Seems like 3 is a bit pessimistic. After all, if there are 3 founders then that greatly decreases the chance that the CEO steals equity from the other 2 cofounders. The CEO generally wouldn't have > 50%, so the non-CEO co-founders could keep the CEO in check.
Seems accurate according to my experience. It’s the new investment banks in later rounds that cause it. Bigger investments, stronger guarantees, better preferences, and lack of understanding on the part of inexperienced founders, plus lack of power held by the employees options pool … recipe for “only the banks see any upside.”
alot of financial engineering happens if the company is raising large rounds, if you leave early as a cofounder, they will absolutely mess with your equity. And even if you are there, youre considered an expense, unless the CEO explicitly advocates for you
its so common that I am shocked people willing enter roles like co-founding CTO without serious legal protections in place. go spend time in NYC/SF and talk to actual cofounders
SaaSyCryptoAI - Leverage our custom AI driven backend to mint your own coin! Seriously though, great little lesson. It would be nice to factor in internal raises and a bit of granularity for when exercises happened to see final payouts and similar bonus topics but I would recommend this to anyone thinking about taking a job with options involved.
Add the effects of "preferred overhang" on employee payouts for various different exit outcomes like acquisitions. Usually only founders and investors with "preferred shares" see anything and those with common stock (employees) see theirs get completely eaten by the overhang.
Yeah, that’s not how my company operates. I’m maintaining my majority share by splitting only. The VCs can go along, or they can hope their next investment is the unicorn.
Yeah, also seems very US-centric with "outstanding shares". Other countries don't allow you to have outstanding shares. Also, where is the "reinvest" option during series rounds. Like, what founder also doesn't reinvest to keep their equity during fund raising?
This is US centric, it's mentioned on the first page, along with the notes and links.
Reinvesting is a minority, edge case. I can't think of a single VC company in the Bay area that can have founders reinvest shares and not cause issues raising.
"...reinvest shares." I don't understand this. I'm guessing it's my lack of knowledge.
I'd expect "reinvest" to mean "supply more capital to obtain more shares" in an attempt to maintain ownership percentage. The founder would have to already be rather wealthy, or be savvy enough to negotiate some other way to maintain their ownership.
You can borrow against your shares if you have a good relationship with the bank. That will allow you to be wealthy enough to buy some shares in the round. Not enough that you won't get diluted, but not as much as being broke. And of course, you have to pay back the loan.
Quick equation:
1. is it an ai lab with a well know founder -> equity might be worth something
2. are you the CEO founder? -> equity might be worth something
3. are you a non CEO co founder? -> equity might be worth something, will probably be stolen from you
4. is the company a year or two from a certain IPO? equity might be worth something
5. all other cases likely zero
Seems like 3 is a bit pessimistic. After all, if there are 3 founders then that greatly decreases the chance that the CEO steals equity from the other 2 cofounders. The CEO generally wouldn't have > 50%, so the non-CEO co-founders could keep the CEO in check.
Seems accurate according to my experience. It’s the new investment banks in later rounds that cause it. Bigger investments, stronger guarantees, better preferences, and lack of understanding on the part of inexperienced founders, plus lack of power held by the employees options pool … recipe for “only the banks see any upside.”
alot of financial engineering happens if the company is raising large rounds, if you leave early as a cofounder, they will absolutely mess with your equity. And even if you are there, youre considered an expense, unless the CEO explicitly advocates for you
its so common that I am shocked people willing enter roles like co-founding CTO without serious legal protections in place. go spend time in NYC/SF and talk to actual cofounders
Is there even a CEO per-se in this situatuon?
Depends on country and type of business entity. Some of them require one legal representative.
It doesn't understand authorized vs issued shares
In practice, for YC or similar Bay area US startups, they are the same.
All authorized shares are issued, and then the charter is amended through board action and more shares are authorized and issued at each stage.
SaaSyCryptoAI - Leverage our custom AI driven backend to mint your own coin! Seriously though, great little lesson. It would be nice to factor in internal raises and a bit of granularity for when exercises happened to see final payouts and similar bonus topics but I would recommend this to anyone thinking about taking a job with options involved.
Add the effects of "preferred overhang" on employee payouts for various different exit outcomes like acquisitions. Usually only founders and investors with "preferred shares" see anything and those with common stock (employees) see theirs get completely eaten by the overhang.
Depends on the outcome.
If it's a positive outcome, then preference has no role.
This game models good outcomes, with warnings for things like down rounds
Useful! I like playing such games where u simulate something from real world so you get playground to do mistakes.
Thanks! :)
Thank you for python anywhere, I will add that to my chasm of free hosters.
Ya for sure, and even paid account is very cheap, few dollars a month
so many erroneous statements in this game. also it's not much of a "game", is it.
Ya, I'd appreciate pointers if there are errors :)
Care to explain where are the errors?
Yeah, that’s not how my company operates. I’m maintaining my majority share by splitting only. The VCs can go along, or they can hope their next investment is the unicorn.
Yeah, also seems very US-centric with "outstanding shares". Other countries don't allow you to have outstanding shares. Also, where is the "reinvest" option during series rounds. Like, what founder also doesn't reinvest to keep their equity during fund raising?
This is US centric, it's mentioned on the first page, along with the notes and links.
Reinvesting is a minority, edge case. I can't think of a single VC company in the Bay area that can have founders reinvest shares and not cause issues raising.
"...reinvest shares." I don't understand this. I'm guessing it's my lack of knowledge.
I'd expect "reinvest" to mean "supply more capital to obtain more shares" in an attempt to maintain ownership percentage. The founder would have to already be rather wealthy, or be savvy enough to negotiate some other way to maintain their ownership.
You can borrow against your shares if you have a good relationship with the bank. That will allow you to be wealthy enough to buy some shares in the round. Not enough that you won't get diluted, but not as much as being broke. And of course, you have to pay back the loan.
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Hey thanks!
There are a ton of edge cases, but the goal was to serve as an intro, and to get a grasp of the basics.
Links in the intro to a more serious look at things.
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