As a normal individual contributor not at the C-level or even management level, I just assume the value of any options/shares I receive is zero unless an accountant or the IRS tells me I should believe otherwise. Too many goofy fine-print shenanigans like this to keep track of.
The IRS has a pretty good incentive to value your options/shares as high as the can, their goals and yours are not aligned. Your accountant may be closer to the true value, but even then it may end up significantly lower or higher in practice.
The only thing that accurately values your shares is a sale.
You owe tax on an exercise below market value, whether you can sell or not. This is why you get the official 409a valuation from the CFO before you file your taxes. The 409a is prepared by the company's CFO, accountants, lawyers, and somehow in conjunction with the IRS (or by IRS rules?) and is the valuation that you use to compute whether you owe tax on an exercise or not.
>The only thing that accurately values your shares is a sale.
Accurately? Perhaps. But until that sale happens, you can still be on the hook for more tax.
This doesn't sound like shenanigans. Reading between the lines:
> While it hasn’t ended up becoming the unicorn I was hoping for
it sounds like the company wasn't a success. It could be the preference overhang, or it could be a difficult acquisition.
Fundamentally, if the company isn't a success relative to the funding, employees aren't going to get paid. Employees can get paid quite well on a $100m exit if eg the funding structure was correct for the exit size.
Right, but my guess is people start talking about being a unicorn probably means they did a unicorn-sized funding round. So total raised is comfortably north of $0.1B.
I don't mean shenanigans as a cutesy word for fraud (and to be completely fair, the author touched on how this is something the industry needs to improve at), but I merely mean that the explanation provided to most workers is "you own X number of shares in the company that are currently valued at Y", and anything missing from that summary that makes it untrue is, well, shenanigans to me.
I totally agree that founders/hiring managers should be very clear on how employees are comped. However, in this specific case, I think a >= 1x preference is so utterly standard that employees of a startup need to do 5 minutes of due diligence and understand how their comp works.
For everyone reading this, there are 3 outcomes:
company failure, company success, middling
In the middling outcomes, people need to know the negotiated rules re: who gets what
the problematic circumstance is when the company doesn’t perform and is forced to raise under desperate circumstances. if you can make that distinction then early equity is worth stupid money (and just leave quickly if the company doesn’t perform)
You can't possibly actually values your shares at zero. Test: can I have all of your shares? No? Well then you must value them at _something_. What if I gave you $1? 10? $100?
Just because something is (even incredibly) risky doesn't mean its value is zero.
When people say that options or pre-ipo shares are “worth nothingl, it doesn’t mean that they literally have zero value on the market. They obviously have value, they have the company had a valuation at issue. It means that you shouldn’t assume you’ll see any value from them. Until a liquidity event, you’re not even a paper thousandaire.
Most private equity is worthless in a couple of years. Most companies crash before any liquidity event. Those that don reach an event, have such a preference stack, and so for such a pittance, the options are underwater.
I just don't think it's a very useful mindset. Or at least, it's not a useful way of phrasing that mindset.
You should absolutely understand the very large chance that your equity is worthless. You should absolutely 100% not plan any part of your life around the equity being worth something. You should understand that, even if the equity is ever worth something, it won't be liquid for a very, very long time.
...but all of that is different than it being worth nothing. I feel like the "your equity isn't worth anything" mindset leads to employees allowing startups to give them smaller amounts of equity than they should. It leads to employees not questioning bad practices (like 3x preferred participating shares) as much as they should.
I've had people quote the "equity is worth $0" thing to me in negotiations about equity/reups. In my head: "Oh that's actually great! You can just give me your equity then instead of me having to negotiate a reup with the company."
Said another way: let's say you find out your startup's VCs have participating preferred shares. There's a world where that's fine -- you just now need more equity to get to the same place as you would in a company that had non-participating preferred. But you need to reason about the value of your equity to reach that conclusion. "Equity is worth $0" discourages thinking about that stuff.
It's a mindset about for thinking about your own finances. That's it. It's absolutely the wrong tool for thinking about equity grants.
I've always considered illiquid equity lottery tickets. Yes, playing the lottery is stupid because the expected value is so small. At the same time, I am absolutely buying into the company lottery pool, and want to maximize the number of tickets I get. If it pays off, wonderful. It it doesn't, whatever, because I never counted on the money to begin with.
Like I said, I just think it's a poor name for that mindset. If what you mean is "Count on your equity being worth $0", say that, and not "Value your equity at $0".
Maybe this has to do with the contexts I've heard it in, but my gut is that it too often deters people from thinking more critically about their equity and whether they're being treated fairly. If someone new to startups read just the comment I originally replied to and not any of this follow-up, would they have understood what you're trying to say?
