>Fortunately, we have figured out how to do that at Cruise.
i think SAS and the likes have been doing it that way for decades. I guess there is a reason why that isn't that popularly known :) Though giving current market swings one can see how even public FAANG and the rest may also want to adopt something like this instead of dealing with backfills/etc.
Also, Google tried to do an extreme version of it for Google X/Waymo (16x artificial appreciation in 3 years) and it noticeably dented their financials at the time.
This is interesting. I'm curious how this will be functionally different from using Carta to allow secondary sales.
Namely, I wonder who the "others" (other than GM) are. In addition to this being attractive for employees, is it also a way for additional institutional investors to take an equity stake in Cruise?
SpaceX has been doing this for years, albeit at a lower cadence. There are predictable pros and cons: lack of confidence in the "independently derived" price—it's easier to trust the market—but shares imbued with some nonzero real value.
I think this misses it a little bit. While it certainly is a problem to have a large $ value on stock that you can’t sell yet, it is a nice problem to have.
The real risk with joining a startup is that it might very likely NEVER be worth much at all. Whereas at a mature or public company, you can have some confidence that at least your stock is worth something today.
Of faang gives me $100k in stock, that’s real money I can put in my pocket. When a startup offers me 100k shares, it’s likely that having a chance to sell them doesn’t matter, because they aren’t worth selling. Of course, it can certainly go the other way and make me rich too. Hence the risk.
It’s not always a nice problem to have. Before a change in tax policy under Trump it was possible to have taxes due on some of the gains the stock had made before you were able to sell it. At least with this type of liquidity program you could cash in enough options to pay the taxman rather than forfeit all your options to avoid taxes.
It is difficult for the valuation. It might not be worth the cost, especially considering that large amount of shares are held by early investors and founder.
At the very least I’m glad more private companies are exploring ways to provide their employees with liquidity.
Issues I can foresee:
- Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have.
- Fewer employees with huge returns. This may or may not be a problem depending on your perspective. This type of system incentivises employees to lock in gains and sell their shares when they see reasonably growth. That’s also a lost opportunity for the future if the share price continues to grow. If you see a 10x increase in the price, you’re likely to sell. The share price could continue to grow by another 100x and you would mostly miss out in that case. In the most optimistic case for private companies, the lack of liquidity is a _good_ thing. You can only sell your shares at IPO when there has been more than 1000x return since seed stage.
I can see this being a huge positive for hiring though. If I was considering multiple AV companies for roles, this would be a huge plus point for Cruise.
409A valuations are almost always paid for by a party that has some interest in the outcome being high (or low). Moreover, said party usually decides who does the 409A valuation.
My limited experience has been that 409a valuations are extremely different from what investors pay (what investors pay per share is much more). I am curious if there has been much written about why this is.
Valuations? You realize the valuation of a small company is much, much harder than the valuation of a public company right? I know a valuator who can take the information of a public company and tell you to about 10% its price on the stock market. 10% isn't good enough for playing the stock market, but with small companies the error factor is like 1000. Meaning your unicorn could actually be worth a million (firesale of assets, IP to patent trolls, fighting over scraps of the VC money) or a trillion (FAANG will now be referred to as FAANGU, U being for Unicorn corporation, your company). It might be more than 1000, it's really all over the map, I can say with certainty though it's less than 1000000.
"Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have."
Yeah, but it's relatively even-handed BS if you're being given the option to sell, not being forced. If you're getting the same deal the investors and/or founders are getting, then you're not being cheated.
As for "the early employees might sell earlier", well... said early employees have a lot of info about what's going on. The risk is what it is. If you can "only sell your shares at IPO when there has been more than 1000x return since seed stage" the modal outcome ends up being "you can never sell your shares". This allows the employee to trade the lottery ticket in the future for some decent money now, and that's broadly sensible. But even more than that, it allows employees to diversify by having a bit of both. I've had cases where I'd appreciate that.
Your second complaint only makes sense if the company doesn't want to go public to screw its employees over. If the offer is good you take it, it's still a market with one participant instead of no market.
Your third opinion literally involves most employees getting nothing.
It's nice to offer liquidity to employees before an acquisition/IPO event, but the "equity value" section sounds a lot like a 409a valuation which is typically a conservative valuation of the company in my experience. I'm not convinced employees will get a very good deal on their shares by selling early rather than waiting for an IPO. It's therefore not surprising that the parent company (GM) is so willing to commit to purchasing these shares, because it seems they're basically getting a discounted buy-back.
Which I think is fair. Having liquidity for employees of private companies is important and something that is very lacking currently. Right now it seems like your options are risk joining a Series A/B/C/etc company and potentially have to wait 5-7+ years while being fully illiquid the whole time and hoping they IPO or get acquired otherwise all your equity is useless. Or join a public company that typically has a 1 year cliff and then quarterly vests of RSU's that are much more liquid.
I'm seeing a lot of early stage startups offer much higher base salaries to compete with the big tech companies that can give out RSU's and this skew in the long run I feel hurts employees more than companies. So I think this levels the playing field a little bit.
From the post: "The access to capital and the ability for shareholders to sell on an open market are certainly attractive, but the benefits of an IPO come at a great cost — distraction — that is often overlooked."
Could someone please summarize for me the costs / distractions of an IPO that a private company has to undergo?
Public companies have huge reporting requirements that require much greater audit/visibility into business activities and are also scrutinized much more closely in the press.
> The world has become a bit more complicated lately. Private companies are waiting to go public for longer
There's probably a reason for that: most "innovative startups", especially in the US, are like Cruise: they lose up to a billion dollars a year with no consequences at all. Some, lik Cruise, have nothing to show for it in terms of either product or long term plans to become even slightly profitable.
So they wait for longer to see two things happen one after another:
First, hopefully have enough unlimited inverstor money to corner a market or a niche.
Seond, go for an IPO as "the innovative market leader" (aka the one with deeper investor pokets than competition that is doing literaly the same).
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In case of Cruise, they are losing 200-300 million dollars per quarter. Trying to compete in the same space as Uber (loses up to a billion dollars a year) and Lyft (up to 1.7 billion dollars a year).
Edit: And Waymo, which is a part of Google's "other bets", and those bets are losing billions, too.
Really? I think they're taking a huge amount of credit for something that really isn't that complicated. Particularly in the US which has a healthy secondary market.
Sorry if that feels a bit negative, but what is Cruise really bragging about here, and why are they bragging about it? I assume they are thinking this gives them some perceived advantage in hiring, but realistically, any company that has reached their scale and level of success could have such agreements in place, and I'm sure many do.
Please go ahead and name any other well-paying pre-IPO tech company which has regularly scheduled liquidity events for its employees as a matter of publicly stated company policy (rather than as random one-offs, which are already pretty rare).
What's that? There are none? You don't say!
A "healthy" secondary market there may be, but that does employees of most startups little good when selling their equity requires board approval, which 1) is a huge hassle, 2) is not even remotely guaranteed to be granted, and 3) there's no reliable way to figure out if you'll have that chance before you join and try it (at least a year later).
A Senior 1 offer from Cruise just went from 300k cash and 225k "equity" per year ("IPO plans? What IPO plans?") to 300k cash and 225k equity per year ("Yep, you can sell it every three months. Sure, we could roll this program back, but we'd probably lose 20% of our new hires within a month."). Good luck finding another startup that'll give you the same promise!
Not really related to the point I was trying to refute, but IMO there are two primary sources of difficulty when it comes to selling private equity as an employee:
1) regulations (imposing barriers & increasing friction as both first-order and second-order effects)
2) companies don't want it (i.e. for incentive alignment reasons, or other)
Regulations have a trivial solution, though obviously one that's not super popular.
Companies not wanting to allow employees to sell equity... well, there are probably some of those? My (mostly uninformed) speculation is that most companies past a couple hundred employees don't actually care, and to the extent that they do it's a mistake to try to lock employees in with golden handcuffs. Allowing the (relatively) free sale of equity before IPO increases the value of the equity, which makes their offers correspondingly more competitive; there are probably _some_ countervailing considerations but I think they're overwhelmingly dominated by potential employees going from "my modal outcome from this equity is 0" to "my modal outcome from this equity is [big number with large error bars, based on the current market price for the equity]".
If I'm looking for a new job in a specific pay range, the only way I can know whether a pre-IPO company's equity is liquid or not is if they explicitly say so, or if there's confirmation online (though obviously that's less reliable). If it's such a well-kept secret that there's not a single person talking about it on Blind, despite the many threads & posts about Canva (including by current employees) and their equity offerings, then it certainly isn't going to make my list.
I don't think this is a new thing (though doing them quarterly probably is) - we called them "internal liquidity events" where I used to work pre-IPO. They provide some liquidity to employees (probably at a price worse than what you'd get after going public since private valuations are mostly bullshit, and these events are only really viable with investors willing to be on the other side of the trade). They can also help with companies private for decades if employee options are approaching 10yr expiration.
They're okay - still imo it's better to be public for employee liquidity in order to get accurate pricing.
Though if I was a founder I'd see the draw of doing it this way, running a public company is a much larger pain than remaining private while still providing some internal liquidity to employees.
Related, the current tax of the strike -> FMV spread on exercise above AMT for ISOs hurts employees and I don't understand the USG rationale for this. If you could exercise tax free it'd make things way simpler for employees and they'd just pay tax on future sale. Still a risk, but not nearly as bad in most cases. It also makes it easier to save up, exercise and hold for long term cap gains.
A lot of people end up forced to participate in these liquidity events (at best - if they're not available there are companies that will front your exercise cost for an extortionate cut) when they otherwise wouldn't because they're approaching expiration and can't afford to pay both the strike and the tax cost on this "income" - when a lot of the time you can't even sell the shares.
I don't know why you'd put income in quotes. It's things you are being paid for your work. If you want to avoid the tax later, exercise the options as soon as they're available and assume the risk.
It's in quotes because you often can't liquidate the exercised shares of a private company.
So acting as if the spread is income prior to an actual sale for tax reasons is wrong (imo) and bad policy.
You're still assuming risk when exercising options even when there's a spread, that risk is only eliminated when you sell them (which is when you should get taxed).
We don't tax people on unrealized gains, why do we tax people on unrealized gains when exercising options? A reason might exist, but I haven't heard one that's made sense.
Surprised at all the negativity here. Anything that gives employees liquidity options is a good thing IMO. Maybe some other companies have allowed their employees to sell shares sometimes, but has anyone ever done it on a scheduled quarterly basis?
I would consider this seriously if they also added these:
Employees should be able to sell at every external funding rounds at fresh valuations.
Company should share key performance metrics that drive investor interest and valuations with all employees.
The independent 3rd party company should provide a detailed methodology and breakdown for each valuation the provide. Initially, they should provide a demo how it works by doing the in-between valuations for previous funding rounds.
Great recruiting hook, but is it different from secondary sales that later-stage startups are already doing?
I suppose predictability in liquidity is useful, but wonder if price per share will be lower than preferred price. And could incentivize startup to delay their IPO even further?
I believe Vestd (https://www.vestd.com/) is a suitable engine to achieve a very similar outcome to this in UK, or at least provide the framework to do it. It's like a slightly more mature version of Slicing Pie
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[ 217 ms ] story [ 2211 ms ] threadi think SAS and the likes have been doing it that way for decades. I guess there is a reason why that isn't that popularly known :) Though giving current market swings one can see how even public FAANG and the rest may also want to adopt something like this instead of dealing with backfills/etc.
Also, Google tried to do an extreme version of it for Google X/Waymo (16x artificial appreciation in 3 years) and it noticeably dented their financials at the time.
Namely, I wonder who the "others" (other than GM) are. In addition to this being attractive for employees, is it also a way for additional institutional investors to take an equity stake in Cruise?
The real risk with joining a startup is that it might very likely NEVER be worth much at all. Whereas at a mature or public company, you can have some confidence that at least your stock is worth something today.
Of faang gives me $100k in stock, that’s real money I can put in my pocket. When a startup offers me 100k shares, it’s likely that having a chance to sell them doesn’t matter, because they aren’t worth selling. Of course, it can certainly go the other way and make me rich too. Hence the risk.
Issues I can foresee:
- Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have.
- Fewer employees with huge returns. This may or may not be a problem depending on your perspective. This type of system incentivises employees to lock in gains and sell their shares when they see reasonably growth. That’s also a lost opportunity for the future if the share price continues to grow. If you see a 10x increase in the price, you’re likely to sell. The share price could continue to grow by another 100x and you would mostly miss out in that case. In the most optimistic case for private companies, the lack of liquidity is a _good_ thing. You can only sell your shares at IPO when there has been more than 1000x return since seed stage.
I can see this being a huge positive for hiring though. If I was considering multiple AV companies for roles, this would be a huge plus point for Cruise.
FWIW, 409a valuations are calculated by third parties. Maybe not as efficient as a market, but a well accepted standard.
Yeah, but it's relatively even-handed BS if you're being given the option to sell, not being forced. If you're getting the same deal the investors and/or founders are getting, then you're not being cheated.
As for "the early employees might sell earlier", well... said early employees have a lot of info about what's going on. The risk is what it is. If you can "only sell your shares at IPO when there has been more than 1000x return since seed stage" the modal outcome ends up being "you can never sell your shares". This allows the employee to trade the lottery ticket in the future for some decent money now, and that's broadly sensible. But even more than that, it allows employees to diversify by having a bit of both. I've had cases where I'd appreciate that.
You're never getting the same deal as investors or founders. Ever.
Your third opinion literally involves most employees getting nothing.
I'm seeing a lot of early stage startups offer much higher base salaries to compete with the big tech companies that can give out RSU's and this skew in the long run I feel hurts employees more than companies. So I think this levels the playing field a little bit.
Could someone please summarize for me the costs / distractions of an IPO that a private company has to undergo?
There's probably a reason for that: most "innovative startups", especially in the US, are like Cruise: they lose up to a billion dollars a year with no consequences at all. Some, lik Cruise, have nothing to show for it in terms of either product or long term plans to become even slightly profitable.
So they wait for longer to see two things happen one after another:
First, hopefully have enough unlimited inverstor money to corner a market or a niche.
Seond, go for an IPO as "the innovative market leader" (aka the one with deeper investor pokets than competition that is doing literaly the same).
---
In case of Cruise, they are losing 200-300 million dollars per quarter. Trying to compete in the same space as Uber (loses up to a billion dollars a year) and Lyft (up to 1.7 billion dollars a year).
Edit: And Waymo, which is a part of Google's "other bets", and those bets are losing billions, too.
Really? I think they're taking a huge amount of credit for something that really isn't that complicated. Particularly in the US which has a healthy secondary market.
Sorry if that feels a bit negative, but what is Cruise really bragging about here, and why are they bragging about it? I assume they are thinking this gives them some perceived advantage in hiring, but realistically, any company that has reached their scale and level of success could have such agreements in place, and I'm sure many do.
What's that? There are none? You don't say!
A "healthy" secondary market there may be, but that does employees of most startups little good when selling their equity requires board approval, which 1) is a huge hassle, 2) is not even remotely guaranteed to be granted, and 3) there's no reliable way to figure out if you'll have that chance before you join and try it (at least a year later).
A Senior 1 offer from Cruise just went from 300k cash and 225k "equity" per year ("IPO plans? What IPO plans?") to 300k cash and 225k equity per year ("Yep, you can sell it every three months. Sure, we could roll this program back, but we'd probably lose 20% of our new hires within a month."). Good luck finding another startup that'll give you the same promise!
I mean, if you have a solution to that problem we should implement it.
1) regulations (imposing barriers & increasing friction as both first-order and second-order effects)
2) companies don't want it (i.e. for incentive alignment reasons, or other)
Regulations have a trivial solution, though obviously one that's not super popular.
Companies not wanting to allow employees to sell equity... well, there are probably some of those? My (mostly uninformed) speculation is that most companies past a couple hundred employees don't actually care, and to the extent that they do it's a mistake to try to lock employees in with golden handcuffs. Allowing the (relatively) free sale of equity before IPO increases the value of the equity, which makes their offers correspondingly more competitive; there are probably _some_ countervailing considerations but I think they're overwhelmingly dominated by potential employees going from "my modal outcome from this equity is 0" to "my modal outcome from this equity is [big number with large error bars, based on the current market price for the equity]".
If I'm looking for a new job in a specific pay range, the only way I can know whether a pre-IPO company's equity is liquid or not is if they explicitly say so, or if there's confirmation online (though obviously that's less reliable). If it's such a well-kept secret that there's not a single person talking about it on Blind, despite the many threads & posts about Canva (including by current employees) and their equity offerings, then it certainly isn't going to make my list.
They're okay - still imo it's better to be public for employee liquidity in order to get accurate pricing.
Though if I was a founder I'd see the draw of doing it this way, running a public company is a much larger pain than remaining private while still providing some internal liquidity to employees.
Related, the current tax of the strike -> FMV spread on exercise above AMT for ISOs hurts employees and I don't understand the USG rationale for this. If you could exercise tax free it'd make things way simpler for employees and they'd just pay tax on future sale. Still a risk, but not nearly as bad in most cases. It also makes it easier to save up, exercise and hold for long term cap gains.
A lot of people end up forced to participate in these liquidity events (at best - if they're not available there are companies that will front your exercise cost for an extortionate cut) when they otherwise wouldn't because they're approaching expiration and can't afford to pay both the strike and the tax cost on this "income" - when a lot of the time you can't even sell the shares.
So acting as if the spread is income prior to an actual sale for tax reasons is wrong (imo) and bad policy.
You're still assuming risk when exercising options even when there's a spread, that risk is only eliminated when you sell them (which is when you should get taxed).
We don't tax people on unrealized gains, why do we tax people on unrealized gains when exercising options? A reason might exist, but I haven't heard one that's made sense.
I can't really see this being more advantageous for employees vs testing private markets.
Employees should be able to sell at every external funding rounds at fresh valuations.
Company should share key performance metrics that drive investor interest and valuations with all employees.
The independent 3rd party company should provide a detailed methodology and breakdown for each valuation the provide. Initially, they should provide a demo how it works by doing the in-between valuations for previous funding rounds.
I suppose predictability in liquidity is useful, but wonder if price per share will be lower than preferred price. And could incentivize startup to delay their IPO even further?
Having the option for faster liquidity is a huge plus though, especially for people who have multiple millions and want to take some $ off the table: https://topstartups.io/startup-salary-equity-database/