It’s interesting that the author thinks that the value of the shares is higher than the preferred price, even though employees typically hold common shares, meaning they get wiped out in most scenarios except best case. The expected (best case) growth is not an argument in favor of a 4x multiple on price. The chance of achieving that is baked into the price
usaar333•2h ago
The value of the equity package is 4x higher than the FAANG equivalent equity package (at preferred/market pricing) - that's not the same as saying the shares themselves are worth that.
To sum up the arguments:
* Employment packages allow things a shareholder cannot do (functionally recall their investment), so the high volatility leads to higher package returns.
* FAANG equity grants (RSUs) are taxed at much higher rates
* Expected return is in fact higher on startup equity than FAANG equity (and you generally have no way to invest in the good startups directly aside from working for them).
inhumantsar•1h ago
doesn't all of this assume that the startup reaches a liquidity event which favors the employee though? or at least that the startup is hot enough that there's a secondary market for those shares?
unless I'm misunderstanding the argument, I dont see how those hypothetical returns could be considered "expected returns". startups which reach a place where employees can profitably cash out seem far too rare to reasonably expect a return at all, never mind a large one.
Since a person works for one company at a time (usually), and it can take 3-5 years or more for a startup to reach a place where the equity is worth something, this argument reads to me like "the returns on a Powerball win are so much higher than your projected lifetime earnings that playing the lottery is a smart financial move".
usaar333•1h ago
It's a probabilistic model. It assumes (correctly) that the low probability of a home run times the home run's valuation is quite large ("expected returns" in the probabilistic sense).
> this argument reads to me like "the returns on a Powerball win are so much higher than your projected lifetime earnings that playing the lottery is a smart financial move".
That's stronger claim than it is making, but yes in a sense it is saying the lottery can be a good move because the expectation is large - that's what VCs do after all.
Note that all the model aims to do is value the equity package. If a public company is offering more than what this model values the startup equity package as (and this often is the case!), it isn't worth it financially to work at that startup.
random_savv•2h ago
usaar333•2h ago
To sum up the arguments:
* Employment packages allow things a shareholder cannot do (functionally recall their investment), so the high volatility leads to higher package returns.
* FAANG equity grants (RSUs) are taxed at much higher rates
* Expected return is in fact higher on startup equity than FAANG equity (and you generally have no way to invest in the good startups directly aside from working for them).
inhumantsar•1h ago
unless I'm misunderstanding the argument, I dont see how those hypothetical returns could be considered "expected returns". startups which reach a place where employees can profitably cash out seem far too rare to reasonably expect a return at all, never mind a large one.
Since a person works for one company at a time (usually), and it can take 3-5 years or more for a startup to reach a place where the equity is worth something, this argument reads to me like "the returns on a Powerball win are so much higher than your projected lifetime earnings that playing the lottery is a smart financial move".
usaar333•1h ago
> this argument reads to me like "the returns on a Powerball win are so much higher than your projected lifetime earnings that playing the lottery is a smart financial move".
That's stronger claim than it is making, but yes in a sense it is saying the lottery can be a good move because the expectation is large - that's what VCs do after all.
Note that all the model aims to do is value the equity package. If a public company is offering more than what this model values the startup equity package as (and this often is the case!), it isn't worth it financially to work at that startup.