WeWork's problem was that while they valuation was $47B, they also had $47B committed in long term leases (essentially debt). Uber & Lyft, are in war and their scale hasn't helped the economics as much since neither can get a monopoly on demand or the supply side of the market. Postmates, Doordash, Instacart, all likely operate with large gross volumes but low transaction sizes and low margins which can be challenging.

Airbnb has now more cash the bank than they have ever raised ($3.5B) and it's growing [1]. I suspect Stripe's financials are strong as well.

Free cash flow, and the ability to use or invest it well, eventually lead to a great business. Raising a lot of money doesn't necessarily mean that you are burning a lot of it, and the economics of the business matters.

It's also likely Airbnb will do a direct listing since they don't actually need the cash. Which is also potentially better for employees than traditional IPOs.

Disclaimer: I used to work at Airbnb, but this is all public information or speculation on my part.

[1]:https://twitter.com/KateClarkTweets/status/11849334122319953...

We are at the inflection point where they are all about to crash and burn. Good riddance.

"We're not $boring_business, we're $boring_business_but_internet" (or, today, it'd be boring but mobile)

This cycle, investors realized that OK, maybe we have to see revenues to believe it's a real business.

But, if you look at things like WeWork, sure, there's revenue, but there's never even been the hope of eventual profit. The business model fundamentally destroys value.

In the late 90s we had a lot of companies that took a lot of money, and the founders and employees got nothing out of them other than painful experiences. When you look at one of the successful "fat" startups (PayPal), Max Levchin's take ($34M) of the $1.6B acquisition was on the same order as the Wufoo founder's take of their $35M acquisition, or the Viaweb founders take of their $49M acquisition. Even Amazon - probably the most successful "fat" startup in history - languished below its dot-com peak until AWS came out in 2007.

Margins matter. Capital efficiency matters. If you want to actually make money, you should make lots of profits on small amounts of invested capital, not lose lots of money on large amounts of invested capital.

Uber and Lyft have it tough in that regard. At the end of the day they've got product market fit in a profitable industry. I mean the very worst case is they become more efficient cab companies, and cab companies have been making money for a very long time.

Their prices are artificially low due to competition, and they are in sort of a prisoner's dilemma. eventually one of them will go broke and the other will raise prices, or something will change about the market (such as driverless cars coming). But if one of them passes up raising and losing money they lose.

Their financial struggles are due to them pricing well below what taxi cabs do. But if Uber priced the same as cabs they'd still be an infinitely better service and make lots of money, once Lyft isn't there undercutting.

It reminds me a lot of airlines. They were all hemorrhaging money similarly, even for a decade or two after deregulation, until they consolidated down into a few and raised prices.

As employees get more educated around stock options I’m certain their risk profile will change and founders will find it harder to rally a tribe around airy promises of a future exit.

This means you're pretty much forced to either take SoftBank's money, or compete against someone else with SoftBank's money. They don't care much who takes their money, because either way they have the most funded pony in the race.

They raised another $250M in 2015. Still a lot less funding than they ultimately sold for, but the common pool certainly wasn't 90% of the value at their exit.

Because there is another group that's putting up all the work. In startups, that work is generally more intense and risk laden, which is why employees are offered shares as part of compensation. Otherwise, why would they be offering shares? Both groups deserve protection.

The SEC was created so that people couldn't swindle each other in a legal manner. It works to some degree for investors who are, by the definition of these types of investors, rich ($1mm in assets or $200k/income). But it clearly isn't working for the people doing the work.

So our system protects the rich, but not the people who apply a trade. If you think that's ok, fine. But I find it terribly unfair.

Joint stock companies exist as a result of legislation, the separation of capital and management requires courts for mediation. I can't see why someone wouldn't support changing it to be more equitable to all involved, especially if it is done based on merit (where labor and capital are both weighed as equal inputs at the time of distribution of large liquidity events)

Generally speaking, the big money goes to the people who risk, not the people who work. If it didn't work that way, who would finance a risky project?

Investors may or may not get paid sometime in the future, while employees get paid today, whether what they do works out or not.

Employment is more than just the paycheck. It's security. It's a career trajectory. Otherwise, why do consultants get paid more than employees?

You can see it that employees take no risk. That's fine. But then I wonder why start ups tout the stocks they give? And why is it acceptable to tout something that they know has no value?

The SEC has a function. To avoid dishonest actions that would otherwise be legal under standard criminal law from eroding trust in security markets. The employee of the article we are discussing here received 1% for losing out on opportunities of growth in a larger company. Obviously he was worth something to the company, and more than they were willing to pay him in cash. He was betting on the future value of the offerings he was receiving. By being able to trust that, start ups could/would/should obtain labor at discounted rates. This is good for the market. Trust in securities.

You can call him naive. But I will remind you that in the late 19th and early 20th century the stock market was not well capitalized. People presumed they were getting screwed. And anybody who placed trust in the system was called naive. "they shouldn't trust" is an easy argument. It's the old 'it's just the way it is' argument.

It's arguable, but I'd say creating trust within the exchange of securities via systems like the SEC was a great advance in the allocation of resources. It's why we have well capitalized markets. Without trust, friction comes along.

That is why I feel what was described in the article is deeply unfair and given that the entire structure of joint stock companies is a legislative creation, surely it could be changed.

So basically, your view that "the big money goes to the people who risk" seems idiosyncratic and reflexive rather than based on any substantial analysis of the article or the situation.

I'm hardly advocating for any revolutionary ideas. Overall, having read The Wealth of Nations, I'm a big supporter of Adam Smith's ideas. Which is why I can see how the system can be structured differently within the capitalist context.

Not at all like the risk of putting in a big chunk of your own money. When you lose it, it's gone. Too bad, so sad.

Employees have the lowest risk position. They get first claim on the money owed for their paychecks and there are many legal protections for that. The investor is frequently last in line, and gets nothing if the company bankrupts.

> described in the article is deeply unfair

My reading of it was slightly different than yours. If the company hadn't gotten the overhang investment, they would have gone bankrupt and the employee would have lost their job sooner. If the overhang wasn't offered, the investors would not have invested. There was no path for the employee to cash in the stock - unless the value of the company was larger than $100m. But it wasn't.

I have no problem with employment where money is exchanged for time. But that wasn't the case.

The employee got paid for time in the form of money and stock. You are conveniently ignoring this part.

If the stock is worthless, why offer it? The answer to me is obvious, they are being deceitful.

As stated, the SECs' mission is so that people who deal with securities don't engage in deceitful behavior, since deceitful behavior removes trust from market participants which creates friction and increases costs and decreases participation.

The argument that people's rewards, one who put in $50 in cash and another who accepted an offer that resulted in a decreased earnings of say $50 avg should be treated differently is anti-meritocratic. Both risked $50. If the employee wasn't accepting a decreased earnings potential, why offer the stock? You can't have it both ways.

Just as the company would have failed if the investors didn't invest, it would have also failed if the employees left when they saw trouble. Many extensively won't because they have shares. That's why the shares are offered in the first place. To motivate the employee. But it turns out many times those offerings are done in a deceitful manner; the people offering stocks to employees many times know those stocks are extremely unlikely to be worth anything, yet they make a concerted effort to make it appear as if those stocks are worth something.

Investors are protected from deceitful security offerings. Surely you think that's a good thing? Why not apply to all parties?

Literally all I'm arguing for is a more honest (and therefore meritocratic) code in our system when handling the exchange of time for securities, especially in the face of a large liquidity event.

It wasn't worthless when it was offered, the overhang deals did not come until much later, and it did not become worthless until the company sale price was agreed upon. The stock would still have been worth something if the sale price was higher than the overhang.

Getting stock does not mean it can be diluted by further stock issuances. There is no deceit there.

> Literally all I'm arguing for is a more honest (and therefore meritocratic)

Honesty has nothing to do with meritocratic. For example, the person next to you on an airplane surely paid a different price. It's neither dishonest nor meritocratic. It is what both parties agreed upon. Each person has a different level of risk tolerance and desire for money.

Everybody in a startup gets a different deal based on their ability to negotiate, what they want, their risk tolerance, and the desire of the company to get them on board.

The employee was offered 1% of the company.

Reasonable, everyday people will understand that to be 1% of all money that comes in on a sale after paying legal fees and bond holders.

The rest of the convoluted mess, while legal and negotiated and something I understand, is done in a way that is taking advantage of the information and power asymmetry of the two market participants. Just as stock swindles happened in the late 1800s.

Honest markets do create more meritocratic markets, as market participants can engage without the friction of complete distrust. Courts and systems to create trust are essential. If you don't understand that concept, then we likely won't ever agree, I think it's a pretty basic concept in capitalism and economics. It's like people who don't believe in supply and demand, if you can't agree on something so basic, then all subsequent points will be going off a different basis.

As stated in my earlier reply, look at the stock market and how it was for investors in the 18th century when there were little to no rules protecting investors and therefore there was massive friction from dishonest market participants.

Your argument can be boiled down to 'caveat emptor'. Which is an argument that lacks intellectual cohesiveness when you are simultaneously supporting the legal structure that removed such a situation from the average investor and which has allowed our markets to develop and become fully capitalized as market participation soars when honest behavior is enforced.

It amazes me that someone can honestly argue against providing time investors with the same protection as fiat investors.

No, they weren't. They were offered stock. Stock can always be diluted by future stock issues.

> Reasonable, everyday people will understand that to be 1% of all money that comes in on a sale after paying legal fees and bond holders.

People who accept stock options and don't bother to learn about them have only themselves to blame. The information isn't hard to come by, it's all over the internet.

> It amazes me that someone can honestly argue against providing time investors with the same protection as fiat investors.

They do have the same legal and system protections. They got what they agreed to.

> Courts and systems to create trust are essential.

Yes.

What you're discounting, however, is the role of risk. Risk is always there. The larger the risk, the more potential returns there are. If you try to legally define the risk and legally force two disparate risks to be the same, the result will be all kinds of market distortions.

You argue that the risk of the employee and the investor are the same. They are not, or they would be priced the same. Is it really right to interfere in the negotiations other people are freely making?

But like we make laws controlling how real estate loans work to protect people from shysters, we should probably have a lot more required documentation for companies that offer stock in pre-ipo companies.

If this was market based, you'd be right. But if it is legislative based, then this is the definition of circular logic. Given that the structure of preferential stock is legislative based, it is circular reasoning.

I count risk based on what percentage of a person's net worth and potential earnings are tied up in the securities.

That renders a different perspective of risk than just raw numbers which is what you seem to be going off of.

Your argument can be boiled down to 'caveat emptor'. Which is an argument that lacks intellectual cohesiveness when you are simultaneously supporting the legal structure that removed such a situation from the average investor.

Not exactly. The courts are there to enforce the contracts, and protect against fraud. They are not there to protect people from making ignorant decisions and failing to do things like read the contracts they sign. They are not there to remove risk.

Some people say that free markets don't work unless there is perfect information on both sides. This is incorrect. Imperfect information is called risk and is always priced in. The overhang in stocks comes about because investing in the company is perceived as extremely risky.

Again, I can't really talk about economics and capitalism with someone who believes what you wrote.

Either we agree that honest markets are more meritocratic (in which case you are admitting to being wrong) or we can't really go any further.

As a practical matter, it was, since it wasn't liquid and had no security against changes which would eliminate it's theoretical value before it became liquid.

It could have become worth something with the right set of future conditions, but those obviously did not materialize.

The lack of liquidity is a factor in the price.

It might additionally be getting common stock, under the same terms of other common shareholders, which is to say, behind the preferred shareholders, who are behind the bond holders.

Person A, investor puts in $100k

Person B, employee gets paid $100k

Company fails.

Person A lost $100k

Person B gained $100k

This is why person A gets the lion's share of the rewards if the company succeed. Person B risked nothing. Person A risked $100k.

The typical retort from Person B is they could have gone to a different company so their risk was to work for this particular company. For example they could have gone to a FAANG company and made a high salary but instead went to some startup at a lower salary on the risk that it would succeed. From one POV that is a risk but it's not your money until it's in your hands. Future money is similar to saying well "if I won the lottery tomorrow". Until you do actually win that money it doesn't really count. You can use that line of reasoning in negotiations (you want me to join your startup but I have an offer from a FANNG company, sweeten the deal if you want me). But after that you didn't actually take a risk relevant to the company. Instead you made a choice to be paid X amount for your labor.

Note: I've never been on the investing side, only the employee side, but for some reason I've never felt ripped off since I knew I was taking no risk.

Person A converted their 100k into 1 year of time. Person B converted their 1 year of time into 100k of money.

They both put in 100k of something, B put in 100k worth of time, A put in 100k worth of money. If we assume a fair market rate for the conversion, then essentially this is a perfect exchange, and they both traded their different investments for exactly what they were worth. That is, the money invested, got back EXACTLY the amount of time it purchased, and the time invested got back EXACTLY the amount of money it purchased.

Person A and B are trading things of equal value. This means they invested equally, and hence should split the reward equally.

Company fails

A risked $100k money got 0.

B risked $100k time got 100k money.

A is now at -$100k

B is at zero

My guess it's you'll claim A got $100k of your time so A is at 0 as well but if we follow that logic in other places we can see how it doesn't work.

A pays $10 for B to make a pie

B pays $10 of time to make a pie

A now resells pie for $20. A does not own B any percentage of profit. That's the business success case just replace "pie" with "business". Similarly A drops pie. B does not owe A a new pie. That's the business fail case. $B got their $10 money for their $10 of time. B's risk has now been paid for. A still has a risk, that they can sell the pie. Replace "drops pie" with "business fails".

Person A has not the time to invest into building the product, so they invest money, 100k's worth of dollars. Person B has not the money to invest into building the product, so they invest time, 100k's worth of time.

So if we compare dollars in the event of company failure, we have:

Person A is now at -100k

Person B is now at 100k

Person A is now at +1 years

Person B is now at -1 years

Again, this means they both invested equally. What is usually harder to see is the time investment. But Person A gains one year of work they did not have to do on the product (via their investment). Person B loses the year they invest/spend on the product.

Purchasing a product does not imply joint ownership. Consumers do not partly own the profit of the Producer. However, if A and B decided to build a pie product together then yeah, they'd split the profits. Which is what is at stake here in this overall discussion: how should profits fairly get split when two or more parties contribute the resources to build it.

Person A is now at -100k: Agreed

Person B is now at 100k: Agreed

Person A is now at +1 years: If you are valuing 1 year at 100k, then no - they are at zero years. They put in $100K over 1 year, so the two cancel each other out.

Person B is now at -1 years: Again, they have been paid at the rate of $100K for 1 year, so they are at zero years.

Again - I reject this "losing a year" thing. The investor hasn't gained a year at all - you can't lose or gain time. But if you value 1 year at 100K then they have paid for 1 year, but that means they have by-passed other opportunities.

If they invest $100K in 2019 and the company goes bust in 2020 how have they gained a year?

But even ignoring that (!!) your math doesn't work.

Well, if you have enough money, you can pay for someone else to work on X while you work on Y. In this way, you have been able to get 2 years worth of work done, in only 1 year. In effect, you doubled the number of years you had to spend on getting things done.

Spending money in exchange for someone else's work is a time multiplier on the one who spends the dollars. They get more done in less calendar time, i.e., because they effectively have more effort-time by converting their money to someone else's calendar time.

The entirety of my reasoning in predicated on one simple thing: an investor trades in their money for something of equal value, and the worker trades in their time for something of equal value.

This means, by definition, they are equal partners in the exchange, and hence must split the profits equally. It also means they each gained and lost equally, because they traded evenly.

If you do not agree with the foundational assumption I am making, point out the error in that, as all else necessarily follows.

But the employee keeps the money.

The entirety of my reasoning in predicated on one simple thing: an investor trades in their money for something of equal value, and the worker trades in their time for something of equal value.

Indeed. The investor buys part of the company, and the worker gets paid for their time.

If you buy shares in Microsoft you get a proportion of the company, not some weird "time" thing.

Are you saying that when a company fails, all employees should return their past salaries paid by that company? Because that’s what splitting the (negative here) reward equally with investors would mean.

Investor A puts in 100k of dollars, the company fails they've lost 100k worth of dollars. Worker B puts in 100k of time, the company fails, they've lost 100k worth of years.

The point is, they are both risking equally, when compared in the same units, time or dollars, but not both. The investor is investing 100k worth of time, and the worker is also investing 100k worth of time. If the company fails, they have both lost that invested time.

This is complete nonsense.

The worker has received $100k for their time and keeps that money. The investor has nothing.

If you try to argue that the workers wage doesn't count for some reason, then you also should argue that the investor's time counts the same as the workers did. Either way the investors is worse off.

That is, the investor, effectively, gets 2x the time they otherwise would have, because they traded some of their money for someone else's time.

Whereas the worker has now lost 1 year, though they did gain 100k for the time they spent.

If you do not believe that the investor is trading their 100k for something of equal value, then please demonstrate this. For it is this equality that underpins my argument.

Saying the investor "has nothing" is naive, since, as with others, you are ignoring what they traded their dollars for.

The investor now has an investment in nothing, worth zero dollars.

The worker has $100k.

Eh, expected value is a thing. If you lay 3:1 odds on a coin flip and then win, you get real money and are free to feel all happy about it, but you still made a poor decision.

If an employee has an FAANG offer for 300k but goes with a startup for 100k+options they are absolutely taking a risk. The expected value of those options is very real and relevant.

They risked the single thing that absolutely no one, anywhere on the planet, can ever give them back: time.

Yes, they took a lower salary on the risk that it would pay off but they slid in the chips of their days existing on this planet alongside that risk. If no one was willing to take that risk alongside the venture capitalists who only invest easily-replenished money, the VCs would find their investments significantly restricted.

The problem is that the some of the people taking a risk and making investment, often the ones in the worst position, have far less information than others. It is inherently unfair that one "investor" can be worse off than another, especially when stacking up money against time. As the author wrote, this isn't inherently unfair...as long as it's not hidden.

But it's almost always hidden because the "lottery ticket hope" of turning 1% equity into seven figures is spoken of as being a regular amount of risk when, in reality, you'd be better taking that higher salary at a FMANGUNFXZOR company and putting the difference into actual lottery tickets.

(As an addendum, if anyone is about to reply with the words "rational actor" anywhere in it, I'm not moved by that rebuttal. Human beings are not rational all of the time and we are nowhere near as rational as economic textbooks would have you believe. Yet, somehow, that rationality or lack thereof is only called into question whenever the person in the crappier position with less leverage is the one who loses.)

We humans are such primates, though, that we regard those with far more money as essentially higher class in the social hierarchy, and venerate their actions, and their property, as inherently more valuable than someone with less.

So when investing in a company with money, you are able to participate in that company by buying someone else's time. But, assuming a fair exchange (which is usually not the case for the laborer), then the one who works is trading one year of time for one year of time from the investor, in the form of dollars (assuming a 100k/year salary). However, the investor isn't trading their time in the form of calendar time, but in dollars. The worker is trading their time not in dollars, but in calendar time. The point is, it's an equal exchange. Which, if there are two people, then both would split the reward 50/50 assuming all else is equal.

We get confused as primates because we are comparing dollars and time, not realizing that we need to convert to common units. To know the true fair split, we have to know how much each person invested in the same units, time or dollars, but not both. We have to convert all dollars invested to time, or all time invested to dollars, in order to know the true investment ratios. In the example of Person A and B, both put in 1 year of time, hence a 50/50 split.

If you hired me to build your house for $100k, and you paid me, and then you sold the house, making a profit of $300k, would you give me $150k? Likely not.

I think a better argument is below from 4ntonius8lock, who says that employees were supposed to get (a) $100k AND (b) stock of some value. But employees were not told all the rules under which (b) could be zero.

Obviously works for hire do not always imply joint ownership. The reason for the discussion is that we are talking about startups built with implied joint ownership. We are trying to infer the equitable joint split for the reward in building something that is implied, often overtly, to be owned by both parties. Both parties in the two person startup are investors.

Most of the things we purchase with money (we spend time to acquire someone else's effort), are sold as someone else's time. If you pay someone to build a house, it's because they were offering that time for sale. This is why software consultants at most startups never get any equity, because their time was already on sale, and was being auctioned off.

If the stock is worthless, why offer it? The answer to me is obvious, they are being deceitful (the start up and its investors). As stated, the SECs' mission is so that people who deal with securities don't engage in deceitful behavior, since deceitful behavior removes trust which creates friction.

The argument that people's rewards, one who put in $50 in cash and another who and accepted a lower payment/higher risk which resulted in a decreased earnings potential of say $50 should be treated differently is anti-meritocratic. Both are risking $50.

BTW, if the company offered no stock to employees, we wouldn't be having this conversation. But the comments are, or should be, based on the FA of which this is a thread.

Investors put in money to get something of equal value back: time. That is why there is no difference. Both parties were compensated.

All those who say, "yeah, but they got paid, the investor risked their money" completely see no value in the time that was traded for the money, which, almost by definition, cannot be the case. The money invested was done so in order to be traded for something of equal value - time. But most people do not see this, and consider themselves lucky if the person with the money was "generous" enough to let them have some of the spoils of their joint effort.

If they are not pushing everyone to work late hours and long weekends ... then there's little reason to expect that later employees should 'get rich' from a buyout - though they should get something.

Earlier / Senior staff should get something more as well.

Worth noting: Canadian 'News Magnate' Conrad Black went to jail for 'carving out' sales of assets like this as kind of a sales fee. The shareholders not only sued him but he went to jail over it. The tiny but important difference would be the 'buyout carveouts' are backed by shareholders to incent execs to stay on while Black's dealings were ostensibly not (although they probably should have been). And of course Black was a foreigner and this has a material difference in the USA (and many other countries) where non-citizens end up getting treated differently for a variety of reasons.

I was working at a small startup circa 2015, around 100 employees. We looked carefully into payment providers to try to reduce costs. Turns out Stripe was very small, we would be their main customer with a 2 digit percentage of all transactions if we moved our payments through them.

Stripe had (has?) few customers and little volume. Meaning very little revenues, because that's a small percentage fee of all that. It was a fairly risky business and it wouldn't be sustainable without a fair amount of capital upfront and many years.

Lyft and Slack were much much smaller back then, also private companies that don't publish any numbers. Not exactly great references at the time.

If you have to learn something from this, it's that Stripe is a long term play, that really needed the capital to sustain and grow the business. The main growth factor by the way is the second-order effect of growing with their customers, and they're very smart to advertise to the HN crowd.

I mean on the one hand, they do have enough of a business case to get that many checks, but on the other, my first thought was that there was no upside at all there most likely.

As such after the IPO all stocks are common stocks which are valued at the market price.

> to align incentives with the I-bankers

What does that even mean?

One way to incentivize the I-bank to do their very best to get the highest price for the shares, and to keep the price high, is to make them shareholders themselves. Thus, Microsoft did a small (Crunchbase reports it as $1M) financing round with their investment bank right before IPOing, despite not needing the money at all. Any dilution is more than made up for by the better IPO price; basically, the I-bank got to share in their upside by making their upside bigger.