nivertech · February 8, 2017 06:24 · Jan 18, 2017 · Jan 18, 2017 · Jan 18, 2017 · Jan 18, 2017
diff --git a/...wish-id-known-before-joining-a-unicorn.md → ...-about-equity-before-joining-a-unicorn.md b/...wish-id-known-before-joining-a-unicorn.md → ...-about-equity-before-joining-a-unicorn.md
@@ -1,4 +1,4 @@
-# Things I Wish I'd Known Before Joining A Unicorn
+# 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.

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -216,5 +216,6 @@ 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 like Google/Microsoft _or_ a
-unicorn like Uber/AirBnB, give serious consideration to the former.
+consider _either_ a public company with good stock liquidity _or_ a
+billion-dollar unicorn, give serious consideration to the former.
+
diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -6,9 +6,9 @@ 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 I've come to believe that the
-power imbalance between founder and employee is too extreme, and that
-potential candidates would do well to consider alternatives.
+_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.

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -1,7 +1,7 @@
 # Things I Wish I'd Known Before Joining A Unicorn
 
-**Disclaimer:** This piece is written anonymously. I mention the
-names of a few particular companies, but as common examples only.
+**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

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -149,11 +149,12 @@ put the basics in one place.
 
 ### Working Environment
 
-* This isn't equity related, but keep in mind 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.
+* 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!
 

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -34,11 +34,11 @@ put the basics in one place.
   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.
-  The money sunk into that project is 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.
+* 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

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -151,9 +151,9 @@ put the basics in one place.
 
 * This isn't equity related, but keep in mind that the environment at
   a big unicorn isn't going to be measurably different from a big
-  public company. You're going to have the same draconian IT security
-  policies, lots of meetings, and fixed PTO. In the worst cases, you
-  might even have to use JIRA.
+  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!
 

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -8,8 +8,7 @@ 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 I've come to believe that the
 power imbalance between founder and employee is too extreme, and that
-potential candidates would do well to consider avoiding private
-companies completely.
+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.
@@ -91,7 +90,7 @@ put the basics in one place.
       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 equally problematic.
+      from an employee's perspective, is still problematic.
 
 ### Founder/Employee Power Imbalance
 
@@ -137,7 +136,7 @@ put the basics in one place.
 
 * 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
+  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

diff --git a/things-i-wish-id-known-before-joining-a-unicorn.md b/things-i-wish-id-known-before-joining-a-unicorn.md
@@ -0,0 +1,220 @@
+# Things I Wish I'd Known Before Joining A Unicorn
+
+**Disclaimer:** This piece is written anonymously. I mention the
+names of a few particular companies, 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 I've come to believe that the
+power imbalance between founder and employee is too extreme, and that
+potential candidates would do well to consider avoiding private
+companies completely.
+
+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.
+  The money sunk into that project is 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 equally 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 keep in mind that the environment at
+  a big unicorn isn't going to be measurably different from a big
+  public company. You're going to have 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 like Google/Microsoft _or_ a
+unicorn like Uber/AirBnB, give serious consideration to the former.