Silicon Valley's best kept secret: Founder liquidity
Venture-backed startup founders increasingly take “liquidity” in early funding rounds, quietly cashing out portions of their equity while employees remain locked into illiquid options that may expire worthless. Commenters debate whether this is fair given the different risk, stress and opportunity costs borne by founders versus early employees, and highlight how opaque cap tables, short post-employment exercise windows and complex tax rules systematically disadvantage staff. Many argue that if founders de‑risk with secondary sales, employees should at least get longer exercise windows, clearer information, and some access to liquidity, or else treat most startup equity as a near‑worthless lottery ticket compared to big-tech compensation.
Founder Liquidity: What It Is and Who Gets It
- Many comments note that in Series A/B rounds, founders often sell a small portion of their common stock (“secondaries”) alongside new primary investment, sometimes into the low- to mid–7 figures.
- Several argue this de-risks founders’ personal lives (paying off debt, securing housing) and better aligns risk appetites with VCs, who prefer “swing for the fences” behavior.
- Critics say this is often hidden from employees, undermining the “all‑in founder” myth and creating a perception gap about who is actually still risking what.
Employees and Access to Liquidity
- It’s rare for non-founder employees to be included in early tender offers; when they are, it’s usually limited (e.g., 5–20% of vested equity, sometimes tenure-gated).
- Some think founders should only take liquidity if all employees can participate pro rata; others say founders’ unique risk and replaceability justify asymmetric treatment.
- Regulatory/tender-offer rules (e.g., limits around number of sellers) are mentioned as a practical barrier to broad employee participation.
Equity Structure: Options, Early Exercise, and 90-Day Windows
- Strong criticism of the standard 90-day post-termination exercise window; several suggest 5–10 year windows and note a small but growing list of startups doing this.
- Many advocate early exercising options and filing 83(b) elections when cheap, to avoid later AMT hits and losing equity on departure; others counter that this is risky if exercise costs or tax bills are large and liquidity is uncertain.
- Confusion is common around what 83(b) covers (unvested stock vs options) and what companies can or can’t “restrict” (early exercise vs filing itself).
Founders vs Early Employees: Risk, Reward, and Morale
- Founders emphasize years of low/no salary, personal debt, reputational risk, and inability to simply “quit,” arguing this justifies 20–50x higher ownership.
- Early employees push back that they often work similar hours, take below-market pay, and can still end up with trivial or zero outcomes—even on sizable exits—due to dilution, preferences, and opaque cap tables.
- Widespread view: being an early employee is usually a bad financial bet versus FAANG or later-stage startups; worthwhile mainly for experience, autonomy, or enjoyment, not EV.
Transparency, Ethics, and Possible Reforms
- Many see secrecy around founder liquidity and complex cap tables as exploitative; some call for more transparency tools, standardized employee-friendly terms, or even regulation.
- Others frame it as straightforward market dynamics: founders and investors will offer the minimum terms needed to hire; it’s on employees to understand and negotiate or walk away.