I joined as a regular non-manager, non-lead employee. Actually, I started as an intern, and was offered a full time job immediately after that. I was employee #~100. I sold 1625 shares in a secondary round for $14,000. When the company eventually exited, I sold 27,375 shares for $1.1M. I have 1000 shares remaining. If I hadn’t sold anything, my shares would be worth about $5.1M today.
I am no longer employed there. I hold them mostly for nostalgic purposes. I sold all of my shares because it seemed foolish to have 100% of my net worth in one company. Holding 1000 shares feels okay. Tax bill was ~0 on the $14K and my marginal tax rate on half (I’m Canadian)
When a Canadian has $14,000 in capital gains, their tax liability is calculated as: $14,000 * 50% * marginal tax rate. The 50% is basically the Canadian way of taxing capital gains lower than earned income.
What GP was trying to convey, albeit in a slightly confusing fashion, was this:
1. He had $14,000 in capital gains
2. No tax was directly accessed against this $14,000 amount, in other word: "tax bill was ~0 on the $14K".
3. The taxable portion of his capital gains was $14,000 * 50% = $7000
4. He paid his marginal tax rate on the taxable portion of his capital gains ($7000)
Sorry, yeah, could have been a lot more clear there. I was making extremely little salary at the time of the secondary, so I paid something like 20% tax on half, for about $1400 in taxes on $14k proceeds.
FYI, in the US there is the Qualified Small Business Stock exemption, which can significantly reduce the tax owed on the sale of stock of a company that was once small. It can be publicly-traded at the time of sale.
Back when I was a tax lawyer, you could exclude 50% of your gain, though the rules may have changed. Also, if you rolled over your gains into other “qualified small businesses”, you could defer taxation altogether.
It applies only to the sale of stock, as the name implies. One can restructure an asset sale as a stock sale in order to take advantage, if the tax benefit is big enough.
Not sure what you mean about a business that has no stock (sole proprietorship?).
I was co-founder of a software company’s old during internet bubble. My partner funded everything so we split shares 80-20. Then we both got substantially diluted by two rounds of investment and 140 employee share packages. I think i had 5% at the end.
When sold we got 15% in cash, and 85% in stock in the public internet company, that was locked up for one year. The cash was a $800,000+ check. A year later i sold the stock for maybe $150k.
At a startup that folded, $0. (Failing is an exit!) At a startup acquired by a larger company, about $20k. Neither made up for the delta vs market rate salary.
I joined an already-successful ~400 person company with an already-published S-1 at around year 8 or 9, and worked there for around three years in total. I was given options representing such a small fraction of the company that it wasn't memorable (perhaps a hundredth or thousandth of one percent?). My options were underwater for several months after a lackluster IPO, but eventually the stock picked up enough steam to make me around $300,000.
Of all the companies/startups I've worked for, this one was by far the most corporate and least startup-ey, yet this was the only one that made me more than a penny after an exit, despite working at a few other startups that have had "exits."
You didn't put anything away from your salary? (401k? Roth IRA?)
As someone from humble origins, it surprises me more people don't live frugally 5-10 years in the Bay then retire in luxury somewhere with lower cost of living.
Yes, should have been clearer. That's what I was clarifying, since some startups vastly underpay. A disturbing number of people I meet in tech don't plan well for retirement.
I had saved nearly $1,000,000 from salary (plus subsequent investment returns) over the years. But I didn't think that's what the question was asking.
I have never worked in the Bay Area. Or anywhere on the West Coast for that matter. And most of my career has been outside of the US by this point (including the successful exit).
I once joined a company that already had several hundred employees as an entry level software engineer. It was my least favorite job: I couldn't find a fit and I only lasted just over a year. However, during that year they IPO'd, and because I made it over the vesting cliff I was able to buy my options on my way out.
Ballpark numbers:
I had 300 options at $5.
post-IPO price was around $15.
I did the "sell to buy" thing, so I sold roughly 100 shares to pay for buying all 300.
I haven't sold the other ones yet but the stock is north of $50/share.
It seems like there's less than 20k shares total in circulation. (that's like an order of magnitude less than I expected? I took "shares held(000s)" and divided by "% Own", and rounded.)
I have the impression that most of the "old-timer" employees did quite well as long as they sold their stocks at the right time: one guy spent 6+ months traveling and then took his time finding his next job, another guy thinks he might be able to retire in his '40s.
edit: as elsewhere in this thread, I also worked at a startup that failed ($0), and I've left a couple that to my knowledge are still going ($ -4k , because both times i bought options on my way out just in case they make it)
I've never heard of an IPO'd company--meaning one that's listed on a public market like the NYSE or NASDAQ--with such thin trading, nor have I ever heard of option grants measured in hundreds...
I think the original grant (4-year vesting etc) must have been for around 1,000 shares. and I joined pre-IPO. but I agree it was not a large grant, even for an entry-level position. Nonetheless it's the only one I've gotten that's worth anything right now!
- 20k total shares would mean a market cap of $1M, and an IPO price of $300k. Those are not viable numbers.
- 20k total shares vs. you having 300 options means you would have been given 1.5% of the company in one year. That's totally absurd given you worked there for a year as an entry-level engineer and the company had several hundred employees.
I agree that I must have misunderstood the reporting of the numbers of shares. the numbers i'm sure of are the rough number of options that i had vested after 1+ year.
I was employee 30 at a startup. I worked there about 3.5 years, and then left. The company was acquired a year later. I made about $115,000, which frankly is a lot less than I would have made at a public company. My friend at Twitter during the same timeframe made close to $1M, and my friend I worked with at the startup left to join Facebook and also made over $1M.
I joined a successful startup about ten months before it was acquired for several hundred million. The deal somehow led to a lot of employees losing their options (myself included). There was some discussion of a lawsuit but it fizzled.
what needs to be explained, a several hundred million exit is LOWWWWWW. If they had a series B for 20 million or so, or a series C for close to or above 100 million, then the valuation itself was WAY more than that.
A few hundred million exit will result in ZILCH (almost $zero) for any common stock shareholder every single time, unless the company was in series A or lower.
VCs have a separate share class called Preferred, and they also negotiate "Liquidation Preferences" with a multiple. So a Liquidation Preference x1 means they get their money back, as much as possible. A Liquidation Preference x2 means they get double their money no matter what, before anybody else - like common stockholders - get paid.
And this is before your stock options' strike price matters.
Its a shitty deal, investor protection laws should be extended to cover this, because the information and transparency is lacking.
The exit was in 2005, and several hundred million was not bad (although it came after a failed effort to go public for somewhere north of a billion). I was very new to the startup game and had comparatively little at stake and didn’t understand any of the language but I was invited to some gatherings of engineers who had been screwed by the deal.
My impression is that founders or early investors often have a lot of ability to dilute the value of stock prior to making a deal (there’s description of similar shenanigans early in “Chaos Monkeys”)
If I understood the details I would never have signed the contract. At the time I was pretty desperate for a job (I’d moved to the US from Australia and my own company had gone belly up and I was living in Santa Barbara with a mortgage).
Pretty standard acquisition story. Shareholders with preferred shares (VCs) got paid first. By the time they were paid there was nothing left. It just means the company was sold for too little for the employees to benefit.
This happened to a company I co-founded. My common stock was bought at about 1/3 of the lowest price given to early employees for options. (I had RSUs, not options).
I got $130k, and their options were worthless.
Luckily the acquirer offered retention bonuses that helped dull the pain, but of course those are taxed at regular income and not long term capital gains.
Oh, and like a previous comment mentioned: the VCs have preferred stock so they get their investment back 100% before any common stock sees a penny. If employees had the same stock as VCs, I estimate I would have walked away with about $400k.
As someone who has been on the purchasing side of one of these transactions, that's not really the case.
What usually happens is, say the company has received $x million in funding. Everyone is plugging away working hard, but runway starts to run short and the product isn't getting the traction originally anticipated. At that point it looks obvious the company will go bankrupt relatively soon, so the investors push for a sale to try to recoup some of the their money. Often times there is value in the team and perhaps industry knowledge to the acquiring company, but the tech itself is often worthless, so the sales price is below the $x million capital raised and only holders of preferred shares get anything.
Note that founders rarely own preferred shares. They have common stock just like employees, so they are usually wiped out, too, in cases like this.
Thanks for the insight. I had guessed that most of the aquihires price are set at (investments + $500K/employee). If this wasn't the case, I would think that employees would have no incentive to get onboard and that would basically not allow the sale to go through. Is this not the case in your experience?
Made 1 million on a company exit of about 100 million as technical co-founder. Started with 15% but got diluted to 1% after several rounds of funding including down rounds.
While I don't disagree with your comment much (if the technical cofounder was diluted down to 1%, guessing pretty much all employees received well under $100k), it's weird that you linked to that "tech bubble" video from 2007. If anything, Peter Thiel was exactly right, and he understood that winner-take-all tech leaders would become insanely valuable. That video is arguing 2007 Facebook was a bubble at a $15 billion valuation. It's worth $470 billion today.
$0 at one and $80,000 at another. I spent several thousand on something I wanted, and banked the rest. My boss bought a nice car. Oh, and a third sold and the buyer had a clause where if you quit you got shit.
I'm a senior software engineer with over 12 years of experience.
6 out 7 start ups I worked for never had a liquidation event that resulted in any monetary gain.
The one that did ( i was employee #97 and worked there for almost 6 years) and they finally had a 2ndary offer which allowed me to sell 15% of my shares, for about 7K, but because it's short term gains, about 4K is what I got after taxes.
The rest of the shares were completely worthless because they couldn't be sold. I am not disappointed. I never assumed the options would ever be worth anything - I choose my employment based on Salary and work life balance. Options are just a nice bonus, if they do happen.
Your argument is not making sense to me as someone who had offers from startups. I was asked to take roughly 40% pay cut now and expect 10X increase in valuation for equity over 4 years which would put me ahead by 2X to 3X in terms of total compensation over that time frame. I didn't took the offer taking to account risk of failure (~80%). If I treated options as "nice bonus" it would never make sense to take any startup offer over jobs at established companies.
That's why people say look at them like lottery tickets.
There's many factors that go into whether or not they are worth anything - dilution and whether or not the startup is successful. The successful startup part needs good management, good demand for product, competitive against competitors.
> I was asked to take roughly 40% pay cut now and expect 10X increase
Of course you were.
They are selling you on the dream, the best case scenario, etc.
The hard part is that no-one is intentionally or literally defrauding, but it is up to every person what terms they agree to.
About $2500. It was basically a lousy tip for about 14 months work.
Some context: The initial offer was either higher salary and lower equity, or lower salary and higher equity. The difference in pay was $5000 / year. Given the nature of the exit, I felt like a decent thing to do was at least make up the difference in pay. (The terms of the deal were confidential.)
Things were eventually "made right" by the new owner.
The problem with startup equity is that employees almost always have little bargaining power and always are kept in the dark about the real value of the equity. It almost always turns into a lottery ticket... Some people make out well, others don't, and always for reasons out of the employees control.
> always are kept in the dark about the real value of the equity
Why would shareholders stay in the dark? Is it because these employees-shareholders are not curious enough to request information about the company they own?
Because employee-shareholders are NOT owners. The system is compensation, and in practice is designed to keep employee-shareholders out of all "ownership" tasks.
Equity is really a benefit that's part of compensation; it's not the same as voting rights. I like equity because I feel like I have "skin in the game," but I never consider it ownership.
A simpler way is: you are only an owner if you have >= 1% and some kind of voting rights.
Five out of seven startups were zero. One was $17K, another was $2K. At all but one place the salaries were not great.
I have done far, far better at larger companies in terms of salary and stock programs. If I'd stayed one of the big companies, I'd likely be able to retire right now (not that I will -- I like writing software and I plan to continue doing it as long as I can, ideally well into my 70s).
Startup 1: $0
Startup 2: $0
Startup 3: Would’ve made ~$40k had I not left so early (left after 7 months, sold for a couple hundred million like 6 months later)
Startup 4: Publicly traded now, will see how it turns out but hopefully $100k or more
At the now public company, it wasn’t a %, but just a grant mix of options post IPO and a grant of RSUs as well because of some funny timing with the IPO.
I only planned on staying a year before moving so I didn’t negotiate any stock into the initial comp package, but later re-negotiated that into the plan which resulted in the weird timing around IPO so have a weird mix of options and RSUs.
I probably lost about $3,500-4,000. Startup was having financial issues, and got last minute funding. People were asking to give up salary for more equity. I was employee #1, and really enjoyed working there, so I took the deal. I truly believed with had a great product, but that's not enough for a company to succeed. Company went out of business 6 months later.
Not a huge financial loss, but I learnt a valuable lesson.
The current company I’m at just sold about a month ago for $140mil. I was one of the first engineers (the three of us originals all started at the same time) and started a few months after initial funding was raised. Between my purchased options and non-purchased vested options I made about $130k and have another about $40k in remaining options that are converting over. I was kept on by the acquiring company and given a new company package with about $40k of additional RSUs that vest over 4 years.
My original option grant was for 0.00225%. I optimized for salary when I was hired, due to the stock at my previous two startups being worthless, and didn’t fight for more. Between series A and B we were going through some rough times as a company and I was granted a second grant of the same number of shares but not sure what the percentage turned into.
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[ 2.7 ms ] story [ 74.6 ms ] threadAlso, what was the tax bill on the $14k and $1.1M in terms of percentage? Was it long term capital gains 15% fixed?
What GP was trying to convey, albeit in a slightly confusing fashion, was this:
1. He had $14,000 in capital gains
2. No tax was directly accessed against this $14,000 amount, in other word: "tax bill was ~0 on the $14K".
3. The taxable portion of his capital gains was $14,000 * 50% = $7000
4. He paid his marginal tax rate on the taxable portion of his capital gains ($7000)
20% earned in a probability friendly way, is much better than 100% in a low probability way (as very high chances would have been of it nearing 0%)
Back when I was a tax lawyer, you could exclude 50% of your gain, though the rules may have changed. Also, if you rolled over your gains into other “qualified small businesses”, you could defer taxation altogether.
Not sure what you mean about a business that has no stock (sole proprietorship?).
When sold we got 15% in cash, and 85% in stock in the public internet company, that was locked up for one year. The cash was a $800,000+ check. A year later i sold the stock for maybe $150k.
If I could have sold earlier I would have. Even then i understood a near revenue-less business couldn’t be worth $500M+.
Of all the companies/startups I've worked for, this one was by far the most corporate and least startup-ey, yet this was the only one that made me more than a penny after an exit, despite working at a few other startups that have had "exits."
Startup 2: $0
Startup 3: $3,000,000
Startup 4: $0
That's over the course of 25 years, with a few stints at non-startups as well.
As someone from humble origins, it surprises me more people don't live frugally 5-10 years in the Bay then retire in luxury somewhere with lower cost of living.
I have never worked in the Bay Area. Or anywhere on the West Coast for that matter. And most of my career has been outside of the US by this point (including the successful exit).
Ballpark numbers: I had 300 options at $5. post-IPO price was around $15. I did the "sell to buy" thing, so I sold roughly 100 shares to pay for buying all 300. I haven't sold the other ones yet but the stock is north of $50/share. It seems like there's less than 20k shares total in circulation. (that's like an order of magnitude less than I expected? I took "shares held(000s)" and divided by "% Own", and rounded.)
I have the impression that most of the "old-timer" employees did quite well as long as they sold their stocks at the right time: one guy spent 6+ months traveling and then took his time finding his next job, another guy thinks he might be able to retire in his '40s.
edit: as elsewhere in this thread, I also worked at a startup that failed ($0), and I've left a couple that to my knowledge are still going ($ -4k , because both times i bought options on my way out just in case they make it)
- 20k total shares would mean a market cap of $1M, and an IPO price of $300k. Those are not viable numbers.
- 20k total shares vs. you having 300 options means you would have been given 1.5% of the company in one year. That's totally absurd given you worked there for a year as an entry-level engineer and the company had several hundred employees.
A few hundred million exit will result in ZILCH (almost $zero) for any common stock shareholder every single time, unless the company was in series A or lower.
VCs have a separate share class called Preferred, and they also negotiate "Liquidation Preferences" with a multiple. So a Liquidation Preference x1 means they get their money back, as much as possible. A Liquidation Preference x2 means they get double their money no matter what, before anybody else - like common stockholders - get paid.
And this is before your stock options' strike price matters.
Its a shitty deal, investor protection laws should be extended to cover this, because the information and transparency is lacking.
My impression is that founders or early investors often have a lot of ability to dilute the value of stock prior to making a deal (there’s description of similar shenanigans early in “Chaos Monkeys”)
I was the 2nd employee too.
I got $130k, and their options were worthless.
Luckily the acquirer offered retention bonuses that helped dull the pain, but of course those are taxed at regular income and not long term capital gains.
Oh, and like a previous comment mentioned: the VCs have preferred stock so they get their investment back 100% before any common stock sees a penny. If employees had the same stock as VCs, I estimate I would have walked away with about $400k.
What usually happens is, say the company has received $x million in funding. Everyone is plugging away working hard, but runway starts to run short and the product isn't getting the traction originally anticipated. At that point it looks obvious the company will go bankrupt relatively soon, so the investors push for a sale to try to recoup some of the their money. Often times there is value in the team and perhaps industry knowledge to the acquiring company, but the tech itself is often worthless, so the sales price is below the $x million capital raised and only holders of preferred shares get anything.
Note that founders rarely own preferred shares. They have common stock just like employees, so they are usually wiped out, too, in cases like this.
haha WOW oh my god, and the software engineers getting a fraction of a fraction of a percent and being "reassured" that its a generous offer!
https://www.youtube.com/watch?v=I6IQ_FOCE6I
extremely relevant and the 2007, in italics for emphasis, is irrelevant ... or is it timeless
Peter Thiel? yeah I'm going to go with "'Missed the Point', for $10,000"
6 out 7 start ups I worked for never had a liquidation event that resulted in any monetary gain.
The one that did ( i was employee #97 and worked there for almost 6 years) and they finally had a 2ndary offer which allowed me to sell 15% of my shares, for about 7K, but because it's short term gains, about 4K is what I got after taxes.
The rest of the shares were completely worthless because they couldn't be sold. I am not disappointed. I never assumed the options would ever be worth anything - I choose my employment based on Salary and work life balance. Options are just a nice bonus, if they do happen.
> I was asked to take roughly 40% pay cut now and expect 10X increase
Of course you were. They are selling you on the dream, the best case scenario, etc. The hard part is that no-one is intentionally or literally defrauding, but it is up to every person what terms they agree to.
It doesn't, from a financial perspective.
Some context: The initial offer was either higher salary and lower equity, or lower salary and higher equity. The difference in pay was $5000 / year. Given the nature of the exit, I felt like a decent thing to do was at least make up the difference in pay. (The terms of the deal were confidential.)
Things were eventually "made right" by the new owner.
The problem with startup equity is that employees almost always have little bargaining power and always are kept in the dark about the real value of the equity. It almost always turns into a lottery ticket... Some people make out well, others don't, and always for reasons out of the employees control.
Why would shareholders stay in the dark? Is it because these employees-shareholders are not curious enough to request information about the company they own?
Equity is really a benefit that's part of compensation; it's not the same as voting rights. I like equity because I feel like I have "skin in the game," but I never consider it ownership.
A simpler way is: you are only an owner if you have >= 1% and some kind of voting rights.
I have done far, far better at larger companies in terms of salary and stock programs. If I'd stayed one of the big companies, I'd likely be able to retire right now (not that I will -- I like writing software and I plan to continue doing it as long as I can, ideally well into my 70s).
Overall, simply bank on it being nothing
I only planned on staying a year before moving so I didn’t negotiate any stock into the initial comp package, but later re-negotiated that into the plan which resulted in the weird timing around IPO so have a weird mix of options and RSUs.
Not a huge financial loss, but I learnt a valuable lesson.