Risk and startup equity

We all know the startups are about risk. Specifically the fact that according to the narrative founders take on huge risks, living on ramen noodles while chasing their dreams. This narrative justifies founders getting way more equity than employees. But what if there’s a secret founders won’t tell you - the early employee?

Founders Get Cash, Employees Don’t

The secret is founder liquidity. During funding rounds, founders can sell some of their shares for cash. This lets them pay bills and live comfortably, all while continuing to build the company. Imagine a founder getting $400,000 at one funding round and $750,000 at another! This is apparently quite common.

Why is This a Secret?

Because it shatters the image of the all-in founder. No one wants to believe founders suddenly aren’t all-in. Remember WeWork’s Adam Neumann? He famously cashed out over $2 billion while employees got nothing.
Employees are told their equity is valuable, but founders are quietly derisking their own position.

Transparency is Key

This little known fact hurts everyone.
Employees deserve to know the real risk landscape because if they knew founders were taking cash, they would ask for more compensation or negotiate equity better.

Founders Should Lead the Change

Company must offer generous equity packages and let employees cash out their options after they leave. This actually opens a whole new can of worms, because it’s not straightforward at all and might require employees to forfait part of their equity to pay for fees etc.

If you have stock options and they vest, you might need to pay the strike price to actually own the shares. This isn’t buying the vested equity itself, but rather exercising the option to purchase it at the agreed-upon price.

Employee equity

Imagine for example that your equity unlocks in stages, like on a schedule. Usually, you only cash out vested equity (a portion that becomes yours after a set time).
Now things change based on the type of company you’ve joined:

• Public Company: If the company goes public (like on the stock market), your equity becomes tradable shares you can sell for cash. These are usually called RSUs.
• Private Company: It’s trickier. Ideally, the company buys back your vested shares, but this isn’t guaranteed.
• Secondary Market (less common): Sometimes, there’s a marketplace for employees to sell shares to other investors before an IPO.

The Takeaway

Founders getting cash isn’t inherently bad. But the secrecy creates a false perception of risk. If you’re a startup employee, the next time there’s a funding round, you know founders might have taken liquidity. It’s hard to find the truth. but that can help you make informed decisions about your future within the company.