Without knowing the specific of their last round, does anyone have an idea of what selling at roughly 2/3 of their previous valuation likely means for their employees?

I know that VCs typically have some kind of "upside protection" in later rounds that guarantees them first money out in the event of a sale on some multiple of their investment, but I don't know what terms are common.

The startup system is pretty rigged against accidentally making anyone rich who is a mere employee. That money is for the investors, not the working class. The days of the office assistant making millions on stock are long gone. There's options with huge tax implications, long vesting periods, the investors get preferred stock, they get guaranteed multiples, if there's a down round there's a carve-out that you won't be part of.

Not only do the investors have priority shares over employees, each investor can negotiate a guaranteed multiple. For example if they put in 100 million for 10% ownership but also had a 5X multiple guarantee and a sale price of 1 billion then the 500 million they walk away with ends up being 50% of the sale price. That part of the agreement isn't made public as far as I know.

If I want to found a VC-funded startup for which a successful exit is much more fair to the employees, how do I do that?

Will the investors insist that it all come out of the founders' percentage of the pie, or can I argue that the better-incentived employees mean a bigger and more likely pie, so VC terms shoudl be less grabby?

Will VCs react negatively to "being soft on" employees, even if it all comes out of founders' slice?

Do early employees get ISOs, other options, RSUs, or something else?

Pragmatically, read "Venture Deals" and "Founder vs Investor" before you start your company. Then hire a reputable law firm and imagine you're an employee rather than a founder, and setup the initial structure in an employee friendly way. When raising your first round, have some non-negotiables that carry the structure forward. You can DM me on Twitter/X if you want more specifics based on my experience.

Successful startup companies can and should compensate employees well with both cash and stock. It's only incompetence and greed that endangers this outcome. VC expectations are a red herring, only bad VCs are so short-sighted as to deprive a founder of one of the major tools of team-building (truly valuable company equity).

As a founder, there are forces you have to fight against from first principles using your moral compass via a thoughtful fundraising strategy, but it can be done.

> how do I do that?

The only good answer to this is 1) don't raise more VC money than you really need, and 2) don’t raise money at a valuation way above what your company is actually worth.

The problem in the scenario here is that they sold for below the valuation of their last funding round, and the size of their last funding round was ginormous.

When you raise hundreds of millions at a $1.5b valuation, you’re expected to sell above $1.5b at some point in the future. Any less and you didn’t live up to the opportunity that you pitched investors (and the financial outcomes for everyone deteriorates when you sell for way less than your valuation).

Can I still attract VC, if I'm arguing for more modest valuations than competing lottery-ticket startups are?

Or do I have to look like much more a traditional fundamentals investment, than a semirandom lottery ticket (or growth scam to exit)?

Not an expert here, but I have worked at a couple startups. The answer I would give is probably not: VCs basically work on a premise like this: 1 in 25 investments will return 100x, 5 in 25 will make they're money back, and the rest are just a wash. The only way the make money is if the company is mega successful, so they're not really interested if that's not a possibility. That being said, not every person at a VC is going to be super greedy or anything like that, it's just the nature of the business model for venture capital.

I don't think VC money cares whether you are soft on the employees. They are there to buy as big a slice of a small pie before it gets big. Anything you keep for yourself or give to your employees is pie that could be theirs. If they show up and you've already promised half the pie away they'll pay less for what's left, or you won't be one of 100 slices in their pie portfolio. Maybe you can convince them the motivated employees will lead to more growth, but it's not the type of thing they are normally swayed by.

I think the end result is that it's probably not possible to pay employees with meaningful equity anymore so you'll have to go back to paying them the old fashioned way with money. I know I'm no longer willing to take RSU lotto tickets and a pay cut to work at a startup.

First find a VC fund that agrees with you

Let your lawyers deal with it.

A 1x liquidation preference (meaning investors get their money back before employees and other investors “below them in the capital stack” get anything) is most common. A 1.5x preference is less common. A 2x preference is rare in VC (more common in growth equity). Anything more than that is extremely rare, and a startup that was hot at the time (meaning multiple investors were competing to invest) would likely not give investors anything more. A 5x pref is unheard of. There are other types of preferences too - google “participating preferred stock” to learn more.

Frequently Investors and Founders get money before Employees.

Investors frequently have clauses (warrants/ratchet) to increase their position if the sale wasn't at some threshold, which will affect (to downside) the basis for Employees payout.

If the Employee thought the stock was at $150/share at 1.5B they will get less than $97 on payout.

I'm listening to the audiobook of "Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist "

https://www.amazon.com.au/Venture-Deals-Smarter-Lawyer-Capit...

It's worth listening to if you want to understand this stuff better.

Having just listened to this book, I would guess that this sale has not been a great outcome for the founder and employees.

So someone spent $205m in 2021 and got $133m back in 2023? My guess is that Atlassian does a similar write down in a few years time. I hope the winners in this deal try to make the world a better place.

No, they likely had a liquidation preference so at least got their money back in 2023.