Something to readCompensation
The liquidation overhang
A 5-minute post from an investor's employee equity series on when common stock pays nothing
Why it’s worth your time
The price in an acquisition headline can say very little about what an employee's shares will pay, and Fred Wilson's short post shows why. Writing as a venture investor, he works through an example where a startup sells for more than its investors put in and the employees still get a fraction of what they'd counted on. Five minutes with it can change which questions you ask the next time equity is part of an offer.
Is my startup equity worth anything
The essay · 5 min · Free
How to get it
Opens their site. We don’t copy it here; we’d rather they get the read.
- Read the post.
Follow the $50 million example with a pen: who owns what, the $55 million offer, and why the investors take their money back instead of their share. The closing paragraphs list the questions he'd ask about an equity offer.
- Ask the four questions about your own grant.
For a current or offered grant, find out how many options you have, the expected strike price, the total shares outstanding, and how much money the company has raised in all. Write the answers next to your offer or grant letter.
Good moments for this: before you accept equity instead of cashwhen a sale of your company is announcedwhen a big funding round closes
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Making it work for you
Every workplace is different. Here’s what to think about before you start, and what might get in the way.
Things to think about
Wilson says a company with a small amount of venture money in it is unlikely to be in an overhang, while one that has raised tens of millions carries the risk. That one number tends to tell you more than the latest valuation.
What might make this harder
Ask for the total liquidation preference instead, since that's the number his math turns on. If you still can't get it, that gap is information in itself: you'd be valuing the equity part of the offer with less to go on than Wilson's questions assume.
Questions people ask
What is a liquidation overhang?
A situation where the money investors have put into a startup adds up to more than the company would sell for. Because investors can take their money back first, there may be little or nothing left for common shareholders, who are mostly founders and employees.
What is a liquidation preference?
The right of preferred shareholders, usually investors, to be paid before common shareholders in a sale. In the simple version Wilson describes, they take either their money back or their ownership share, whichever is larger.
How do I know if my startup equity is worth anything?
Compare what the company might realistically sell for with how much money it has raised in total. If those numbers are close, Wilson's math suggests common stock may pay little in a sale right now, though that can change as the company grows.
Is the liquidation overhang post still accurate?
The basic payout order he describes still applies to simple preferred stock, though real terms vary; the post dates from 2010, so its examples have aged.
What it says, and how it holds up
Picture a startup selling for $55 million, with employees holding 15 percent between them. The quick math says about $8 million for the staff. In Fred Wilson's worked example, they get $3 million. Investors who bought preferred stock can take their money back before anyone else is paid, and when they've put in a lot, the rest of the cap table splits whatever is left. If the same company sold for $50 million or less, his example has employees getting nothing at all.
Wilson wrote it in 2010 as the fifth post in a series on employee equity for MBA Mondays, the explainers he ran on his blog, AVC. He writes as an investor and doesn't hide it: he explains why preferred stock exists (to protect people putting in cash from the whims of whoever controls the company) before showing what it does to common stock. He also shows the way out. In his example, if the company keeps growing and later sells for $100 million, the overhang clears and employees share $15 million.
His closing checklist can still be a good one to carry into a startup offer. What's most tied to 2010 is his reassurance that web companies needed far less investment than the companies of the late 1990s and early 2000s, so overhangs were less of a worry; whether that's true for your company depends on how much it has raised. Real terms vary by deal and by country, and your own terms live in your company's documents.
Sometimes the decision in front of you isn't whether to join but whether to stay through a sale. Wilson's math tells you what your shares might pay; it says nothing about the job afterwards. A retention package, the new owner's plans for your team, or simply whether you want to work there can matter more than the payout. This explains how things usually work; it isn't financial, tax or legal advice for your situation.
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Picked by Truest and described in our own words. The original belongs to its creator. Last updated October 9, 2026. We sell a career membership; where that’s relevant above, we say so.