You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out."

That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had.

By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.

You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."

I didn't miss the second part.

The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all.

Hence the "it worked for him then, but probably wouldn't work for anyone else, now"

It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.

This lockup normally affects everyone who had shares pre-IPO -- investors, founders, and employees -- when did it not exist? It played a large role in making people sad when the Internet Bubble burst, for example.

That's pretty crappy. Another way to prevent anyone but the founders and investors from capturing any value from the IPO.

Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?

It's definitely crappy. I'm not sure what rules the founders operate under, but it's definitely something investors and underwriters push. Nominally it's to control liquidity, and it does do that, but it does so specifically by handing all early returns to a few of the shareholders. It's not hard to imagine other systems that would, with a bit more work, manage liquidity while letting everyone access the market.

On the options - I'm honestly not sure. I don't think it's barred by contract (since that's about managing actually control and share movement), but I don't know what options trading looks like for newly-IPO'd stocks.

In a word, no.

https://blog.wealthfront.com/hedging-stock/

Bummer. Startup equity indeed looks like a sucker's bet.

Many agreements explicitly ban just-post-IPO sales these days. His point is that the $10 million in profit would have evaporated if not for a rapid cash-out which is often illegal to perform today.

You're right, but there's a better way to think about the $10 million, called the "safe withdrawal rate".

If you're 65, a good rate is 4%. This means that if you invest your $10 million in a diversified mix of stocks and bonds, and you withdraw 4% per year, then there's a very good chance that you won't run out of money before you die. See: Trinity Study [1]

If you're younger, you should probably use a more conservative rate of 3.5%. That's still an annual return of $350,000, for the rest of your life.

According to your rate of $110 USD per night, you only need to spend $40,000 per year to live in a four star hotel.

First class flights seem to cost around $3,000. You could fly twice a month for $72,000 per year.

Then you have $238,000 left over for food and entertainment. (And hopefully some charity.)

[1] https://en.wikipedia.org/wiki/Trinity_study

You should also be sure to save enough for healthcare related expenses FWIW

What about taxes?

I think we're talking about after-tax money; unless you live somewhere that has a wealth tax, once you've paid all your taxes on income (wages or capital) then you're free and clear.

Common retirement strategies, like a 401K, differ taxes until withdrawal. So taking out 4% of your portfolio every year upon retirement would in fact incur taxes. Since a 401K is massively tax advantaged in your highest earning years it only makes sense to maximize this portfolio while you can thus delaying, but not avoiding taxes, until a later date when you'll likely pay much less on the income.

The issue is not that investors prefer to keep the rise in equity to themselves.

The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.

I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success?

Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.

There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares.

You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.

Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)