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I disagree. The most common way to predict payout is to compare to other companies' exit valuations. E.g. "Oh, company X got acquired for $250 million. We do s

I disagree. The most common way to predict payout is to compare to other companies' exit valuations. E.g. "Oh, company X got acquired for $250 million. We do something similar. If I own .025% of the company, I'd make $62,500 if we exited at that valuation. Cool." It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% if you're lucky enough to have a successful exit.

doingmyting 8y ago
I'm glad you said this. Many got burned including myself due to dilution events. When your 2% stake turns into 0.25% over time and you get paid last, there needs to be a very large buyout/IPO for you to get anything substantial. Add in the taxes paid on that and I would have been 10 times better working a corporate job with less headaches.
jasode 8y ago
>It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% But you're repeating the same error of prioritizing the wrong thing: dilution. What employees ultimately care about is their wealth calculation: shares_multiplied_by_price. Example of the type of math people actually care about: 0.008% (because dilutions) a $1 billion company is $80k 0.025% (no dilution) of a $100 million company is $25k. People would rather have $80k than $25k. The dilutions that dropped them from 0.025% to 0.008% is irrelevant trivia. For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation. Highlighting "dilution" in advice for employees in an attempt to make them more financially more sophisticated has the opposite effect! The scenarios for dilution to be a calculated strategy would be something like a founder considering 2 different offers from potential investors. One VC offers $20 million for 15% of the company. Another offers $30 million for 25% of the company. Or some founders selling too much of a percentage such that the dilution crosses some boundary such as 51% ownership where they collectively lose control of the company. These deliberate decisions around dilution are very different from employees realistically worrying about dilution dropping them from 0.025% to 0.008%!
- nlh 8y ago
  You’re entirely (technically) correct. The issue is that side-effect often comes into play because employees like to calculate potential future outcomes, and that’s done based only on overall company value (since that’s one of the only data points that’s available from past acquisitions). I’m sure you get this and I know the psychology of what an employee might hope for shouldn’t be relevant, but unfortunately it is. (For those who don’t fully get this - what I mean is that folks often look at a potential outcome and say “other companies like this have been acquired for $1-2B vs $100B, so if I’m being given 1% at $10M my stake could be worth $10M!” When in reality after dilution, that stake might only be worth $2M, which is a very different outcome after 5-10 years of hard work at below market salaries.)
  - tdumitrescu 8y ago
    Another aspect of this is that if you join an early stage startup and work there 5-10 years without any new equity grants (such as the annual refreshers that many companies give) while the company grows and does new funding rounds, then you're getting screwed badly.
    - jiveturkey 8y ago
      only financially, which isn't one of the reasons you should work for a startup!
      - kakaorka 8y ago
        I think getting paid (preferably well) is always one of the reasons why people work for any company, including startups.
  - spookthesunset 8y ago
    What you are saying, I think, is it is important to figure out what the expected future value of each of your shares are. All you have to go on, in general, is "what do companies like this one generally sell for"? From that, assuming all the preferred stock get converted back to common stock, you can figure out what each unit of stock is worth. The problem is, the cap table you have now won't be the cap table you have when the company gets bought out. It's not dilution that is the problem. Dilution is just what happens when you bring in new money. It's that it is very hard to predict what a reasonable upper bound is for the future value of your shares. Quite frankly, it is one of the big reasons I think trading salary for stock options is a horrible idea. Much better to treat those options are lotto tickets--the odds they pay out in any meaningful life changing way are very small. Startups don't like to hear this because the truth is, when you work for a startup you almost always take a sizable hit to your salary.
deleted 8y ago
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doingmyting 8y ago

I'm glad you said this. Many got burned including myself due to dilution events. When your 2% stake turns into 0.25% over time and you get paid last, there needs to be a very large buyout/IPO for you to get anything substantial. Add in the taxes paid on that and I would have been 10 times better working a corporate job with less headaches.

jasode 8y ago

>It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% But you're repeating the same error of prioritizing the wrong thing: dilution. What employees ultimately care about is their wealth calculation: shares_multiplied_by_price. Example of the type of math people actually care about: 0.008% (because dilutions) a $1 billion company is $80k 0.025% (no dilution) of a $100 million company is $25k. People would rather have $80k than $25k. The dilutions that dropped them from 0.025% to 0.008% is irrelevant trivia. For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation. Highlighting "dilution" in advice for employees in an attempt to make them more financially more sophisticated has the opposite effect! The scenarios for dilution to be a calculated strategy would be something like a founder considering 2 different offers from potential investors. One VC offers $20 million for 15% of the company. Another offers $30 million for 25% of the company. Or some founders selling too much of a percentage such that the dilution crosses some boundary such as 51% ownership where they collectively lose control of the company. These deliberate decisions around dilution are very different from employees realistically worrying about dilution dropping them from 0.025% to 0.008%!

nlh 8y ago
You’re entirely (technically) correct. The issue is that side-effect often comes into play because employees like to calculate potential future outcomes, and that’s done based only on overall company value (since that’s one of the only data points that’s available from past acquisitions). I’m sure you get this and I know the psychology of what an employee might hope for shouldn’t be relevant, but unfortunately it is. (For those who don’t fully get this - what I mean is that folks often look at a potential outcome and say “other companies like this have been acquired for $1-2B vs $100B, so if I’m being given 1% at $10M my stake could be worth $10M!” When in reality after dilution, that stake might only be worth $2M, which is a very different outcome after 5-10 years of hard work at below market salaries.)
- tdumitrescu 8y ago
  Another aspect of this is that if you join an early stage startup and work there 5-10 years without any new equity grants (such as the annual refreshers that many companies give) while the company grows and does new funding rounds, then you're getting screwed badly.
  - jiveturkey 8y ago
    only financially, which isn't one of the reasons you should work for a startup!
    - kakaorka 8y ago
      I think getting paid (preferably well) is always one of the reasons why people work for any company, including startups.
- spookthesunset 8y ago
  What you are saying, I think, is it is important to figure out what the expected future value of each of your shares are. All you have to go on, in general, is "what do companies like this one generally sell for"? From that, assuming all the preferred stock get converted back to common stock, you can figure out what each unit of stock is worth. The problem is, the cap table you have now won't be the cap table you have when the company gets bought out. It's not dilution that is the problem. Dilution is just what happens when you bring in new money. It's that it is very hard to predict what a reasonable upper bound is for the future value of your shares. Quite frankly, it is one of the big reasons I think trading salary for stock options is a horrible idea. Much better to treat those options are lotto tickets--the odds they pay out in any meaningful life changing way are very small. Startups don't like to hear this because the truth is, when you work for a startup you almost always take a sizable hit to your salary.

deleted 8y ago

[deleted]