Do you want to work for a unicorn?

unicorn-money

Once upon a time, unicorns were a rare thing. In fact the use of the term ‘unicorn’ in the startup World was meant to convey that rarity. Only a precious few startups get to $1B+ in valuation.

While this is true in relative terms, the absolute number of unicorn startups has never been higher. And the timeframe from inception to unicorn status is compressing. The poster child of this trend is Slack. In the last year it has gone from a $67M valuation to a $2.6B valuation.

slack valuation

When I talk to founders these days, especially in the Valley, they tell me that they struggle to compete with these unicorns for talent. Everyone wants to work for them. And of course they have so much money that they can pay more than other merely mortal startups.

Why do people join startups? There are many factors: interesting work and getting to work with smart people usually top the list. Good salaries come next. But the potential to have ownership in a company and share in the rewards of the value you help create has always been an important component. And when I look at these valuation trends I can’t help think that regular employees are not going to see much from their options when all is said and done.

How many millionaires have Facebook, Paypal, Google and others created? Those millionaires have started companies, become VCs, angel investors and contributed towards the next generation. They are an important part of the puzzle.

If you own options in a company that has raised far more capital that it needs at a valuation that it has yet to grow into, then your options are under water. Even after the 409A valuation discount. Moreover, many startups do unnatural things to get their unicorn status. They agree to unclean terms such as multiple liquidation preferences in order to artificially bump up valuation. This only puts you even further back in the bus when it comes to sharing the spoils come exit time.

The founders of these unicorns are taken care off. They’re selling shares in secondary transactions earlier and earlier. I don’t fault them for that at all. The chances of achieving a multi-billion $ outcome are very small. If you’re going to go for that, you should de-risk yourself.

So, the founders are protected and the VCs are protected. Employees are not. Think about that when you’re choosing what company to join. Do you stand a reasonable chance of seeing any return from your options? That should be an important part of your decision.

  • http://www.danbenoni.com/ Dan Benoni

    “So, the founders are protected and the VCs are protected. Employees are not. Think about that when you’re choosing what company to join.”

    Wow… I’ve never thought of it this way. I’m wondering if most Bay Area engineers who are switching boats like that do realize that simple fact.

    Very interesting article Mark. Cheers.

    • http://startupcfo.ca/ Mark MacLeod

      I’d say they don’t given that some companies use their inflated valuation as a draw to get people to join

      • http://www.danbenoni.com/ Dan Benoni

        I’d be ashamed to do that as a founder. At that point I’d much rather establish that we don’t give shares unless for very exceptional cases, just like Helpscout does it. Then again, I know that most VC impose an employee pool, especially for series A. Any take on that?

  • http://startupcareeradvice.com/ John Gannon

    Wish we as a startup ecosystem would do more to promote transparency re: equity grants –> namely how they work and what one can reasonably expect equity to be worth under a handful of illustrative scenarios.

    What you describe here is one possible ‘gotcha’…but there are so many other gotchas and nuances that people don’t know to ask about or consider when talking to a startup about joining.

    I know that all of the lawyers reading this will say ‘No way’ but I wonder if there is a way we could put some sample exit scenarios in options agreements. With a lot of caveats, of course.

    But at least it would help people understand what drives startup stock option value and how much said options could be worth across a few different scenarios.

    • http://startupcfo.ca/ Mark MacLeod

      Good points John. The problem with scenarios is that the good scenarios create expectations and the bad ones scare people away.

  • http://about.me/paulsullivan Paul Sullivan

    Hey Mark, timely topic. I wonder if there’s another reason to work for a unicorn and that’s the opportunity to quickly advance (as the company grows) and be granted responsibility that you’d never otherwise be qualified for in a “conventional” company? I’ve seen many people who never got to enjoy option liquidity at their first rodeo, but were given such a great education, they went on to launch their own successful ventures. Though Digg was far from unicorn status, Brian Wong is a good example.

    • http://startupcfo.ca/ Mark MacLeod

      Hey Paul. good to hear from you. For sure, there are lots of great reasons to be part of a rocketship. You’ll learn a ton, make great contacts and have something super visible on your CV. You’ll be well set up for the next thing.

      I’m just pointing out something that i think many employees don’t realize: that they are not super likely to see much from their options.

      • http://about.me/paulsullivan Paul Sullivan

        Agreed. I think your advice will come as a surprise to many employees who think they’re in for a big windfall.

        Hey, how about a post regarding too early IPOs of tech companies? Seems to me the employees often face a similar surprise when they find out there is no market for their exercised options.

  • http://www.startupmanagement.org/ William Mougayar

    True as long as said Unicorn stays private, but this all equalizes when they go public, no?

    • http://startupcfo.ca/ Mark MacLeod

      Unicorns by definition are private companies worth $1B+. Setting terminology aside, for sure, once you’re public all shares convert to common,so employees hold the same shares as everyone else.

  • garydpdx

    “Good salaries come next.” But when a startup has reached the point of paying market salaries, whether from investments and/or revenues, you will be joining at a later stage (e.g., after a B round?) than the early employees and will enjoy much less of an equity pop.

    • http://startupcfo.ca/ Mark MacLeod

      Generally true, but I’d point out two things: 1.) A rounds are getting larger and companies are upping salaries earlier; 2.) the issue I’m referring to is where companies are just plain over-valued relative to their stage. I’ve joined B stage companies and made great money on my options. Because they were appropriately valued at the time that I joined (which was reflected in my strike price).