Startup Employees Are Getting Screwed By VCs And CEOs, Says 22-Year Industry Veteran en-us Wed, 31 Dec 1969 19:00:00 -0500 Fri, 26 Dec 2014 11:06:35 -0500 Nicholas Carlson StockOptionCnsl Mon, 10 Mar 2014 18:44:26 -0400 We just released more tickets & moved the event to Palo Alto High School's Haymarket Auditorium to accommodate the amazing response. RSVP at <a href="" target="_blank" rel="nofollow" ></a>. Map to Palo Alto High: <a href="" target="_blank" rel="nofollow" ></a>. Map of Palo Alto High: <a href="" target="_blank" rel="nofollow" ></a>. besmertnik Mon, 10 Mar 2014 13:00:18 -0400 Thanks for posting this Chris. What I've found is that employees can have all the information they want, but when it comes down to whether they make money/get taken care of, it all depends on the integrity of the board and the CEO. Suitors come up with lots of creative ways to create disproportionately favorable outcomes for founder/CEOs that even if you have a perfectly employee favorable capital structure, employees can still get 'screwed'. Unless the business is under a lot of duress, the CEO often has the ability to either negotiate on behalf of employees or him/herself/board. I completely agree that knowing whether the capital structure is favorable or not is important, however, if I were an employee evaluating two opportunities in the context of stock/option value - I would ask myself which CEO is likely to share the success with the team vs. be out for themselves. One Sun, 09 Mar 2014 03:29:34 -0400 I see a lot of lunatics believe that taking risk leads to monetary return. Now explain to me how playing Russian Roulette would lead to any return. You do get plenty of risk though. One Sun, 09 Mar 2014 03:26:00 -0400 You do not enter in employment contract. You get a job at normal established place where normal people work, not a bunch of bipolar weirdos with outsized ambitions. One Sun, 09 Mar 2014 03:20:35 -0400 You are completely wrong. You win by not taking the risks. Taking risks is stupid. One Sun, 09 Mar 2014 03:17:30 -0400 I did work for government and big private enterprises. What I mean is what you get for your effort: Government > Big Company > Startup. I was not talking about changing the world. If you want to change the world, maybe you do want to work for a startup. However, I have many-many friends who worked for startups and several who tried to start them. Only one guy made something like 1 or 2 million and that was not really a startup, unless you call Google a startup in 2003. nerdbert Sat, 08 Mar 2014 20:58:41 -0500 You've obviously never worked for the government. I've worked for NASA, and by comparison IBM was a startup, and IBM can't get a decision done about starting a project in the lifetime of a typical startup. If you're an engineer and want to do actual engineering work you need to be a contractor for NASA, not a NASA employee. With all the procurement rules and bureaucracy, NASA employees are usually little more than project managers. nerdbert Sat, 08 Mar 2014 20:54:53 -0500 Merely knowing what the terms are going in is leverage and knowledge. Most startup employees don't really know what they're getting into if they haven't done it before (or haven't worked for one that's not failed) in terms of what their stock will do. Once you know how your stock compensation rates you can negotiate on other terms like salary, or on stock terms. It's part of the hiring process you should be doing with ANY company you join, and the more you know the better off you'll be. It's no different from any other company, it's just that for startups the compensation methods are less regulated and less well known and that leads to an imbalance in negotiations. nerdbert Sat, 08 Mar 2014 20:45:48 -0500 BTDT. It's funny how many times you'll set a startup off script when you ask those simple questions. They'll look at you like you're from Mars if you ask for basic information about vesting schedules, stock types, and stock outstanding. It's a sign that you've been down that road before and seen what VCs and founders do. I've done a few of these with mixed results. I've seen VCs actively screw employees by trying to get them to sign over shares before they'd agree to a chip release, and most of the engineers agreed because they'd invested so much of their life into getting the chip out that they wanted that more than the stock. Dumb, dumb, dumb. A couple of us refused and were willing to call their bluff, but most caved. Startups and fun, high energy places to work, and with committed folks. But you have to remember it's a business first and be willing to walk and willing to sue when required. I remember one startup that fired nearly all the engineers right after the first prototype and used the money to bankroll the sales team until things got rolling, then hired new engineers to replace the old team. It screwed the original engineers out of most of their shares. killingmycareer Sat, 08 Mar 2014 11:39:38 -0500 Wow! Thank you for writing this article, as I have been writing on this subject from the startup medical device position and keep pointing out the similarities between the two industries. Both are run like corrupt monarchies where the CEO acts as king and the employees are the loyal subjects who do as they are told even if unethical or illegal (especially if illegal) or they risk hearing off with their heads! I refer to this as The Sociopathic Business Model ™ where organizations are personifying the characteristics of a sociopath and where it’s being encouraged, replicated and rewarded. George Danner Fri, 07 Mar 2014 20:25:17 -0500 I guess I am really surprised that smart people (good developers) took so long to figure this out. Chris Zaharias Fri, 07 Mar 2014 17:31:19 -0500 Startup valuations and revenues have much more to do with execution against the business plan than they used to, and as such the excellence needed by founders from the Sales, Marketing, Finance, Operations, Client Services and Product Management rank & file are worth more & more while also getting harder & harder to find. Agreed - if one or two employees get smart and ask for basic information and equity terms, not much will come of it. But if lots & lots of potential & existing hires do so (which is the movement next Friday's event is trying to enable), you'll be surprised at how fast startups will get in line so that they're viewed as good places to work. Doug in Virginia Fri, 07 Mar 2014 13:57:02 -0500 How do you see that change occurring? If one or more employees decide they don't want those terms, it's relatively immaterial to the company except for very certain rare skills. They can just find someone else who will accept the terms. Nicholas Carlson Fri, 07 Mar 2014 11:51:08 -0500 Startup jobs are for losers? Government jobs are for winners? Guest1831 Fri, 07 Mar 2014 10:10:26 -0500 Sorry, put me in the 'no sympathy' side. If you enter into an employment contract and don't know the T's & C's, shame on you for not doing some research or having a financial advisor review it for you. I see startups like the promising high school and AAU basketball players - some will make it and be millionaires; others will not. That's Life. If you don't like the risk go take a programming/sys admin job at a big company with a nice stable product line and decent compensation/benefits. Or do found your own startup with your own 'great' idea. kryptic Fri, 07 Mar 2014 09:51:06 -0500 As a rule, employees of startups work longer hours and get paid less than those of established companies, in return for a "piece of the action" if the startup is sold or IPOs. ackmania Fri, 07 Mar 2014 08:56:19 -0500 ...but hey look at the brightside, at least you get to have a happy hour every friday and you can play ping pong whenever you want. Except for the founders that is Fri, 07 Mar 2014 06:02:21 -0500 Agreed, but the founders are a different category. The little sheep who go to work for them are just juvenile Mac types. They should be thankful Fri, 07 Mar 2014 06:01:10 -0500 They're drones. They're not entrepreneurs. If you want the rewards, go take the risk. And do not even *begin* to tell me that working for that salaried position represented some kind of risk. It didn't. And if you think you're a risk taker by working for a small startup, then why aren't you starting a start-up? There are players, and there are peons. Decide which one you are. And no, the fact that you have a degree from blah-dee-blah does not mean you deserve to be considered more than a peon. And if you clamor about "preferred shares" during your interview, good luck getting the job. If you don't like being a little gimp, go out into the jungle and slay your dinner like a man. So tired of whiny employees who think they deserve to be rich just because they got hired early-on. Wareatur1 Fri, 07 Mar 2014 05:35:29 -0500 up to I looked at the receipt which was of $5776 , I didnt believe that my mom in-law was like they say actually taking home money in their spare time on there computar. . there great aunt haz done this for only about nineteen months and just repaid the morgage on their villa and bought a gorgeous Fiat Panda . view it now,,,,,,,,,,,,,,,,,, WWW.Works6.COM One Thu, 06 Mar 2014 23:20:17 -0500 Startups are for losers who cannot find employment at mature company or government or are in transition between them. Doug in Virginia Thu, 06 Mar 2014 22:23:29 -0500 Relatively few employees have the leverage to negotiate the sort of terms the author throws out (somewhat cavalierly). If you're key person in the top ten employees before all of the ownership documents are frozen, then maybe you have a shot. Once there are VCs on board, you're not going to negotiate a better class of stock for yourself, or preferential change of control treatment. Not Going to Happen. AtlantaDude Thu, 06 Mar 2014 22:03:11 -0500 There are many ways in which this happens, but I will give you an example. VC puts in ten million dollars and gets 50% of the stock (thus valuing the company at $20 million dollars). For simplicity, let's say that the employees get the other 50% of the stock. The VC stock is preferred stock. The employees' stock is common stock. This is where the term "liquidation preference" comes in. A common formula would be that the VC has a 2x liquidation preference. This means that the VC gets to take double their original investment out of the company before any other shareholders get their first dollar. So, if our example company is worth $20 million at the time of the VC investment, and then triples in value, the company is worth $60 million. So, you would think that the employees would get half of that, i.e. $30 million. However, the VC has a 2x liquidation preference, so the first $20 million goes to the VC (i.e. 2x their original investment.) Only after that $20 million is paid out, do the remaining proceeds get split 50/50. Therefore the VC will get every dollar up to $20 million and will split the remaining $40 million with the employees. In this example the VC would get $40 million and the employees get $20 million. So the VC quadrupled their investment despite the company's value only tripling. Meanwhile, the employees only saw a doubling of the value of their shares, despite the company's value tripling. It is worse if the company does not do so well. If the company only rises in value from $20 million to $30 million, the VCs will get all of the first $20 million, plus half of the next $10 million. So the VC gets $25 million and the employees' portion is worth $5 million, which means the value of their shares went down, so they will have lost money if they had exercised their options and bought shares in the beginning. If they were only holding options, they would be underwater and worthless. It doesn't matter anyway Thu, 06 Mar 2014 21:45:46 -0500 Even if you explain all the points in the article to your average employee, they won't understand it and it wouldn't change their behavior/negotiations. So it doesn't really matter. JasonD Thu, 06 Mar 2014 21:36:06 -0500 I thought Founders don't get Preferred Stock??? It's pretty uncommon these days. Would really love to hear a deeper analysis on how to find out/protect yourself from this 'preference multiple' ? JasonD Thu, 06 Mar 2014 21:36:00 -0500 I thought Founders don't get Preferred Stock??? It's pretty uncommon these days. Would really love to hear a deeper analysis on how to find out/protect yourself from this 'preference multiple' ? Danny L Thu, 06 Mar 2014 21:29:50 -0500 I've heard about Number 2 & 3 but haven't inquired about Number 1. Can someone explain how to ask about #1 and what to look for in an optimal Preferred structure? didittakethatlong Thu, 06 Mar 2014 20:49:25 -0500 Seriously, did it take them that long to figure it out? VC money comes in first. Then you go public, Then the investors pull their money out and the stock tanks leaving the little people holding the bag of rocks. JoeInsider Thu, 06 Mar 2014 20:26:41 -0500 Very true. I love it in particular when CEOs give out stock bonuses right before a financing round they know will wash out or reset common equity values. Doug in Virginia Thu, 06 Mar 2014 19:55:12 -0500 Startups needs investors more than they need most of their employees. That's how the reward system works. Chris Zaharias Thu, 06 Mar 2014 19:44:54 -0500 Sherlock - unfortunately, the people like you who appear to already know all this are all on the Preferred side of the equity tracks. Having talked to hundreds of startup employees over the years about this topic, it's clear to me that most startup employees don't know what they need to until they've been whooped in the keister 2-3 times by founders & VCs. The event's gonna change that, at least for those who attend and get, ahem, clued in. very true Thu, 06 Mar 2014 19:06:57 -0500 Startups are all about "Animal Farm". You're either a founder or early employee, or your some sucker making the equivalent of $9 an hour when averaged for how much time you put into the place each week. Not saying it's all bad but most folks end up making more money long term, and having a life, outside the startup world. Sherlock Thu, 06 Mar 2014 18:52:30 -0500 And in other news: The sun will rise in the east. This falls clearly into the 'no shit' pile. Bankers and financial transaction lawyers exist only to better themselves. They are the very definition of parasites. Their entire existence is predicated on finding ways to steal money from other people. Next! vafer2k Thu, 06 Mar 2014 18:26:43 -0500 So true. Unless that startup happens to be Google, Facebook, or another WhatsApp, most of the time, the odds are much worse than you think. StockOptionCnsl Thu, 06 Mar 2014 18:14:23 -0500 Please add your thoughts on the draft of the Startup Employee Stock Bill of Rights and your stories here: <a href="" target="_blank" rel="nofollow" ></a>. - Mary Russell, Stock Option Counsel legal services for individual employees Yessir Thu, 06 Mar 2014 17:52:29 -0500 All true. Not too surprising either. Think of it this way, if you're an employee taking stock options in a private company as part of your compensation, you're receiving something complex enough that the SEC wouldn't allow it to be sold to you unless you could prove you are a sophisticated investor with a high net worth and income. FWIW you usually get the same stock as the founders and CEOs, it's the cash money investors that get the good stuff. If you get 40% per share what they get consider yourself damn lucky.