<story><title>Who pays when startup employees keep their equity?</title><url>https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9561718</url></story><parent_chain><item><author>chollida1</author><text>There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise.&lt;p&gt;Their thesis was that&lt;p&gt;- startups would remain private longer.&lt;p&gt;- employee&amp;#x27;s lost their options when they leave&lt;p&gt;- longer periods to go public means more employees return options to the pool which means employee option pools can be smaller&lt;p&gt;- longer private periods leads to more rounds raised which benefits investors over employees as the former can participate on each round to keep from being diluted&lt;p&gt;- exits would come eventually and the investors would always have superior terms, I believe that they were working under the assumption that investors would never have mandatory black out periods after IPO so they could essentially participate in the opening day IPO pop.&lt;p&gt;This is one of the coolest and most maddening things about finance.  Every time you think you&amp;#x27;ve come to a big realization, usually you find out that someone else came to the same conclusion many years ago and has been making money &amp;quot;arbing&amp;quot; it out ever since.</text></item></parent_chain><comment><author>wyman</author><text>Where are all these secondary market companies &amp;quot;arbing&amp;quot; it out on employee stock option liquidity? The market should be HUGE, both for locked-in employees, and for buyers who want a small discount on hot startups.&lt;p&gt;This would totally solve the 90-day exercise period problem for the employees, without requiring company goodwill.&lt;p&gt;Some companies like ESOFund, 137 Ventures, EquityZen can do deals without company involvement, with a non-recourse loan with limited upside&amp;#x2F;downside, or a forward contract with cash delivered today, and the certificate held as collateral until IPO, when it is transferred.&lt;p&gt;There are increasingly share restrictions (which some consider unenforceable) on sales&amp;#x2F;transfers, loans, etc. First-hand knowledge online is scarce and lawyers give unclear answers due to the novelty of these deals. Can the company find out? Intervene? Sue? Are they likely to? Do we need a public case and TechCrunch headline in order to find out what the outcome is? How different is self-financing vs. a rich relative vs. angel vs. a marketplace investor?&lt;p&gt;Ask HN thread: &lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;news.ycombinator.com&amp;#x2F;item?id=12034716&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;news.ycombinator.com&amp;#x2F;item?id=12034716&lt;/a&gt;&lt;p&gt;Edit: It seems like I misunderstood, and the investors are investing in the company itself, not buying employee shares on the secondary market. The major point still stands though.</text></comment>
<story><title>Who pays when startup employees keep their equity?</title><url>https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9561718</url></story><parent_chain><item><author>chollida1</author><text>There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise.&lt;p&gt;Their thesis was that&lt;p&gt;- startups would remain private longer.&lt;p&gt;- employee&amp;#x27;s lost their options when they leave&lt;p&gt;- longer periods to go public means more employees return options to the pool which means employee option pools can be smaller&lt;p&gt;- longer private periods leads to more rounds raised which benefits investors over employees as the former can participate on each round to keep from being diluted&lt;p&gt;- exits would come eventually and the investors would always have superior terms, I believe that they were working under the assumption that investors would never have mandatory black out periods after IPO so they could essentially participate in the opening day IPO pop.&lt;p&gt;This is one of the coolest and most maddening things about finance.  Every time you think you&amp;#x27;ve come to a big realization, usually you find out that someone else came to the same conclusion many years ago and has been making money &amp;quot;arbing&amp;quot; it out ever since.</text></item></parent_chain><comment><author>Jerry2</author><text>&amp;gt;&lt;i&gt;same conclusion many years ago and has been making money &amp;quot;arbing&amp;quot; it out ever since.&lt;/i&gt;&lt;p&gt;Can you (or someone else) please explain how you&amp;#x27;d make money based on set of assumptions listed above?</text></comment>