The scientists [and engineers] never make any money. They’re always deluded into thinking that they live in a just universe that will reward them for their work and for their inventions.”
As I listened to Peter Thiel’s lecture, I nodded at the relevance of this point today: $585B of unicorn value is starting to falter and the inevitable fire-sales are being announced. Employees who never fully understood their equity packages are experiencing a rude awakening as investors escape safely on Preference stacks while workers get little or no return for their years of hard work.
While I am fortunate to work at a company that does a good job of explaining investor terms, not everyone is so lucky. In fact, one of the reasons I chose to work on Wall Street prior to joining a start-up was to fully grasp the financing terms of the companies for which I would later work.
My father learned that lesson the hard way. Two years ago, he called me to explain the terms of his biotech company’s reverse-merger IPO. Never mind that he founded the company 20 years ago. Never mind that as a lifelong scientist entrepreneur, he had conceived new antibiotics to fight community acquired bacterial infections that will save lives for years to come.
Unfortunately, he had also imagined a “just universe” where he would be rewarded for his work and now needed me to explain what the hell had happened. I was happy to help, but the bigger issue was the innate trust. He had never requested prior counsel to analyze the over-dilution and cram-down of his Founder shares and fight for protections. While there may not have been a choice but to take the investment (FDA-mandated testing is expensive), it was hard to stomach that my father, an inventor of world-changing drugs, had not previously reviewed the investment terms with a fine-tooth comb. Why had he politely remained in the lab (as Chief Scientific Officer) and trusted the Board’s business decisions, rather than been intimately involved in the business decisions of HIS company?
My entrepreneurial father inspired me to help build companies. But his story is emblematic of the chasm between Silicon Valley’s technical and business minds. Every week, I meet brilliant engineers and talented designers who accept option packages without understanding the first thing about the underlying equity instrument to which they are tying their fates — besides someone assuring them that they’re joining “a high-growth, sexy company.” Further, when things begin to go south, many don’t take the time to re-evaluate what the dilutive financings will mean for them personally.
I find this lack of diligence infuriating. These intellectuals — much smarter than me — imagine block chain technology for cryptocurrencies and how to cure diseases, but don’t put in the effort to comprehend ownership percentages or what a ratchet means in a down round. Why?
Consider Good Technology, which recently sold to Blackberry for $425M, 40% of its previous valuation. While I don’t know the nuances of the sale, I do know employees were advised to exercise their stock options years ago, prior to any liquidity event. Which muppets advised them to spend hard-earned cash to exercise a non-liquid, highly volatile financial instrument? There is no world where the (relatively) small tax breaks involved justify the expected value equation, given that Good Technology was nowhere near exit. To all the technically gifted minds out there — please talk to a financially savvy individual to avoid missteps that could impact your long-term wealth. It could prove invaluable in assessing a proffered package or the value of your current equity. I’ve personally helped friends at many companies better understand — and negotiate — their compensation.
At this point, you might be thinking: “To whom is this finance bro evangelizing? Does he not realize that people join start-ups for the thrill and excitement of working with other young smart people? It’s not about the money!”
And that’s fine.
But you should want to be compensated for your risk. Every equation has an expected value solution. So if you’re going to accept a negative value, high-risk package, do it because you believe in the business, not because you don’t appreciate the potential downside. If the company craters, at least you’ll know why your shares did too. Ask questions and seek advice — about anti-dilution provisions, about IPO protections, about liquidity preferences, about 409-A pricing.
You wouldn’t ship code before QA-ing it or unveil a new design interface without peer review, so why are you believing someone who tells you, “Don’t worry, we’ll all make a lot of money if we do well.”
What if we don’t do well?
Don’t be shy. This is your lifeblood. You will put in countless hours to make your company great. So talk to the CFO about the numbers — when you’re hired, when it’s fundraising time, and any time in between. Take ownership of your financial future — nobody is looking out for you but yourself. Don’t make the same mistake as countless others before you. Understand your comp.