Knowledge sharing on the exit benefits of ordinary employees in a start-up company

Editor: The average employee in a start-up company is often a group of people who are ignored by outsiders, but Facebook is not built by Mark alone. Damndigital's readership has a dream to join others entrepreneurial team aspiring young people, hope that through this article can popularize the startups of ordinary employees of the income expectations and various rights. Because of national conditions, regulations and other differences, this article is for reference only.
36kr Original title "What kind of start-up company can make Me a millionaire in four years?", edited as intended.

... Someone asked this question in Quora: What startup could made me a millionaire in Loko Perton if I got hired as a emplyee

Symbolic Analytics founder Brandon Smietana has made a very long answer below, but please do not:

Most startups exit (exit) through M&a, rather than through IPOs (IPO), and now most m&a prices are below 30 million dollars, the most typical price is 15 million dollars, now let's assume a most optimistic exit case, Figure out how much money I can get as a founder and CEO, and figure out what benefits you might earn as an employee.

(i) Assuming the case I got 10 million of the investment. Investors have a 50% per cent stake in the company (optimistic estimates). I will sell the company at a price of 30 million. I have 30% of the external stock (outstanding Share), very optimistic estimates.

Investors also have preferred shares, through mergers and acquisitions, they first put their money back, and then participate in the remaining equity income dividends.

in the 30 million exit, investors first take back their input of 10 million, the remaining 20 million. The preferred shareholders then ate 20 million of the 50% profit dividend, so they took another 10 million. Now there is only 10 million of the total cash out of the sale, and those who share this interest include shareholders, employees, founders and management teams.

I, as the founder and CEO, enjoyed the most common equity stakes, worth 10 million dollars for about 6 million. The 4 million savings are attributable to all other common stockholders (including all employees).

The most typical early employee, who had less than 1/30 of the CEO's assets in dividends, was a very important early employee who was able to get 200,000 dollars off the sale.

Now, let me imagine less optimistic, relatively practical. 70% of entrepreneurs entering a round of financing, other than wages, have no other benefits from the company. So as an employee,

there is a 70% chance that if you join a start-up in a round of financing, your common stock is worthless. Compared with earlier employees in the a round, the benefits to be obtained by the employees in the a round are much less than those of the previous ones. After the a round of financing, the new employees will be able to get the best share of about 0.3%. No matter what kind of employees, their equity will be diluted in management changes or a new round of financing. (b) What if I enter a company that is "next Facebook"?

Silicon Valley has changed so earthshaking in the past 10 years. These changes, at the same time, affect the benefits that IT staff can derive from the company.

If you joined a successful start-up company in the future by 1998 (including 1998), you must have made a lot of money. But if you are in Facebook, the value of the benefits you can gain may not be comparable to the former. Well, those who join the "next Facebook" will hopefully be even smaller, and here's why:

When Google's early employees joined, Google's valuations were low.

Google's valuations rose from 40 million to 200 billion. Those who first joined Google had a 1000 dollar stake in Google, worth $4 million in 2008. An engineer with a 50,000 dollar stake, his stake was worth 100 million dollars in 2008. Google's chef also gained a 28 million stake in the price.

There are four reasons why Google's employees can benefit financially so well:

They get stock options when the company is at a very low valuation. Google's valuations have risen 4,000 times-fold since the financing of a round. Company employees get buy options at artificially ultra-low-price agreements (roughly 1/10 per cent of the share price), because the 409 (a) terms of the IRS do not yet exist. Because the price of the agreement is low enough, the employee pays the capital gains tax 15% (Gain Tax) rather than the income tax 50% (income Tax) in the right of ownership.

When Google issues shares to his employees:

The company is at a low valuation stage, not a later peak valuation stage. At that time, the IRS had not implemented the 409 (a) clause, and 409 (a) clearly defined the valuation of employee options.

More than 10 years ago, startups would be giving employees options at less-than-valued deals to lure people of insight. Employees are therefore likely to get rich overnight through the company's IPO, which is roughly equal to 1/10 of the estimated price.

And today, it's illegal. Now, the directors of the company, under the terms of the article (b), still have the right to an undervalued stock (undervalued) through restrictive stocks (restricted stock); but now get the rational option (incentive-the stock options) Employees must follow the IRS 409 (a) clause. At the same time, today's employees are more likely to pay a 50% income tax than a 15% capital gains tax.

With higher early valuations, employees are now less likely to have the cash to do so, and are less likely to pay capital gains tax, which is generally paid by income tax. 409 (a) the provisions of the clause have also prevented the price of the employee from being as low as it was ten years ago. Now, an employee of a start-up company who exercises an ISO option of $2 million (International standard option) may still face a 50% income tax after paying a California tax or a Texas tax.

In general: Founders and directors are given restricted shares (restricted stock) based on the terms of the article (b), and they pay a 15% capital gains tax, while employees are more likely to get welfare options (incentive options), with a higher tax rate.

So, as an employee, even if one day your company is sold, you may have to pay a 50% income tax.

2 million seconds left 1 million, and now the price in San Francisco is 3 million.

(iii) The impact of valuation of start-up companies on employees

All the previous reasons for Google employees to win are now likely to disappear.

New startups, such as Facebook, have a very high early valuation, so the benefits of early employees are much less than those of previous startups.

More importantly, there are only a growing number of large IPOs, replaced by more and more small m&a.

1992-2009 ratio of venture capital to IPO and M&A trading

Most companies do not do as well as Google and Facebook do. Even on Facebook, only a handful of employees accumulate wealth.

Zuckerberg's stake in Facebook is roughly equivalent to the sum of all of Facebook's non-executive equity (24%vs30%). The top 50 of Facebook's non-executive employees are almost equal to the total of the next 25,000 employees.

Equity is the pyramid, the higher the level, the greater the gap.

In a 30 million-merged company Exit case (see above), a successful m&a exit. The CEO of the company can only make 6 million dollars.

(iv) The relationship between entrepreneurial field and employee return

Many startups are rooted in the mass Internet (Customer Internet space), but they have the lowest ROI in this sector. Take Facebook's example (one of the most successful consumer internet companies), which generates only 3 dollars/year benefits from active users every one months.

Few mass-market internet companies are able to make profits through advertising, like ad.ly, Digg, Myspace, Twitter, and many other companies that are hard to reach, even if they are huge.

A VW Internet company, if the number of active users per month is 500,000, according to Facebook's earnings projections, a year's profit is only 1.5 million dollars. Therefore, do not regard the public Internet as a lifeline.

Today, the B2b/saas model and the biotech market are still able to grab billions of dollars in the market, but few people have the ability and experience to do business in the market. But there are more lucrative opportunities in this area than in the mass internet market.

The most profitable market, the most difficult to find start-up companies. In particular, the financial sector's annual profits accounted for 70% of America's interests, but it is hard to find financial start-ups in Silicon Valley, even if they are basically public financial services.

Protip: From the data and the theory, if you are a member of the Volkswagen Internet company after a round, your stake is almost worthless.

Original: Quora
Source: 36kr