[ The original post can be seen on reddit /r/cscareerquestions.]
Hi everyone, I made this post last week that blew up. I received many of the same type of questions in the comments, in my DMs and on Discord, so I thought I'd just make an additional follow up to go a bit deeper into some of the specifics.
I was actually trying to Google a lot of these questions on your behalf, and was really surprised to not be able to find good resources on this, so I hope this will be useful.
There were a lot of questions on what a tender round is, what happens in an acquisition event, IPOs, etc, so I thought I'd talk about this section by itself.
In general, there are 4 ways you can "make money" aka liquidation events when joining a startup that you should know about.
IPO This is self explanatory and is probably the most desired outcome for liquidity. In years past, when a company gets listed for the first time, it opens up the flood gates of pent up demand leading stock prices to skyrocket. Nowadays, because of the shaky macroeconomic footing, IPOs have slowed down dramatically and IPO prices have depressed.
The thing to know about IPOs is that as an employee, you'll probably be subject to a lockup period. That is, after an IPO, you won't be able to sell until 6 months after it is listed, and sometimes even for 1 year. Plan accordingly and know your tax situation accordingly. (I won't get too much into ISOs vs NSOs, for this one since this is also something that is covered well through Google).
M&A This is something that's super critical to understand because it's a very likely scenario for most startups. Both a struggling startup or a thriving startup might get bought by another company and depending on the terms in your employee stock option plan can either be good for you, or terrible. The biggest misconception here is that in the event of an acquisition, many people just assume that they would just get the dollar amount proportional to their amount of shares.
For example, if a company sells for $1B and you own 0.01% of the company, it would be intuitive to think that you'd make $100,000, but that's very wrong. All companies have something called a "liquidation stack" (you can play with it here by tapping "show liquidation stack"). What this means is that the investors in the last round will always get their money first (99% of the time). Then investors in the last last round, then the round before that, and the round before that, until it finally gets to employees and founders. The employees only get the proceeds after everyone has been paid out. Note, founders get common stock too, so you'd think they would be more aligned with the employees, but often times, in equity rounds, founders might sell their shares in previous private secondary rounds without disclosing it to the other employees. Also, because founders are the "directors" of the company, they have a fiduciary duty to the INVESTORS not the employees. I'm not saying that founders are out to screw employees, I'm just pointing out the often overlooked / unknown competing incentives here.
Due to the liquidation stack, it's important before joining a startup to look at what the potential valuation of the company is, then also look at how much money the startup has raised in its lifetime. For example, valuations are coming down and the startup struggles and has to be acquired, it's best to expect that you may see $0 from that sale.
Lastly, another important to make sure you're aware of on your equity is if there are acceleration clauses (double trigger). This helps protect you in the event that there's a M&A and you get fired. Without this provision, what could happen is in an event of an M&A, the acquiring company can just fire large swaths of employees and you'd lose all your unvested equity. If you're unsure whether or not this might be the case for you, feel free to DM me on discord.
Tender offer There's a lot of Google-able information on this one so I won't get into the specifics too much, but if a company is "employee friendly", they will have a track record of offering tender rounds to their employees. Before joining a pre-IPO company, if the company is telling you, "The IPO is just right around the corner~" be sure to ask them if they've had any tender offers, and make sure to ask how frequently they have occurred.
Companies that are not very "employee friendly" might make some excuses here. The common ones are excuses like, "We don't want it to be distraction" or, "The IPO is coming in a couple of years so we're just holding out until then". Whereas the truth is, most of the largest, most successful IPO'd startups of today had tender offers right before their IPO. Facebook, Uber, Airbnb, Instacart, Stripe, etc.
Private secondary This is one that hardly many people know is an option and is also the one that can feel the most sketch. Depending on your employee stock option plan which you should 100% understand, you may or may not be able to just sell your employee shares whenever you want, as long as you find the buyer. The reason why it's sketch is, many companies don't necessarily want you to sell the shares, so they won't be very forthcoming on what your options are. Also, finding a potential buyer means you have to be a bit clandestine about it.
Whether or not you can see, and how "valuable" your shares are depend on a multitude of things. Some companies just have blanket restrictions on your shares prohibiting it from trading hands, period. RSUs for example, cannot not be easily exchanged. Other companies are very aggressive in exercising something called The Right of First Refusal (ROFR), which means, if you find a buyer and they offer you a price, it must be taken up with the company's Board of Directors first. If they always exercise ROFR, it's much less attractive for buyers to even bite and put in a buy offer for it, because they know it'll just be taken by the company.
It's a lot more of an art than a science. I commonly see the thinking of, "I just assume it's worth $0", which has some truth to it. Valuing one's shares has so many variables that a lot of the times, it's easier to shrug your shoulders and just assume the worst which isn't a bad idea. However, the truth of the matter is that your shares probably DO have some value, and it's pretty critical when accepting a job, or even thinking about leaving a company to understand, "Am I really leaving $0 on the table? Or is it more like $50k? $100k?"
When I say there's A LOT of variables, I mean, there are A LOT of variables:
All of this makes for a major headache. If anyone is in this position and wants some advice / help on accepting an offer or if you're currently at a startup and wondering how much your shares are worth, definitely DM and I'm happy to help. Or, if you're not sure if the terms you have are "employee friendly", definitely ping me too.
Summary
Whether to join or not join a startup is always about comparing the pros and cons. For many, the largest component is comparing your potential compensation at a startup and also the risk associated with a startup potentially going to $0. The ambiguity of valuing and understanding your equity is something that many startups play to in order to recruit talent. Most of them are not trying to be malicious, but when a recruiter tells you that an IPO is around the corner and sells you the dream, the recruiter has probably also drank the kool-aid and has believed it themselves.
It's up to YOU (I can help) to figure out what your equity is worth and make the proper decision. Like making any big investment, knowledge is power and distilling the good startups from the bad startups can literally be the difference of hundreds of thousands if not millions of dollars.
Happy hunting and good luck out there everyone! ❤️❤️