Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it.
Second, the bogeyman of "letting some strange interloper see our books" is a myth. Every company's share plan that has share restrictions, also does not confer disclosure rights to common shareholders. That is, you have no right to see the books if you're a common shareholder in these companies. It's not the same with public equities as it is with this new round of startups. It used to be that case that you exercised 1 share of stock upon hitting your cliff. That way you could see the books and see what's really going on. The powers that be (Hello YC) have instructed their companies to remove disclosure rights as a workaround.
The myth that "having lots of shareholders increases costs too much" is also just a myth. Any company with a valuation north of a few mil can afford a finance team (or person) to keep track of registered shareholders. There are services that do this for you. We're talking about companies worth billions of dollars, not the corner bakery worried about the cost of flour because any rise might drive them out of business.
It's not a matter of a company choosing to allow an 83(b) election. It's a personal tax election that you make by mailing a filing in to the IRS and you can do it without the company's involvement or permision.
The problem is that 83(b) elections just aren't applicable unless (i) you own stock, not options, and (ii) that stock is subject to vesting.
Longer explanation: When you buy something, if you are paying less than the fair market value for that thing, then the spread is taxable income to you. Typically this spread is calculated at the time of the sale, so if you're buying shares at $0.0001 per share and they are currently worth $0.0001 per share, you'd think there would be no problem. But the IRS says that if shares are subject to vesting then the spread is actually calculated at the time that the shares vest. So a common case would be that you buy shares now for $0.0001/share, next year you hit your cliff and a bunch of shares vest, and at that point the price has gone up to say $0.001/share, and you would then owe taxes on the difference between $0.0001 and $0.001 per share. The 83(b) election gets you out of this trouble by letting you say at the very beginning that you want to be taxed on all shares up front, so the spread is calculated on day one, and is 0, and there's no tax liability.
So if you own shares and they are subject to vesting, either by a purchase of restricted stock or an option exercise, then yeah, make an 83(b) election and you can do that with or without the company's permission. But if you just own an option that you haven't yet exercised then an 83(b) election just doesn't apply and it's not something the company chooses to allow or not allow.
It's up to the board at the time they make the grant. Some companies prefer not to allow early exercise to save the minor administrative burden, but it's employee friendly to allow it so lots of places do. Your option paperwork will mention it if you have this right.
> The myth that "having lots of shareholders increases costs too much" is also just a myth.
No, it isn't a myth. I used to work for a company which had to re-incorporate for various reasons, and had three shareholders too many; They managed to buy them out before the reincorporation, but it was a big problem (with lots of drama), and if an agreement wasn't reached, the company might have had to fold, and would definitely not have been as profitable, if it couldn't reincorporate.
IIRC, in the US it's 500 shareholders; We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems. Regardless, it is not a myth -- having lots of shareholders has weird and unexpected costs.
It's a myth. The US JOBS act removed the 500 shareholder disclosure trigger. It's 500 unaccredited or 2000 total now.
You might have been forced to fold for reasons, but having 500 shareholders wasn't one of them. Going out on a limb here, but it sounds like there were lots of other serious problems and cap table length was a minor one.
This was 2007, before the JOBS act. The company had 43 shareholders. It was subject to laws in a different country, that had the same "500 shareholder disclosure" trigger at 40 people (but the disclosure would have made it to the US as well, being public).
Also, the JOBS act is from April 2012. Almost every ESOP, ISO etc. plans in effect today were prepared and enacted before the JOBS act.
Just to clarify on this subject: the 83(b) election applies to stock options where early exercise is involved. Not all companies permit early exercise.
I've heard from several sources that the company has no say in the matter. That it's basically rule by fear. That said, thrusting 83b paperwork upon a company that doesn't "allow" it isn't the best way to start your new job.
Also, Peter Thiel always told his portfolio companies to allow 83b elections. It's smart for the employee and the employee. I guess it's a changing of the guard from the Founders Fund types to the YC mania today.
I don't know who your sources are, but you can talk to an attorney about this. A company does not have to permit employees the early exercise of options that have not yet vested.
Founders and key early hires, who may be receiving restricted stock (not options), are in a different camp because they're receiving stock, not options.
you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.
hm, but i don't think most founders have founder series preferred. It was getting more popular for a few years but the trend seems to have died down - if you have evidence to the contrary, I'd be curious to see. Mine's anecdotal but not bad: last 20 cap tables with at least 5 you would recognize as "hot" companies, I didnt see one.
Often your shares come with proxy voting agreements that go to the CEO / Founder. So the employee stock pool becomes the founder voting pool, until IPO.
I think that if you held a secret poll of founders of these companies, the majority of them would say they don't want this to change. Retention is really hard, and this is an incredibly powerful retention device at a fast growing company.
As an employee though, you can always vote with your feet. When considering a job at a startup, you should go over the stock option plan and ask hard questions. Remember... the founders (generally) don't have stock options. So sometimes founders at small startups don't even know the implications of the stock option plan they've created, and might be open to changing it if it means the difference between hiring you and not hiring you.
And for the larger companies that have thought about it, you can always pick the ones with more employee friendly plans. The higher the initial value of the company when joining, the harder it is to exercise options if you can't sell the stock immediately (because you have both a high exercise price and taxes on gains). So this can be a non-trivial difference between compensation offers at bigger companies.
I think what's challenging in the current environment is that the most vested employees came on to a set of implicit promises made in the early stages of the company about long-term exit strategies. A decade ago the idea of a unicorn was unheard of so the equity grants seemed to have a closer date of execution than it was in reality.
The truth is that most companies in the unicorn zone will probably have some sort of stock sales plans set up that go through the company. It isn't black and white between private/no liquidity and public/full liquidity.
However, the private market liquidity is always controlled by the company, and that can create artificial boundaries on timing and volume, which can be trouble if an employee wants to leave on their own schedule.
It's often only %10 of vested equity, once every one or 2 years.
Also remember that if your $5mm company becomes a $1b unicorn after 4 years, and you got %0.5 at the start, then through dilution your %0.5 stake can become a %0.05 stake. Which means you get $500k / 4 years = $125k/yr in stock. But you cannot sell that stock, so it would of been better to go work at apple. It's very rare that a startup will pay better for an employee better than the big cos.
Your dilution math is pretty pessimistic. Even if you are diluted by 30% 5 times (which would be extremely uncommon for a company that grows so successfully), you'd go from 0.5% to 0.1% of the company in your example. More realistically, you'd probably expect to have around ~%0.15. So now you'd be looking at 1 or 1.5MM in a probably still-growing company, which compares much more favorably.
Yes, as I noted above I do agree that volume constraints are an issue and are pretty annoying. Even in the examples where you get to hold options for 7 years, you wouldn't get the ability to sell at the "peak" (if you think there is one) unless the company was public.
There are many things you have to take into account when valuing stock options, and from a purely compensation basis I agree that Apple/Google/Facebook are going to be tough to beat.
Would you (or anyone else so inclined) mind just spelling out a list of these "hard questions" in a reply here? I, for example, actually didn't know about the 83b stuff.
I don't think it's possible for a candidate to properly value the options part of an offer. Not only is too much information withheld in the beginning, but the picture changes several times through the life of the startup, and employees are generally not informed.
There was a good thread or subthread on this recently - can't find it.
The company has a large bag of tricks to dilute your options, if desired.
I had this discussion in depth with a Valley CEO a few years back. The best indicator you get as a candidate is that the CEO has rewarded employees in past exits.
Now focusing on the numbers could theoretically prove you're getting a bad deal, but it can never prove you're getting a good deal.
(I'm guessing the "hard questions" start with total shares/options outstanding, valuation, and liquidation preferences).
The "summary" section had a good list of questions, and if you read the document you'll have all the background necessary to understand their importance.
I worked at a company for about five years. It became a unicorn while I worked there and I saw the value of my initial grant increase tremendously (something like 35x) over the years. I was significantly in debt and very nearly out of savings when I started there, so early exercise, while available, was not affordable to me. By the time I had money to exercise my shares, the potential AMT liability plus lack of liquidity made it unrealistic to do so. If I left, I'd lose it all. I ended up feeling held hostage by loss aversion. It was not good for my mental health. Feeling stuck can make an otherwise awesome job terrible.
I was very lucky - when I left I was able to just barely cover exercising everything by liquidating my non-retirement investments and savings, then sell enough on the secondary market (which took many nerve wracking months) to cover the AMT bill, pay myself back and set aside enough to pay the tax bills for selling shares.
Very much "Silicon Valley Problems", and I don't expect much, if any, sympathy - especially since I had a good outcome. I'd just like to see the AMT rules changed to make it easier on employees who don't have the luxury of liquidity.
Cash is very cheap right now, and has been for several years. Is it difficult or expensive to obtain loans to cover these expenses against the shares themselves?
It's very difficult, and not recommended unless they are ESO fund style loans, where you don't pay anything if the stock goes to zero. People did similar shit as getting HELOC loans in the dot com bubble, and it did not turn out well for them at all.
Cash is cheap for a few large banks and other organizations rolling in money. Not for the middle class / upper middle class employee.
Capital losses are only allowed to offset your normal taxes by a small amount in the USA.
Also companies drag their feet in getting you the proper documents that you might be missing. It can take months and those 2-3 months later, ESO isn't interested anymore. It's happened to me.
Another glaring issue that the article doesn't mention is option lifetime. Most options have a lifetime of 7 years from grant. Companies are delaying going public longer and longer. There's a very real chance that early employees can't sell shares, don't have the money to exercise their shares, and will watch their options expire from old age because the company thinks it's cooler to be private. This is a very real scenario; one that I'm about to face.
At most private companies, stock options aren't worth the paper they're written on. Unless of course the company sells, in which case they're worth slightly more than the paper they're written on. And besides that, to exercise them you usually have to pay a pretty hefty sum. I generally don't consider equity as a part of my compensation package when I work for a private company.
Best response so far. Your equity compensation is worth what you can currently sell it for. If you can't sell it, it's worth nothing. You should consider it an extremely fortunate and lucky turn of events should your equity become both liquid and in the money--you shouldn't expect it as a given.
I would truly, honestly treat that equity as I would a portion of my compensation being paid with lottery tickets. Unless there's a liquid secondary market for it, it's not worth anything to me.
I would, honestly not be able to treat it as lottery tickets and would rationalize it into the compensation at a higher rate than it is probably worth. Just being real.
This trend also makes startups just less attractive as destinations for employees. My experience is that startups that have started to scale still don't have as much compensation as larger more mature companies.
Employees join for a number of reasons but stock compensation is one of them. This compensation has always been risky and hard to value but it is now becoming risky, hard to value and even if the company succeeds the compensation won't be realized for a very long time.
The honest reality of unicorn'hood is also that your post-IPO performance is almost assured to be flattish (on average) with potential for swings in either direction of course. So when you look at the delta between your strike price and your actual potential future IPO price -- that is really probably the net of the win you can hope to achieve... and often it's not as good as you'd hope.
I think the idea is that if you're an employee with a bunch of vested options, those options capture a big chunk of the real upside of the company. IPO buyers might get modest returns, but the reason for that is the amount of value baked into those internal shares.
Stock distribution and stock rules are traditionally skewed towards the investors and upper management; the technical team traditionally gets short shrift and is subject to constraints and limitations which favor the other folks.
Stock grants and stock options are very different. Founders shares usually get treated very differently.
Going public has significant downsides and substantial on-going costs (for example, reporting), but it is one of the few ways value can be taken out of a company by shareholders. I wish there were another way.
Missing from the article: the fact that employees are discouraged from seeking buyers because there is an unspoken implication that this means the employee is "losing faith" or "believes less" in the company, or is getting ready to leave.
If the party line is: "hey, we are going to be a billion dollar company!" and then one employee says "hey, I want to sell at this $100M valuation", even if the $100M is a solid upside from the employees strike price the next natural question for the founder is: "hey, why would you sell at this valuation if we all know we are going to unicorn?"
Lots of people are reasonable and could understand many good reasons to sell at that point, but in high-growth culture those are not always appreciated. Sure, employee can/should suck it up, but it still makes it more challenging.
Generally, I think this is why company's should more regularly organize secondaries, it removes this dynamic to a certain extent.
It's getting easier with companies like sharespost.com but securities regulation generally discourage the sale of private company stock in any "open" (aka. public) way - this is ostensibly to protect buyers of stock from investing in risky assets that they know little about and for which there is little public information.
Buyers are generally hesitant because they want to get financial info and other private data to make an analytic investment decision. Given that VC-style investment are more normalized now and they aren't as based on fundamentals, investors are definitely more willing to invest without private financials BUT really large asset managers (who spend 99% of their funds on public stocks with their expansive disclosures) will not tolerate this, limiting the market. Besides, they are getting common stock, which sucks compared to the other investors who get preferred stock.
Companies don't usually want this to happen because they don't want a shareholder (who has voting and other legal rights) that they don't know or trust, and who is not aligned with them in the way that employees and VC are (supposed to be..ha).
The solution growing in popularity tries to deal with all of these by having a company organize a secondary offering, like what pinterest does (palantir does it too, twilio recently did, so do a bunch of companies). Usually this means the company knows the buyer (sometimes an existing investor) and basically gives them the info they would give a VC, except the investors buys employee shares rather than new stock - sometimes this will be asked for an investor when they are doing a preferred stock deal, and the investor will agree as an additional "company favorable" term. Important to note here too, that USUALLY the biggest sellers in these deals are the founders, so while it's a very nice thing for them to do for their employees, there's some healthy self-interest there as well =)
It's damn near impossible to find a buyer without financials. Unless you work at a unicorn that raises money on hype, you're going to have a really tough time.
Perhaps they should be able to sell their shares back to the company? The company would be responsible for raising more money and have some allocation for share buyback.
Some well-run startups make arrangements for this when raising a round. The VC will agree to buy into the round at X dollars per share. They'll also agree to buy up to Y dollars worth of stock from employees who want to sell. VC gets more ownership of the company, and the company doesn't have to give up more ownership. It's overall a good situation. I know that Cloudflare and a few other companies offer this.
Who determines them when you raise money from investors?
That's the market that should determine the value of the shares obviously. The last price fetched on that market. Whether its liquidity is high or low, it's still a viable market, even if it's not the public stock market.
Yep, all of those people stand to gain from setting as low a price as possible given that a liquidity event will reset the share price anyway. Not to mention that any buybacks would hit your run rate, because run rates are about operating cash flows and not valuation numbers (and buybacks are just a way to convert operating cash into equity).
Most companies have a Right of first refusal clause embedded in the options agreement effectively limiting selling shares of private companies even after exercising options.
If they are RSU's , I am assuming they can't be sold at all in the private markets ?
Can anyone with prior experience elablorate on these ?
It's due to the SEC. The SEC places restrictions on who can buy shares in the private startups -- eg. you need to be an "accredited investor" to purchase them (>$1M liquid assets or >$200k/yr earnings). The SEC also places limits on the number of shareholders a company can have without (effectively) going public... which creates an incentive for startups to disallow current/former employees from selling their shares on the semi-private market.
Ultimately, I think that the interests of employees will not make a company decide to go public, unless it's already borderline.
To solve this, it seems like a more likely path is longer exercise windows, more liquidity in the markets for stock and/or options. If we're talking about "unicorns" like AirBnB, Uber and such, I imagine there is a demand so if a way for buyers and sellers to come together existed, it could work.
There are some advantages companies would be forgoing, but it's not like going public just to let employees cash out.
> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it.
Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employment. Employees can calculate the total cost of exercise based on the information contained in the Notice of Stock Option Grant. You can and should ask for this information before you join a company.
If you are granted 100,000 options with an exercise price of $0.20, you know that the total cost of exercise (assuming full vesting) will be $20,000. The company's valuation could increase fifty-fold and it wouldn't affect the cost of exercise.
Companies with skyrocketing valuations can be precarious for employees who join late, but here too employees can calculate everything up front and they should take into concern liquidity risk when evaluating what their options are really worth.
Capital gains taxes. When the "fair market value" of the company increases away from your strike price, when you exercise your options you have to pay tax on the difference between your strike price and the fair market value. And it will be a short term capital gain so it isn't cheap. If those .20 options of your have a fair market value of 5.00 now, you will owe tax on 4.80 of capital gains. 4.80 * 100,000 is 480,000.00 and a tax rate of about 40% on that means you will owe $192,000.00 in taxes to exercises $20,000.00 in options. So you will need around $210,000.00 to get out.
And even after that you're holding a non-liquid asset which could be diluted to nothing or the company could simply fail and you can't dump the stock.
As the article states, you typically have 90 days after leaving a company to exercise your options or you lose them entirely. Yes, that avoid taxes, at the risk of eliminating any potential upside.
You have a choice though. The exercise price + taxes is the price you pay for potential upside. Not willing to take that risk? Just walk away from your options and pay nothing.
If that's the truth and the employee's best guess as to the company's outcomes are that their options will either be worth nothing or the taxes will be too expensive to afford with the cash available to him, the employee should rationally value any option grant at zero. Startups may find it a little hard to recruit employees if everyone starts valuing options at zero. This isn't in anyone's interests.
That's my argument exactly. Employees should value illiquid stock options at close to (but not exactly) zero. They're assets that have potentially huge upside, but also the risk of ending up worthless, cannot be sold now, and have no guarantee that they will ever be sellable. A rational decision maker would value such an asset at close to zero.
I'd argue that it's in the employees' best interest to realistically value the equity portion of their compensation package.
*if that employee doesn't have sufficient liquidity to take the risk.
This is another case in the world where having money helps you make money. I think most people rationally understand that it often takes money to make money, but the startup scene is usually portrayed differently.
So if you don't exercise your options, then why take the pay cut and work twice as hard for a startup ? The whole thing reeks of a scam against early employees.
The company's valuation increases fifty-fold. Now you decide to exercise your stock options, and you pay $20,000. You have just paid $20,000 for stock that is now worth $1,000,000.
The IRS now expects you to pay tax on your $980,000 in income. However, your stock is not liquid, so you can't sell it. This is why you can need "millions" to acquire your options.
Why would you exercise a stock option to receive stock you can't sell? If you can't sell it, it's not worth $1,000,000--it's a piece of paper that might one day be worth more or less than $1,000,000.
Here's the advantages of exercising stock options and filing an 83b election as soon as you join a company:
* When the company has an IPO, you only pay the Long Term Capital Gains tax rate (20%), instead of the standard income tax rate (39.6%).
* Once your stock options have vested, you have the freedom to leave at any time without worrying about taxes or losing your options.
So you can risk tens of thousands now to potentially save hundreds of thousands later, in addition to giving you some freedom.
It's very risky. The company might fail. The company might be successful, yet never have a liquidity event (acquisition or IPO). But you only join a startup if you believe it has a good chance at success. You're risking a huge amount of time and effort, so you may as well risk a bit of cash too.
It's not always that easy. People are not totally rational. Loss aversion is powerful. I've been in that situation. I'm actively avoiding putting myself in it again.
It's the AMT issue. In your example, if the company's valuation increased by 50X, the spread between the FMV and the exercise price would be $1,000,000, so you would have to pay taxes on AMT income of $980,000 - assuming AMT is 20%, that's almost $200k. It sucks =)
Of course IF you are lucky enough to have $20K sitting around, enough faith in your company the day you get your options AND your company lets you early exercise, then you can avoid this. Unfortunately, for most folks those conditions are not all met =(
The article doesn't state this well, but the additional cost comes from AMT. If you exercise your options you pay AMT on the face value of a share of common stock at time of exercise minus the exercise price (the spread). This is true regardless of whether or not those options are liquid at the time. For a unicorn, the stock has most certainly increased in value over time, which means the exercise price is a fraction (possibly a very low fraction) of the current value, and you'll be writing the IRS a much larger check than you write the company.
The only escape from this problem is an 83(b) election, which I've heard many companies say they don't allow (IANAL and am not sure what the circumstances are here). It's also the case that with an 83(b) election you are putting real money, potentially a significant amount of real money, into the company's bank account with no expectation of when that investment will become liquid. So this also has risks, but at least the AMT is on the spread, which is $0 in this case.
Virtually nobody talks about the AMT credit when discussing ISOs and the AMT trap. Everybody assumes that AMT is this horrible beast, and while it's never a good thing, folks would do very well to have an experienced professional look at their unique situation and perform the calculations because it's often not nearly as bad as suggested.
I have a 7 figure AMT credit that will likely never be eliminated in my lifetime. People in this position hopefully all have competent tax attorneys who understand the credit. The reality is that the credit isn't very meaningful to people like me (and I am pretty typical among people who work at Unicorns).
Sure, $20,000 for the shares but what about the taxes you'd owe on the shares? If the value increases 50-fold, does the IRS not see that as 1,000,000 - 20,000 = $980,000 of taxable income?
You should understand that every situation is different. Are you talking about NSOs, or ISOs? Have you factored in the minimum tax credit?
Very few articles on ISOs and AMT highlight the minimum tax credit that is applied when the amount paid under AMT exceeds what would otherwise have been paid.
You still need to pay your taxes in one year to claim it as a credit in a successive year. Uncle Sam and California don't take kindly to IOU's (nor does your credit score).
What if you exercise a little every year, triggering AMT each year? No credit for you and the credit is reduced the older it gets. Like you said, each situation is different, but most people are going to pay a boatload in taxes on this and not be able to claim it as a credit later on.
Well that's what you get for taking stocks in a private company I guess. I never do it because it's just dumb. Unless you want to be tied to that company for ever don't do that. But who knows, I don't live in the same world as you people.
That's one factor, and one that the investment community likes to play up. I'm not really sure this applies in the unicorn case, though, since the amount of money that they're raising in the "private IPOs" they do dwarfs the reporting costs of being a public company.
The biggest factor, in my opinion of course, is that some large private investors realized that they could capture most of the upside in an IPO before the IPO actually happened. The first real example of this is DST and Facebook. This has obvious advantages for the private investor -- they get access to a source of high quality risk for their portfolio. It also has obvious advantages for the company -- they get access to capital without having to manage to Wall St's expectations (and that's no minor thing).
Facebook was sort of the proto-unicorn, and it spawned imitators. Those imitators were not just startups, it also spawned imitators on the investment side. Suddenly a source of relatively easy money -- the initial IPO allocation in "sure thing" companies -- weren't available to the usual suspects, and those funds have naturally followed the leaders into the D, E, and F rounds of the new breed of unicorns. These deals are even accessible to relative small fry now -- private bankers will routinely shop around access to these funding rounds to people with assets "only" in the 10's of millions. Sometimes they're shopping a theoretical deal that they want to present to the company in question, and sometimes they're shopping AirBnB.
At any rate, many of the gains you used to be able to get in companies like Amazon or Google are now going to people able to get access to these pre-IPO deals. Financing private companies is very different now than it was 5 years ago.
Unicorns, do not exist. by the time they get to this size, scale, they are 'just' corporations, or a vaporcorp. The free market operates on the principal of a products value is whatever the market is willing to pay for it. Going public or being acquired provides a value. Everything else as far as valuations, even for a profitable company that has been around 50 years are just estimates.
Unicorns and Valuations are like Schrödinger's cat... until you open the box they are neither dead or alive, not worth 10Billion or Zer0
That might be a good thing. I'm still not convinced that a lot of these high-flying "unicorns" are really worth their valuations in a meaningful way. If Uber were to go public today, they'd immediately switch from "startup cutting legal corners" to "entrenched corporation doing illegal-ish things". Pulling back the covers of their financials is one thing that would bring an outcry of how much money they make off the backs of people that they dump liability onto.
The overhead, requirements and legalities are there for a reason. If you've raised $10b, you can afford the overhead dollar amount; but can you afford the visibility?
Not entirely true. IPO as a process exists to allow companies to raise money from the public, especially when private funding is not available. Overhead, requirements and legalities are a side effect, and if you have any money in a public market (like 401(k) in US), you absolutely want that. I do.
When private funding is available, IPO is not needed by definition. And since comp structures are set up with the expectation of IPO or exit, it's employees who are affected.
If you are negotiating an offer with a private company, you should attempt to price the risk of having to forfeit your stock comp. This risk has increased recently (that's what this story is about) but most people still under-negotiate it in their offers.
It's more than just overhead - going public forces you to think in terms of quarterly earnings reports.
It's very hard for a tech company to thrive in that kind of environment - capital expenditures required to develop new products or enter new markets will often not be profitable for several years, and getting the public market to understand that is impossible.
Come on, capital expenditures to develop new products or enter new products have been a part of business since forever, and indeed the cost to develop a new product for a traditional company (say, a car company) is probably orders of magnitude higher than the cost to develop a new pure-software product.
I mean, is there some kind of truth that it's harder for public companies to do ultra-long-range moonshot stuff? Maybe. But the idea that this is what's keeping Uber or AirBnB or Palantir from going public is ridiculous.
Focus on quarterly numbers is a side effect, which is unfortunate. You go public not because you want to report quarterly. You go public because you want public funding and potentially better terms than private funding.
Well, that's overly binary; it creates strong pressures to focus on short-term results rather than making long-term thinking impossible. (If enough of your stock is held by arms-length investors interested primarily in maximizing short-term returns, it could become impossible for management to manage based on long-term thinking where that conflicts with perceived near-term optimality -- since they will be replaced if they do -- but most IPOs don't actually produce that kind of distribution of stock.
Yeah, it really sucks to be forced to act like a grown-up, real company spending money on oversight and compliance. Much more fun to just buy pingpong tables and keep the beer kegs full.
"That might sound harsh, but put yourself in the CEOs’ shoes: It’s often in a company’s best interest to be able to reclaim equity if an exiting employee can’t afford to purchase his or her shares within 90 days of leaving."
I'm sure it would be in a company's best interest to chain their people to desks too. We don't allow that, for obvious reasons.
I was hoping that this would be about the term "unicorn", which can't go away too soon. It reflects the juvenility of the Valley, that people are too creepy-humble amount money to say "a billion dollars" (teehee!) and have to hide behind a mythical creature. It also allows VCs to hide the fact that all they really care about is money (and I don't begrudge them for that per se, but for the dishnesty around it) by making a billion dollars sound like something other than what it is. (It reminds me of "change the world" nonsense, because you'd literally have to change the world to make unicorns exist.) If what you care about is making a lot of money and nothing else, then just admit it. There's plenty of company on Wall Street for that sort of person.
Seriously, fuck this "unicorn" shit and fuck that whole culture of juvenilty that comes out of the polar vortex of immaturity called Silly Con Valley.
While it's no doubt annoying for those involved, I find myself unable to sympathize much with the woes and travails of those poor stock-holding employees of private firms with skyrocketing valuations.
Cry me a river, basically. If this is a serious issue that needs to be addressed, it's at most inside baseball not worth the rest of us worrying about.
> I find myself unable to sympathize much with the woes and travails of those poor stock-holding employees of private firms with skyrocketing valuations.
Stock-Option-Holding and often financially restricted from exercising.
The overwhelming majority of readers of Hacker News are not employees of the balooning private startups being discussed. Their companies have no equity exchange possibility at all.
Seriously, how many employees are there in the world of companies that could take "please exit" as serious advice? A few hundred, tops? And these are hardly impoverished folks to begin with, they could get solid six figure jobs at established tech companies in most cases. So why are we crying for them?
Second, the bogeyman of "letting some strange interloper see our books" is a myth. Every company's share plan that has share restrictions, also does not confer disclosure rights to common shareholders. That is, you have no right to see the books if you're a common shareholder in these companies. It's not the same with public equities as it is with this new round of startups. It used to be that case that you exercised 1 share of stock upon hitting your cliff. That way you could see the books and see what's really going on. The powers that be (Hello YC) have instructed their companies to remove disclosure rights as a workaround.
The myth that "having lots of shareholders increases costs too much" is also just a myth. Any company with a valuation north of a few mil can afford a finance team (or person) to keep track of registered shareholders. There are services that do this for you. We're talking about companies worth billions of dollars, not the corner bakery worried about the cost of flour because any rise might drive them out of business.