Liquidity Is Coming(henrysward.medium.com)
henrysward.medium.com
Liquidity Is Coming
https://henrysward.medium.com/liquidity-is-coming-761a9140dedd
66 comments
I believe the reason is simply that many highly technical people aren't that good at negotiation or have an overly strong sense of duty.
Out of my wider social circle, I know several people who I believe are underpaid but stay due to being afraid of interviews or due to loyalty to their company or their customers. I mean that's kinda also why nurses don't quit even though they are usually treated badly.
But I also know multiple people who negotiated a generous chunk of stocks as a signing bonus and/or who have agreements that allow them to convert employee stock options into convertibles debt notes (i.e. akin to seed investors).
Out of my wider social circle, I know several people who I believe are underpaid but stay due to being afraid of interviews or due to loyalty to their company or their customers. I mean that's kinda also why nurses don't quit even though they are usually treated badly.
But I also know multiple people who negotiated a generous chunk of stocks as a signing bonus and/or who have agreements that allow them to convert employee stock options into convertibles debt notes (i.e. akin to seed investors).
I’ve been trying to figure out just how strong a prospective Sr. Software Engineer’s bargaining position is here: if they walk away unless given RSUs instead of options, is this likely to be met? If they walk unless given a $20k signing bonus? Also, is “four year vesting with one year cliff” for options negotiable with any chance of success?
A signing bonus is kind of based on your reputation and the alternative job offers that you decline to accept this one.
Also, it depends on whether you contacted them directly, or if you were introduced by a headhunter, as the latter will charge them.
If you approach them directly, you have a good reputation, and they can see a clear way from your time to increased profits, I'd say you can get up to a year of salary as signing bonus, which for senior positions will be a lot more than $20k.
There's also the path of being acqui-hired, where the money that they pay for your past startup is kind of like your signing bonus.
Also, it depends on whether you contacted them directly, or if you were introduced by a headhunter, as the latter will charge them.
If you approach them directly, you have a good reputation, and they can see a clear way from your time to increased profits, I'd say you can get up to a year of salary as signing bonus, which for senior positions will be a lot more than $20k.
There's also the path of being acqui-hired, where the money that they pay for your past startup is kind of like your signing bonus.
mmmm yeah I’m just rolling in all these choices and offers
why oh why did I take that job where the hiring manager told me with a straight face my fraction of a fraction of a percent was “high” and couldnt tell me details about the common stock and preferred stock
why didnt I take that other job where that other red-but-most-likely-benign flag popped up when the interviewer asked an awkward question
why didnt I take the 83(b) election and cough up all the money for my shares right when I started
what is up with employees like me, can someone explain?
why oh why did I take that job where the hiring manager told me with a straight face my fraction of a fraction of a percent was “high” and couldnt tell me details about the common stock and preferred stock
why didnt I take that other job where that other red-but-most-likely-benign flag popped up when the interviewer asked an awkward question
why didnt I take the 83(b) election and cough up all the money for my shares right when I started
what is up with employees like me, can someone explain?
Sometimes it takes going through it to learn it. Experience.
Don’t beat yourself up. Few if any make all the right choices. Just try to always avoid the worst choices (which it sounds like you’ve done so far).
And remember: one persons 83b triumph is another’s capital loss they get to carry forward for a while.
Don’t beat yourself up. Few if any make all the right choices. Just try to always avoid the worst choices (which it sounds like you’ve done so far).
And remember: one persons 83b triumph is another’s capital loss they get to carry forward for a while.
or like it wasn’t a mistake at all and calculated risk, and not on the share upside.
I'm sorry for being dull, but how does what you described translate to a business opportunity?
There's a lot of demand for pre-IPO stock. Facebook was selling on the private market for ~$40-$45 per share before listing at $38. Uber had a similar run-up. Carta provides some equity tools for start-ups (at least, I've used their 83b product) and they want to expand to be a marketplace for helping sell that stock. Forge Global is similar operation (if you create an account there btw they were giving free Crunchbase data for a while).
These equity transactions aren't as simple as buying and selling an ETF though. Moreover, most of the existing sales have been private, so sellers (e.g. accredited investors) and buyers (e.g. employees and founders) are at a steep information disadvantage when jumping into these deals-- Carta and Forge know the consequences, but the market participants do not. Moreover, the space isn't necessarily well-regulated. So that's a prime business opportunity: you have people who are too "dumb" to create a market themselves, but who want to transact. The snark in my narrative comes from personal observations that it's very easy to get burned (even in successful exits) and that these middlemen are typically even less trustworthy than big banks.
These equity transactions aren't as simple as buying and selling an ETF though. Moreover, most of the existing sales have been private, so sellers (e.g. accredited investors) and buyers (e.g. employees and founders) are at a steep information disadvantage when jumping into these deals-- Carta and Forge know the consequences, but the market participants do not. Moreover, the space isn't necessarily well-regulated. So that's a prime business opportunity: you have people who are too "dumb" to create a market themselves, but who want to transact. The snark in my narrative comes from personal observations that it's very easy to get burned (even in successful exits) and that these middlemen are typically even less trustworthy than big banks.
What are, in your opinion, things that startup founders should do to make things more financially rewarding for employees?
Any low hanging fruits you suggest we look at first?
Any low hanging fruits you suggest we look at first?
I am certainly biased but I would like to see the minimum employee comp package include:
* 83b election standard with employee on-boarding paperwork.
* Bonus of up to one year salary to cover 83b early exercise costs.
* Employee equity pool size disclosed along with 409a. Ideally contractual protection for the employee equity pool.
* Offer documents must include a 409a valuation and share price. (I have gotten multiple offers with just a number of shares. And in one case the company was literally peddling a false valuation in my offer).
* 401k with company match, even for a small company. Lottery ticket is not a retirement plan.
Ideally in my mind:
* Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.
* Double standard employee pool to 20%; keep 30% founder pool size.
* No ISOs or non-quals ever. Extremely tax toxic, and employees can actually get driven into debt from the job. Options should be outright forbidden for comp packages under $1m / year. The tax games are absolutely not worth it.
The main way any positive change can happen is for employees either to negotiate for it during offers or for founders to just start doing it to be more competitive. One might argue that Carta has made 83b easier by chasing a private stock marketplace... perhaps there are other mechanisms for change.
* 83b election standard with employee on-boarding paperwork.
* Bonus of up to one year salary to cover 83b early exercise costs.
* Employee equity pool size disclosed along with 409a. Ideally contractual protection for the employee equity pool.
* Offer documents must include a 409a valuation and share price. (I have gotten multiple offers with just a number of shares. And in one case the company was literally peddling a false valuation in my offer).
* 401k with company match, even for a small company. Lottery ticket is not a retirement plan.
Ideally in my mind:
* Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.
* Double standard employee pool to 20%; keep 30% founder pool size.
* No ISOs or non-quals ever. Extremely tax toxic, and employees can actually get driven into debt from the job. Options should be outright forbidden for comp packages under $1m / year. The tax games are absolutely not worth it.
The main way any positive change can happen is for employees either to negotiate for it during offers or for founders to just start doing it to be more competitive. One might argue that Carta has made 83b easier by chasing a private stock marketplace... perhaps there are other mechanisms for change.
Rather than pay for early exercise costs and cover the tax burden, I think it makes more sense for early companies to extend the period employees can exercise options to 5-10+ years after they leave. Several places actually do this already, I've been offered it without asking in fact!
Small companies probably can't afford to pay taxes for everyone's 83b elections, nor can they afford the 401k match or the other missing perks. After all, if they could afford to compete on cash comp with big tech cos, surely the founders would rather do that and preserve their own equity stake.
But with exits taking longer and longer, such an exercise scheme lets rank and file employees preserve some small upside that they have earned themselves, and not worry about hurting their career by being forced to wait for an exit.
I think I generally agree that employees get a pretty bad deal. I think it used to look better, but these days you can make so much more money so much faster working at Google than you can at a random startup.
Small companies probably can't afford to pay taxes for everyone's 83b elections, nor can they afford the 401k match or the other missing perks. After all, if they could afford to compete on cash comp with big tech cos, surely the founders would rather do that and preserve their own equity stake.
But with exits taking longer and longer, such an exercise scheme lets rank and file employees preserve some small upside that they have earned themselves, and not worry about hurting their career by being forced to wait for an exit.
I think I generally agree that employees get a pretty bad deal. I think it used to look better, but these days you can make so much more money so much faster working at Google than you can at a random startup.
That is why when the 83b bonuses start making you choke, that its time to start converting into RSUs, and delivery of those RSUs happen at first liquidity, which means after the 6 month lock up period of an IPO, not at IPO.
https://www.harnesswealth.com/articles/promissory-note-progr... What about a system like the one proposed here? This is the only tech startup I’ve heard of that uses an alternative equity system.
Agree with your point about 409(a) disclosures. As an ex-employee with outstanding options in two tech startups I find it crazy that nothing requires firms to annually disclose this information to options holders. And while I was working at these companies there was no mention of the #of shares outstanding and the % allocated to employees—even if you knew your personal percentage stake, you didn’t know how much was diluted with each subsequent round.
Agree with your point about 409(a) disclosures. As an ex-employee with outstanding options in two tech startups I find it crazy that nothing requires firms to annually disclose this information to options holders. And while I was working at these companies there was no mention of the #of shares outstanding and the % allocated to employees—even if you knew your personal percentage stake, you didn’t know how much was diluted with each subsequent round.
>Ideally in my mind: - Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.
I don't think this is financially realistic. Most employees (especially non C-suite executive employees) do not want to loan money to a startup to receive a "convertible note/debt". Even if employees wanted to loan money, most don't have the discretionary play money in their bank account to risk on a startup.
It's the investors that have the money and risk appetite to pay for convertible notes.
If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.
I don't think this is financially realistic. Most employees (especially non C-suite executive employees) do not want to loan money to a startup to receive a "convertible note/debt". Even if employees wanted to loan money, most don't have the discretionary play money in their bank account to risk on a startup.
It's the investors that have the money and risk appetite to pay for convertible notes.
If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.
> If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.
How would you describe it? Note that the OP said "employees get convertible debt notes" not "employees buy convertible debt notes." Practically speaking the notes are indistinguishable from convertible debt that investors get, but they're compensation for employment rather than bought.
How would you describe it? Note that the OP said "employees get convertible debt notes" not "employees buy convertible debt notes." Practically speaking the notes are indistinguishable from convertible debt that investors get, but they're compensation for employment rather than bought.
What happens if you have an underperforming employee and end up having to fire them in the first 3-6 months? Do you really want to give them permanent equity in a company before they've proved at least some value? Some sort of clawback structure would be necessary here.
In the case of 83b, the unvested shares are returned. Even the bonus-to-cover can be returned contractually—- the bonus-to-cover never even has to hit the employee’s bank account.
RSUs are probably better but the equity games are set up right now such that startups issue options.
RSUs are probably better but the equity games are set up right now such that startups issue options.
Employees take less cash in exchange for equity. They earn the equity as a part of compensation. Under what theory you want to claw it back?
In addition employers are protected by a vesting cliff, and after that it is their fault if they keep underperforming employee around.
In addition employers are protected by a vesting cliff, and after that it is their fault if they keep underperforming employee around.
Great points...believe it or not it happens, but privately, in a case by case manner. Also why do you think companies and founders are in the business of making employees wealthy?! What is the specific reason for all of these being implemented?
Your trying to recruit people who can go work at a FANG and or have been burned by or have researched about startup equity shenanigans, so they have high requirements before they would even consider talking to you.
Bonus-to-cover + early exercise seems strictly inferior to a 10 year guaranteed exercise window, what is your opinion on this?
There are 2 key tax advantages: Qualified Small Business, and avoiding AMT. (But should both be considered playing on expert mode, higher risk/reward.)
And AMT can mean a $5k/year accountant if you want to play it right. IMO AMT risk not worth it unless the comp package is well north of $1m.
The number of startups that IPO and 2x or better is strictly less than the number that even make it to IPO. The 10 year window is certainly better than 90 days, but options just increase your chance of being a bagholder.
In the case of an acquisition, options also can screw you. In my view, it’s always better to have either shares or equity most comparable to what the founders have. Be ready to sell early at any time.
In the case of an acquisition, options also can screw you. In my view, it’s always better to have either shares or equity most comparable to what the founders have. Be ready to sell early at any time.
Pay more money? Allow employees to include their shares in a round?
The more you pay, the shorter your runway. It’s a balancing act like most things in business.
>The more you pay, the shorter your runway.
The horror of asking a company to charge customers to finance their operations rather than running the VC treadmill.
I don't get how more founders don't realize it is in the VC's best interest to keep you on the treadmill, burning their money and giving away your equity.
The horror of asking a company to charge customers to finance their operations rather than running the VC treadmill.
I don't get how more founders don't realize it is in the VC's best interest to keep you on the treadmill, burning their money and giving away your equity.
Being a money-changer is very lucrative, it's not noble nor constructive but it is lucrative.
Very, very brilliant comment.
> bonus-to-cover early exercise
Can you explain this in more detail? I'm a bit familiar with it, but it seems you might have more experience and could be able to describe it properly.
> bonus-to-cover early exercise
Can you explain this in more detail? I'm a bit familiar with it, but it seems you might have more experience and could be able to describe it properly.
Not the person you are responding to, but I think something like this is what they meant: https://news.ycombinator.com/item?id=13426949
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There is a multibillion dollar secondary market for private shares. It is ignored because it undermines this pitch.
That market is fragmented and disorganised and inefficient. But it’s deep, cross border and growing. Issuers write their own transfer policies which range from nope to fully permissive. The former aren’t interested in something like this because they aren’t focussed on shareholder liquidity. The latter don’t gain anything from forcing shareholders to only do business through Carta. (If they do want to do all that work, they can just do a tender. It is cheaper. And has no lock-in.)
This is a product in search of a problem.
Disclosure: I work in the private markets.
That market is fragmented and disorganised and inefficient. But it’s deep, cross border and growing. Issuers write their own transfer policies which range from nope to fully permissive. The former aren’t interested in something like this because they aren’t focussed on shareholder liquidity. The latter don’t gain anything from forcing shareholders to only do business through Carta. (If they do want to do all that work, they can just do a tender. It is cheaper. And has no lock-in.)
This is a product in search of a problem.
Disclosure: I work in the private markets.
> It is fragmented and disorganised and inefficient.
Sounds like you've found the problem
Sounds like you've found the problem
Forcing a single venue for an issuer doesn’t solve that. If anything, it isolates that issuer’s securities thereby furthering the fragmentation—it’s a gift for anyone in a position to arbitrage.
He seems to argue that "it' not a bug ,it's a feature" TM
Private markets take 3-5% of a deal, require a 3-way contract, and thus won't do anything below $100K. They are indeed fragmented, disorganized and inefficient. If Carta can solve that, great.
> Private markets take 3-5% of a deal
In my experience, spreads are closer to 1 to 5%. The upper end of that spectrum dominates in the trading employees' shares, however, so there is a fair point here.
That said, CartaX isn't comparable to the open secondary markets. The latter are continuous. CartaX is periodic.
The better comparison is Nasdaq Private Markets, who offer a similar tender offer platform. Last time I checked, they charge a fixed fee plus something like $500 per trade. Compared with this, the 2% CartaX charge is only competitive for <$25,000 transactions.
> won't do anything below $100K
This is generally correct for open market trades. (Though folks like EquityZen are pushing the envelope on minimum transaction sizes.) It is not true for tenders.
CartaX looks like a pricier Nasdaq Private Markets. Perhaps that premium--and the ongoing disclosure requirements and lock-in--is worth paying for some issuers.
In my experience, spreads are closer to 1 to 5%. The upper end of that spectrum dominates in the trading employees' shares, however, so there is a fair point here.
That said, CartaX isn't comparable to the open secondary markets. The latter are continuous. CartaX is periodic.
The better comparison is Nasdaq Private Markets, who offer a similar tender offer platform. Last time I checked, they charge a fixed fee plus something like $500 per trade. Compared with this, the 2% CartaX charge is only competitive for <$25,000 transactions.
> won't do anything below $100K
This is generally correct for open market trades. (Though folks like EquityZen are pushing the envelope on minimum transaction sizes.) It is not true for tenders.
CartaX looks like a pricier Nasdaq Private Markets. Perhaps that premium--and the ongoing disclosure requirements and lock-in--is worth paying for some issuers.
It sounds like Carta is marketing to early employees and not to accredited investors. There will be quick product market fit if employees prefer to join companies listed on CartaX. I have offer A that is liquid, and offer B that is not liquid, etc
An orderly secondary market could increase 409a valuations and result in a higher exercise price for stock options.
Seems like senior execs don't have much incentive to accommodate that...
Seems like senior execs don't have much incentive to accommodate that...
I am having difficulty following your former and latter references.
You said it perfectly. Agree 100%
Slightly OT but has anyone else gotten equity grants vía Carta? They are “signed” with a unverifiable digital signature. So you just have to trust that the document that they have is signed and that they will keep track of the records correctly. It’s very poorly done and gives the impression that they are low in technical competence.
E-signature law is rock solid, there had never in the US been a contract tossed out solely because the signature was electronic.
This ship has sailed a long time ago. Scribbling on a dead tree is not superior.
This ship has sailed a long time ago. Scribbling on a dead tree is not superior.
I agree completely that real signatures aren’t really useful. What I was trying to say is that they don’t give you a way to verify the digital signature. I believe that DocuSign does provide a certificate chain that you can use the check the signature.
What's old is new again? The public markets are too fiddly, so companies seek financing/liquidity on a non-exchange exchange?
Investors can buy and sell small shares of private companies on a "private" market in public view?
Seems like the SEC would be grumpy about a public non-public market?
What are the listing requirements? Is there an equivalent of the 10-K?
Investors can buy and sell small shares of private companies on a "private" market in public view?
Seems like the SEC would be grumpy about a public non-public market?
What are the listing requirements? Is there an equivalent of the 10-K?
Presumably only accredited investors (and equity holders) can participate.
This is interesting. Will Carta be disclosing 409a valuations as well?
Carta was eShares: https://techcrunch.com/tag/eshares/
>>> It is an odd artifact of history that private markets have zero liquidity
This is formally true, but in practice, not so.
I have invested in a bunch of private equities funds over the last 8-10 years and the average life of an operation is about 3 years, which is about what they are aiming for:
>>> They would only have to hold positions for 2–3 years, instead of ten, and could recycle their cash back into early stage startups.
And I'm doing precisely this. Recycling my cash into private equity.
This is formally true, but in practice, not so.
I have invested in a bunch of private equities funds over the last 8-10 years and the average life of an operation is about 3 years, which is about what they are aiming for:
>>> They would only have to hold positions for 2–3 years, instead of ten, and could recycle their cash back into early stage startups.
And I'm doing precisely this. Recycling my cash into private equity.
I'm a little confused. If you look at their listing requirements it's $500M+, with a target of $1B+.
That's a pretty small list of startups that achieve that, no? So this doesn't help employees of a start-up with a post-money valuation of $50M or even $200M, where I assume the vast majority of start-ups spend their time (if they see some initial success).
That's a pretty small list of startups that achieve that, no? So this doesn't help employees of a start-up with a post-money valuation of $50M or even $200M, where I assume the vast majority of start-ups spend their time (if they see some initial success).
Is this going to only be open to accredited investors?
Would expect it to only be for accredited investors.
On the flip side, I see a lot more Github style buyout deals - but with companies splitting the pie by pooling their public stock. Like IBM and Walmart going in to buy GitLab.
If that’s happening, I think you just broke the news early.
This could be really great for existing investors to buy employee equity. There's no easy way for an employee to reach the broad set of existing investors with a relatively small amount of options/shares. Founders are very much against this happening being worried that it sends the wrong signal. And at a later stage nobody will want to help a small employee do this as the amounts are not significant enough.
Alternatively, issue your new company's stock in Ethereum and get all the same benefits immediately. I'm sure there's some laws that prevent this, for now.
This isn’t my topic so I’m not qualified to speak on it at all. That said I clicked anyway and... am I crazy for reading the first paragraph in a hyperventilating tone?
There are enough shady scams on the listed markets without making non SEC regulated companies available as well.
The company's website: https://cartax.com
Boiling down to a loss of faith in the existing financial structure.
> It also means that all issuers will have to meet our listing requirements.
And what are those requirements? If it’s anything like where Nasdaq is headed, with forced diversity quotas (https://www.npr.org/2020/12/01/940501693/nasdaq-pushes-to-re...), then no thanks.
And what are those requirements? If it’s anything like where Nasdaq is headed, with forced diversity quotas (https://www.npr.org/2020/12/01/940501693/nasdaq-pushes-to-re...), then no thanks.
In tech, there are many accredited (potential) investors who have product expertise but no finance experience. This "slack capacity" of capital is what Carta wants to profit from. (If you want a public VC fund, there's Forge. Maybe Carta wants to go here some day, too).
Why do tech employees join companies that doll out significantly better equity to investors? (In some cases, those investors even get dividends on their convertible debt). Why are there still startups who don't even have 83(b) elections yet, and why aren't all start-ups doing bonus-to-cover early exercise? Why are employees totally cool with dilution and a 10% employee pool?
Because employees earn just enough to compete with each other, but not with the house. This is Carta's business opportunity.