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- # What I Wish I'd Known About Equity Before Joining A Unicorn
- **Disclaimer:** This piece is written anonymously. The names of a few
- particular companies are mentioned, but as common examples only.
- This is a short write-up on things that I wish I'd known and
- considered before joining a private company (aka startup, aka unicorn
- in some cases). I'm not trying to make the case that you should
- _never_ join a private company, but the power imbalance between
- founder and employee is extreme, and that potential candidates would
- do well to consider alternatives.
- None of this information is new or novel, but this document aims to
- put the basics in one place.
- ## The Rub
- ### Lock In
- * After leaving a company, you generally have 90 days to exercise
- your options or they're gone. This seems to have originally
- developed around a historical rule from the IRS around the
- treatment of ISOs, but the exact reason doesn't really matter
- anymore. The only thing that does matter is that if you ever want
- to leave your company, all that equity that you spent years
- building could evaporate if you don't have the immediate cash
- reserves to buy into it.
- * Worse yet, by exercising options you owe tax immediately on money
- that you never made. Your options have a _strike price_ and private
- companies generally have a _409A valuation_ to determine their fair
- market value. You owe tax on the difference between those two
- numbers multiplied by the number of options exercised, even if the
- illiquidity of the shares means that you never made a cent, and
- have no conceivable way of doing so for the forseeable future.
- * Even if you have the money to buy your options and pay the taxman,
- that cash is now locked in and could see little return on
- investment for a long and uncertain amount of time. Consider the
- opportunity cost of what you could otherwise have done with that
- liquid capital.
- * Due to tax law, there is a ten year limit on the exercise term of
- ISO options from the day they're granted. Even if the shares aren't
- liquid by then, you either lose them or exercise them, with
- exercising them coming with all the caveats around cost and
- taxation listed above.
- Does ten years sound like a long time? Consider the ages of these
- unicorns:
- * Palantir is now thirteen years old.
- * Dropbox will be ten years old this year (2017).
- * AirBnB, GitHub, and Uber are all within a year or two of their
- ten year birthdays.
- * Some companies now offer 10-year exercise window (after you quit)
- whereby your ISOs are automatically converted to NSOs after 90
- days. This is strictly better for the employee than a 90-day
- window, but as previously mentioned, ten years still might not be
- enough.
- * Golden handcuffs kick in fast. The longer you stay with a company,
- the more equity you build, and a decision to leave becomes that
- much harder. This can culminate to the point where early employees
- have modest liquid assets but are "paper millionaires", and have to
- make the hard decision to throw all that away or stick around until
- their founders allow them some return.
- ### Liquidity Events
- * No time horizon for any kind of liquidation guaranteed. In fact,
- _no liquidation event_ is ever guaranteed, even if the company is
- highly successful. One could be at 1 year out, 5 years, 10 years,
- or never. We've seen a lot of evidence in this day and age that
- companies are staying private for longer (see the list above).
- * The incentive to IPO between employer and employee are not aligned.
- Employees want some kind of liquidation event so that they can
- extract some of the value they helped create, but employers know
- that allowing employees to extract that value might cost them some
- of their best people as they're finally allowed the opportunity to
- pursue other projects. One more reason to stay private for longer.
- * Although the above is one reason that founders don't want to
- IPO, it's not the _only_ reason. Many of them do believe
- (rightly or wrongly) that there is another 10x/100x worth of
- growth left in the company, and that by pulling the trigger too
- early on an IPO all of that potential will be lost. For a
- normal founder, their company is their life's work, and they're
- willing to wait a few more years to see the canvas fully
- realized. This is a more noble reason not to liquidate, but
- from an employee's perspective, is still problematic.
- ### Founder/Employee Power Imbalance
- * Founders (and favored lieutenants) can arrange take money off the
- table while raising rounds and thus become independently wealthy
- even before they make true "fuck you" money from a large scale
- liquidation event. Employees cannot. The situation is totally
- asymmetric, and most of us are on the wrong end of that.
- * Even if you came into a company with good understanding of its cap
- table, the ground can shift under your feet. New shares can be
- issued at any time to dilute your position. In fact, it's common
- for dilution to occur during any round of fundraising.
- ### Private Markets
- * Private markets do exist that trade private stock and even help
- with the associated tax liabilities. However, it's important to
- consider that this sort of assistance will come at a very high
- cost, and you'll almost certainly lose a big chunk of your upside.
- Also, depending on the company you join, they may have restricted
- your ability to trade private shares without special approval from
- the board.
- ### Valuations
- * Especially in early stage companies, equity is offered on the basis
- of a highly theoretical future valuation number. Sam Altman
- recommends offering the first ten employees 10% (~1% each), which
- could be a big number if the company sells for $10B, but consider
- how few companies actually make it to that level.
- If the company sells for a more modest $250M, between taxes and the
- dilution that inevitably will have occurred, your 1% won't net you
- as much as you'd intuitively think. It will probably be on the same
- order as what you might have made from RSUs at a large public
- company, but with far far more risk involved. Don't take my word
- for it though; it's pretty simple math to run the numbers for a
- spread of sale prices and dilution factors for yourself before
- joining, so do so.
- ### Tender Offers
- * Some companies acknowledge the effect of drawn out phases of
- illiquidity on employees and engage in a tender offer to give
- employees some return (google around for some examples). I don't
- want to overstate this because receiving a tender offer is strictly
- better than the alternative, but keep in mind that one will
- probably be structured to minimize the amount of value you can
- extract. They're also very likely be infrequent events. Read the
- fine print, run the numbers, and consider how much your annual
- return _to date_ will actually be (including all the time you've
- spent at the company, not just the year of the offer). It's
- probably less than what you could've gotten in RSU grants at a
- public company.
- ### Working Environment
- * This isn't equity related, but it's worth considering that the
- environment at a big unicorn isn't going to be measurably different
- from a big public company. You're going to have little impact per
- employee, the same draconian IT security policies, lots of
- meetings, and fixed PTO. In the worst cases, you might even have to
- use JIRA.
- ## I'm Doing It Anyway!
- So you decided to join a private company anyway. Here's a few
- questions that I'd recommend knowing the answer to before accepting
- any offer (you'd be amazed at how infrequently this information is
- volunteered):
- * How long is my exercise window if I leave the company?
- * How many outstanding shares are there? (This will allow you to
- calculate your ownership in the company.)
- * Does the company's leaders want it to be sold or go public? If so,
- what is the rough time horizon for such an event? (Don't take "we
- don't know" for an answer.)
- * Have there been any secondary sales for shares by employees or
- founders? (Try it route out whether founders are taking money off
- the table when they raise money, and whether there has been a
- tender offer for employees.)
- * Assuming no liquidation, are my shares salable on a private market?
- * Has the company taken on debt or investment with a liquidation
- preference of more than 1x? (Investors may have been issued > 1x
- liquidation preference, which means they get paid out at that
- multiple before anyone else gets anything.)
- * Will you give me an extended exercise window? (After joining I
- realized that most people's window was the standard 90 days, but
- not _everyone's_. Unfortunately by then I'd lost my negotiating
- leverage to ask for an extended term.)
- It's really tough to ask these without sounding obsessed with money,
- which feels unseemly, but you have to do it anyway. The "you" of
- today needs to protect the "you" of tomorrow.
- ## Summary
- Working at a startup can be fun, rewarding, interesting, and maybe
- even lucrative. The working conditions at Silicon Valley companies
- are often the best in the world; it's quite conceivable that you
- might want to stay there even if there was never a possibility of a
- payoff. But don't forget that as far as equity is concerned, every
- card in the deck is stacked against you.
- The correct amount to value your options at is $0. Think of them more
- as a lottery ticket. If they pay off, great, but your employment deal
- should be good enough that you'd still join even if they weren't in
- your contract.
- I don't say this just because of the possibility that your startup
- could fail, but also because even in the event of success, there are
- plenty of scenarios where getting a payout will be difficult. Say for
- example that five years in you want to try something new, or want to
- start a family and need a job that will pay you well enough to let
- you afford a starter home in the Bay Area (not easy). Your startup
- Monopoly money will put you in a precarious position.
- If you're lucky enough to be in high enough demand that you can
- consider _either_ a public company with good stock liquidity _or_ a
- billion-dollar unicorn, give serious consideration to the former.
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