from Hacker News

A new kind of equity program

by conroy on 3/18/22, 8:44 PM with 40 comments

• by axg11 on 3/18/22, 10:07 PM

  At the very least I’m glad more private companies are exploring ways to provide their employees with liquidity.

  Issues I can foresee:

  - Price, as determined by a third party, is going to be BS. There is a reason we use markets for price determination. They’re not perfect but markets are the most efficient mechanism we have.

  - Fewer employees with huge returns. This may or may not be a problem depending on your perspective. This type of system incentivises employees to lock in gains and sell their shares when they see reasonably growth. That’s also a lost opportunity for the future if the share price continues to grow. If you see a 10x increase in the price, you’re likely to sell. The share price could continue to grow by another 100x and you would mostly miss out in that case. In the most optimistic case for private companies, the lack of liquidity is a _good_ thing. You can only sell your shares at IPO when there has been more than 1000x return since seed stage.

  I can see this being a huge positive for hiring though. If I was considering multiple AV companies for roles, this would be a huge plus point for Cruise.

• by fossuser on 3/18/22, 11:26 PM

  I don't think this is a new thing (though doing them quarterly probably is) - we called them "internal liquidity events" where I used to work pre-IPO. They provide some liquidity to employees (probably at a price worse than what you'd get after going public since private valuations are mostly bullshit, and these events are only really viable with investors willing to be on the other side of the trade). They can also help with companies private for decades if employee options are approaching 10yr expiration.

  They're okay - still imo it's better to be public for employee liquidity in order to get accurate pricing.

  Though if I was a founder I'd see the draw of doing it this way, running a public company is a much larger pain than remaining private while still providing some internal liquidity to employees.

  Related, the current tax of the strike -> FMV spread on exercise above AMT for ISOs hurts employees and I don't understand the USG rationale for this. If you could exercise tax free it'd make things way simpler for employees and they'd just pay tax on future sale. Still a risk, but not nearly as bad in most cases. It also makes it easier to save up, exercise and hold for long term cap gains.

  A lot of people end up forced to participate in these liquidity events (at best - if they're not available there are companies that will front your exercise cost for an extortionate cut) when they otherwise wouldn't because they're approaching expiration and can't afford to pay both the strike and the tax cost on this "income" - when a lot of the time you can't even sell the shares.

• by modeless on 3/19/22, 1:48 AM

  Surprised at all the negativity here. Anything that gives employees liquidity options is a good thing IMO. Maybe some other companies have allowed their employees to sell shares sometimes, but has anyone ever done it on a scheduled quarterly basis?

• by a1pulley on 3/18/22, 9:55 PM

  SpaceX has been doing this for years, albeit at a lower cadence. There are predictable pros and cons: lack of confidence in the "independently derived" price—it's easier to trust the market—but shares imbued with some nonzero real value.

• by a13n on 3/18/22, 10:17 PM

  It's nice to offer liquidity to employees before an acquisition/IPO event, but the "equity value" section sounds a lot like a 409a valuation which is typically a conservative valuation of the company in my experience. I'm not convinced employees will get a very good deal on their shares by selling early rather than waiting for an IPO. It's therefore not surprising that the parent company (GM) is so willing to commit to purchasing these shares, because it seems they're basically getting a discounted buy-back.

• by mdavis6890 on 3/18/22, 9:58 PM

  I think this misses it a little bit. While it certainly is a problem to have a large $ value on stock that you can’t sell yet, it is a nice problem to have.

  The real risk with joining a startup is that it might very likely NEVER be worth much at all. Whereas at a mature or public company, you can have some confidence that at least your stock is worth something today.

  Of faang gives me $100k in stock, that’s real money I can put in my pocket. When a startup offers me 100k shares, it’s likely that having a chance to sell them doesn’t matter, because they aren’t worth selling. Of course, it can certainly go the other way and make me rich too. Hence the risk.

• by pedalpete on 3/18/22, 11:24 PM

  > we have figured out how to do that at Cruise

  Really? I think they're taking a huge amount of credit for something that really isn't that complicated. Particularly in the US which has a healthy secondary market.

  Sorry if that feels a bit negative, but what is Cruise really bragging about here, and why are they bragging about it? I assume they are thinking this gives them some perceived advantage in hiring, but realistically, any company that has reached their scale and level of success could have such agreements in place, and I'm sure many do.

• by trhway on 3/18/22, 9:22 PM

  >Fortunately, we have figured out how to do that at Cruise.

  i think SAS and the likes have been doing it that way for decades. I guess there is a reason why that isn't that popularly known :) Though giving current market swings one can see how even public FAANG and the rest may also want to adopt something like this instead of dealing with backfills/etc.

  Also, Google tried to do an extreme version of it for Google X/Waymo (16x artificial appreciation in 3 years) and it noticeably dented their financials at the time.

• by simonjgreen on 3/19/22, 10:05 AM

  I believe Vestd (https://www.vestd.com/) is a suitable engine to achieve a very similar outcome to this in UK, or at least provide the framework to do it. It's like a slightly more mature version of Slicing Pie

• by dlevine on 3/18/22, 9:47 PM

  This is interesting. I'm curious how this will be functionally different from using Carta to allow secondary sales.

  Namely, I wonder who the "others" (other than GM) are. In addition to this being attractive for employees, is it also a way for additional institutional investors to take an equity stake in Cruise?

• by bspear on 3/19/22, 4:55 AM

  Great recruiting hook, but is it different from secondary sales that later-stage startups are already doing?

  I suppose predictability in liquidity is useful, but wonder if price per share will be lower than preferred price. And could incentivize startup to delay their IPO even further?

  Having the option for faster liquidity is a huge plus though, especially for people who have multiple millions and want to take some $ off the table: https://topstartups.io/startup-salary-equity-database/

• by vinay_ys on 3/19/22, 4:55 AM

  I would consider this seriously if they also added these:

  Employees should be able to sell at every external funding rounds at fresh valuations.

  Company should share key performance metrics that drive investor interest and valuations with all employees.

  The independent 3rd party company should provide a detailed methodology and breakdown for each valuation the provide. Initially, they should provide a demo how it works by doing the in-between valuations for previous funding rounds.

• by dmitriid on 3/18/22, 10:42 PM

  > The world has become a bit more complicated lately. Private companies are waiting to go public for longer

  There's probably a reason for that: most "innovative startups", especially in the US, are like Cruise: they lose up to a billion dollars a year with no consequences at all. Some, lik Cruise, have nothing to show for it in terms of either product or long term plans to become even slightly profitable.

  So they wait for longer to see two things happen one after another:

  First, hopefully have enough unlimited inverstor money to corner a market or a niche.

  Seond, go for an IPO as "the innovative market leader" (aka the one with deeper investor pokets than competition that is doing literaly the same).

  ---

  In case of Cruise, they are losing 200-300 million dollars per quarter. Trying to compete in the same space as Uber (loses up to a billion dollars a year) and Lyft (up to 1.7 billion dollars a year).

  Edit: And Waymo, which is a part of Google's "other bets", and those bets are losing billions, too.

• by acjohnson55 on 3/19/22, 12:26 AM

  Sounds like a regularly scheduled tender offer. Good for them, but not really an innovation.

• by xmly on 3/18/22, 9:58 PM

  It is difficult for the valuation. It might not be worth the cost, especially considering that large amount of shares are held by early investors and founder.

• by paxys on 3/19/22, 12:16 AM

  Soo..they are inventing secondary rounds?

  I can't really see this being more advantageous for employees vs testing private markets.

• by nosefrog on 3/19/22, 12:29 AM

  Has anyone been able to take a ride in a cruise mobile yet? I'm still on the wait-list.

• by tareqak on 3/18/22, 10:26 PM

  From the post: "The access to capital and the ability for shareholders to sell on an open market are certainly attractive, but the benefits of an IPO come at a great cost — distraction — that is often overlooked."

  Could someone please summarize for me the costs / distractions of an IPO that a private company has to undergo?

• by countvonbalzac on 3/19/22, 12:23 AM

  If you don't have the price set by a market, but some "a third-party financial firm" chosen by the corporation, well that just sounds like fraud?