At the very least I’m glad more private companies are exploring ways to provide their employees with liquidity.
Issues I can foresee:
- Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have.
- Fewer employees with huge returns. This may or may not be a problem depending on your perspective. This type of system incentivises employees to lock in gains and sell their shares when they see reasonably growth. That’s also a lost opportunity for the future if the share price continues to grow. If you see a 10x increase in the price, you’re likely to sell. The share price could continue to grow by another 100x and you would mostly miss out in that case. In the most optimistic case for private companies, the lack of liquidity is a _good_ thing. You can only sell your shares at IPO when there has been more than 1000x return since seed stage.
I can see this being a huge positive for hiring though. If I was considering multiple AV companies for roles, this would be a huge plus point for Cruise.
"Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have."
Yeah, but it's relatively even-handed BS if you're being given the option to sell, not being forced. If you're getting the same deal the investors and/or founders are getting, then you're not being cheated.
As for "the early employees might sell earlier", well... said early employees have a lot of info about what's going on. The risk is what it is. If you can "only sell your shares at IPO when there has been more than 1000x return since seed stage" the modal outcome ends up being "you can never sell your shares". This allows the employee to trade the lottery ticket in the future for some decent money now, and that's broadly sensible. But even more than that, it allows employees to diversify by having a bit of both. I've had cases where I'd appreciate that.
409A valuations are almost always paid for by a party that has some interest in the outcome being high (or low). Moreover, said party usually decides who does the 409A valuation.
Valuations? You realize the valuation of a small company is much, much harder than the valuation of a public company right? I know a valuator who can take the information of a public company and tell you to about 10% its price on the stock market. 10% isn't good enough for playing the stock market, but with small companies the error factor is like 1000. Meaning your unicorn could actually be worth a million (firesale of assets, IP to patent trolls, fighting over scraps of the VC money) or a trillion (FAANG will now be referred to as FAANGU, U being for Unicorn corporation, your company). It might be more than 1000, it's really all over the map, I can say with certainty though it's less than 1000000.
My limited experience has been that 409a valuations are extremely different from what investors pay (what investors pay per share is much more). I am curious if there has been much written about why this is.
Your second complaint only makes sense if the company doesn't want to go public to screw its employees over. If the offer is good you take it, it's still a market with one participant instead of no market.
Your third opinion literally involves most employees getting nothing.
Comments
At the very least I’m glad more private companies are exploring ways to provide their employees with liquidity.
Issues I can foresee:
- Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have.
- Fewer employees with huge returns. This may or may not be a problem depending on your perspective. This type of system incentivises employees to lock in gains and sell their shares when they see reasonably growth. That’s also a lost opportunity for the future if the share price continues to grow. If you see a 10x increase in the price, you’re likely to sell. The share price could continue to grow by another 100x and you would mostly miss out in that case. In the most optimistic case for private companies, the lack of liquidity is a _good_ thing. You can only sell your shares at IPO when there has been more than 1000x return since seed stage.
I can see this being a huge positive for hiring though. If I was considering multiple AV companies for roles, this would be a huge plus point for Cruise.
"Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have."
Yeah, but it's relatively even-handed BS if you're being given the option to sell, not being forced. If you're getting the same deal the investors and/or founders are getting, then you're not being cheated.
As for "the early employees might sell earlier", well... said early employees have a lot of info about what's going on. The risk is what it is. If you can "only sell your shares at IPO when there has been more than 1000x return since seed stage" the modal outcome ends up being "you can never sell your shares". This allows the employee to trade the lottery ticket in the future for some decent money now, and that's broadly sensible. But even more than that, it allows employees to diversify by having a bit of both. I've had cases where I'd appreciate that.
You're never getting the same deal as investors or founders. Ever.
FWIW, 409a valuations are calculated by third parties. Maybe not as efficient as a market, but a well accepted standard.
409A valuations are almost always paid for by a party that has some interest in the outcome being high (or low). Moreover, said party usually decides who does the 409A valuation.
Valuations? You realize the valuation of a small company is much, much harder than the valuation of a public company right? I know a valuator who can take the information of a public company and tell you to about 10% its price on the stock market. 10% isn't good enough for playing the stock market, but with small companies the error factor is like 1000. Meaning your unicorn could actually be worth a million (firesale of assets, IP to patent trolls, fighting over scraps of the VC money) or a trillion (FAANG will now be referred to as FAANGU, U being for Unicorn corporation, your company). It might be more than 1000, it's really all over the map, I can say with certainty though it's less than 1000000.
My limited experience has been that 409a valuations are extremely different from what investors pay (what investors pay per share is much more). I am curious if there has been much written about why this is.
It mostly comes down to conflicts of interest.
Your second complaint only makes sense if the company doesn't want to go public to screw its employees over. If the offer is good you take it, it's still a market with one participant instead of no market.
Your third opinion literally involves most employees getting nothing.