> If a founder cashes out 10% of their position for $500k @ $25M Series A valuation, that de-risks a lot of their personal life. But when the startup ends up selling for $250M, that $500k of 'early' selling would have been worth $5M (less any dilution between rounds) - hard not to regret the choice in that case even if hedging is going to be the correct choice 99% of the time.
IMHO, it's very easynot to regret, with those particular numbers.
I'd take $500K now plus possibly $45M later -- over $0 now and possibly $50M later.
I'd take that deal even if "possibly" were "guaranteed".
(Who might regret that is a founder who was otherwise already wealthy.)
Exactly. About 15 years ago I was offering equity in a good little startup. I didn't take it because I just wanted to go somewhere with a higher salary.
When they finally sold about a decade later I ran the numbers and determined it would have been about $40,000 based on the actual sale price.
Hear, hear. My one-time $10M (early employee) eventually cashed out at a low/mid 6-figures. Take the salary I earned multiplied by the years I spent there, add to it the IPO, and then divide by number of years I was there. I could've trivially surpassed that annual salary elsewhere. Lesson learned.
Exactly. As a former founder who dealt with hospitalization and thousands of dollars a year in medical bills on the sh!t insurance startups can afford, I too would rather have 500K now than 50M later. There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.
Plus, setting 100K aside for medical bills and even throwing the 400K into Bitcoin is a far less risky investment than me NOT being in a FAANG and accumulating 401K money which is absolutely critical if you want to keep up with the rising cost of life through retirement. When everyone else who joined Google or Meta out of college and now has a 10 million net worth at 40, that defines the cost of living in the area, and that's the bar you have to keep up with if you want to still live here at 40, 50, 60. Chipotle will cost $50 in a few years. A 1 bedroom apartment will cost $5000 in a few years. UberEats was $15 when it started, already costs $50 for lunch in my area, and at this rate, it will be $200 in a few years. Because those people can afford it, so greedy owners and greedy landlords will up their prices, so I will have to pay not just my $5000 rent, but also the Chipotle worker's rent, and the Chipotle franchise's rent, in order for their prices to stay profitable. The cost of living in the bay has tracked the S&P500, not the CPI. YOU will be priced out if you didn't have liquidity at a younger age to throw into some investments.
I'm at a large company right now. Being compensated enough to be able to afford life in the bay area now, having enough income to afford a mold-free modern apartment in a place where I don't need to worry about getting mugged, and hedge the risks of all the crap that's going on in the world was a big part of my reason to join one. If I had enough saved to "feel safe", I would absolutely be doing a startup again.
> There's also a good chance I could turn 500K into 5M-20M in 10 years with reasonably low risk investments.
I would very much like to know where you can find low-risk investments that are likely to net you 10x-40x returns in the span of 10 years.
(But overall I very much agree with your point that $500k now and $45M later can be a much much much better deal for someone than $0 now and $50M later. I would likely take that deal every single time.)
By doing homework and research every day and investing only in things you personally deeply understand.
But if you don't want to do that ... passively investing in QQQ would have given you a 5.4X return in the past 10 years.
If you just throw your money across some large, too-big-to-fail companies, you could have 10X'ed easily.
AAPL, NVDA, MSFT, TSLA, NFLX have all >10X in the past 10 years.
GOOG, META have come close.
You could have split your money evenly across the biggest 5-10 companies in tech and 10X'ed.
And if you actively invest and do day-to-day research it's fairly easy to beat 10X in 10 years.
By the way my definition of "low risk" is calibrated to the risk of founding your own startup and making 100K/year hoping for a big payout later in the future vs. joining a big company and making 500K/year.
My "startup founder calibrated" low risk stock investment means:
- Reasonably high probability to 10X in 10 years
- Some probability of losing money, but very low probability of losing most of your money
- If you lose money, it's because of a major world situation, and holding for another 10 years will probably get you out of that
- You also have skills and are hireable so you can hold the stocks
AAPL, NVDA (even without the recent events), MSFT, TSLA, NFLX, yeah sure. But out of those, only Apple and Microsoft were reasonable companies to put that kind of money into. I think you're not realizing that you're cherry-picking.
I mean I think your point still stands with just looking at QQQ, but I'm just saying over embellishing hurts your argument, not helps.
Meh, this isn't a me vs. you situation. If you take value from my overall comment, great. If you think my whole comment is invalidated by one statement that you do not believe, I'm not interested in defending it.
I meant low risk in the sense of doing some basic homework and investing, and investing in large publicly-traded companies, I consider it low risk compared to everything in startup land. I'm pretty confident I could 10X in 10 years with ~80% probability by investing actively and doing homework.
Joining a startup is extremely high risk from an opportunity cost standpoint. Literally any profitable company's stock is low-risk in comparison.
But ... if you don't want to do homework, you could just buy a smattering an equal distribution of the biggest names in tech (MSFT, NVDA, AAPL, GOOG, META, TSLA, etc.) and you would have easily gotten 25-37% pa averaged over the past 10 years. It's highly unlikely all these companies suddenly fail, all together.
And if you want to protect yourself against that, write covered calls at ~15-20% per week and use the proceeds to buy protective puts on all of your stocks.
(Disclaimer: not investment advice blah blah blah)
Just to clarify about taking the $500K rather than even guaranteed additional $5M ($50M vs. $45M) years later...
$500K is an immediate big quality of life boost for most people.
For example: a condo/house downpayment, which lets you move out of cruddy ramen apartment, to routinely get a good night's sleep. And/or that relieves some of the various other startup salary level money stresses on your family.
I think this can also be aligned with the goals of the startup. You don't want people so "hungry" that the stress is hurting their health and their home lives. You want them motivated by the mission, the work, the environment, and the possible big liquidity windfall in the future -- but not by desperation.
Your point is well taken but usually the bigger burden to buying a house is being able to afford the monthly payments, especially at high interest rates like right now. Esp in Bay Area where most startups are.
Usually if you don't have the money for a down payment, you probably don't have the cash inflow for making monthly payments either. Especially at a startup where you are not drawing much in salary.
Maybe it depends on the area and kinds of properties one is looking at?
Only a little anecdata, but the few times I've looked (affluent university town, once recommended as a place to do a tech startup)... if one could swing a downpayment on certain places, the monthly costs were lower than rent one would otherwise have to pay, on places not as nice.
Not to mention that in reality there is no guarantee you'd end up selling for $250m. $500k now would look pretty damm good if the whole thing tanks and the other 90% of your shares become worthless.
Yep; for the vast majority of people, the difference between $45M and $50M is not going to change their lives in any meaningful way. With that amount, you can live a fairly lavish lifestyle and still see the number in your brokerage account go up every year.
I actually kinda think a founder that was otherwise already wealthy wouldn't mind this too much, either: say they already have $50M in the bank; the difference between $95M and $100M feels even less of a big deal than $45M and $50M. Granted, the founder with $50M already in the bank probably wouldn't bother with the $500k in the first place, though, especially if they believed in the likelihood (or guarantee, in your hypothetical) of a future larger exit.
When you sell your stocks before 5 years of holding period has passed, you pay significantly higher taxes. So you don't get 500k net, you get 500k gross, or probably 300k net. Which makes the de-risking less compelling.
The numbers are made up anyway, adjust up by a few hundred thousand and the point that securing one’s shelter is worth foregoing winning the lottery still stands.
This is when you immediately liquidate your stock position, instead of taking a loan using it as a collateral, which would likely cost you 10%-15% in interest, not 30%.
No, in this example the person sold equity in order to get the 500K. They can't use the equity as collateral for the loan because they dont own it anymore
But then they’re paying interest and very few startups are going to have stock that a someone will lend against. I cannot imagine someone taking Series A stock as collateral for a loan.
Not sure why you are getting downvoted. There are multiple ways of structuring what is effectively selling the shares early that are not tax disadvantaged.
Regret is perhaps too strong of a word. But $5M is $5M even if you have $45M. Sure, it won't change your life since you have the $45M, but the incremental investing / philanthropy / estate / family help etc that it allows you is real in absolute terms.
The other thing I've noticed is that for people on the other side of this transaction, it's not like "smaller numbers" all of a sudden become immaterial. $1M is still $1M. $5M is still $5M.
Again, I'm with you, I don't think it's regret exactly. But post hoc you might choose differently, even if it's the rationale choice at the time.
Your argument is treating the future as knowable and certain, while not accounting for the value of risk.
I guess you'll feel pretty bad if you pay for car insurance for 40 years, and never have a crash.
If the 100% upside is guaranteed, then sure, you should hang on.
But if "anything can happen" then cashing out 10% now, and providing a "can't fail" safety net, is well worth it. The reduction of risk of "losing it all" is well worth the 10% premium. And if the (somewhat unlikely) big exit ever happens you still have 90%.
> If the 100% upside is guaranteed, then sure, you should hang on.
Overall agreed, but that's not even always true! If you're -- for example -- under crushing levels of debt today, you very well may want to take that $500k now, even if that $50M is 100% guaranteed in 5 or 7 or 10 years.
Or even if you aren't in debt, but would find it a huge quality of life improvement to be able to have a down payment for the house you'd really like to live in now, and not have to wait 5 or 7 or 10 years.
IMHO, it's very easy not to regret, with those particular numbers.
I'd take $500K now plus possibly $45M later -- over $0 now and possibly $50M later.
I'd take that deal even if "possibly" were "guaranteed".
(Who might regret that is a founder who was otherwise already wealthy.)