[FreakLegion]

It's the case. And the kicker is that if you understood the tax games we play with startup stock, you wouldn't want preferred shares.

Why? Because common shares have their price set by a 409A valuation, which through the first few rounds of funding especially will be a small fraction of the preferred share price, set by agreement between the company and its investors. Cheap common shares make early exercise practical, so you can file an 83(b), not worry about AMT, and benefit from the QSBS tax exclusion after five years. Cheap common shares also mean you capture most of the value of preferred shares as gains, rather than having it as basis, out of the gate, since in a successful exit preferred shares are simply converted to common.

What companies that care actually do is offer early exercise, so employees who want to can take advantage of the QSBS tax exclusion, and give 10-year exercise windows with ISO->NSO conversion, so employees who decide to leave aren't forced to exercise or forfeit their options within 30-90 days. There's a lot of uninformed talk about preferred shares on HN, and you really ought to ignore it.

[hinkley]

Only if you don’t get diluted to shit.

I’ve known one person screwed by AMT, he worked for PayPal. I’ve known a few people who got rich off of early FAANG, Microsoft. I’ve made enough off company stocks to buy a car after 30 years at this, I’ve made probably five times that much just being long on AAPL since Steve returned, and some of that was also from company 401k match, which is likely second for income from employer benefits, or maybe behind health insurance.

I’ve know hundreds of people fucked over by the empty promise of common stock options. Who got less than nothing because they got nothing and lied to about it by bosses who they would now never trust again. At least a dozen of those were early employees, and a few of them looked to make money on paper but got diluted to hell and back during a funding round, because you can do that to non preferred stock.

I would also invite you to follow up with the person who responded to me in the affirmative. This is by and large an opinion I’ve adopted from advice from other people, that fits my own experiences, not something I’ve researched as much as they. The other person may give you better counter examples.

[FreakLegion]

Preferred stock isn't protected against dilution. That's why the big investors also negotiate pro rata rights, which allow them to buy proportionally more shares in future rounds to maintain their target ownership percentage (the key word here being "buy"; they still have to pay up for the new shares at the going rate).

Under standard deal terms (1x liquidation preference), preferred stock simply means you're first in line to get your money back if the company is liquidated for less than the price you paid. But if you haven't paid anything, if you're just sitting on options, then the preference does nothing. And those shares will cost 5x+ more than common shares, so now you probably can't afford to exercise them. That means you've limited your upside to protect yourself from a downside you can't afford to expose yourself to in the first place. It makes no sense.

Like, to boil this down: What you're asking for is the right to invest in the company at the same price and on the same terms as other investors. And if you ask for that, some companies would say yes! A gung-ho employee with that level of buy-in? Hell yes! But you probably can't afford it. Luckily common shares are a much, much better deal.

Dilution also isn't in itself a bad thing. It just means new shares are being issued. Generally your shares are going up in value at the same time, but if they aren't, if they're being devalued, it's not because of the dilution. It's because the company is failing. And in this scenario the capital raised from the dilution is actually maintaining a higher value for your shares than they'd otherwise have, because again, the company is failing. At least now it's failing with some cash in the bank.

> I’ve know hundreds of people fucked over by the empty promise of common stock options.

To be clear, I'm not saying you and your friends haven't been shafted. I'm saying the underlying mechanism of the shafting isn't what you think, and wouldn't have been fixed by having preferred stock. If the company(ies) were successful and the outcome wasn't great for the team, then the grants were too small. The fix for that is to give people more ownership. If the company(ies) failed, then believe it or not all the preferred shares did for investors was best-case get them their money back. Either way, preferred stock is a red herring.

> I would also invite you to follow up with the person who responded to me in the affirmative.

rjbwork? They're just regurgitating the common talking points. Anytime someone brings up cap tables you can safely ignore them. The cap table has sensitive information; even most investors don't get to see it.

Happy to explain any of this in more depth. I had extremely good outcomes as an employee with common stock at companies that actually cared, and now with my own company have spent tens of thousands of dollars on lawyers optimizing our stock plan to be as employee-friendly as possible.