behind the words of founders who have been doing it for years and decades.

Look, I've worked for 5 companies, 1 of which I knew would never sell and I had inklings that one other probably wasn't going to sell and instead was a lifestyle business for the founders, and the other 3 had successful exits. I won the lottery 3 times but I quit the game because I was tired of making VCs and founders rich while taking home breadcrumbs, comparatively.

My first startup I walked with a paltry sum and the owners suddenly went from being doctors with a side hustle to private investors. That was my first warning sign and really drove home the need to invest in myself because it certainly wasn't going to be someone else doing it, despite the talk of changing the world. It was really, really obvious that the payouts were stacked in one direction and it certainly wasn't on the side of employees, early or not. I still enjoy working for small companies, but the hype and bullshit are really tiring and so very cultish. I'd really suggest treating the startup life like a scratch lottery ticket, because that is all it is. If you win, you're gonna get paid but it won't be life altering money, just like a scratch lottery ticket. Plan around it being worth zero and go in eyes wide open.

    > Plan around it being worth zero and go in eyes wide open.

This is the best advice I have seen on HN about start-ups. Note: I have seen it repeated multiple times.

> the owners suddenly went from being doctors with a side hustle to private investors.

Did the owners sell the company or get some sort of payout? I'd imagine if they were making decent money they'd have kept the business alive, right? Would you be okay sharing the name of the place?

I've worked for six companies, won the lottery once, and it was life-changing. I'm not bringing this up to brag or to suggest that it's common, but to point out that it is possible.

And frankly I think as time goes on it has become and will become more possible for more people. In part because of people like you who bring up all-too-common stories of how their founders got big payouts, but their employees only saw breadcrumbs. As more and more employees become educated on this stuff, the more pressure it puts on companies to offer better deals to their employees. We have a loooong way to go before my experience is common -- if we do ever get there -- but I do think it's possible that we could get there.

In my 20s I joined a couple startups as "early engineer" or "founding engineer".

I quickly realized those are the absolute worst positions to be in. You take almost as much risk as the founders but almost none of the upside. One startup died, the other one sold for 100m$. Out of that I saw 400k$ as an exit. Not too bad but even with that exit I ended up making way less than if I joined a FAANG. In both cases the founders made millions (through the exit or through liquidity)

Now I'm a realist. Either you create/found a startup or it's not worth joining one as an employee. You have way more upside at a FAANG/pre-IPO mid-life startup that already found a great product market fit.

Essentially, founders are pushing a crazy narrative of Startups being worth it to early employees because they need them. It was sometimes fun but I wish I just joined a FAANG like most of my friends, I would have a couple millions by now if I did.

I second this. I took a large salary cut to be 1/2 of an engineering team at a seed stage startup for ~1.25%. After 2 years of pretty grueling work I left to go back to big tech for 3x the pay. I wouldn't call it a total waste of time in the sense that it made me a better engineer, but it certainly wasn't worth it financially. The company still exists and has had a relatively successful series A and "A extension" but I don't think my equity will ever be worth anything.

I really wouldn't recommend anyone work as an engineer at an early stage startup unless you're getting ~5% or more (this would be unprecedented) because the risk is barely less than the founders and the pay is generally terrible. Series B or later (growth stage) may be a sweet spot where the salaries are decent and there is still significant equity upside without the insane hours.

Founding engineers are so underpaid relative to founders. I’ve seen it be founding CTO with 40% and founding engineer with 1%. It’s ridiculous and we should not accept it as the standard.

A few good early hires can be just as valuable as good founders.

> Either you create/found a startup or it's not worth joining one as an employee. You have way more upside at a FAANG/pre-IPO mid-life startup that already found a great product market fit.

I'm glad you mention the pre-IPO mid-life startup and not solely trot out the usual "work for a FAANG instead and make $600k/yr out the gate" nonsense. There are quite a few pre-IPO mid-life (or even vaguely-but-not-super-early) startups out there that are doing well, growing more or less sustainably, will pay you a market-rate (or even above) base salary, and give you a solid equity package that has a much higher likelihood of being worth something than those early-stage startup options have. You might not make $600k/yr at a FAANG, but most people at a FAANG aren't making that, and many smart, talented people won't pass a FAANG interview anyway.

How do the startups that you found flourish without employees?

I worked at a preseed company recently. Here's my experience:

- Work 9 to 7 everyday. 6 days a week.

- People are working 9 am - 5 am in crunch time. Then joining again at 10 am.

- Monetary Comp is exactly market average.

- Equity Comp is even more paltry since founders raised at a huge valuation.

- Founders make unrealistic promises. Eg: It took a competitor with 7 people, 3 months to make a product. The founder told us Saturday that he wanted it built by Monday (with 3 total devs).

- Founders message you 24 x 7. If you don't reply, there's a "serious discussion" to be had next time.

- Non Accomodating of anything because "It's a startup".

I left the place after 10 weeks. I saw 3 people leaving the 6 person company in these 10 weeks. The ones who stayed were under heavy financial stress or had drank the kool aid.

it's important to figure out where to set your own boundaries. people out to exploit you will seek to see how far they can push. congratulations for leaving.

one thing that catches out some junior folks is that they may believe this kind of behaviour from bosses is normal and unavoidable as they have only worked for exploitative bosses at places with toxic cultures. you can do better, you're worth it. get out. find a more mature company with professional managers, where it's normal to leave the office on time and turn off all your work comms and leave all work-related messages unanswered until you're back in the office and getting paid to think about work again.

This is a great post. No need for the throwaway account!

   > Founders message you 24 x 7. If you don't reply, there's a "serious discussion" to be had next time.

That one is my favourite.

Honest question: do people with young kids do these jobs well, or at all?

I'm sure the answer is sometimes, yes. But, as a 41-yr-old father of two kids (6, 2) and a wife in PE, the pace and stress strike me as contradictory to being present in a marriage, being present with my kids, managing my health, etc.

I'd love to hear how the people with families manage (or fail) this pace?

I've worked for a startup similar to that, though it was series A when I joined. It was gross. I stayed there for nearly a year and a half because I did genuinely enjoy the work and my peers, but ultimately the founders ruined the experience for me with their evasiveness and lies, and their creepy later-on focus on "loyalty" when the company's prospects started to go downhill. The last straw was when I was told by another often-in-the-know employee (whom I trusted) that one of the founders had found out I was interviewing at another company, and he called someone he knew there and told them not to hire me. Obviously I don't know for a fact that's what happened, but it sounded believable based on the founder's other behavior, coupled with the seemingly-fantastic interview experience I had.

That hurt, but I realized I had to do a better job of treating interviews as a two-way street. The company was interviewing me, sure, but I also needed to interview them, and learn what I could about the kind of people the founders and my peers were. I also needed to understand up-front what would be expected of me, and how flexible they could be with my time. The next startups I worked for were much better, and I never felt exploited.

Sorry if founders already raised a huge valuation, why didn't they hire more devs?

I'm sure what can be done with 996 style slave labor with 3 devs can be done with 6 devs working 9 to 5. It's not like they couldn't afford the salaries (and you mentioned they weren't paying that much anyways).

I recently left a long career in FANG to roll the dice on an early startup. I was pretty surprised by the uneven terms between founders and early employees. From what I could tell the early employees takes more risk than the founders because they don't get that magic token dollar turning into their share of the founding equity event and have to pay the fictional valuation of the seed to convert their options. Depending on how hot your startup is that can be a lot of money.

Anyway that ended in tears, but I got what I was looking for from it. A look under the covers of the hot VC backed startup roller coaster. I may be getting old and cynical, but it looked considerably more exploitative than what I saw at Google. Obviously depends on the character of the founders and leaders, but the structure seems to be setup for toxicity.

I worked at a Series A startup as an employee, and wont be doing that anymore. Early engineers have all the risk (lose job the second things go bad) but little upside. They would offer 500 options, or 1000 options, or 30,000 options -- but when you look at the prices, that was worth $100-$10,000. Why would anyone take all this risk, and lower base salaries for that lottery ticket?!

Secondly, they wont share the cap table, so you dont know what the denominator is. 30,000 shares of What!? No one would tell you. You should run.

Third, the VCs installed a buddy from SV as CEO who was creative with revenue. Great -- so they make their bonuses based on creative revenue, but the company gets saddled with VC rounds they have to dig out of w/o showing real revenue growth. Once you get SV insiders being placed into the company, often with their entourage of cousins and neighbors' kids as Director of HR or Director of Finance -- RUN FAST. The company is being strip-mined for cash, while Engineers slave away trying to code their way out of the wreckage left by locusts.

The C-Suite operated in a separate tier of the company with a heads-i-win-tails-you-lose setup. You could tell -- no way you are all driving Tesla Plaid on a "startup salary" -- the "startup salary" was for suckers, engineers, and those not in the VC-back-scratch loop.

My advice to everyone -- if you want risk, be a founder. Not Engineer #1 or #10. If you want balanced risk, go to a Series C or D company where you dont have the risk of fake accounting. If you want money, go to a public company with real accounting rules, visible revenue, visible liabilities, and more accountability.

I did a similar thing to you. However, I do feel like cutting your teeth as a "founding engineer" at an early startup has 2 major benefits:

1. You get to see what it's like under the covers, as you said. It's not nearly as glamorous as it looks from the outside. And yes, as an early engineer, you share in a lot of the downside without nearly an equal share of the upside.

2. You get to leave. Unfortunately, the startup I joined entered a tailspin. But, my name wasn't attached to the company, and I didn't have a fiduciary obligation to our investors. I had a lot of "stake" myself after putting in years of 12-hour days, nights and weekends, but at a certain point I saw that my career was actively being harmed by staying. That "founding engineer" role on my resume got me the job I'm at now, at a level that skews higher than my YOE.

Do those two points mean you should get a fraction of the equity (or rather, a fraction of the options) as the founder? Honestly... maybe. I've now seen a few founders fail. It can really be a career-killer.

There was an oft-repeated response back in the day (but gladly rarer now) when you dig too deep into employee benefits at startups: "If you're offered a seat on a rocket ship, don't ask what seat!"

To this, I usually reply "Unless the seat happens to be in a stage that gets jettisoned before reaching orbit".

I have been working in multiple startups, I've come to think that it's a Ponzi scheme for the founders.

Generally underpaid and quickly toxic. It is an experience, but it's important to know it.

As an engineer you really have a finite amount of good working years, and accepting startup salary vs big tech compensation is a bigger risk than founders are willing to generally admit.

I almost left for an ultra early startup, still running on seed money. They offered a typical SDE2-Senior salary + 1%. I was kind of offended. I'd be inventing their core technology (which didn't exist yet and which their CTO wasn't fit to do) and probably interviewing every engineer and growing them.

Even IF they achieved a 100-300M exit, after dilution I would be compensated at best par with a FANG Senior over about 5-7y.

I was pretty excited about joining and would have been all-in. So I asked for 2-3% and was denied. Looking back, I'm glad because even 3% isn't worth it. Not when the founders are taking 10x.

I did early employee several times because I didn't know any better, didn't have anyone around to tell me not to. I won't do that again. All the risk, none of the reward. 1% of $10-20M after 4+ years of 80hrs/wk is less than the difference between a startup salary and a good salary over that same time.

most i know who work as eng #1 (non founder), are new grads who couldn't get into FANG. So mainly just looking for experience/inflated job title to boost their resume.

So not like these startups are getting top senior talent who obv will want to get PAID.

I've worked at seed, series A, and series B startups, and I think... it just depends. Only one time (a series A) did I feel exploited. That wasn't because I was an early employee at a startup; it was because the founders were sketchy and lied to us about what was going on with the company's fundamentals.

I frankly don't mind the idea that a founder is going to see orders of magnitudes more cash from a successful exit than I will, though I do think it would be great if that gap were closed a bunch.

Ultimately I worked at startups because I thought the work would be interesting, challenging, and educational (it was), because I wanted autonomy, influence, and impact (I got those), and because didn't want to deal with bureaucracy and many layers of management (I mostly didn't have to). In contrast, working at a FAANG sounds not particularly enjoyable to me. But I've never done that, so maybe it would be more ok than I think. Then again, I did join a 50-person startup and stay until it became a 10,000-person public company, and was pretty unhappy there for the last few years of my tenure, so I think it's pretty reasonable to expect I wouldn't be happy at a FAANG.

I say this to point out that not everyone is looking for the same things out of their employment experience, and that's totally fine.

You have the current unicorns, basically anything from about the time YC started, and then you have the old school unicorns.

For comparison, Microsoft IPOed in 1986:

> The company's 1986 initial public offering (IPO) and subsequent rise in its share price created three billionaires and an estimated 12,000 millionaires among Microsoft employees.

https://en.wikipedia.org/wiki/Microsoft

I would really, really want to know if anything more recent has gotten to that level of widespread distribution of the riches.

I kind of doubt it, such an event would probably be considered Communist by modern standards :-)

I completely disagree on the risk. What was the opportunity cost for you in founding? Are you taking a salary comparable to your FANG comp? Usually the early employees are getting paid a lot closer to their market rate than the founders are.

This and my own experience with employee stock options led me to reject any work for startups that offer stock options. It is a way to make you work hard and allow to be treated like dirt for less money. The lowest point was having to walk across town to the office to eat energy bars from the office kitchenette, because I could not afford a bus fare or food as my pay was delayed by a week over Christmas. Meanwhile, the founder was holidaying in Dubai, driving a BMW X7 to work, and showing off a house with a small park and a pond bought in leafy Berkshire. Employee #1 treated the rest of us like dirt. I got laid off in a round of cuts just before my options kicked in and thought it was unjust, but a year later the company was sold to a competitor and the investors got a nice return, the founder got another pot of gold, and the employees with stock options got nothing, because it was a private sale and not an IPO. Employee # 1 was in a bit of a shock allegedly.

I don't believe a private sale entitles one to ignore a stock options legal rights. What are the relevant details here I'm missing?

Working for an early stage startup with no stock options carries its own risk.

You want insurance against the case in which it actually rockets to billions in valuation (even if extremely unlikely)

I was mentally, physically and emotionally worn out when I left my previous startup after being an early employee. Despite that I really wanted to stay and be part of what my friends and I were building. Had I had the chance to 'de-risk my life' with some equity to replenish my empty bank account, which was empty from taking an early employee salary, I may have been able to stay but in the end I had to get out.

Getting out for an early employee after funding rounds is expensive because buying options can hit you with massive tax bills on top of the cost of buying the options. Worse, the stats aren't great for a chance on return. Your lotto ticket gets expensive and risky as soon as you decide to leave.

Articles like this one hammer home more and more to me how little VCs actually value early employees. Paying out founders to stay is a strategic move. Keeping them is worth it because they are the face of the company and turmoil at that level hurts their payout. Burning out early employees is not a concern because you can just swap them without drama. In fact, with the way options are structured and the 'industry wisdom' to hold off purchasing, it feels like a strategic move to burn out early employees since many employees that are forced out often can't even buy their options. They are left with nothing after all that work and risk. From a purely cynical view this is a great thing for VCs since now the company got all the benefit of an early employee and just lost all the costs.

I don't know about the other three points, but I can guarantee you point 1 of 'right sizing perceptions' is wrong.

This is the model, you can see a lot of early stage founders looking for a "founding engineer" which is really just an excuse to pay founder salaries for 1% of the company rather than 50%. If the founding engineer quits without buying their options, then the founding team recoups the 1% equity. Its a recipe for the founding engineer to be burned out and pushed out.

the lottery ticket analogy doesn't quite hit the mark imho.

I've been seeing really shitty vesting schedules more often these days. a year in an early stage startup is often more intense than years in larger companies, yet they feel the need to push vesting schedules like 5/15/30/50 on people.

even if you do stick it out and exercise those options and eat the tax burden, those shares can still be ignored in an acquisition or diluted into oblivion in an IPO if the agreements are structured to allow that.

with a fat carrot dangling at the end of year four and the promise of an IPO Soon™, a lot of people will be more than happy to ignore important parts of their lives and financial well being for the chance of maybe, just maybe, getting access to that lottery ticket.

I think a better analogy might be like gambling in a casino. investors get to write the rules and hold all the leverage. the worst places are mobbed up, the rest might be legit but either they have every incentive to keep selling you the dream of winning big. in all likelihood, if you keep making that bet you'll walk out worse off than you were when you walked in.

if a startup or VC truly gave a shit about anyone outside the c-suite, they'd have an employee ownership program of some form and assign actual equity, not just options. I've yet to see many of them do this though because founders are the most likely ones to be gambling in those kinds of casinos.

> Getting out for an early employee after funding rounds is expensive

Early exercise and 83(b) is a must, or forget about it.

When considering joining an early startup ask if they will allow you to early exercise as soon as you start (well, it'll be after board approval but as soon as that happens).

If they don't allow that or if the price is too high for your comfort level, don't join that startup.

The irony of being an early engineering employee (and any engineer really) is that the better job you do the easier it is to replace you with someone who can maintain what you built. Accepting a below market salary and then doing a great job is a huge risk.

I’m really sorry to hear about your burnout, I hope you’ve made a recovery and are at a better place now.

I thought it was the prevailing wisdom here on HN that being the first employee almost always is bad for the employee. You’re right, the cards are stacked against them

In my experience there has never been a good time to be a founding engineer even in companies that have later made it. It's much better to join the company 1-3 years prior to IPO/Sale where you get many of the benefits but significantly less stress. If I had worked at startups I would have been taking a 30-40% pay cut compared to the roles I did work and none of those startups have gone anywhere with most crashing and burning.

I can also guarantee you points 2 & 3 are pretty wrong as well. Funny (and also sad) how different peoples realities can be. I have been worn out sitting on both sides of the table to tell you the truth. (One thing I will say is that within VC, the vast majority of the folks actually doing the work are sympathetic and helpful to companies, working with early/senior employees, but it gets lost up the food chain so to speak and there's usually just one or two people making decisions at the end of the day about a particular deal or a whole portfolio- and these people are generally very self-interested.)

90 day exercise window is a big part of the problem here.

If you were early, why didn't you purchase your options and file an 83b?

> how little VCs actually value early employees

Do they even pretend that they care about anything other than money? Like... ever? Maybe to family and friends (not even sure), but I mean professionally?

Posting from throwaway so I can be very open.

I joined a YC startup as engineer #1 with close to $200k salary and 2% options vesting at the usual 4 years, with a 10 year window.

I feel like this was bettern than usual, and for a while felt like I struck an awesome deal, but as time went on I realised I was building everything single-handedly, while getting (at best) 2%, which started to annoy me deep down.

Over two years in I'm considering quitting, for multiple reasons. I still believe there is a good chance of getting to an exit at some point, but I don't like the vibe and culture here, and honestly between cashing out 1.X% and cashing out 2% I don't see the point.

If I had been given a much higher chunk (>5%) there is a good chance I would've stayed, so we'll see if they value me enough with a counteroffer when I give my notice.

All in all, and reading through all of this I would never join a startup under these terms again, if I'm engineer #1 then I'm getting at least 10% and essentially being a cofounder. Otherwise I want a salary that's on par to a bigger company.

10% to a founding engineer almost never happens. You’re in cofounder territory. There really are 2 reasons to stay in the startup,

1. The startups reaches a great valuation. If it reaches a 1B valuation, then even assuming 50% dilution, you have 10M for 2+ years of work, almost 3-5M per year TC! Yes your founders are earning much more but comparison is the thief of joy, you just got a salary that no big tech company could match (unless you’re in C suite)

2. The startup doesn’t reach a large valuation but grows rapidly making you in charge of a large group. This too is useful, promotions in big tech have a very standard time schedule, it takes 8-9 years to reach staff (or never) and then 4-5 years for every subsequent promotion if it happens. With a startup, if as a founding engineer you gain experience leading a team of 50 people, you’re scoped for staff and above in your next job hop. Of course you need to sell this in your interviews but I’ve seen this happen and it can be worth it, if you played your cards right.

If none of this is possible, you should leave.

What I don't get is that you are engineer #1 but you say the vibe and culture are bad.

Why didn't you build a better culture? I very much doubt that the management team took all the hiring decisions on their own after they got you on board. I'd say the most important part of my job as #1 was to hire and build the team.

throwaway acct here. I left a flagship tech company with $500k total comp and joined a startup as engineer #1 with 5% options over 4 years. My salary is current $120k and I'm losing money each month, although I've been promised that will changed as soon as we raise more.

We are going to raise a Series A in the next few months. I know a little bit about this stuff, but not enough that I'm confident in exactly what to expect over the next few years, nor enough to know that I've negotiated properly (thought I did lol) and are protecting myself enough. This thread is scaring the shit out of me. I have a good relationship with the two founders and not afraid of being candid with them. Would appreciate any advice.

This sounds like a bad job and you should find another.

At some point you were happy with $200k and 2%. Now you aren't. I don't think there's a bump that they could give you at this point that would make you want to tolerate the shit that's bad about the job.

Note that this is a bad job. Startups are more prone to creating bad jobs.

The math for employee #1 at a startup is almost never ideal if you're being completely rational about expected value. That is, I think, a separate problem than you're dealing with.

If you're building everything singlehandedly, then you have leverage over your employer and investors.

You should use that leverage to renegotiate your pay. You'd lose nothing because you're considering quitting anyways.

Compensation wise, that’s a great startup job, especially with such an insanely generous exercise window. Where I think you maybe went wrong is, if you are building everything, it’s not a collaboration with the founders, which is half of the fun of everything.

I suspect it’s more about the culture than the numbers. You say on one hand, oh I’d probably stay for 3% more, yet, you don’t see the point to earn another 1%. Your salary is pretty good man. Meanwhile they are burning $250K every month into smoke

10% is not realistic. That’s the whole employee options pool. I mean imagine if at your current job, someone worked there for a year before you, then walked away with more than your entire current equity grant, never to be heard from again. That’s what you’re describing.

$200k? Do you live in a place where this is considered a bad salary?

I'm in a really similar position to you. I'm currently engineer #1 at a seed stage startup making $155k with 1.5% equity. But a year in I'm realizing I've built their entire product from scratch while they do sales and outreach. Obviously those things are important but I'm a leg of a tripod holding the whole thing up and yet I have a fraction of the equity they have. Makes no sense.

I've been thinking about the equity split amongst early employees. Our startup is reserving 20% of equity for early employees. How about a division by 2 every time? First employee gets 0.5 x 20%, second employee gets 0.25 * 20%, etc.

Early employees are better rewarded for the risk, but later employees (e.g. #10) will get basically nothing. It's all about tradeoffs

out of college directly, would you recommend a similar position? looking for early career options

how much effort are you putting here wrt to your previous job

This post has managed to piss off everyone: employees who didn't realize founders were getting liquidity events while they're still sitting on their more-often-than-not valueless equity, and founders who feel they've earned it and don't like the implication they haven't.

The mark of a good post!

Good point. Its interesting to see the comment thread here.

The part to me that I see as surprising is dismissal of the stress of taking VC money and being a founder. It is a job thats incredibly demanding. Which is eye opening to me that that's how people see it.

If it was so easy why aren't there more of them and more companies?

Early employee is tough - unless the company is on a significant trajectory the options should be valued at zero. That said being an early employee has other benefits such as being part of an interesting team and work problem. Definitely not a cushy job though (and nor is a founder) - both are significantly hard and for a certain personality type.

Everyone else go join a FANGG and get paid if thats what you are looking for comfy life benefits.

It also reminded me about another post I read here, probably a few years ago, that outlined how stuff works. And my takeaway from that one, was yet another way that early employees get shafted, as they get diluted a lot, and other employees being brought on later end up with a better exit in the end. But I can't remember the details or find it.

You managed to make both parties sound like absolute tools.

If I hadn't found your comment I was going to say this is the best HN I've seen in months.

Oh yes it's time to shoot the messenger.

This is the reason I didn't check the comments until a couple of days later - I didn't expect anyone to read this and I also figured everyone would be pissed haha - the response is more mellow than I expected for a semi-controversial HN thread though!

It also pissed off some investors, so everyone is pissed off - I might write about something a bit more positive next time :D

Yeah, this one lives up to headline!

The founders I've known were already wealthy when they decided to do a startup. They aren't at risk because even if the startup falls through without making a cent they have enough money in their bank account to withdraw $200k/year for thirty years. There's no risk there.

Most can even file for personal bankruptcy and then lounge around in their parent's home for a bit. (Or a house in the name of their spouse-with-a-prenup.) My parents didn't have a garage for me to found a business in.

When people helpfully suggest, why don't you start your own business, they usually have a substantially bigger than average support network and liquidity to begin with. I never get those suggestions from people who've actually experienced hardship due to job loss or financial stress.

Founder liquidity is wrong -- and not because employees don't get the same deal.

It's wrong because it is NOT uncommon for a founder to take chips off the table sometimes enriching themselves to the tune of millions only for the startup to then "fail" -- either go bankrupt, sell for peanuts, or sell for only a modest multiple.

You're not done until you're done. But founder liquidity has now become a path to getting rich when the outcome of the company is still unknown and up in the air. If venture backed founders don't want that risk, they should start bootstrapped companies.

At a minimum, there should be a cap on it (not % but $), and yes, it should be extended to early employees too.

When is the outcome 'known'? Only when the business fails?

I always thought there was another reason for VCs encouraging founders to sell shares: giving them a taste of wealth. If you're a founder that sold 2M in stock a year ago and a 200M acquisition offer comes along, you'd be less tempted now that you appreciate the difference between small millions and big millions.

If you thought you had a real chance of going much bigger, having cash already makes you more willing to take that risk. And since VCs tend to make most of their money off a couple very big wins, it's worth it to have founders that won't settle for less than billions.

> another reason for VCs encouraging founders to sell shares: giving them a taste of wealth

VCs are wealthy. Some of them weren't born wealthy. The best among them recognise that removing the worry about e.g. paying rent will make a better CEO.

Nice article, but it is wrong about liquidity events at WeWork. The author only discusses a tender offer that fell through at the end of 2019 after the failed IPO and collapse, implying there was nothing ever before.

There was a tender offer in 2017 with the first SoftBank investment, and again in early 2019 (pre IPO attempt, closed in April) associated with the second investment by SoftBank. It is possible there were earlier events, but I had joined in 2015.

That isn't to say things were roses; I know many early employees who, in the lead up to IPO, exercised their options and took enormous loans to pay AMT and were left in a terrible situation.

Thank you for letting me know about this - I searched for other tender offers or liquidity for employees of WeWork and couldn't find anything (and the 2 former WeWork employees I know joined in late 2019 / 2020 - so they had a pretty terrible experience)

I will re-work that section so that it's factually correct

I was aware something along these lines was going on when a profitless not-quite-unicorn (and still private & profitless 6 years later) startup founder bought the nicest penthouse apartment in my building some years ago... and then spent more money gut renovating it.

It wasn't Adam Neumann sized liquidity but certainly mid single digit millions at least. His company meanwhile has floundered with wave after wave of layoffs post ZIRP era.

I wish I had known so much more about this before joining a hot AI startup a few years ago. It raised its Series C at $850MM valuation. The business was doing terribly; investment was exclusively speculative with no business success to speak of.

The founders made tons of cash. Layoffs ensued. They're still kicking; they've pivoted to Gen AI which has given them new life. I had no idea how terrible the deal was. I regret so much about that time and the opportunity cost of joining that place.

Founder liquidity events are done in secret in startup land. There's a simple reason for that.

It's wrong.

Startup employees, especially early ones, take on most of the risk that founders do. They take pay cuts. They work insane hours. They sacrifice.

And they have the same liquidity needs, too.

It's wrong to make them wait a decade for a fraction of the liquidity that founders got in the Series B.

It's wrong to force them to absorb the risk of the Series B, C, D, E, F, and IPO. All while the founders were set for life years ago.

If founders are going to take money off the table, they should extend the same liquidity offer, pro-rata, to their employees. Period.

It's also wrong because it's not the founders work in isolation that is providing the liquidity opportunity in the first place. The entire purpose of a joint-stock company is to align incentives for all shareholders to benefit from the value creation of the company. Founder secondaries are a work-around that hack money into the pockets of a couple people off the back of other's labor instead of collectively enriching the group performing the labor.

I don’t understand the framing here, where they need to justify why they get paid. They created and secured a thing and sell off chunks of it along the way when it suits them. What’s strange about that? If you buy a cheap stretch of land in the middle of nowhere and develop it and sell pieces of it off, that’s just understandable.

When you come on board as an employee, you’re just not in the same situation.

One under appreciated dynamic that has changed is that companies with limited revenue/PMF are raising more money at higher valuations. This mean that more early employees are being hired into less certain, less profitable situations, and the equity they are getting is a smaller percentage behind more liquidity preferences.

E.g. There are numerous AI startups I’ve spoken to in the past year with negative gross margins, 8 figure raises, and >100x ARR multiples. $1mln in paper equity in such a company is probably intrinsically worth <$100k.

Being an early employee at a startup right now is a really bad financial decision imo

> Founders often feel guilty that they are getting liquidity (they shouldn’t)

Well they should not feel guilty that they are getting liquidity, but I think they should feel guilty that their employees get pretty much nothing in comparison.

> Investors, founders, and employees all believe that founders are taking more risk than early employees (this isn’t true once founders have exclusive access to liquidity)

As an employee in multiple startups, I can tell you that I never thought that. One startup went well, the founders got rich and I did not even compensate the salary compared to being in an established company (and I'm not even talking FAANG). When the startup goes bad, then the employees are screwed as well.

Employees actually have the risk of getting fired, of being lied about the finances of the company, etc.

I've read that Sam Altman's net worth has ballooned from hundreds of millions (mostly tied up in Helion) while at OpenAI to billions, and that despite all his protestations of not making a penny from OpenAI, he also has/had a $10M investment in the (~100x profit capped) for-profit part of OpenAI...

Given Altman's slippery relationship with the truth, I have to wonder if his sudden significant increase in wealth, if true, is due to having participated in an early "liquidity event" as the article describes. Did he sell part of his shares to Microsoft, perhaps ?

He was rich before ... he has a couple of villas

The situation I recently went through reads like a horror story:

> was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground.

> company is a breakout success, raises a large growth round.

> founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity.

> founders start thinking about early employees as "problems" because they have too much equity and could easily hire multiple FAANG engineers for the equity comp they're paying the early team. push all early employees out of the company.

> horrible ego-based decision making such as this kills the company culture and runs the company into the ground. company is a mess, stock is now worth significantly less.

---

> early employees have to pay money to exercise their stock options which are worth millions on paper. early employees have to front money to pay taxes on the capital gains on the stock.

> founders have pocketed millions, off the backs of other people's work, while the employees who built the company all owe huge tax bills and have no path whatsoever to ever seeing liquidity with the floundering company.

> all of this is because the employees did their jobs too well, the company grew too fast, and the founders egos got completely out of control.

To be blunt, situations like this should be illegal. joint-stock companies aren't slush funds for three people to personally enrich themselves off the labor and capital investment of others, they're supposed to be entities where all shareholders participate in the upside of the value creation together. Until there's some sort of legal framework for pursuing class-action lawsuits against founders who defraud their employees like this I don't think this situation will ever get better. There are already laws against self-dealing transactions by company executives, I don't see what is different in cases of extreme founder liquidity off the backs of other people's work.

This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one.

I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us.

Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales).

I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth.

One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop.

I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX).

I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations.

Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.

If we talk about stock options, the company is still private, and no stock was issued.

Paying taxes on options for stock that may never materialize, or never be worth much, sucks.

I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.

I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.

employees aren't shareholders

they get options, not equity

personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!)

and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!

Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.

I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal.

I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?

> Why is it a secret that founders get liquidity in many venture rounds? Because it undermines the narrative of the founder who is "all-in." The story of the founder who mortgaged their house and lived on ramen noodles for years is compelling.

A lot of startup compensation seems to rely on people not having transparency and honesty. The founders, investors, etc. all have very different risk and reward situations compared to typical employees and even non-founder executives. But for most it seems like a raw deal compared to working at a big tech company, unless you’re lucky and strike gold at a place like OpenAI or whatever.

Another area where there is a lot of obscure but important detail is in the cap table, stock plan documents, and so forth. If company financials and cap tables were transparent, and if it was clear the various ways in which a company could screw over employees through various clauses deep in their documents, no one would take those jobs.

This is a solid argument to motivate startups to build confidence on employees through any of the captable solutions available out there

I must be an idiot, I've been a cofounder or first hire in 6 startups (2 successful) over the last 25 years and have literally never been offered secondary during a Seed or Series A or B.

You don’t necessarily get offered it, you demand it as a term. If it’s a “hot startup” you pick and choose your investors so if some don’t like it they can walk.

Secondaries have become more popular over the past few (5?) years but you need to know to ask.

It depends a lot on the startup. I have similar number of startup experiences, and only one had early stage secondary sales ( but those were even for non founders ). Mainly money comes from IPO or other exit.

How has your time in startups panned out? Were those 2 successes worth the failures?

I think most employees are mostly well aware that founders take a money off the table in every round, and I think that it absolutely does negatively affect morale.

Only a small percentage of tech companies raise a series A or beyond.

To me, this just seems like a capital-efficient alternative to the founder increasing their salary that could be negotiated. I had no such perception that this was some “secret” thing, I assumed it happened since you can do whatever you want if the investors and founders agree that it makes sense.

This whole thread is leaving me very confused. Series A is the first priced round. You're saying only a small percentage of tech companies raise a priced round?

It is a bit funny how founders get the special access at a lot of companies. Not all places work like that, but it seems disingenuous.

As a founder with multiple years of experience I can say that this post and a lot of other comments are coming from people who don't understand the life of a founder. It's not so much about risk. My peers earn 5-10x my salary. I'm paying my employees more than myself. I have to provide for 3 kids and we have a lot of debt on the house. I'm working day and night, 24/7. I don't like the phrase "taking money off the table". If I can sell some equity, this is none of your business. I started this company with my co-founders. Start your own company and try reaching Series A. It's almost impossible. Most people are not capable of getting there.

Aren't most early employees also working very long hours for 1/4th the pay and maybe 1% equity? A lot of them also have kids and debt. The life of a "founder" is not really that different from how most people in the world make ends meet. Heck most small businesses run on loans not VC money and are a ton more stressful.

To be frank that's your call to work 24/7 with 3 kids and not the business of your employees. They are free to negotiate how they please and we are free to take issue with certain founder behaviors. It's all business and it's a free world.

How many of your employees have kids and a house?

It's sad this post was so downvoted. You speak the truth from your view. We need more of that here.

    > My peers earn 5-10x my salary.

I need to troll a little bit here. So... their package sounds much better. Way lower risk. Are you shooting for the moon (want to be 1B+?)... or what?

So you either you are neglecting your kids, or you are calling work at building legos with your kids?

Wait wtf founders are taking liquidity in second rounds?!

Had I known this was possible I would have totally changed my strategy years ago.

I've founded 3 startups and always thought I could only take out whatever ramen salary I could defend to the most scrutinizing investors. I've given a heck of a lot more in employee bonuses than I've ever taken directly out of the investor pot, where was this "de-risk your own life" essay all those years ago!

I think it’s entirely reasonable for a founder to take money off the table.

The founder possibly walks away from a 6-7 figure opportunity cost working for a big corporate or FAANG. In return they take zero salary.

All of the money that begins to come in is then used to pay employees.

Maybe they raise some funds and pay themselves a below market salary for years.

A few years later they are over $1 million in opportunity cost and still owning a lottery ticket.

By this time they are a bit older, have a family, want to buy a house etc.

They are also massively wedded to the project for as long as it takes, so strapped in for the long haul.

The founder should be able de-risk at the next funding round and not continuing to roll it all for the benefit of VCs.

The same is probably true of early employees, but a lot of the factors above are dialled down. They didn’t work for zero, salary wasn’t under market by such a degree and they haven’t had such a high opportunity cost.

In what world 6-7 figures at FAANG is something a founder is actually "walking away" from?

First of all, it assumes everyone wants to work for those companies and assumes all founders could get such high paying jobs with a snap of the finger.

^--- This

Founder liquidity doesn’t make up for much in the average situation.

Making $400k after making $100k for 4 years doesn’t really change much.

It gets you upto junior engineer level.

The underestimated play is becoming a cofounder to a great CEO 2nd time founder.

Getting out of the SV bubble this is an insane amount of money. I boostrap my business and I make 40k a year. Most senior SWE around here make less than 100k.

This assumes how much of the founders' shares they sell and the size of the raise. The $400k figure is just arbitrary here. I imagine when companies are raising Series B or later, founders are walking away with millions.

I’ve got a job as a ML Researcher without a degree. I have experience building multimodal generative products. Because I was able to learn on the job at startups. I get to work on the problems of my dreams for the rest of my life now.

10 years ago the only jobs for machine learning were for PhDs at big companies. If you want to join a nascent industry and you’re not a top college graduate you have to find a way in the back door.

Don’t do startups for the money do it for the career growth.

10 years in startups out of college.

Even with two good exits. I didn’t make much money as an early employee, even in success, compared to FAANG peers.

If I went to big companies I most likely end up doing a lot of web development and Im rich off the stock market.

The other aspect that's not factored in here is that often founders can spend years in search mode, living on savings or some early stage pre-seed VC, with zero guarantee of success or ever even finding something to work on.

Took you 5 years to get to a concept that finally justified hiring someone to help you grow it? Equity is the only form of compensation you have for all that work, and it might still be worth $0 another 5 years later. In the meantime the ICs are getting paid, are getting benefits, are having a life beyond the company.

The rewards have to be deeply asymmetric for this system to work, otherwise nobody in their right mind would even consider it.

The asymmetric reward is the _company_ having a liquidity event thereby enriching the founder, NOT a funding round enriching the founder.

Bad founder behavior is quite prevalent and should be called out for sure.

I disagree though with the general notion that employees are taking similar or even greater levels of risk. If you get a stable monthly paycheck, and the reasonable worst case is you're laid off because the company runs out of money (or downsizes), then the risk is in finding a new job.

That situation exists in a job at a large company too. Founders however are so tied to their ventures, that getting a new job is effectively out of the question, because it very likely means the death of the company.

And starting a company is an exceedingly difficult, stressful, and sacrificial thing to do. There is a clear and significant asymmetry in risk, and frequently in blood, sweat, and tears. So the nonlinear rewards should be commensurate too.

Oh please. There’s definitely no blood. Most likely no tears. I’ve been burned by two startups. So done with this asymmetrical inequality

The question I am most interested in is: How do people even get funding (or in other words: Who gets funding)

I'd assume it's 'references', i.e. which school you went to, which university you went you, who you know/who knows you

Where are early employees from? Are they still from the same elite circles?

> How do people even get funding (or in other words: Who gets funding)

Second question first, early employees are from anywhere, just make sure they are hungry to ship. You want devs able to self-organize and self-manage amid ambiguity and pivots, and filled with an urgency to get working software in the hands of users to get feedback to iterate, and you want sales/product able to listen and drive focus on product that users believe could be 10x better than however they meet their need today.

Answering your first question, this answer sounds cynical, but this is how the math usually has to work for VC to give outsized returns to pools of investors in VC funds:

You need to have a 20% to 5% chance at 2x - 10x annualized growth generating high cash flow and high margins reinvestable in the business with ability to switch modes and cash out or IPO in 5 years to let investors exit by year 7.

In other words, don't aim for a solid dependable low risk business plan. Aim for a unicorn business plan. To get funding, your business plan should be so compelling that in a funding round of 10 startups, yours is the one delivering returns that make up for the other 9 blowing up, and still giving the investors in the venture fund returns that are a multiple of the stock market.

Remember VC have customers too, their investors. Their investors want a basket of startups that handily beat just parking their money in a market-beating ETF of Apple, Meta, Tesla, Nvidia, Netflix, Alphabet, Microsoft ...

In practical terms, your business plan must convincingly show that the startup can grow exponentially (not just "up and to the right" but a curve) and overcome inherent risks (show you're risk aware, and already planning to beat the risks). Investors are looking for ideas that can stand out in a portfolio where the rare successes can de-risk returns that far outweigh the more common failures, for their portfolio to generate overall profitable returns.

To get funding, position your startup as a standout gem for a portfolio.

The title of the article is mostly clickbait. Anyone who's lived in SV for a decade or so knows this well. Startups are a scam unless you are a founder. They are a meat grinder that runs on naive young new college grads who buy into the bullshit that their options are worth anything.

Founders cashing out early may be more of an "open secret" but it warrants more discussion. I don't find the title overly clickbait-y.

And a counterpoint to your perspective, I joined a startup a couple years out of college, had the most fun of my career, and the options were very much worth something. Working for a well-funded start-up is something I'd especially recommend early in your career when you can take more risk even if the equity doesn't always work out.

If anything, I'd discourage becoming a founder as a new grad more than SV typically discusses. I really appreciated taking time to build up my savings and get experience before taking a shot at that.

Even founders get shafted in later rounds where they are diluted out of their voting rights because they can't raise the capital to maintain their share. The only people not getting scammed regularly are the VC.

> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)

It would. Knowing that founders are cashing out and I’m not able to would be a very good reason to walk away, in my rather old, maybe slightly cynical opinion.

I get the need to hedge your bets, but employees should be able to that too.

The single data point here is Adam Neuman, so I have a hard time taking this seriously.

I have raised 6 equity rounds as a founder of 2 companies. Never took a dime off the table, was never offered it, never asked for it. We actually did have early employees ask about it, and we encouraged them to not sell.

Why would you, especially at early stage valuations? You're either bad at math, or you know you're about to fail. And who is buying these secondary shares? I don't know a VC or angel who would "de-risk" an early founder like this; it's not aligned with their model. It also complicates QSBS status if I recall correctly.

> Never took a dime off the table, was never offered it, never asked for it

Well they certainly wouldn't volunteer the offer without you asking for it.

I think founders generally have 20 to 50x what the first employee has, in my experience. Employees rarely have more than 1%. Founders tend to start out with about 20-40% depending on number of cofounders.

Yeah that line in the article is completely off:

> Ask most venture-backed founders why they get 10x more equity than employee #1

Employee #1 typically gets 1%. Sometimes could be up to 2%, but 1% is standard. So then the founder gets 10%? No way.

I posit that very, very few early non-founding employees in SV startups have a true notion of how cheap they're working compared to the founders. Founders do founder-y stuff, the early engineers build and launch the full product, and if all goes well, the founders fly private the rest of their lives while early engineers make good progress towards a down payment.

Damn I was writing a blogpost about this exact problem inspired by a talk w/ a friend of mine.

Being an early engineer is the worst deal in all of tech, the people I've seen do it are either comfortably wealthy or just don't care about money.

I did it not caring about money and got burned so badly I was still mad. It's ok though, it is nice to return to work with good people earning more than 2x a founding engineer salary.

This is another reason why American companies beat out Canadian and many other companies by so much.

In Canada even at Series A Canadian VCs will not offer you liquidity while at the same time allotting pennies in the first place. Absolutely conservative poor people.

If things are working, derisking the founder so that they can focus all in on the problem is the best thing you can do as a VC.

I'd be very careful with a 20% option pool and a 3 month cliff.

My assumption is this means the founder is providing double the equity, meaning that at 3 months the potential of not insignificant amounts of equity can be walking out the door.

We've had the experience where we had a contractor who we thought was a good fit. We decided to hire them as an employee, and back-date the cliff to when they started. We had a very big somewhat bet the company deadline which their work was key to, and this deadline was about 3 weeks past the cliff date. They walked 2 weeks before, and didn't deliver. Literally waiting until they could claim some equity.

Of course, this is what bad leaver clauses are for, but there is a reason why some of the terms exist.

I agree with the long exercise options. Vesting timelines have arguments for longer and shorter, which is why I think the standard 4-years is settled on.

It is too bad it is up to the founders themselves to offer liquidity to employees. Founders are financially incentivized to not offer anything, so you're counting on their sense of justice and morals to overcome their sense of personal gain. This should be regulated.

(Yes, this is a political opinion. No, I am not American.)

Having only worked for larger companies (RSU stage), I'm curious what the typical breakdown of founder to early employee to investor to later employee equity looks like. I'm sure it differs pretty wildly, but I'd love to know what a 'typical' case for mid-to-late-stage start up looks like.

I can share some details.

Employee 1: ~1%

Employee 10: ~0.1%

Employee 1000: 0.01%

I'm extrapolating from past experiences in SaaS companies where I was employee number X and X has varied fairly widely.

Here is a post with data from Carta - https://www.linkedin.com/posts/peterjameswalker_cartadata-st...

Background: I work in technical diligence and talk to a lot of companies just before they do exits to PE firms (i.e., usually the first big cash-in). One of the things I see over and over again is just how much great people matter. Not only do they matter for getting you there, but they matter for how much you get when you get there. Our work is used at the negotiation table: piles of tech debt and stuff that needs to be seriously fixed up comes off the top... a "hair-cut" as they put it. Your pile of tech debt and ignored security issues and so on could be millions off the deal.

So... I agree with this writer that it there is likely more value to early founders than they think in doing that which motivates star-level early employees to join and stay.

As someone who has worked in startup environments for 20 years, its rather offensive that anyone in 2024 would claim that employees arent taking risks.

In todays salary brackets, one could be comfortably making 220k as a staff dev some huge healthcare/pharma tech firm. One may also feel the job is boring, soulless, and mostly uncomfortable. Then one may choose to work at an exciting AI startup for ~160k, and suddenly find themselves way happier, growing more, and engaged. One just took ~60k worth of risk right there, not to mention that it could be come $0 tomorrow, and one likely now has crap healthcare benefits, given the startup status.

That 60k could be a million dollars in ~15 years if invested wisely.

Startups are far more founder-friendly than they used to be (thanks in part to YC’s contributions) but we have a ways to go to make them more employee-friendly too.

To call out the employee-friendly equity policies that OP has instituted at his new startup:

> Our employee option pool is 20% which is double the average

> We have a 3-month equity cliff which is 9 months sooner than the average.

> We allow employees to exercise options up to 10 years after they leave instead of 90 days.

> Our equity packages vest over 3 years instead of the industry standard 4-year period.

> … only taking liquidity if I can also offer it to employees as well.

The 10-year exercise window is especially noteworthy since the cost to exercise options can be substantial.

"Silicon Valley's [worst] kept secret: [Loyalty will not be rewarded]"

The fact remains that sweat-equity deals rarely work out in a founding employees favor.

i. IP selloff to umbrella firm for $10

ii. contract restructuring or share dilution

iii. jettisoned from a company months before an IPO

Most techs have seen all of these events unfold... if you are around long enough.

People always have their own strategic truths once significant money is on the table. Even moderate success can destroy peoples memory, and anything not legally watertight is just hot air.

Best of luck, =3

I don’t agree with this sentiment: Investors, founders, and employees all believe that founders are taking more risk than early employees (this isn’t true once founders have exclusive access to liquidity)

This completely discounts how much risk and stress go into the early stages before money is raised, or before enough money is raised to pay founders properly. They often go into debt, put many aspects of their lives on hold, and undergo outsized stress that is largely alleviated by the liquidity event, enabling them to plow forward and shoot for the moon. There are outliers that are insane, but you can’t throw the baby out with the bath water.

...? Much of what you described applies to early employees, too.

I joined a startup as an engineer about 30 years ago. I was one of the first employees and one of the last to get some 'founder stock'. I took a big risk (low initial salary and even lent them money to make payroll) but it paid off. When the company was purchased 8 years later I did fairly well. Not enough to retire wealthy, but well worth the risk I took. I am glad I did it, but it could have turned out to be a big mistake.

Everyone working for a startup might have a different story to tell. Some good. Some bad. Tread lightly if you wade into the startup waters. It CAN be very rewarding but it can also lead to nowhere.

Making less money isn't really the risky part about founding a startup. The risky part is missing out on years of other life experiences, stressing (or losing) your closest personal relationships, failing and feeling personally responsible for disappointing everyone you convinced to believe in you, and developing an anxiety disorder (or worse) from chronic long-term stress.

Author's suggestion that they could have taken a "similar level of risk" as an early employee by taking secondaries as a founder is way off, IME.

Having been employee #10 a couple times now, there is a lot of that even when you aren't a founder. It would be nice if the 'de-risk your life' stuff this article describes for founders was also available for early employees.

Perfectly illustrated by this statement:

> I have been an early or first engineer at five different companies and have had three liquidity events in a 9-year career.

A "big" success is a 10+ year journey. For an early employee, it is perfectly acceptable to give a few weeks' notice and move on to the next lotto ticket. This doesn't work for a key founder-exec -- they're likely going to commit to a decade working on one big problem, and investors want to incentivize them to shoot for the moon & stick with it for the long haul.

It's definitively not the same for an early employee.

Having been a key early employee at a failed startup, horseshit.

The employees bear the burden too, if they're working their asses off at an early stage startup they believe in the cause just as much. Viewing founders as somehow magically special is a symptom of the broader misguided hero worship the US has right now.

I’d also push for allowing early exercise along with secondary sales restricted only by a short right-of-first-refusal period.

We allow early-exercise too but I (possibly, incorrectly) assumed that this was the standard for newly incorporated startups - at least within the last 2-3 years it has become significantly more common.

"secondary sales restricted only by a short right-of-first-refusal period"

I really like this as well, I've always found it confusing when private companies are anti-secondary for former employees especially. I'll look into adding something like this to our stock plan, ROFR protects against any hostile take over weirdness and I'm confident we could add something like this to make it relatively easy to sell on secondary under a certain % threshold.

> allowing early exercise along with secondary sales restricted only by a short right-of-first-refusal period

Do you mean cashless exercise?

We are talking SV here, and that's very different from my European experience. I've known of founders in Scandinavia who walked out from startups that weren't doing so bad and that could have gone for another round of investment because they were earning as much as a bus driver, had zero savings, and were experiencing burn out after almost a decade of work. Maybe that bit of SV culture that lets founders be on par with a highly paid engineer at a big company is up to something. Maybe if it were more of a thing in other parts of the world, we would be more competitive.

Having cofounded both bootstrapped and funded startups, I can say that in each case there was a deadline associated with success: for bootstrapped, we set hard targets in terms of maximum spending and time in order to test our hypothesis. This allowed us to fail fast in our own way and go back to a better paying day job.

For funded startups - at least with a healthy seed round, the investors expected us to burn fast and hard in order to prove our hypothesis or fail trying as quickly as possible, but they also expected us to not pay ourselves very much. As we found product-market fit and raised Series rounds, it was understood that we would pay ourselves competitive salaries.

Being stuck at the seed stage for 10 years is not healthy - neither in Europe, nor in Silicon Valley.

Yes and that is why we call them Europoor out here.

How common is this? How many founders that raise series A are liquidating? What are the amounts typically?

It's fairly arbitrary, but there is at least one constraint on how much you can liquidate: You cannot liquidate much more than 10%, because you're taking money from the company and investors would not appreciate that.

I just got off the ride (at a small startup) after ~9 years. Not much to show for it economically, but I did gain a lot of confidence and experience around how to actually run a business. I've picked up a lot of lessons, most in what not to do. I'd say it was absolutely worth it compared to alternative paths that I was previously on.

My biggest takeaway is to focus on compelling problems, rather than delusions of financial grandeur. I've learned that solving a hard thing and hearing the feedback from the customer brings me a lot more joy than hypothetical promises of extra cash in the bank. The money is a mind killer for me, especially when it's not real yet. Stock options are no longer something that interest me. I'll negotiate additional salary instead. The only company with stock options I am interested in would be a company that I personally found and retain control over.

One other lesson is to pull the rip cord the microsecond you think something doesn't feel right with management/leadership. I started thinking things like "does anyone care about the sales funnel?", "Why are we only talking to one prospect at a time!?", etc... The chances you will be able to "fix" some other person in this setting are pretty much zero, unless they actively want to be helped. I feel like I could have jumped off this ride at the ~7 year mark and walked away with 99% of the wisdom I have right now.

The only fair way to analyze this is by looking at opportunity cost, which isn’t what TFA does.

Founders often have slightly higher market value (though not always) than first employees, so they are giving up more to go the startup route.

Separately, TFA further underestimates founder risk as they are typically not taking salary during pre-seed, and no or low salary during seed. However employees 1-5 typically get mostly cash, often much closer to market.

Thirdly, there is also often a lot more stress in being the founder. It is a complex, all day job. You have the weight of keeping things going for all employees, and when cash is low it’s your paycheck that gets delayed/cut first, not your employees.

That said I am all for reasonable early stage liquidity where it makes sense, but as many other commenters have mentioned, it tends to not be life changing super early for most early employees. Most employees would rather keep the bet on the table. Also, I am strongly against large founder secondaries. I think it’s helpful for founder to remain feeling “not financially successful”, especially first time founders, so that they keep their heart in the game. I followed this practice with my companies.

> Thirdly, there is also often a lot more stress in being the founder. It is a complex, all day job. You have the weight of keeping things going for all employees, and when cash is low it’s your paycheck that gets delayed/cut first, not your employees.

I've seen startups from a founder perspective and from an employee perspective (VC style startups). I agree there is more stress as a founder, but people really underestimate the toll as an early employee - the gap is smaller than many people think. Particularly those ideal missionary-type early employees, they take on just as much mental ownership burden as the founders. It is also an all-day job. Let me tell you, when the money runs low, it is immensely stressful as an early employee - it is both hard to be the one making the decisions and it is hard to not be the one making the decisions. The ability to walk away isn't a benefit, it's a burden.

Their jobs can be different (or can be very much the same - depends on people and every startup is its own beast) with founders needing to deal with fundraising, board management, and ultimately having the impossible problems land at their feet which is often out-of-scope (and out-of-sight) for early employees. But the same core problem exists for both - your actions will dictate the success of the company.

And there is a huge amount of understanding of the founder burden and support for them, from financial to emotional to reputational. Where are the support networks for early employees? People will say the founders, but this is a load of crap for the same reason that founders rely on relationships with other founders rather than talking to their board or teammates.

Early employee is probably the worst engineering gig in Silicon Valley on most dimensions. Unless you just want to 0 to 1 build things. Then I haven't seen a job that can compare.

This is a great post and I am glad it is getting high visibility. Everyone involved in a startup should understand this and consider it as part of their 'do I join' calculation. Additionally, founders shouldn't try to hide it nor should they horde the returns.

Clearly founders are the reason the business exists, but the whole team is the reason it succeeds, everyone deserves a piece of the reward. Mark Cuban is a famous founder that understands this and distributing gains well before his big win. [1]

One piece of feedback on the terms, 3 month w/ 10 yr window is pretty rough for the company. You will end up with a bunch of random people on the cap table... people that didn't really contribute much in the overall picture. That is annoying as you raise and downright frustrating when you exit. I would suggest you go back to a 12 month cliff w quarterly going forward and maybe set the window at years served, rounding down. My 2 cents.

[1] https://www.businessinsider.com/mark-cuban-employees-million...

I don't know if I agree - but I'm open to being wrong. I can't recall many scenarios where I thought someone was a strong fit at 3 months but a terrible fit at 12 months. I can probably think of a couple of scenarios for 3 months and 6 months, especially with slower time to value roles like leadership positions.

Right now 3 months is within my risk tolerance - and there is another side to the cliff that folks don't talk about too often, pre-cliff people will generally be less transparent with negative feedback for fear of being fired before the cliff hits. I'm ok with giving up a bit of equity and polluting the cap table if it increases transparency faster. Maybe the lower risk bet would be a 6 month cliff but I believe 12 months is too long to hold the equity hostage.

You get Founder Liquidity because you managed to convince people who do just as much work that they couldn’t do just as much work without you. LOL I am so cynical.

To be fair, there is a skill in getting people to believe your vision and to take the risk to work for you. They also need to convince VC's of that vision to get the money to pay you in the first place.

Generally they make more decisions that directly effect the odds of the company existing 6 months or a year down the line than the average employee does (with some exceptions obviously).

You can still be cynical, I think all employees should be given the ability to get liquidity early, but it's not like it's totally unjustifiable.

People are talking about angry founders and angry employees, but there is another side to this post:

Prospective founders who work in big tech companies and have a family which depend on them. I include myself in that group, and I thought I needed 10 years worth of savings to venture on creating my own startup. But from the discussion, in about four years it is possible to match big tech compensation.

I feel more motivated to start a company now.

> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)

Not sure I agree there. If employees widely knew founders were getting liquidity but the rank-and-file aren't, I think there would be a hit to morale.

Of course, the solution there isn't secrecy, it's giving employees some liquidity.

Founder risk is total myth. I was at a startup where, when it was apparent there would be no more funding, the vc’s permitted principal founder to essentially embezzle the remaining few $M. He and his cronies then lived off the proceeds for the better part of a decade in a kind of “brown dwarf” of a company of the same name.

And it was the SECOND time he had done this in his career!

> We allow employees to exercise options up to 10 years after they leave instead of 90 days.

This always struck me as completely unethical. Your vested options are part of your pay; you should be able to exercise them years after leaving. I would never work for a startup that evaporates my vested options 90 days after leaving. That’s like clawing back cash comp, in my view.

I could not agree more - I still have no idea why 90 days is the standard. It also exploits people who are ignorant about equity compensation more than people who are not - which I think is even worse.

While I agree that employees should get more equity and liquidity, I think it comes down to supply and demand:

- If the founders are de-risking appropriately it will take years of no pay/low pay work before they can even consider taking on employees. Building a valuable asset is not done overnight and takes extreme commitment - plus reputational & financial risk, opportunity costs etc.

- It's very rare for companies to get past the Series B stage. When they do, the founders have accumulated non trivial and non replicable knowledge about the market and the customers. The liquidity they get should be worth much more down the road.

Now of course if you are an early employee that is expected to 'make the startup work' like a founder and get none of the benefits there's a problem. On the other hand employees are replaceable & 'swappable' in a way that founders are not.

The entire system seems like a scam. Thankfully, the COVID-19 pandemic and the Ukraine war have deflated startup valuations a bit. I believe another crisis is looming in the near future, and once it passes, we should be in a better place for the next 5-10 years.

Love the movement and glad there are founders out there pushing the envelope for their team.

(aside: 51 points but only 1 comment? It's a front-page worthy article, but sort of feels like there's some vote gaming happening. I've never seen 50 points w/ 1 comment.)

That's actually a lot more common than people assume it is, and comments like "I can't believe there are X points but only Y comments" are more common than you'd think they'd be as well!

My theory is that it's a sign of a good article, because more energy is going into reading it than into posting quick comments (which are usually less valuable comments). But I don't have the data.

Edit: well... we have the data (to test this), but it would be enough of a pain to do the analysis that other things will probably take precedence forever.

I'm one of those people who upvoted without commenting. I think it's just a way of saying, "I found this article interesting / I agree with the content, but I don't have anything of value to add".

But hey I just commented :)

The usual problem of late on HN is people commenting without upvoting, even if they like the article.

On this post, I started reading, then paused to hurry back and upvote on HN, to do my part to keep it from falling off the front page, before I returned to finish reading.

It’s a vote bait title. (Type of thing people upvote without reading the article)

IDK how secret this is.

But the reason for founder equity -- as with anything in a free market system -- has nothing to do with deserve and everything to do with demand/supply.

There are many more we early employees willing to take 1% equity than founders willing to offer it.

I think its less about more risk etc, and its more like, they are the ones starting the company lol.

1. They are providing jobs 2. They are responsible for growing business 3. They are accountable to not only the employees but to board and investors, etc.

They take money off the table because they are in a much different position than say an engineer. It might be bad to say, but the engineer is responsible for one part of the business, the founders and CEO etc are responsible for all aspects of the business, and should be compensated appropriately for it, whether secondaries or higher salaries etc.

Also, secondaries at seed and A are not as common as they were during the 2020-2022 run up.

Are founding engineers not also taking on risk? They're typically taking a much lower salary in exchange for their shares. They're avoiding vacations, nice cars, fancy houses, and other expenses that they could purchase if they worked for a larger, public company. In the example from the article WeWork founding engineers would've gone 9 years without seeing any value from their shares while the CEO was cashing out billions.

The difference in responsibilities is already accounted for in their disparate salaries and ownership stakes. I don't think it's very relevant to whether or not they should have the option of cashing out some of their stake during funding rounds.

I like the discussion you folks are having in this post and all, but haven't you asked yourselves who is this guy?

Because there isn't much information about him on the Internet and that website has that single one post up.

I'd be asking the same question, it's a fair criticism. I wrote this expecting 10 people to read it and I wrote it as a part of a writer's feedback group. I'm just a random guy who has worked at a lot of startups, nothing special!

It’s all relative. Founders that actually make it to series A levels have options to take money off the table (usually) and often what most Americans would consider a great salary, but if you do the math vs getting a massively overpaid FAANG job and include the odds of the startup imploding founder is actually a tougher gig.

I refer to dilemmas like this as "zeroeth world problems."

Of course like I said… relative. It is nowhere near as tough a gig as schoolteacher or service industry worker, at least financially, though there can be a lot of stress and some mental health risks.

Hmm, I’ll be controversial. Twinned secondaries, i.e. secondaries tied to a primary, are almost always a give away to senior management and the buyer. (They’re frequently syndicated at double-digit spreads.)

If the company sucks, senior management gets cash back first while the investor gets top-of-stack liquidation preferences. If the company is doing great, the investor gets to buy stock at a price almost always lower than market.

They’re common in Silicon Valley, because they’re good for founders and the Board members. But they’re rare in public markets. The closest thing I can come up with is the current clusterfuck with Shari Redstone.

> They’re frequently syndicated at double-digit spreads

What does this mean?

What shines better in a resume? ex-founder or ex-founding engineer? If ex-founder is a better role for next job, I think founders are taking much less risk than founding engineers. They get all the exposure to talking to rich people, VCs, learning how financial game works, which i regard much more rewarding career-wise.

The difference is: no founder === no company at all. no first employee === not a problem, hire another one.

My guess would be that it has to do with the amounts involved. In a typical series A/B only the founders have enough equity (they have larger share, plus they've been at the company the longest so they've vested the most) to be worth the transaction cost of a secondary sale.

This thread is more entertaining than both TikTok and Netflix combined, which is truly exceptional.

I'm glad I waited for the dust to settle on the battlefield before taking a look at the comments - agreed, super entertaining! haha

I thought "founder liquidity" would refer to the supply and fungibility of founders. I've heard that, although ZIRP is over, there is still a large supply of capital, which implies that there's not enough good idead / founders to go around?

Supply and fungibility is more for kpop idols

Wow. This is relevant to me as I am choosing a big company versus a backed pre-seed company with 4-5% at a $5M valuation.

If someone could offer the time to walk me through the liquidity scenarios, it would be much appreciated.

When I was younger, I worked for multiple startups and received stock in each one. How much is that stock worth now? $0. I no longer will put that much time and effort into something, unless I am the founder.

This is weird AF.

I gave 20pct to my employees and didn’t have to write a blog post about it.

dunno why the writer opted for this: "Our equity packages vest over 3 years instead of the industry standard 4-year period."

given it takes a long time to build companies; so on the contrary, many startups are instead opting for like 6 year windows.

"We allow employees to exercise options up to 10 years after they leave instead of 90 days." - the reason that 90 days is more standard is that it's more tax effective than having options exercisable for 10 years, though many companies are making a compromise on this recently

At this point, you have to be colossally stupid to work for a startup. Assume options are worth $0, demand market salaries, and close-to-market benefits.

I was an early (first 5) dev at a company now valued north of $5B

I have seen only a few hundred k so far while both founders have bought over $30m of real estate and who knows what else...

This is a wonderful article and kudos to the author for his moral sensibility here. The lack of liquidity and anti-dilution rights for any except a handful of key persons is a dirty secret of Silicon Valley. Most startup employees do not end up better compensated than they would at a larger company on a net present value basis even when their startup is successful -- and they don't as easily get liquidity along the way although there are more private secondary market brokers than there used to be.

The other angle worth observing here is the tax angle. In many cases, the founders are taking liquidity at valuations that are only loosely tied to tax valuations of the company. These valuations are fine for the founders and preferred by the buyers/investors, but undercut the premise of the tax system that was redesigned after the options backdating scandals of the early 2000s, in part, to ensure that taxes were getting paid in accordance with the actual capital gains.

“ Being a software engineer who has a strong preference for creativity, problem-solving, and autonomy”

That’s nearly every engineer or programmer I’ve ever met, not some rarity.

Being a "founding engineer" is a sucker's game unless you have some very specific goals.

Nearly all the same risk, 99% less reward.

Delaware allows for employee shareholders to demand some transparency, but it doesn't apply to options holders.

VCs and Founders should be far more forthcoming to sweat equity participants. Delaware could mandate that too.

I've been on both sides, where leadership gaslights candidates and employees about why their tiny stock grant is so generous, diluted in the best case scenario. And on the other side where leadership is confused why someone with prior financial success would want to be an employee at all since its so obviously shit. That's sad to me that they can put on two faces, and its enabled in a way that securities laws were made to mitigate.

If employees realize they are taking more risk than the founders, maybe they'll ask for more compensation, maybe they'll congratulate the founders and move on with their day, maybe they'll start yelling: "I'M TAKING SO MUCH RISK, IT'S SO HARD TO BUILD A COMPANY, I DON'T EVEN HAVE ACCESS TO LIQUIDITY!!!". And maybe they're right.

This is why I think the term "Founding Engineer" is often just a fancy way of saying 'sucker.'

Founder here who turned down an offer to secondary in our B round.

It would have brought ~$5M before tax. This would have been a material change in my financial security. I live in a high-cost US city and have been putting off starting a family. It would have removed many concerns that are holding us back from feeling like it's the right time for us.

My thinking has evolved, but is roughly:

(1) The argument from VCs in favor of a secondary is often: If the founders take some money off the table, they have downside protection and are more strongly incentivized towards only a massive outcome. This aligns their risk profile more closely to their (Seed/A/B stage) VCs who model their portfolios based on bimodal (boom or bust) outcomes. It helps prevent scenarios where the founders safely exit for $Xm leaving the Series B VC with a 1x'ish return that's against their profile.

(2) I didn't take the offer because I felt it would be unfair to our early employees who took a big risk leaving FAANG compensation to come build with us. I ruminate on this often. It would have changed my life, and the only difference to them would be some numbers in our cap table being 10% different. In retrospect, doing it pro-rata for everyone would have solved this, but I'm not sure the VC making the offer would have gone for it. Who knows.

(3) I do not think founders and early employees deserve exactly the same treatment. While early folks took a similar financial risk as I did, they aren't chained to the company in the same way. They can quit tomorrow and go back to FAANG jobs. A founder has to either find their own replacement, sell the company, or run a long and painful wind-down process and return money to the VCs. All of these options take months-to-quarters of work, create reputational risk, suck emotionally, etc. And that's in addition to still losing all your money like the employee did. I don't think it's the same.

(4) You don't get nice-guy points for turning down the offer. Nobody on my team knows that my cofounder and I turned it down, so we get no credit for doing right by them. Telling them about it feels somewhere between a humble brag and guilt tripping them into working harder. The motivation to do "the right thing" has to be purely internal.

(5) If you're starting a company I strongly suggest you give your employees the option to early-exercise / 43b their shares. Few folks seem to know enough about their options to take advantage of this but it prevents the lock-in scenario where someone wants to quit but can't because the AMT bill would devastate them. We have had this since the seed round but sadly only a few people pay attention to it, and I can only suggest it so much without creating a financial-advice legal risk.

While I feel like I did right by my team, I can put an exact price on the cost of that positive moral sensation. My team might even think I'm stupid for not taking it when they would have.

It's pretty easy to say what's obviously right and wrong in HN comments, but when all you have to do to pocket a life changing amount of money is say "ok", the decision feels much heavier.

I'll give you nice-guy points for turning it down - that's a very principled position to take when that much money is sitting in front of you and all you have to do is say "yes"

I think your intuition on #2 is right - pro-rata across the board or even if the amounts are small enough, offering to do it as a "series B bonus" line item in payroll is not out of the question. 10% seems on the high side but sub 5% it's probably do-able.

I agree with a lot of what you've written - I understand if you want to stay anonymous but would love to talk to you about this more if you are open to it!

It's clear that the author is first time founder. The article is disingenuous in that it talks about secondary availability, but the solution is longer exercise and shorter vesting? That wouldn't solve WeWork situation at all. Also, the risk of founders and employees is not comparable. A good analogy of the relationship is Landlord vs. Tenant. Founder burdens statutory obligations, is responsible with their personal belongings, has to lay the groundworks, and get the investors. Employee has to pass a job interview. If company fails, both lose a job, so that part is shared. First employees are sometimes special, but they are not founders. Musk was not even an employee and he became founder of Tesla.

I feel like the article contradicts itself in this point:

> Investors and founders both tend to think that if employees knew founders were getting liquidity that that would negatively impact employee morale (it wouldn’t)

> If employees realize they are taking more risk than the founders, [...] maybe they'll start yelling: "I'M TAKING SO MUCH RISK, IT'S SO HARD TO BUILD A COMPANY, I DON'T EVEN HAVE ACCESS TO LIQUIDITY!!!". And maybe they're right.

How is "not impact morale" and giving an example of employees shouting as a possible outcome when they find out not contradict each other?

As an early stage engineer that was bought out by a FAANG, I can assure you that most of the hype surrounding buyouts is mostly an exaggeration.

Sure some people get millions, but most people do not, even early stage engineers.

Think about it, you as an engineer, have deliberately avoided working at $bigCorp, and are about to be given $5m in shares. Would you continue working at $bigCorp? no, you'd take the money and fuck right off.

Ok Ok you say, but look at the headline buyout figures Google buys a company for "450 million" that startup having raised 65m in capital for a valuation of x.

so, you as an employee have an option for 0.1%. Awesome, you're gonna get 450k right?

No.

The 450M is the headline figure, The PR figure. Its not actually how much the company is bought for (well it rarely is)

Google will pay off the 65M from investors, plus some amount, maybe give some shares. This will value the company at say 85-100M in terms of cash paid for actual shares.

oh sweet, so you'll get 0.1% of 100M right? well not always. There is debt seniority and weird structures that mean that certain investors are paid more per share than others.

So it might mean that the pool of employee money would be 10M or 1M. or even none. The structure is normally bespoke and deliberately opaque.

Ok, so fuck, not that much money.

If you are lucky, you'll get a job offer from google. This is where the head line figure comes in. Say Google pays 100M for the actual company, in actual cash, the rest of that headline figure comes from share offerings.

That is, if you join google, you'll get the standard level of pay, plus the normal share offer. However you'll then get an additional share offer from the headline figure. This could be double, or many multiples of the normal share offering.

TL;DR:

The headline buyout figure for startups is mostly fiction. You'll only get lots of money, if you are part of the 0.01% that IPO and stay long enough to get the full offering, even then thats not a given. The second best outcome is getting bought out and serving your golden handcuff period.

Yeah. This misses the point that founders often go unpaid for long periods of time.

Those payments catch founders up to being able to have a “normal” lifestyle - which enables them to perform their CEO or CTO jobs better. A CEO having issues with making ends meet at home, having personal debt, and eating ramen can sustain that additional pressure forever. It’s in the interest of VCs to arrange things so that founders can focus 100% on the success of the company.

Two words: opportunity cost.

Silicon Valley’s best kept secret is how Altman made his first few bucks.

Everyone just buys that someone with a failed startup has capital that better founders lacked.

Invested in X with what Y bro?

Do something meaningful. The people I know who make the most money, do absolutely asinine stuff that they don't even bother explaining to other developers. They just hide behind the phrase 'I work at X.' A lot of the best people I know are not web developers. A lot of people making the world meaningfully better in scalable ways, are not developers.

Accumulating capital becomes easier as you gain more capital, which is exactly why we need to abolish stock option pay packages and tax these people. Film at 11.

Silicon Valley was my dream destination when I was a child

Wouldn't most 9-5 employees stop working if they had a sizable liquidity event?

On pro-rata basis most of these secondary liquidity events as apart of raises are not "retirement" level of liquidity - it's just "safety net" level of liquidity. So I think they would probably not be considered "sizable".

I couldn't care less. They can keep their secret and stick it where the sun doesn't shine.

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