I think the main takeaway from any startup stock advice is what this article starts with: you need to pick a good startup.

The details all matter, but they all matter far less than that fact.

People shouldn't lump all startups together and should have a long think about whether they actually believe in the startup they're joining.

I don't think that's the main takeaway. IMO, the main takeaway is there are, in the best case (exit for >100% of latest 409a), ~three classes of shareholder in a startup: those with preferred shares (investors, occasionally founders if they have a lot of leverage), those with >=1% fully diluted common shares, and everyone else.

In the most common positive case (i.e. sale price is <100% of invested capital), or negative cases, the three collapses into into preferred holders vs common holders.

If you're in the lower class, you should assume your equity is worth zero. No matter what startup you're joining. You're here for the cash comp and to be surrounded by a growing cast of ambitious, upwardly-mobile people.

If you're in the "middle" class and highly value future wealth over present matters, you should act "like a founder" (sacrificing your life to, one day, make 1s or 10s of millions) if the company is on the ups, and you should act "like a mercenary" (leaving to some place where you can resume acting "like a founder") if the company is permanently plateauing or on the downs.

If you're in the "upper" class it's a different game entirely. That's not really the subject of this thread (valuing equity from a typical prospective employee's POV), so I won't go there.

Whether a "good startup" (great founders, great business, great investors) results in "a meaningful outcome for holders of <1% of common shares" involves so much luck and non-determinism that's beyond your influence as a <1% employee that you would be foolish to write it off to anything other than zero. The same is not true for >=1% and founders, of course, so they should value their equity differently.

Edit: the "magic" that many startups try to get away with is convincing people in class X that they're actually in class X+1 (even X+2!) and that, you should therefore act like it!! Be wary.

Don’t take a salary if you’re in the upper. Live for the equity as a price of the pain of solving a real world problem. Not the vanity of launch parties or bell-rings X-D //that’s meant to be an emoji

Not sure if you mean that seriously, or with tongue in cheek. It takes a very healthy dose of luck and market timing to be successful. Even the VCs, the experts, don't know how to pick winners. They expect a 90% failure rate, and this is among the ones they picked!

As an employee you don't have the same profit structure in play -- you can only work at one startup at a time. You cannot spread your bets around and let that one winner make the math work. You have to be 10x better at selecting a startup than the experts, probably 100x better if you expect to beat a big tech salary.

That all is correct and leads to a very simple conclusion: working for a startup has a very low probability of making you rich. Doesn't mean that people shouldn't do it, but it's better to have healthy expectations.

I still think its good for college grads, gives you a lot of leeway and space to play around with many different hats and find one that fits you better.

Incredibly lousy way to make money though, odds you will hit jackpot are none unless you're one of the founders and even then odds are still small.

If a college grad is choosing between faang and no-name startup, their career will likely go over much better than no-name startup. Having the big name on your resume does wonders. Even for experienced candidates, keep taking the big name. The market rewards it. (Including startups - compensation packages for people with faang resumes usually are better)

I mean, it's still a pretty good way to make money, when compared to other fields and not to other engineers at FAANG.

Yep. There’s very many reasons to work at a startup. Thanks for mentioning that.

I do mean this seriously.

YC manages truly incredible returns, and you can just... join those companies after they have gotten the YC seal of approval (or any other signal you like).

Unlike a VC, you do not have to "return the fund", so you are excited about a much wider range of outcomes than just the top outliers, and you are not locked in and can leave.

It is also much easier for an employee to get into a hot startup than an investor.

You also don't have to deploy a certain amount of capital or join a startup if you don't see one that you think will be successful.

Particularly in the b2b space, I think it's quite straight forward to see if the company is doing something valuable or if their idea is dumb and bad.

> [Among YC companies,] 45% secure Series A (vs. 33% average), 4% to 5% become a unicorn (vs. 2.5% average), and 10% achieve an exit.

https://www.lennysnewsletter.com/p/pulling-back-the-curtain-...

Of those 10% exits, 50% are acquisitions. Acquisitions are rarely lucrative for rank and file employees. But even at 10%, you need to have a crystal ball as an employee. YC is not an especially strong selector. And unicorn is baseline success these days (the data is from 2025), so we at the 5% level not 10%. Maybe you aren't aware of typical equity grants beyond, say, employee 10. You need at least a unicorn exit to match a big tech salary.

I mean you're right, you don't have to return the fund. You have to match (risk-adjusted) the opportunity cost of a big tech salary. Incredibly hard and luck is the most relevant factor. Meanwhile, if you job hop out of the startup after startup because they mostly go nowhere, your resume quickly becomes uninteresting (ye olde 1 year of experience 5 times problem). So you do have to stick it out.

> idea is dumb and bad.

the idea rarely matters. ideas are free. execution is king.

This is a very cynical read of the data. Most of the companies discussed here are still too early to have an exit.

If you look at the early batches (which are the only ones where all the companies are dead or exited), then more than half of them got to an exit.

And looking at all the companies, only 13% have failed so far, compared to 10% with exits. And failures generally come way before exits, so the data is incredibly biased if not taken on a cohort basis.

I disagree that acquisitions are rarely lucrative. I have been part of several and they have both been good for rank and file (me).

> the idea rarely matters. ideas are free. execution is king.

This is true at the earliest stage where the idea is very fungible. And execution always matters, but there are people out here working on the 50th Travel Booking Assistant who you should not go and work for. If the idea didn't matter, YC wouldn't ask about it.

> your resume quickly becomes uninteresting (ye olde 1 year of experience 5 times problem)

Nobody is forcing you to spend your entire career doing 1 year stints.

Ok, now tell us how we differentiate across 10-person, pre-revenue startups. This advice is like buy low, sell high. Thanks.

You conduct your own due diligence and make an educated decision. You won’t necessarily pick a successful one but you can avoid an obvious failure.

IME picking a good startup is extremely difficult, because even the ones with PMF and growing customers can so easily fail at execution: the human factors are so huge there. You can definitely narrow the field (use common sense: evaluate their business), but long term it’s impossible to know.

Correct, the 409a is only going to show you the maximum possible value.

Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.

It's the preference and its multiplier that gives investors their money back first. These aren't different things, they're one thing, and generally only matter if the company exits for less than the valuation the investors invested at. The exception to this is if any investors have a liquidation preference > 1x (you should avoid companies where this is the case).

Preferences also don't stack with the rest of a liquidity event. E.g. say an investor puts in $100m at a post-money of $1b with a 1x liquidation preference. If the shares go for $900m, the investor gets back their $100m, and that's all. They don't lose money, but they don't make money either. If the shares go at a $1.1b valuation, the investor converts their preferred shares to common shares like everyone else has. The investor doesn't get their money back first and sell more shares on top of that. It's either/or.

Whether it's and vs either/or is the difference between a liquidation preference or a participating liquidation preference. And indeed the more than 1x cases are also problematic for common stock holders.

But I do assume the 409A for the fair marker value of the common stock takes these into account? Not a US tax expert :-)

You can construct any arbitrary deal terms you like, of course, but in the Silicon Valley ecosystem nobody you'd want to raise money from does this. Deal terms are broadly standardized and the desirable investors only do clean term sheets. Quoting myself from another thread a couple years ago: VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a dirty term sheet (e.g. liquidation preference > 1x) from Sequoia, for example, because they don't return 8x on a fund by squeezing pennies out of failed startups.

To answer your question, yes, doling out company value to different share classes is part of the 409A calculation. I've used Carta and Pulley for this, but it looks like neither has their docs posted publicly. Here's Pulley's overview page from our last 409A, though:

Valuation Analysis

To determine the fair market value of the Subject Interest in our analysis, the following steps were taken:

Step 1 - Determine the value of the Company using an appropriate methodology(ies)

Step 2 - Allocate the value of the Company to the various share classes taking into account share classes economic rights and preferences

Step 3 - Apply a discount for lack of marketability (“DLOM”) to the resulting per share value of common

Step 4 - Analyze any secondary transactions that have incurred in the past and determine to what extent they should be considered relevant in determining the value of the Subject Interest in the analysis

The system is built to handle non-standard liquidation preferences, but anything more esoteric (e.g. your participating preferred shares) probably needs a bespoke valuation. You won't see this stuff from successful VCs, though. It would be a bit like investing in SpaceX, but having one of the terms be an increase in Earth's gravity.

>>> VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a dirty term sheet (e.g. liquidation preference > 1x) from Sequoia, for example, because they don't return 8x on a fund by squeezing pennies out of failed startups.

Serious question -- if you are right, then why hide the cap tables?! Typically cap tables are even hidden from employees who have millions of theoretical dollars riding on the company.

Transparency is usually an indicator of above-board terms, and opaque things are usually opaque for a reason.

The cap table is just a spreadsheet of who owns what. Employees don't need to see that level of detail to understand their shares, so there's no particular reason to pass it around, and plenty of reasons not to.

Many startups are happy to give relevant details, though, like the percentage of fully diluted shares you own, the last preferred share price, whether any investors got non-standard terms, etc. Rather than asking to see the cap table, ask the questions you want the cap table to answer. If they won't tell you, maybe pass on working there.

> the 409a is only going to show you the maximum possible value

While the points about uncertainty of options are quite accurate, this detail isn’t really true.

For the most part a 409a is the lowest reasonable valuation the company could talk the auditors into accepting. The lower it is the less tax paid and everyone knows that.

You're correct about valuation, but the parent post was meant to address "how much liquid dollars should you expect to receive vs. 409a." You are likely to receive less in most cases (read: unless there are wildly successful public liquidity events) due to liquidation preferences.

Plenty of (non-VC backed) startups raise some money and then sell privately; it’s often the case that preference does not cause the common stock value to drop below the most recent 409a in these cases.

(In my experience, the 409a is on the order of 20% of the most recent raise, and preference is not more than 50%, in my area. And obviously you hope to sell for more than the last raise!).

Any reasonable 409a will be fully aware of those preference terms and will have factored them in.

>> Then it gets even worse with multipliers and preferences.

Yeah, and most companies wont share the cap table with you, so you do not know the multipliers and preferences. Its like you get $(409a/X) in value, but you dont know what X is and they wont tell you -- but you still have to buy in or lose everything (you typically have to exercise all options upon departure, or lose it!)

Then, once you exercise, you wait for 5yrs to 10yrs for a liquidity event, if the company even survives that long. My annual discount rate would be like 10% or higher.

> The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.) If you dont have that, the price is purely theoretical.

This is not true in Australia, where they are proposing a new 15% tax on gains attributed to the portion of an individual's retirement account larger than $3 million, including unrealized gains. That means people must put a dollar value on each asset at the end of each income year, including startup shares or venture fund interests.

> spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out

There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like. Meaning, they lend you the money, but if there's no IPO/liquidity event, you don't owe them any money. 70% (say) of a big number may not be as big as 100% of a big number, but 100% of zero is $0. Which isn't financial advice, just a bit of math.

If you find a company they accept you should keep your shares if possible. Most companies will not be accepted for good reason.

>> There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like.

Yes they do this, but only for select companies. They wont touch most startup equity.