How to Protect Yourself with Startups? 122
JustAin'tFair asks: "Last year, I took a chance on a small but promising startup. When they approached me, it was a 3-person operation (all involved were investors) with a functional website, a viable piece of technology, and a problem. Their prototype was just that -- a prototype. They were experiencing serious maintenance and scalability problems, and had exhausted their own technical knowledge. I agreed to come on board as their first employee, in return for a decent salary and a nice vesting schedule."
To make a long story short:"My old boss & his partners netted a very nice payday, on the backs of their former employees. What would you do to protect yourself? I got a fair salary, but in the end, they got far more out of me than I got out of them. Would you contract? Get a parachute written into your contract? What have you done?"
"In 6 months, I rewrote and redesigned most of the key subsystems, built new servers, hired new staff, and got the company rolling on a serious path. Serious senior architect-level stuff. Then it all fell apart: one day, out of the blue, they fired all of us, claiming shortfalls in funding, and so on. It sucked -- it always does (I watched my own startup fall apart in the dotcom 1.0 days). So the other day, I saw they were bought out.
Sucks twice.
In the end, that's their right. At-will employment, and all that. However, it chafes me to get screwed like that."
Sucks twice.
In the end, that's their right. At-will employment, and all that. However, it chafes me to get screwed like that."
Your vested options? (Score:1)
Doesnt quite add up. (Score:4, Insightful)
But, as employee #1, you should have negotiated a better severance package, for the risk involved (along with the golden handcuff vesting schedule). Of course, that would probably mean that you'd probably be required to give serious notice if you decided to leave (I was once in an employment situation where either side had to give the other six months notice, by contract).
How to protect yourself.... (Score:5, Insightful)
2. Don't take a job for less salary than you would be satisfied with in exchange for equity.
3. Don't sign on to a vesting schedule you know you won't stick around through.
If you hadn't vested at all yet, you either weren't working there very long, or had a crappy vesting schedule. Were you there for less than a year? If so, don't worry about it. All you lost was the value of less than a year's work. I know it feels crappy that somebody else made money and you didn't, but you'll die an unhappy cynic if you look at life that way.
Re:How to protect yourself.... (Score:5, Insightful)
He did his job,and got paid for it. That's what he asked for, and that's what he got. There's nothing here to be "protected" against. He's just complaining because other people did well on a risky investment, whereas he went in with no risk and got exactly what he asked for.
Re:How to protect yourself.... (Score:3)
Re:How to protect yourself.... (Score:3)
If you work for a big company with thousands of employees, you can be pretty sure that the CEO is taking home millions, even if you and everyone else are earning a pittance. This is no different. It's how American capitalism is supposed to work.
Re:How to protect yourself.... (Score:4, Insightful)
It really is that simple.
If you're "just" an employee, you *should* get paid a concrete value based on your time, talents, and output - and not on the success of the company.
If you're an executive, you *should* get paid an abstract value based on the success of the company - and not on your time, talents, or output.
What's really dumb is that large one-time payments to take control of companies preparing for a merger are causing CEOs of companies NOT preparing for mergers to try to "flip" their gig into a better paying one through consolidation and capitalization - which nets them a huge windfall, almost always at the expense of the labor force, with redundant jobs being eliminated. Not to mention this is a terrible strategy in the long run.
As related to this article, if there were strong corporate laws in place, if a firm went under, executives would be forced to provide exit pay to lost employees and cover all of the firm's debts before filing for bankruptcy. It'd make them think twice before pulling shenanigans like this where they cut their losses and run on the labor beneath them.
Bankruptcy (Score:1)
Re:How to protect yourself.... (Score:2)
Why *should* it be that simple? Why should the rules be completely different for different people? Why shouldn't everyone get paid according to the work they do? If a company does well, why should a few people reap all the benefits?
Conversely, if the executives were responsible for all the debts of a failed company, no-one would ever want to be an executive. The potenti
Re:How to protect yourself.... (Score:3)
What goes around, comes around... (Score:2, Interesting)
My advice is that you use this experience to your advantage. Next time an offer like this comes
Re:What goes around, comes around... (Score:1)
Re:What goes around, comes around... (Score:2)
Re:How to protect yourself.... (Score:3, Insightful)
Re:How to protect yourself.... (Score:2)
Yes it does. "He who holds the most capital does the dictating." Please note that "capital" doesn't neccessarily mean just money, but anything that can be used to make money - intelligence, experience, etc.
Re:How to protect yourself.... (Score:2)
You have that risk practically everywhere, with one exception, which...
As opposed to a gouverment union job with life employment guarantees.
Re:How to protect yourself.... (Score:1)
False Statement: "...he went in with no risk"
Perhaps this particular employee took few risks in accepting that job, but obligating yourself to someone else's company is actually more risky than working fo
Re:How to protect yourself.... (Score:2)
Employment is anagolous to time as a Certificate of Deposit is to money. You are going in with a set expectation of what you WILL earn for the duration of the agreement. You may not be able to get the same deal when the mi
Re:How to protect yourself.... (Score:1)
Re:How to protect yourself.... (Score:2, Interesting)
I worked for a startup that floundered in startup status far longer than any company has a right to - they're still there after nearly 8 years in operation. I was there long enough for my vesting schedule to be completed (and then some), and should have been able to cash in a very tidy sum. Vacations in Rio, private schools for the kids, and a new home with no mortgage kind of tidy.
Well, that's not the way things worked out. The company had some ques
Re:How to protect yourself.... (Score:2)
Re:How to protect yourself.... (Score:1)
No. Have great monetary expectations but only beyond salary expectations.
Startups pay very little with the expectation of it becoming something big and rewarding the people who stand with it at the end.
2. Don't take a job for less salary than you would be satisfied with in exchange for equity.
If you want a salary then take a job with a well founded company.
3. Don't sign on to a vesting schedule you know you won't stick around through.
If yo
Re:How to protect yourself.... (Score:2)
I am currently working at my fourth startup in a row, and fifth overall, and I've had offers from countless others in the process of finding these four jobs. I can say from personal experience that what you're saying is absolutely false. Unless you're in pre-funding and have a period with no pay, startups invariably seem to may *considerably* more than established companies. You d
It's a risk (Score:2)
Plan B (Score:5, Interesting)
Talked to the new owners about a job yet?
Re:Plan B (Score:5, Funny)
IMHO (Score:5, Insightful)
Weigh your options: You are hired to perform X function for a startup. Anything extra is on you. If you out of the goodness of your heart decide to give it your all for nothing in return, you are to blame. Business has no heart nor emotion. Option a) take a high salary to perform your task. Perform your task well and obviously (well theoretically) it will show and hopefully you will earn more. Option b) take a moderate salary and work with management to ensure your works pay off in the long run (via options, Sr. position, etc.) Option c) believe business should have a heart and cry foul when you find out that again it doesn't.
On a slightly different note, my brother in law was with Citigroup for 21+ years. He was the Tier 2 Network Engineer at Citibank HQ in NY. They outsourced first, then made a data center in Texas. He was given the opportunity to relocate their however... He had to come on as a new employee. 21 years down the drain. Sayanora. Although he made out with a nice goodbye package, that will run out in about a year. Business nothing personal happens everywhere.
Re:IMHO (Score:2)
Let me just expand on this. The original post has the same argument as communism (as I understand it). The people who invest the money get rich on your work (you said that they were investors). It is like gambling. What do you have to loose in your job? The answer is just your job. If the startup folds, you just go on your merry way and find new employment. It is a pain, I admit, but that is all that you have to loose.
Now, look at the guy who owns t
Re:IMHO (Score:1)
This was not the case during the in person interviews. In fact, one manager flat out lied to my face. Based on the way the managers handled the interviews, I would not have gone to work for t
Re:IMHO (Score:2)
And for the OP, I'd bet your brother wasn't a Citigroup employee in NY. If he had been, there shouldn't have been any question about his time. If he was working for a third-party providing services for Citigroup, and now would be employed by Citigroup directly, why should his time with
Re:IMHO (Score:1)
What did you really expect?
I got a fair salary... (Score:3, Insightful)
Risk vs. Rewards. Most of the folks who end up with a Ferrari started off putting their house up at collateral to make the startup work. Better cash than a lot of worthless stock like many of us got in a startup...
I don't understand (Score:2)
Re:I don't understand (Score:5, Interesting)
That's my thought as well. My only guess is that he didn't exercise his options. If that's the case, then things get a bit tricky. If he was lied to or otherwise mislead about the status of the company, then he might have a chance of recovering his losses in court. He might even find a lawyer to work for him on a pro bono basis, with the expectation of the judge ordering the other party to pay for the lawyer's services.
If he was not mislead about the status and simply chose not to exercise his options, then he's SOL. Thems the breaks.
Re:I don't understand (Score:2)
Re:I don't understand (Score:2)
If a the lawyer is working for free with an expectation of the judge ordering the other party to pay for the lawyer's services, the lawyer is not working pro bono. It couldn't be more clear, you anonymous tard.
Re:I don't understand (Score:1)
Working for a startup is speculation (Score:1, Troll)
Obvious? (Score:4, Insightful)
Re:Obvious? (Score:2)
Re:Obvious? (Score:2)
Re:Obvious? (Score:2)
Yes and no. As an employee, it's unusual to get the preferred shares that the VCs and founders get. You get common stock instead. You don't control the company, the preferred share owners do. When a buyout comes along, the preferred share owners can decide to divvy up the money however they want. If they want to take all the money for themselves and leave nothing for the common stock owners, they can.
If they hire their buddy to work for the company, they can dilute your shares by issuing new ones to their
1099 and reverse-options (Score:4, Interesting)
Then, decide how much less money you're willing to take per year for a shot at a bigger pie later. Call that number $X.
Ask them to pay you for the first 2 years as a form-1099 contractor and give them a vesting schedule for buying out your ownership of the intellectual property you produce. At six months they can buy you out for X cash. At 12 they can buy you out for X cash and X stock. At 2 years they can buy you out for 4X stock. If at any time prior to 2 years they fail to maintain your contract, the offer to sell changes to 3X cash and is good for 3 years. Upon buyout or after 2 years (whichever comes first) you expect to be offered a W2 salaried position at the fair market value of your services.
This way you're both reasonably protected. If things go well, they have a fixed and reasonable buyout. If things go poorly then either you walk away with your work-product or whoever they sell the remains to will have to seperatly buy your work product from you. And if the buyer insists on a package deal, they even have a fixed price for it that they know up front.
Re:1099 and reverse-options (Score:2)
The only way you get that deal is if you have an unhealthy business relationship with the company founders, the investors are complete idiots (in which case you'll probably end up with nothing in the end anyway), or if you're the 1 guy in 100 million that can do what you do.
Clearly this guy didn't have a good-ol-boys relationship with the founders (if he did they'd have just given him a stake anyway, or they would have canned everybody but him). I like my odds that this guy wasn'
Re:1099 and reverse-options (Score:2)
The nice thing is sometimes you offer something that protects you and the employers balk. A friend of mine got screwed by stock option dilution once so when the next company came around he asked that his options be non-dilutable. They said "no way" so he knew they were planning to devalue his shares at some point and avoided that potential trainwreck while learning the kind
Re:1099 and reverse-options (Score:2)
Every early round startup will probably raise more money eventually. Practically every startup will tell you to go screw if you ask for a different equity deal than everybody else. They only want to pay the lawyers once.
The proper way not to get diluted in a startup is to go to a company that has pre-alocated shares for the later fina
Re:1099 and reverse-options (Score:2)
Re:1099 and reverse-options (Score:2)
Instead, you should account for it when you negotiate. Assume the shares will be diluted around 60%-80% (i.e. the original shares m
Re:1099 and reverse-options (Score:2)
And somehow Sergey and Larry wound up with, what 2/3 or 3/5 of the company while investors beat their doors down with fistfulls of cash.
Then again
Re:1099 and reverse-options (Score:3, Interesting)
When the founders of a small business look to hire their first employee, they're looking for three criteria:
1. Well above average expertise. Like themselves, in other words. Such people are available, but it takes months of interviews to find them.
2. Fanatic dedication to the work. Like themselves, in other words. Nine-to-fivers need not apply. When combined with criteria #1, these people are no longer a commodity. They can be found but it takes a
Fair (Score:4, Insightful)
Second, you were an employee. You were hired to do a job - with, by your own words a fair salary - and you did that job. You should have no expectation beyond that; you certainly have no moral right to anything more.
Really, if you want a part of a company's future, become an investor - put your money on the line and accept the risk that comes along with the possible rewards.
Re:Fair (Score:3, Insightful)
Re:Fair (Score:3, Insightful)
Again, and as the story poster found out, options are a lottery, not an income source.
What you get by working at a startup? Little bureaucracy and short decision paths; well-focused, exciting projects; tightly knit organization where everybody knows each other; quick career advancement (and commensurate salary increase) if the
Re:Fair (Score:3, Interesting)
I work in a promising startup now - the options are great if they come through, but if not, I don't lose a whole lot. I made sure that my salary and benefits were adequate when I took the job.
The best thing about working in a startup is that it's a small company, and we're all friends (having worked together at a previous company). That is worth more than all of the money in the world, because it makes working more fun than most other jobs.
I disagree with the parts about well-focused projects a
Re:Fair (Score:2, Insightful)
Absolutely. I've worked for that kind of place myself.
It's competely understandable - they started the company, toiled night and day to make their fledging enterprise survive and thrive. They've known every single thing going on for years. It can't be easy to face up to the fact that the place really has outgrown them; that they don't know every employee personally; that they don't have, and can't have, the kind of control and knowledge that they've lived wit
you expected too much (Score:5, Insightful)
The investors, who made more than you, would have lost all of their money if this went badly. If things went badly for the company, you would have still been paid your salary.
If you wanted the benfits of being an investor, you should have taken out a second mortgage on your home (for example) and invested the money in the company. Of course you didn't want to do that, because it was a startup, and you didn't know if you would get your money back.
Well, guess what? The investors in the company didn't know if they were going to get their money back either. The money they earned from the sale is their reward for taking the risk in starting the company.
So what you wanted was all of the benefits of being an investor, without any of the risk.. which was unreasonable to say the least.
Re:you expected too much (Score:2)
Way before you showed up, newbie.
Re:you expected too much (Score:1, Offtopic)
Re:you expected too much (Score:2, Insightful)
Re:you expected too much (Score:2)
Look at it this way. If the company had gone under, all he would have lost was his job. And he would have still gained something from it, and whatever he'd saved over that period and experience. That's always valuable when going to your next employer. If he'd have become a fully fledged in
Re:you expected too much (Score:2)
How exactly do you define risk? I don't think investors' lives or health was at risk, so let's assume you are talking about property loss risk. Well, most every property today comes from talent or effort and risk, either owners or owners' ancestors. What I am trying to prove here is that
Re:you expected too much (Score:3, Insightful)
It does not count as investing, because there is very little risk in going to work for someone else. If the company had gone under, he could have sued for his paycheck; the owners would have been responsible for paying any employment taxes, even if they had to
Mortgages, vesting, key players, and headcount (Score:2)
No investor/founder worth their salt is going to let just anyone invest in thei
Re:Mortgages, vesting, key players, and headcount (Score:2)
Maybe he should have been allowed to purchase a few percent in the company.. but he wasn't, and he can't expect to benefit from a risk he never took.
Re:you expected too much (Score:2)
Re:you expected too much (Score:1)
I joined a startup, and I should have been the first employee, but as the only tech guy I was given the option of becoming a partner. The catch was that I was going to be paid sporadically, had to take responsibility for the company and its decisions, and worry about all those things that people who run companies have to worry about. Not only things like going bankrupt, but also taking a load of people down with you. But since I was doing the work myself, I felt I
Re:you expected too much (Score:2)
Yes, the investors take risks. Yes, the founders do too. That's why this guy couldn't have expected an equal share of the company with the founders. But he certainly could and should have expected a significant stak
Get a contract with and escape clause (Score:2)
Basically if I was in the same situation I'd double check the contract when I signed up. Always try and think what's the worst that could happen.
My guess is that you would have gotten vested shares after either 12 months or 24 months. If that's the case then add an escape clause that says something like "The share will be immediately vested immediately upon the termination of the contract unless the contract is terminate by myself or is terminate for gross negligence." While you can could just add it at
'Bought out' == Rescued from Creditors (Score:2)
Having been a principle at one of these things I will tell you that their life is more hell then you can imagine and you should actually be happy you got out and could just move on with your life.
Sure, MAYBE they got some cash but I have to date have never seen a post layoff startup get bought out, just acquired for t
Get ahold of new company and see about a job! (Score:4, Interesting)
Ask for partial payment in stock (Score:1, Interesting)
Every two weeks, they have to give you a paycheck and the agreed upon number of stocks. After 6 months, you'll own 5% of the company. Thus, if they
Love Your Work (Score:2)
A startup is a risk no matter how you cut it. You and everyone else is involved in a project which may or may not take off someday, and your financial compensation is directly tied to the success of the organization. Your challenge is re
Re:Love Your Work (Score:2)
Re:Love Your Work (Score:2)
meanwhile, that guy who works his ass off? we love him. he'll never lose that job. 'course, that also means he'll never be promoted either, and he'll be working deep into the night long after his health or his life really all
Re:Love Your Work (Score:2)
This presumes of course that the dedicated employee even wants a promotion.
get a lawyer (Score:2, Interesting)
Rule of Acquisition #211 (Score:4, Funny)
Employees are the rungs on the ladder to success. Don't hesitate to step on them.
Its in the employment letter... (Score:2)
The rest is up to you. The rest is you offering something for free, to look good, to be friends with the investors and to possibly be a future dev manager. You're providing that for free and you should simply know that when you're providing that. Apart from that, what you do is your job and you'll get paid for it.
For some strange reason, I suggest you try and apply to get hired in that bought company again.
I dont know why I suggested that.
You ask a very good question (Score:2, Interesting)
Immediate Vest (Score:2, Interesting)
Re:Immediate Vest (Score:1)
Re:Immediate Vest (Score:2)
Depends on which country, and at what stage you get in. First of all, with options there's the issue of the strike price (and your local tax authorities WILL care if it's set artificially low) which may be insignificant or not depending in particular on whether the company has gotten any funding (which would typically have pushed the price up as your tax authorities will have a hard time swallowing a strike price below the pr
Get Equity. (Score:1)
All of the fancy notes, options, future grants, and other instruments are not very meaningful until they actually turn into stock. You will also find that you often have more rights as a shareholder than as an employee.
The only down side to this a
There's Always Plan B... (Score:3, Funny)
Re:There's Always Plan B... (Score:2)
Re:There's Always Plan B... (Score:1)
That's what a Startup is. (Score:3, Insightful)
A start ups, especially web start ups, really only need talented people up front, then they have to get rid of them. Same reason you don't pay carpenters to come back to the house after they finish building it. That's the nature of the startup.
I'll echo what everyone else said.
Either you need to get into the company before they have employees (in which case you'll likely get burned much more severely, but with better reward possibilities) or get there later, after they've shed their builders.
there are no equals (Score:1)
You took the wrong class (of equity) (Score:5, Informative)
Let's say that I do a startup. I immediately create two classes of equity - Class A for me, Class B for you and everyone else that I hire. To make things simple in this example, let's say that in terms of ownership, Class A = Class B, but they have different rights. Class A gets to vote on things, Class B doesn't.
OK, so I have 50% of the company in Class A stock, let's say 100 shares. You have options for 50% of the company in Class B stock, also 100 shares. These shares seem to be equal, but they're not.
So, together, we build the better mouse trap. Then we run out of money. The VC's step in... and since we're distressed, they seek to do a cramdown. Which means that they're going to shrink the existing slices of the pie,and perhaps convert things. Time to vote on whether to accept the cramdown. But only I have voting rights. So I agree to do it on whatever terms we can get.
So... first they buy the majority of the company with their investment 89.99%. The company issues 10,000 shares of a new class, Class C, which is what the investors get - 8999 shares worth. Class C becomes the only redeemable equity. The investment terms specify that Class A owners can convert on a 10:1 ratio - so now I have 10% of the company, or 1000 shares. I've been diluted. Class B owners can convert on a 1:10 ratio, or 10 shares. You are diluted, the way the "active ingredients" in homeopathic remedies are diluted. So now you have
The VCs find someone who wants to buy the company for $100 million. They get $89.99 mil for doing a bit of social networking, and tiding us over through the rough times - in other words, the rich get richer. I get $10 million. Woo hoo. You get $10k. Thanks for playing!
This is how it works. Founders often end up with far less than 10% of the company, if anything at all. Employees typically get screwed. The exceptions are the companies that are so hot, and/or have enough revenue coming in, that they can play one VC off of another. It is not often that founders have the ethical grounding to make sure that employees don't get screwed, at least any more than the founders themselves. But, on the other hand, I've seen employees cut separate deals with new investors to cut the founders out. No one plays nice in this game.
This is what you need to know going forward: get the same CLASS of equity that the founders have. Insist on instant vesting upon change of control. Insist on at least partial vesting if you are fired without cause (although employers will always be able to show cause, there is at least the threat of a lawsuit).
The flipside: if you have the stomach to do another startup... since you helped launch a company that made people money, you can get a better deal the next time around.
Re:You took the wrong class (of equity) (Score:1)
Also, the reason a founder can look you in the eye and screw you with worthless stock and make you believe they are sincere is because most of them are. They are clueless. Most of them (especially back in 1.0-land) don't know much more about stock and what it will mean in an earn-out, merger, or IPO than you do. In fact, most of these people ARE you three years into the future. And many of them are in the process of getting screwed too on a different level...
LH
Re:You took the wrong class (of equity) (Score:2)
Now, only a fool would think that getting paid in lottery tickets is a good way to make a reliable income. The same applies to startup stock, only a fool thinks that stock is reliable income.
What century do you live in? (Score:2, Interesting)
The market is dynamic in the U.S. In other words: we hire and fire like it's nothing. Didn't Slashdot the other day link to an article discussing this effect in the U.S. economy and its positive value?
As 1/4 of the business at the time, you should have demanded at least 1/4 of the business.
Taking pay at a startup is the easy way out. And I guarantee you it's why your employers didn't feel bad about letti
Re:What century do you live in? (Score:2)
At the stage where a company has a prototype and a business plan that is just not a realistic prospect in most cases unless you're very heavyweight or well known in your industry, are bringing in funding, or the founders are very close friends of yours.
Re:What century do you live in? (Score:2)
A startup is a very tricky business, and a type you can only participate in for a very narrow window of your career.
It means that your situation needs to match the company and vice-versa.
If they don't see the match as that important, then that's life. In that scenario, you're no better than the guy pulling French Fries out of the vat at McDonald's. So, the lesson is if your not a primary,
Options / Equity (Score:1)
F8 (Score:2)
eCharge in Seattle (Score:1)
I got F*CKed royally by eCharge in the bad old days of 2000. The day my wife was closing on the sale of our house in Boise, eCharge, who recruited me only a few months ahead of time with tons of evidence of financial health, had me in a conference room tell me and others that the doors had been shuttered retroactivly to the day we all left on Christmas vacation.
Still live in the area, but still can't go to 5th and Union without spitting on the building.
Get monthly, automatic vesting (Score:2)
There are some cool companies that vest stock on a monthly basis. Or, some companies will have a vesting schedule with a clause that if the company is acquired by someone else all of your shares automaticall vest.
My friend was an exec at MySpace and worked there for a few months before they got bought. Not sure of the details b
Some clarity (Score:2, Insightful)
You can choose to be both by agreeing with your employer to take part of your salary and use it to purchas
Sorry dude, but . . . (Score:1)