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
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).
> Expected return is in fact higher on startup equity than FAANG equity
Expected return is extremely misleading because it depends strongly on extraordinarily few outlier winners. Like when Jeff Bezos walks into a bar and now the average wealth of every person in the bar is over a billion dollars.
Firstly, if your prior is that every previous startup failed, what does that say about your future chances of success?
Secondly, all the returns for YC are concentrated in a few companies. If you were in a winner then great, otherwise you most likely got $0 for your shares.
4% of YC companies become unicorns. How many startups do you need to work for before you become part of the 4%? That number is not a feasible number of jobs for one lifetime.
The modal return matters far more than the average return because you don't get to choose to be in an outlier.
The first article I checked said that 17 companies had IPOed for YC. Common shares often only get returns from an IPO. How many companies have gone through YC? What's the average number of companies you need to be part of before you get to be in one of the 17?
I'm using YC because the numbers are better for YC than most other VC or startups.
> Firstly, if your prior is that every previous startup failed, what does that say about your future chances of success?
The prior is the market. It isn't sane to use your own prior experience. (Works both ways -- if your last startup did great, shouldn't assume next will).
> 4% of YC companies become unicorns. How many startups do you need to work for before you become part of the 4%? That number is not a feasible number of jobs for one lifetime.
The bar (and what the model is calculating) is Series A from top VC, not YC Seed funding. That significantly increases odds. Specifically, ~45% YC companies get Series A, so it's more like 10% chance of a YC Series A funded company becoming a unicorn (https://www.lennysnewsletter.com/p/pulling-back-the-curtain-...).
Model is change jobs every 18 months if not booming. A 1 in 10 chance is quite reasonable over a career.
I agree there is an issue with the event being too rare, but you can't just look only at modal returns. 2/3 chance of $0 (the modal return) and 1/3 chance of $10 million profit is still pretty good odds to work with.
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".
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.