How to Protect Yourself with Startups?

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."

Comments

Your vested options?

[WinEveryGame]

Did you not have any vested options? Did you not get any $ for those?

Re:Your vested options?

[Anonymous Coward]

Sad story and all, but WHO GIVES A FUCK?

Re:Your vested options?

[Anonymous Coward]

I'd give a fcuk... with you.

Doesnt quite add up.

[renehollan]

If you were the first employee, your old boss would have been an investor, and thus didn't make out like a bandit, but rather left with somewhat less than they had invested.

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....

[ivan256]

1. Have zero expectation of monetary compensation beyond your salary.
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....

[Procyon101]

I'm curious how he got "screwed".

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....

[scattol]

I disagree he went in with absolutely no risk. He had riskier long term job prospects which impacts his overall earning potential because of the real risk to fall on his ass for X months earning nothing. That's opportunity cost. As opposed to a gouverment union job with life employment guarantees.

Re:How to protect yourself....

[badfish99]

So what? He chose to take the job, so he must have agreed to the salary.

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....

[ivan256]

[...] because of the real risk to fall on his ass for X months earning nothing. That's opportunity cost. [...]

You have that risk practically everywhere, with one exception, which...

As opposed to a gouverment union job with life employment guarantees. ...you've mentioned, but I guarantee you that he was much better paid at this job.

Re:How to protect yourself....

[kthejoker]

Executives of companies, and in particular Chief Executives, should have their pay tied squarely to the fate of the ship. While they should receive a salary that is higher than the highest non-executive (perhaps 50% more? Arbitrariness works both ways), if a company is doing poorly, an executive shouldn't expect to "take home millions", because they represent the company in abstract, and as such their entire endeavor (executing) is abstract - which means their pay should be just as abstract.

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.

Re:How to protect yourself....

[Keyslapper]

Ivan has hit the nail right square on the head here.
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 questionable financial practices - well the parent company did, anyway. The parent saw their stock rise from $20 through 4 splits, and end up at $142 right at the height of the dotcom crash. Of course our VC was no idiot, he sold as much as he could possibly sell - both his stock and ours, within a month of the crash. That crash saw the parent stock fall back through 2 or 3 reverse splits back down to penny stock status, and was finally delisted because they failed to file some financial report with the SEC.

Funny thing, though. When stock was back near the bottom - under $20 if I remember right, the parent company announced a massive stock repurchase. Total net: Over $800 million. Of course, it was all through his own company stock, which had been overpriced based on our expected performance, which never happened due to a "lack of available funding".

During all this, our company was pushed through a 100,000 to 1 reverse split. There had been so much watering down of the stock at this point, that people who initially had options on a measurable portion of the company now had less than one share. And anyone who had purchased vested stock when they left had nothing - to the tune of several thousand dollars in some cases. Those that had a vesting schedule found that they had to wait 5 years for roughly 1 share - though most came out to roughly 1/100th of 1 share. No new option plans were forthcoming, though they were promised at the time.

This was (hopefully) an extremely uncommon chain of events, but I have to reiterate the 3 points presented by the parent. A few other posters have made suggestions to the effect of "make sure one of the golden cuffs are on your employer". In otherwords, get a severance contract, and make it as sweet as you can.

Another thing to remember, as stated by a former coworker:
"It's all about the BS"
BS = Base Salary. (Thanks Captain Boiko!)

Look at this as a paraphrase of the 3 points above. The options are nice, but that's just lottery tickets.

Still, in a case where you're employee #1, and you have such a critical role in getting the company successful, it is often better to negotiate a percentage of the company, rather than a number of stock shares. The VC can always add more stock, but if you negotiate even 0.10% of the company value in the event of a sale, that will always be 0.10% of the company value, regardless of how they water down the company stock.

Better luck next time. Personally, I'm avoiding startups like the plague these days.

Re:How to protect yourself....

[Ratbert42]

Focus on the base salary. For my last two jobs, I waived my "right" to any bonuses in exchange for getting the base salary that I wanted. Haven't regretted it one bit. I've gotten options, but I never considered those any sort of compensation. The free sodas were worth more.

Re:How to protect yourself....

[bluprint]

I think the point is that he could have better mitigated his risks (primarily, the risk of being out of a job) by better negotiating his contract. Capitalism doesn't dictate any particular method of contract negotiation.

Re:How to protect yourself....

[Anonymous Coward]

Opportunity cost is not risk, it's cost, just like the name says. First year economics.

Opportunity cost is covered by expected profit. If the amount left after taxes, food and shelter were taken care of isn't sufficient for the value of your time, don't take the job.

Pretty simple stuff...

Re:How to protect yourself....

[sgt scrub]

1. Have zero expectation of monetary compensation beyond your salary.

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 you can't survive the bad times then you aren't right for a startup.

90% of the startups I have worked for have failed; PetWorld, BigBearArms and sporting goods, HomeDecorp... were failures. Broadcast.com was bought by yahoo. The startup I'm working for now looks promissing too.

The only way to protect yourself is is a partnership agreement. Make sure your percentage of input is recorded and everyone involved understands what percent of the end reward is yours. Options are for employees that are not major parts of the business, but loyal and deserving.

Re:How to protect yourself....

[jayclimbs]

While the gist of your response is true -the poster got what he asked for, one statement is glaringly false. Because I see it frequently bandied about in any discussion of Free Enterprise it's starting to cause a Pavlovian response of frothing rage every time I see it, so let's get it fixed quickly here.
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 for yourself. It requires trust in someone else's ability, honesty, integrity, and commitment; all of which tend to get shaky at some stage in the relationship. Indeed, the longer an individual works for someone else, the greater the risk that one or more of those necessary components will be compromised.

It's important to realize that many, if not most of those who choose to be employees do so because they are far too undercapitalized to start their own business. As such, their economic fate becomes crucially tied to the company they offer their services and loyalty to. One need not look far to realize that corporate lay-offs, outsourcing, bankruptcies, mergers, and downsizing rarely effect shareholders and CEOs with anywhere near the significance they have on employees. Yes, the former might lose billions of dollars -and be forced to live off the measly millions they retain. The latter lose their home -their one and only home, and find themselves back in a job market that values them less than when they accepted employment to begin with. Again, that harm, that risk, increases with time , whereas in general, the risk of an owner, CEO, or shareholder tends to decrease.

My recommendation to the original post: get a contract; one with terms you absolutely love. If the employer won't sign, don't work for them, there's something they aren't telling you.
If you work in a field where such contracts aren't used (you poor sot) your best defense is to learn everything you can, keep close notes of every contact address/phone/email, and get ahold of some customer database information just in case. The day your boss whines about your paycheck, start your own business.

Re:How to protect yourself....

[badfish99]

Where do you get your idea of what *should* happen? did someone tell it to you? Did you dream it up yourself? Did you read it in a book?

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 potential risks would be so ruinous that no-one would ever start a company. Hence the bankruptcy laws.

Re:How to protect yourself....

[Anonymous Coward]

Opportunity cost is not risk, it's cost, just like the name says. First year economics.

From who's viewpoint? To at least some players opportunity cost is pure risk.

Re:How to protect yourself....

[Procyon101]

I agree. I started to write something to that effect in my original response, but thought it diverged from the point I wanted to make. He got what he asked for. If he wanted a different outcome, he should have signed up for something that had the possibility of supplying that outcome.

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 minimum agreement is over, and almost *ANY* investment will probably pay off better even while you are under the terms, but your risk is mitigated, except for the opportunity cost of not taking the risks, which can be mammoth. The original post's question is one of "How can I find a CD with the same returns as Google has shown in the last few years." You can't. The poster had a rude introduction to opportunity cost. Somehow, most people don't see opportunity cost as a real cost, no matter how big of a cost it turns out to be.

Re:How to protect yourself....

[ivan256]

Startups pay very little with the expectation of it becoming something big and rewarding the people who stand with it at the end.


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 don't get bonuses or vacation time though, and you're dreaming if you think you'll ever work only 40 hours in a week.

If you can't survive the bad times then you aren't right for a startup.

I don't see what that has do do with what I said about vesting schedules. It is unreasonable to assume that anybody will stay in the same job for more than 5 years. This is especially true of the types of people who look to work at startups. Therefore I'd say that any vesting schedule longer than 5 years is unreasonable. That has nothing to do with sticking around during the bad times.

The only way to protect yourself is is a partnership agreement. Make sure your percentage of input is recorded and everyone involved understands what percent of the end reward is yours. Options are for employees that are not major parts of the business, but loyal and deserving.

It's unreasonable to expect that any but a tiny minority can get those deals. In any company that starts down the path to success there will be five, maybe six of those. We're talking out of what could be 100+ people by the time you get a payout. The best way to protect yourself, beyond managing expectations and getting a fair salary, is knowing how to pick the winners. There's a lot of luck and instinct involved there though, and it's not something you can tell somebody they have to do. Incidentally, so far I've had a 50% success rate and the jury is still out on the current company, but things look good.

Re:How to protect yourself....

[kthejoker]

No, I don't think the executives should be responsible (as in jail time) for the debts. But they shouldn't have any golden bungee cord/parachutes for driving a company into the ground. Almost all bankruptcy proceedings by major companies are preceded by hastily voted agreements to dish out "final payments" and bonuses for CEOs and other executives. THAT is where the problem lies. These people did no different - just on a smaller scale.

Re:How to protect yourself....

[jayclimbs]

Oy, would that I had read such information at 18 (or 20 or 30)! Original poster should count self lucky to have lesson laid in lap early in career.

Re:How to protect yourself....

[Anonymous Coward]

Why shouldn't they be responsible for debts if it was caused by their malfeasance or fraud?

Re:How to protect yourself....

[Anonymous Coward]

even if you and everyone else are earning a pittance...It's how American capitalism is supposed to work.

Really. Well someone forgot to tell the middle class.

Re:How to protect yourself....

[ultranova]

Capitalism doesn't dictate any particular method of contract negotiation.

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.

It's a risk

[lawpoop]

It's a risk, and you didn't win this time around. Any of the possibilities you entertain -- contract, golden parachute -- only work provided you have a good relationship with them. If you're fired, don't expect anything. Sue? Good luck -- they have more money than you. If you are not fired, you are in good standing, and you won't need them. So in the end, they won't do anything for you.

Plan B

[AndroidCat]

So the other day, I saw they were bought out.

Talked to the new owners about a job yet?

Re:Plan B

[I Like Pudding]

Better yet, jump on as a consultant for a couple months for 6 months worth of normal salaried pay. You did remember not to document any of your code, right?

Re:Plan B

[Anonymous Coward]

You're fucking sneaky!!! ;)

IMHO

[packetmon]

You should have had something written in concrete on your contract. One of the problems with going to a startup is that there is no guarantee of anything so its always a tough call. I think gone are the days where people caught a wave. Nowadays one would have to be absolutely deranged to chuck salary for options considering the market on tech has been crappy thanks to dot.com days of Critical Path, Worldcom, Metromedia Fiber, etc. I was working for an up and comer who was ahead of the game in the managed services arena. They allowed Metromedia Fiber to buy them for about 2billion at the time... Just a month or two after Metromedia disclosed their woes and I saw many people thrown in the gutter.

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

[Anonymous Coward]

Citigroup is a bunch of backstabbing motherf*$kers that are out for one thing- and that is money. I don't like to use profanity, but they will indeed f your mother if offered money and the opportunity to.

BTW... this friend of yours didnt happen to just move out of Brooklyn did he? I met a guy w/ a similar background from Citi the other day, though he didn't really discuss the details of his leaving, though I know his job moved elsewhere and he decided not to follow.

Re:IMHO

[Anonymous Coward]

(Brother in law)... He lives in Queens. He is sort of straight financially since he has bought 4 houses, but he is moving to Florida by the end of the month ;) He was originally from Bklyn though ;)

Re:IMHO

[PHPfanboy]

Citigroup is a bank, like any business they're out for money, only more so.
What did you really expect?

Re:IMHO

[harrkev]

You are hired to perform X function for a startup.

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 the company, who might have looted his retirement fund and his children's college fund and mortgaged his house to pay for the startup. If the company folds, he is likely in the poorhouse and living in a single-wide. He risks more, so he should gain more.

If you really wanted more of the gain, you should have kicked in $50,000 of your own investment capital. Then, you would be more justified in complaining about the money.

Re:IMHO

[Atomm]

I applied for one of those jobs in Dallas. I received a telepone interview, then an in person interview. Having been a technical manager for a national ISP, I have been on the other side of the interviewing fence. So, I expect a certain level of organization and professionalism from those handling the interview process.

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 them if they had offered to double my current salary.

Funny thing, I keep getting emails from multiple recruiters looking for Network Engineers to work for a Global Finance Company based in Dallas. Sounds like they are having some problems with staffing.

Tell your brother he was better off.... ;-)

Re:IMHO

[Chazmyrr]

Citigroup on the whole is a great place to work. Certain parts of Citigroup are not. IT tends to be one of those parts. The manager already knew who he wanted to hire and was only interviewing other people to avoid complaints.

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 the third-party carry over? Sure, it'd be nice, but is it reasonable to expect it?

I got a fair salary...

[(H)elix1]

I got a fair salary

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

[DeadPrez]

As a first employee with a "good" vesting schedule, shouldn't you have turned a profit on the buyout?

Re:I don't understand

[AKAImBatman]

As a first employee with a "good" vesting schedule, shouldn't you have turned a profit on the buyout?

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

[Jason1729]

That's not what pro bono means.

Re:I don't understand

[Anonymous Coward]

"That's not what pro bono means."

He never claimed it was the definition of it, you tard.

Re:I don't understand

[Anonymous Coward]

Are you sure he was getting options? The automatic assumption that first people in get options is no longer true in a vast majority of cases. Too many people had their options turn to toilet paper, or watched some lazy schmoe vest his and then slack off.

Re:I don't understand

[lith123]

Vesting means that over time he has the option to either 1 buy stock, or 2 is given as "time served" if you will.

Re:I don't understand

[Jason1729]

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 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.

Working for a startup is speculation

[PornMaster]

Just like investing in a gold mine in Venezuela (see NYSE:KRY), in a startup, some Hugo Chavez type can make it all go away in a blink. High reward if it works out, high risk if it doesn't.

Obvious?

[rueger]

Don't be an employee, be a partner. Should have bought a chunk of the company.

Re:Obvious?

[timeOday]

Isn't that what his stock options were supposed to be - a chunk of the company?

Re:Obvious?

[kasparov]

Options are only that--options to purchase a chunk of the company at a particular price. If you exercise that option to buy a chunk of the company when the stock price is higher than your option price, you make money. All kinds of restrictions can be placed upon those options as well, including a vesting schedule. Chances are that if he didn't exercise his options within a certain time frame after he ceased being an employee, he lost them. As the first employee at a startup, I would have asked for stock in the company instead of options. Once you own stock, it is yours.

Re:Obvious?

[wfeick]

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 friend. If they decide you're no longer pulling your weight, they can issue more to those who are and you again are diluted. Whenever there is a refinancing round, existing shares are diluted and those employees who are still with the company and still considered valuable are granted new shares (with a new vesting schedule) to partially undilute them. If a refinancing happens after you've left a private company, expect to get diluted.

VCs typically don't screw the employees by grabbing everything for themselves, but from what I've gathered from working in a variety of startups over the years they have the legal right to (IANAL, YMMV, yada, yada). It's bad for their rep if they screw employees over too badly, but they like to make sure they're in control if they're putting their money into the game.

1099 and reverse-options

[Spazmania]

First, as others have suggested, tell them what a fair market salary and benefits package is and assume the options will be worth $0.

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

[ivan256]

That way, you're unemployed.

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't 1 in 100 million, and that you, I, or anybody else reading this aren't either.

You can come up with all sorts of clever contracts to 'protect' yourself from this kind of thing. Either they'll work, which means you'll never get that contract, or they won't, and you'll be in the same boat you were in without it.

Re:1099 and reverse-options

[bill_mcgonigle]

Either they'll work, which means you'll never get that contract, or they won't, and you'll be in the same boat you were in without it.

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 of folks he was dealing with.

Re:1099 and reverse-options

[ivan256]

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 of folks he was dealing with.


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 finance rounds so that the pool of shares doesn't grow when the company raises money, or to ask for more shares. The people hiring you get diluted when the company raises money too, and it's totally unreasonable for you to expect a better deal than they got.

Startups are a risk. You can't contract your way into a sure thing.

Re:1099 and reverse-options

[Anonymous Coward]

If he'd said all that they just would've hired someone else.

Sounds like they needed a work for hire and this guy took them up on it and wishes he hadn't. There's no indication that any other deal was ever on the table. Why would there have been? They needed engineering talent - a commodity.

1. Prototype system
2. Get investment
3. Hire lackeys to do dull engineering work
4. ???
5. Profit

It's a classic business model. If you come in at step 3, you're a blue-collar lackey.

I guess your plan might work if the company was officed in North Alaska and there were only 2 suitable engineers within a 100-mile drive and one of them was in an asylum or something.

If you want to work the exciting startup thing, don't get stuck reimplementing someone else's system. There's no money in that, there never has been, and there never will be.

Re:1099 and reverse-options

[bill_mcgonigle]

I guess it's a matter of how it's sold. Often the recruiters lure folks in promising them some tiny percentage of the company in equity which sounds like a good deal to them because they don't understand that percentage is going to plummet. I've seen plenty of guys get their shares subsequently revalued to the point where they get a couple thousand bucks after working there with three or five years worth of vested shares, sometimes going in with whole number ownership stakes. Not to say every company intends to screw the employees, but some do. I hear Google did well by their folks, maybe because the founders wanted to maintain their fixed interest.

As far as the lawyers go, if I were looking to hire a guy for $100K per year and he wanted a small change in his option plan I'd pony up the $2K for lawyer fees to get it done. Also, there are usually at least two option plans already on the table, one for leaf node employees and one for people with fancy titles.

Re:1099 and reverse-options

[Spazmania]

If he'd said all that they just would've hired someone else.

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 while. By the time you sit in the interview the founders will have figured this out and are willing to negotiate.

3. Will work for well under the going wage. At this stage of a startup, the founders are taking out perhaps a third of what they would be able to get in a salaried job. If they're lucky it pays the mortgage and utilities. Unless they're particularly well funded (and few startups are) the founders will have to cut their own salaries even further in order to make that first hire.

Its incredibly galling to take a paycut so you can hire someone at a salary you won't claw your way back to for a couple years. The founders don't want to do it, so they look for prospective employees who will accept a basement salary in exchange for buying in to the company itself.

Their offer is invariably stock options. They can't simply give an untested guy stock; it wouldn't be fair to them. But options are reasonable from their perspective. There is no down-side risk and the employee gets a nice payday if the company survives.

Unfortunately this offers the employee has no protection whatsoever from the downside risk and no say in how the company is run in order to avoid that downside risk. He's not going to get a say in how the company is run, but he can negotiate in order to mitigate his downside risk. And if its at all possible they'll say yes because nine times out of ten he's the only prospective employee who met all three of their criteria.

From the poster's description, he met all three criteria. That's why they hired him. The problem is, he took their offer instead of making his own deal. It gave him zero protection from the downside risk.

Re:1099 and reverse-options

[vidarh]

True, but getting protection against dilution is a non-starter in part because it will make it impossible for the company to get funding. No investor is going to be willing to buy into a company where some employees won't get diluted while they do get diluted, because any chunk of the shares that are "protected" that way will mean they will take a larger chunk of the dilution.

Instead, you should account for it when you negotiate. Assume the shares will be diluted around 60%-80% (i.e. the original shares make up between 20% and 40% in the end) before an IPO or reasonably priced aquisition and you should be reasonably protected.

Re:1099 and reverse-options

[bill_mcgonigle]

I agree, that's a good strategy for working at an honest company. The trouble is you don't always know up front if that's where you are. I've seen the 'worker' class of shares reduced to less than one percent while the VP's class wound up more like at the 20-40% range you mention. No ethical board would do such a thing, but being such isn't one of the rules.

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, the risk adverse can always work for money.

Fair

[JanneM]

First, like others have pointed out, forget stock options or other perks. Don't plan your economic future around them - they are a lottery ticket, nothing more. Your salary is where it's at.

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

[timeOday]

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.

If working for a startup only pays a normal salary, why would anybody work for one instead of a more stable company? Options are supposed to make up for the added risk of unemployment.

Re:Fair

[JanneM]

If working for a startup only pays a normal salary, why would anybody work for one instead of a more stable company? Options are supposed to make up for the added risk of unemployment.

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 enterprise grows.

On the other hand, of course, you have the lack of security; long hours; greater risk of interpersonal conflicts; (megalo)maniacal owners that insist on detailed control long after the organization has grown beyond their ability to do so.

It's all in what you value most.

Re:Fair

[Anonymous Coward]

(megalo)maniacal owners that insist on detailed control long after the organization has grown beyond their ability to do so.

I joined a 15-year-old tech company. These kind of owners are not limited to startups. I'd say any company where the CEO/Owner sees most of the employees every day can suffer from this kind of owner.

Re:Fair

[JanneM]

These kind of owners are not limited to startups.

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 with for so long. It's their little baby, and relinquishing control must be extremely difficult.

Re:Fair

[The Vulture]

Hear, hear!

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 and little bureaucracy - it only takes one or two to spoil things. But because the rest of us are so close, we've come up with ways to deal with that. :) Also, long hours are only an issue if you let them be, and the lack of security is roughly the same at almost any type of job.

-- Joe

you expected too much

[dfjghsk]

You expected way too much. You were hired as an employee. You didn't put any money into the company, and you were paid for the work you did.

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

[davebo]

Help me take back Slashdot. When did 'News for Nerds' become 'FUD and Conspiracy Theories for Extremist Nutjobs'?

Way before you showed up, newbie.

Re:you expected too much

[Scudsucker]

There are more kinds of investments than just money. If the guy's story is right, they had maxed out their own tech experience, and he ended up making a lot of high level infrastructure/planning decisions. So yes he invested in the company - he invested his talent and expereience, and possibly saved their bacon. It sounds like either he didn't have a good contract to start out with, or should have renegociated when he started assuming more responsibility.

Re:you expected too much

[dnnrly]

He did invest his talent, but he never invested in any of the risk. It's easy to put effort into an enterprise, doing the work etc. but until you decide to share in the risk then you don't have very much to negotiate with.

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 investor, invested in the risk of a startup and taken some of the heat of the others then he would have been rewarded appropriately.

Re:you expected too much

[dfjghsk]

every person who goes to work at a company invests their time and talent. In exchange they are given a salary. If that counts as investing then every employee and independent contracter in America deserves a piece of the companies they have worked at.

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 sell everything they have to pay it.

Unlike the poster, the investors had no guarantee of getting paid. They could have worked for years, saw the company go under, lost everything they had, and yet the post would have still been paid his salary.

These were active investors.. they invested not only their money, but their time and experience and talent in the company. And when their talent wasn't good enough, they hired someone to help them. That is all that happened, nothing more. It's unreasonable for him to expect to benefit from someone elses risk.

Re:you expected too much

[dfjghsk]

my other id is 200-something thousand.. not as low as yours, but I didn't sign up yesterday either.

Re:you expected too much

[salec]

He did invest his talent, but he never invested in any of the risk. It's easy to put effort into an enterprise, doing the work etc. but until you decide to share in the risk then you don't have very much to negotiate with.

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 today's talent and effort, if not up front completely compensated can be considered an investment put to risk, too. Now, original poster obviously had some implied expectations, which were not upheld by any contractual instrument, that he will be rewarded more for his effort later on. Obviously, it was not realistic and so it didn't happen. Now, as present, post festum situation is all clear and obvious (to person submitting the question too), let's get back to the original question: what should had Woody Woodpecker done in the first place to avoid feeling crossed? I see three options:

• lower the expectations, hold back enthusiasm and be cool. He may get fired early but what the heck, why break your back with extra, heroic work for offered average Joe's salary. Don't work with your heart or you'll end up with heart condition.
• show awareness of the situation (if you're sure you've got it) and entrepreneurial spirit and negotiate for more, over the job-market price (higher salary or other compensation). Now, this calls for a change of sides for the moment to have a look from employers' angle: First, the job success is critical and most important thing for the investor. If he has poker players' nerves of steel, he may try to be cheap and try to get extra effort from "young, self-motivated person willing to advance career" (a sucker) with vague-hints-of-would-be-promises, like what actually happened to our friend here. Now, this weasel approach may and probably will work, unless there is a narrow closing window of opportunity for success of the business and adequate help haven't been acquired so far. If so, IF employer decided that it would not kill the deal to spend some more on key personnel salary, THEN there is a small matter of *guarantee* from employee to employer that extra money will be well-spent instead of just thrown away into pockets of lazy greedy slacking son of a... In other words, employee has to share burden of risk with employer so that employer would know that employee's work is worth some extra money (or whatever goodies like options, etc.). This line of reasoning naturally leads to putting cards on the table face up and seeing what each side has to offer: how much can employer share with employee and in exchange for what? What an employee can possibly and realistically promise to do "extra" that would affect the success of upstart business, which can not be purchased from another one ? What is employer planning? Perhaps everything can be OK, deadlines met even with regular (regular price/average employee) work? If, so and if You, like most of us, don't have more then one "gear" of work, then it is not a position for You and it is good to know it in advance, before too much work is sold for too little money.
• Unethical (but hey, they WILL be unethical to YOU whenever they can get out with it) and perhaps illegal (depending on how hard you enforce it) one: if they haven't got a clue about your job, then make yourself indispensable by obscuring critical details of your work, "plan for obsolescence" in regular periods everything you do so that you know they will have to come to you again. However, that will not work if they sell the business to other company, unsuspecting of time bombs. They will laugh to both of you all the way to the bank.

Re:you expected too much

[Gulthek]

Help me take back Slashdot. When did 'News for Nerds' become 'FUD and Conspiracy Theories for Extremist Nutjobs'?

Before user accounts were even available. I posted as an AC for quite a while before registering because I thought that it was weird to access a news site with a username and password.

Re:you expected too much

[yawgnol]

I have to agree in principle with this...

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 had enough input into how well we'd do... and besides that, I was young and had nothing to lose.

The next person we hired we liked so much we made her the same offer. She turned us down thank you very much, and decided she'd rather draw a reliable salary. That reliable salary turned out to be MY reliable salary for a few months which I had to hand over to her because we weren't making enough money. In the end we both felt half-screwed with our choices. But we accepted the difference in pay-off as a result of our risk and both of us felt ok with our choices.

We held on, and my work was good enough to finally hire some REAL employees who were a lot better than myself. They all got stock, but in the end it's no surprise that their stock turned out to be mostly worthless. So all the employees felt shafted when we got bought out.

The funny thing is... ALL THE PARTNERS FELT SHAFTED TOO! I swear EVERYONE except for the investors and a few people who really knew what they were doing (not the original partners) felt they got hosed. It is very hard not to feel bad when people sitting right next to you become millionaires, and you become a hundred-thousandaire even though you KNOW you worked harder. But still, when you think about it, it's more than you THOUGHT you'd make.

If you've read through all of this, you deserve to hear the magic information from one who knows... First, you probably will get screwed if there is a payoff and there probably won't be one. So enjoy the foozball and the work and your friends and don't sweat it too much. Start-ups are only about big pay-offs for the partners and investors, and mostly just for the investors, and only then maybe once in ten times (companies/investments).

But if you really think you've got something and if you want a big payoff from a start-up, and you don't understand the legal mumbo-j (and you don't) get a lawyer. Pay money to get a decent offer together.

However, the chances are your lawyer won't know %&* either. This sounds wrong, but it is true. They know more than you, but not as much as you think they do and not as much as the lawyers who are getting ready to screw you in the future... So to double check, or if you just don't have the cash for a lawyer upfront... (magic information coming)

ASK FOR THE SAME STOCK/DEAL AS THE INVESTORS GET.

If they tell you that the investors get "pink fluff elephant stock", ask for pink fluff elephant stock. DEMAND pink fluff elephant stock. You'll know you're on the right track if they flat out refuse you... If they tell you that would be impossible ,and probably illegal, then you've got it. If you want the big payoff, keep giving up stuff until you get it. Say you'll give up 20% of your salary and BUY "p.f.e.s." with cash. Say you'll work for free. Say what ever you have to, but unless you're getting the same deal as the investors (not the partners) you are going to get logarithmically less with each drop down the ladder. It is a power curve...

The chain is like: INVESTORS(VC), INVESTORS(Angel), FOUNDERS, PARTNERS, EMPLOYEES(executive), EMPLOYEES(smart/early), EMPLOYEES(long-stay), EMPLOYEES(new), Freelance/Temp.

Also, whatever you do, don't base your future on posts you read off of Slashdot. Do your own research ;)

And in case you were wondering, no one ended up hating me to my face, I didn't become a millionaire (maybe on paper for a while), and I would do it again, but totally differently (that's experience).

LWH

Re:you expected too much

[Anonymous Coward]

my other id is 200-something thousand

Right. And you are 6'3", your wife is a bikini model, and you make $400,000 a year.

Re:you expected too much

[vidarh]

Bullshit. If you go into a startup as the first paid employee in a reasonably high responsibility situation (such as taking the app from a prototype to functioning system) and don't get options for at least a couple of percent of the company with a decent vesting schedule, you're being shafted.

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 stake.

And no, I'm not talking out of my ass. I'm talking based on experience from multiple tech startups, both as founder (and yes, I've put my cash in too to get a company off the ground) and early stage employee. The lowest amount of shares or options I've taken when joining a company with less than 5 employees (which means most of the companies I've worked in) was 4%. In that case it was 4% straight equity with no vesting (yes, some people are that crazy)

Get a contract with and escape clause

[natmsincome.com]

Hi,

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 the end and get both of you to sign the contract it would be better to get a lawyer to write it up.

After being involved in two startup companies the most important thing to learn about is the escape clauses. If things go badly or one party wants to rip the other party off how can you terminate the agreement? Always have escape clauses.

'Bought out' == Rescued from Creditors

[siberian]

As we all know from out dotcom 1.0 days a 'post layoff buyout' is basically getting rescued from creditors and being able to sleep at night, secure that they won't come to steal your furniture.

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 the price of the debt.

Yup, it sucks, but keep taking chances and remember, never trade $$$ for options unless there are 2nd level investors lined up. Besides, they always give more options... This has worked well for me and if they really need you they'll do both.

Golden handcuffs help as well.

Get ahold of new company and see about a job!

[ejoe_mac]

So, since you know so much about the technology purchased, how it was implemented, and who was involved - drop by! Once you show them your role, you're in the best possible place to argue for and recieve cash and stock in the new company. I know it sucks, but some times it'll all work out in the end.

Ask for partial payment in stock

[Anonymous Coward]

You could argue that since you're one of the first employees, they should offer you some amount of stock (not options, but actual stock). Just have them calculate the amount of stock they would have to give you in order for you to own some small percentage of the company (e.g. 5%), and then divide that amount by the number of paychecks in the first 6 months.

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 later make out like bandits, at least you'll get 5% of whatever they get. If they fire you before the first 6 months are up, then you'll leave with less stock, but you won't have lost as much time, either.

Love Your Work

[techsoldaten]

I happen to be one of those people who owns a startup. My company doesn't have the money to pay phenonmenal salaries, but we make sure people are taken care of. The best advice I have for anyone coming into a situation: love what you do and make sure your work is meaningful.

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 really to find ways to mitigate your risk, you can look at the management, the people you are going to work with, the product, the business model, etc. If these are all good, you have taken care of 90% of the risk already.

But the one thing that most directly affects whether or not you are going to see a return for all your efforts is whether or not you care about what you are doing. I can't say it enough, I have had people work for me who want to check out at the end of the day, and I have had people work for me who call at 3am for help on a problem. The fact is, both of these individuals bring expertise and competence with them that allows the company to operate, but the concentration of value in the latter is what allows us to expand and improves our reputation in the business community (clients can see it). If I didn't have people working for me who really care about what we do, we would be far behind where we are now.

M

Re:Love Your Work

[jsailor]

Out of curiosity, how do you compensate the two individuals? Or more specifically how is the disparity in work effort reflected in their compensation. As some have pointed out, you 9-to-5'er is doing his job and earning his salary. However, your dedicated employee is far exceeded the job requirements. We have struggled with this issue for a long time.

Re:Love Your Work

[SomeGuyFromCA]

well, obviously, the 9-to-5er is not effective in his current job, so we'll move him into another position, perhaps a minor supervisory position where he can use his knowledge to oversee a small group of people doing what he used to do. if he does well there, he can always move it up...

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 allow it...

Re:Love Your Work

[Knara]

You're promoting the guy who isn't as dedicated to the company and as committed to his job, over the guy who excels in both of those categories. Seriously, do you think that's the sensible thing to do?

This presumes of course that the dedicated employee even wants a promotion.

Re:Love Your Work

[Anonymous Coward]

Speaking as the one who emails at 3 am while working on a problem, i can tell you that while it's great for people to love their job, it just isn't enough. two reasons:

1) health. that employee who's never getting enough sleep, exercise, or food is going to crash. it may take 6 months, it may take 2 years... but it's going to happen eventually. your employee's love for his/her company is going to wither under that sort of pressure, no matter how nice you are.

2) when your company inevitably moves out of the 'startup' phase where you dont care if that employee is wearing jeans and tshirts all the time, and you start enforcing more 'business'-like policies, your employee's going to feel betrayed. why? because you're not paying him/her a whole lot. this employee probably joined your company for the benefits that come with being a startup: wearing tshirts all the time, working from home when needed, etc. your employee's pay probably doesn't change the day you start to take away the small perks. so you just turned a really cool 'love your job' sort of atmosphere to a corporate grind. your employee starts to wonder if you're thinking about him/her anymore.

sure, the 'love your job' thing is great for a while, but between the two problems above, you're just setting yourself up for a tired, grouchy, embittered employee who's wondering when you're going to start giving more than lip service for all of their hard work. hence the original question.

get a lawyer

[DudeBroccoli]

It sounds like you feel that the proffered reason for termination, that they were out of money, was pretextual. This implies that the actual reason was that they didn't want to let you collect on your options. Don't assume you have to just chalk this up to experience, live and learn. The law often provides protection for this type of situation. Likewise, don't assume that the term "at will employment", that gets bandied about, universally applies and precludes fair treatment. From a cursory search, stock options create an implied covenant of good faith and fair dealing.
So, my advice is, if the potential money involved is significant, get a lawyer, and let them decide if you have a case.

Rule of Acquisition #211

[eclectro]

Employees are the rungs on the ladder to success. Don't hesitate to step on them.

Its in the employment letter...

[mnmn]

exactly what you are supposed to do and to what extent.

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

[Javaman59]

I've personally made the mistake of accepting a job at a startup where I traded some salary for non-binding verbal assurances about future benefits. In some ways it was a similar position to yours - I was to build the company's software capability, and in return I would their CTO. In fact, all they really wanted me to do was fulfill a specific contract, which didn't interest me much, and which I wouldn't have taken if it weren't for the promise that I could "grow with the company". Later I was sacked, although the firm was doing quite well, but just didn't need me any more.

I have heard of similar things happening to others at startups.

The times that I've been employed by large companies I have found them to better at sticking to whatever deal was offered initially.

Perhaps this happens because startups know that in general they are not as attractive to job-seekers as large firms are. They can't offer more money, so they offer more talk.

What to do about it? My advice would be to only trust verbal assurance from people that you've known and trusted for a long time. For anyone else be cautious, and think about what they really want from you, rather than what they are saying. Or else just charge a surchage to work for a startup.

Immediate Vest

[khyron4eva]

The answer to the question is you write it into the contract that you vest immediately in case of termination, whether for cause (your screw-up) or not (they fire you). 100% vesting upon termination of employment for any reason is very popular with most of the tech execs I know. You probably should have taken a higher salary too though. Or better yet, instead of options (which need to vest to be usable), you should have negotiated a small piece of equity, even 0.5%. As employee #1, you could have negotiated founder's equity had you played your cards right. Or even a package deal - salary for the base work with a small piece of equity on the side, and some options as a sweetener.

Re:Immediate Vest

[Anonymous Coward]

I've never heard of an immediate vest on termination (and I'm a tech exec on my fourth startup). Why on earth would any company sign up for that? Are you sure you aren't confusing it with an immediate vest on acquisition?

Even if he had negotiated for equity instead of options (the difference is minor) - he left in six months, and nobody in their right mind is going to vest equity, options or anything in such a short time period.

Re:Immediate Vest

[khyron4eva]

I never said it was common, but I have heard of it. IIRC, the CEO of the storage startup I worked for a few years ago had this type of arrangement. As to your second point, believe what you want. But I've seen some creative compensation in my time in this industry. I would imagine you've seen even more than me, so I don't understand the incredulity. And as for the difference, maybe it is minor to you, but it appears to be rather significant to me. A definite ownership stake (equity) vs. the right to obtain an ownership stake (options). These are hardly identical.

Re:Immediate Vest

[vidarh]

Even if he had negotiated for equity instead of options (the difference is minor)

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 price the investors got...).

Secondly there's the issue of taxation. In the UK for example something called taper relief means that any shares you get outright will be taxes as income at the value they had when you got them + 10% of any capital gains from selling them if you keep them at least 4 or 5 years (don't remember the exact limit). Compare that to options, which are taxed as income based on exercise price minus strike price, meaning that not only do you only get the gain from any increase over the strike price, but if you're a well paid tech exec you're likely in the 40% tax bracket and pay 40% of any gains.

- he left in six months, and nobody in their right mind is going to vest equity, options or anything in such a short time period.

Yes they will. I've vested on a monthly schedule since month one at my current company. It's not common, but it certainly does happen if you get in early enough and are considered valuable and trustworthy enough by the founders, or if they need you badly enough. I'm not vain enough to think that I'm unique in having gotten a deal like that... In my case I made it very clear that I preferred options to cash until I joined full time, which of course made a difference.

Note, of course, that you are right that nobody in their right mind is going to vest the entire promised grant in that short time period, unless you are brought in for a specific, limited task and the grant was set accordingly. More likely you'd get a grant that fully vests over 3 or 4 years. But negotiating away any cliff at the start, and getting the vesting periods down to a month shouldn't be too hard if you're worth it.

Negotiating various events that will accelerate vesting (such as vesting a chunk instantly on completion of a beta on schedule for example) is also something that shouldn't be a problem as long as you're not grabbing for far more than your work is worth.

Re:Immediate Vest

[Anonymous Coward]

I've heard of executives having accelerated vesting and similar terms, primarily related to acquisitions. It is pretty rare for engineers to get this sort of package, mainly because the acquirer wants the dev team to stick around.

Accelerated vesting on termination doesn't make much sense for the employer, because it is potentially rewarding the employee for bad behavior i.e. an engineer is terminated for not showing up to work for two weeks and because of that, he is granted all of his options? I can't see a board justifying those sort of employment terms.

Where do you live?

[Anonymous Coward]

If you are in California, you may have legal options against your former company. If you are here, contact your local Labor Board (Department of Industrial Relations). They will be able to figure out if you have legal options against them and if so, give you an inexpensive arena for nailing them.

Get Equity.

[mophab]

Options are worthless if they never vest. You should insist on something that gets you actual stock as you go. Monthly vesting, up-front stock grants, maybe with the stock in escrow. Then they can not sell off the assets without notifying you as a shareholder.

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 approach is that you will be paying for stock (either in cash or tax liabilities) in advance when the stock may end up being worthless.

There's Always Plan B...

[Doomedsnowball]

If you want to protect yourself from ungrateful, uncaring employers... there's just one word: rootkit.

Re:There's Always Plan B...

[Da w00t]

If you want to protect yourself from installing a root kit, there's just two words: anal rape. You'll be bestest friends with Brian the BeefCake at the county jail for installing a rootkit on your company's servers.

Re:There's Always Plan B...

[Doomedsnowball]

I do see your point, though some of us old hacks are a bit crafty and 'create' our rootkit out of a collection of undocumented and not-so-well-known bugs, carefully --even artfully-- scattered throughout the code. Of course, if you're this good, you're not getting into bed with shady investors/employers. Offtopic: Love your website. Better luck with the firework photos next time.

That's what a Startup is.

[Zadaz]

You say you got a "Fair" salary, but clearly you didn't because you feel screwed. You should have asked for more up front.

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

[sciencecneisc]

you need authority not promises. if there's someone who can fire you and ruin you then you're already fired and ruined. you need power over people in your work place. you need to not give a shit what they do or think because in the end you're in control and only you can mess up your career. allow yourself to risk their jobs? that's what they're doing to you by making you have no job security. just like in dating, unless you are both virgins in your first true love relationship then be brutal. you both will screw each other harshly at your first opportunity because that's what we are designed to do. don't get caught in a fantasy of your own. it's just you who believes you're safe and secure in your job. just you.

You took the wrong class (of equity)

[hirschma]

Most people believe that equity is equity. It isn't.

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 .1% of the company. You still have the same number of SHARES as spelled out in your agreement, but they're now effectively valueless.

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)

[yawgnol]

Yeah, what hirschma said...

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)

[GWBasic]

My opinion about employee stock with startups is very simple: In exchange for putting up with the startup environment, the company gives me lottery tickets!

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.

Mortgages, vesting, key players, and headcount

[kninja]

I agree with you mostly, except for one thing: This is the second comment about "invest by mortgaging your house",so I need to set the record straight. You can't just take money and put it in a company (if the company was cash strapped and short of investors, perhaps, but this was not the case). There are few things worse than having an immature/nervous/difficult-to-deal-with investor on board, and so it is often INVITATION ONLY.

No investor/founder worth their salt is going to let just anyone invest in their company, particularly some software developer with no business or investment experience (the poster). They are going to seek investors who have experience and can open doors for them with customers, just by making 2 phone calls. If this guys was as key as he said (he probably wasn't), maybe he should have been allowed to buy a few percent, but I doubt that would have required a mortgage.

The poster options hadn't vested (obviously his vesting deal wasn't good enough), and the owners were dropping the headcount (it's a balance sheet figure) so they could get a better deal when acquired. If the poster was as key as he made himself out to me, then the company that acquired the startup was screwed over - this happens all the time.

Re:Mortgages, vesting, key players, and headcount

[dfjghsk]

Good points. I own a small business myself, and employ a few people. Investments in small businesses are, almost exclusively, invitation only.

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.

What century do you live in?

[SlappyBastard]

Sorry, but in all seriousness, this is a mentality the average worker hasn't displayed in 30 years.

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 letting you go -- they assumed the risks, you took a steady paycheck.

When I started my business, I offered a friend of mine who does graphics work for me the chance to get in on the ground level. He took a pass, and instead took pay. Now he bitches that he doesn't have a say in things.

Guess what? Tough shit.

That paycheck is a huge thing for a startup to fork over. It is money that could have been saved and risk that could have been transfered.

Surprise. Risk and reward are tight.

You skipped risk. Now rewards skip you.

Wanna protect yourself next time? Take a bigger risk and demand a bigger stake. No paycheck -- get the chunk of the business you feel your work constitutes.

Re:What century do you live in?

[vidarh]

As 1/4 of the business at the time, you should have demanded at least 1/4 of the business.

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?

[SlappyBastard]

If that's the case, then I'd offer the company doesn't value you enough to make joining a startup worth the effort.

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, be very wary of participating in a start-up that may require a great deal of your time.

Options / Equity

[rlholgate]

Lot of focus on early option vesting here. But options have a strike price, and even vested options are worthless if they're out of the money. If you want a share in the company (and the subsequent sale of the company) then you need to own a piece - i.e. you need equity. So either buy into equity as an investor, or earn-in by receiving shares as remuneration. Equity by itself is risky, options (as remuneration) are speculative devices.

F8

[tverbeek]

Press [F8] and startup in Safe Mode.

eCharge in Seattle

[WED Fan]

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

[shodson]

Markets rewards those who take risks. The founders took the risk of starting a company that may make $0 and putting their own money into it. You took a job. They get the rewards.

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 but he made out quite nicely even after being there only a few months.

Bankruptcy

[hackwrench]

But the whole point of filing for bankruptcy is the inability to cover all debts. Bankruptcy is a replacement for Debtor's prison.

investor / consulting

[kb1ikn]

I've been in a similar situation. It's all about risk assessment (time and money). Do you take the risk to leave your previous job, solid salary, and the paycheck that will be coming in two weeks? Or do you venture outside the bubble and try to make a prototype into a final product?

I would base my involvement on my financial ability to take risks.

Depending on what level of involvement you would be doing for this project, would indicate your salary. Partnership Agreements can be a legal mess, but it can work out to your advantage. If you were looking to gain money on the project, don't become an employee. Employees get paid a basic yearly salary without the promise of a raise. Consultants make more money, but never know when they next pay day will be. Being a partner or leaving with a patent of a certain technology, you can walk away with more then just added zeros.

What goes around, comes around...

[1iar_parad0x]

Do they "owe" him anything? No. Should they give him a fat bonus? Yes. No one wants a job for 6 months. Especially if you have to put your blood, sweat, and tears into it. Wait till these idiots try to hire some talented staff the next time around. Anybody who knows better won't touch them with a ten foot poll. Why do you think consultants charge start-up companies hefty fees? They know whats going down.

My advice is that you use this experience to your advantage. Next time an offer like this comes around, mention this job. Hopefully, the owners aren't such dicks that they'd give you a bad reference. References are cheap and he deserves a good one. Any business person with half a brain knows that experience like this is golden. Also, any business person knows you keep truly talented people around. Ever notice that top executives work in clusters. A CEO hires people he trusts. He hires people he knows. You reward people for their good work. You should try working as a contractor next time. Charge a fair hourly rate. Try to get some options in company. Heck, make them give you an inflated title. Use that to get your next job. Heck, go get a MBA and put together your own business plan. You've got useful experience. It will help you get into business school and get investors.

Look, it does suck. If nothing else, I feel for the guy. He did a good job, and now he's unemployed.

Re:What goes around, comes around...

[ACPosterChild]

I have a sneaking suspicion that this *was* "the next time around". Otherwise, how do 3 investors end up with a decent prototype product that they know nothing about? Somebody had to do the initial work...

Re:What goes around, comes around...

[putaro]

Oh, that's easy. They hired some contractors when they had a little angel funding and then shopped the prototype around for a while to get some more funding. Startups don't just happen overnight. Typically you'll see years of low-level activity before they receive enough funding to really start moving.

Some clarity

[pHaze]

There are two distinct roles you need to be aware of. An employee and an investor. An employee does the job, gets paid a salary and bears no risk. The only risk is that the company might go away and you will have to go be an employee somewhere else. Then there's an investor. As an investor you bear the risk of losing your investment which may mean losing your home if you've morgaged it to raise funding.

You can choose to be both by agreeing with your employer to take part of your salary and use it to purchase stock in the company you work for.

Stock options confuse the issue. Employers use options to give employees the illusion that they too are somehow investors and have a similar interest to founders and those who have purchased stock. Options are only worth something in the distant future when the company IPO's and even then their value is only the difference between the strike price and whatever the stock is being traded at.

With options you have no voting rights, no say in the day to day operations of the company, no right to see financial reports and in fact you don't even have the options until your vesting schedule says you have them.

Sure some employees have gotten rich from their options, but they are few and far between.

My advice:

1. Negotiate your salary without taking options into consideration because, lets face it, they're a long shot. Negotiate a salary that is appropriate for the level of risk/instability you feel you're exposed to.

2. Never confuse being an investor with holding a vesting schedule.

3. If you do want to be an investor, then negotiate a work-for-stock program with your boss and accept that you're risking a large part of your salary to invest in this company.

I'm a CEO who sold my first startup last year. I'm also a geek. I'm not at all a fan of options and often see them abused by CEO's managing employee perceptions.

Regards,

Mark M.

Get your own company.

[Anonymous Coward]

It's a capitalistic society. Those with capital (the owners of the company) enjoy the benefits. Of any profits, they'll be the first to get their hands on it, you just get your salary. That's just how it goes. If you want to be the person to get your hands on the profits first, then you need to be the owner of the company.

steve

Sorry dude, but . . .

[paulevans]

You didn't invest in the company, you offered a service to them in exchange for monetary payment. You didn't dump hundreds of thousands into this company. Those people took a risk, you didn't. You were going to get a paycheck if the company floped or exploded. Taking risks is what investing is all about, that is what makes money. don't whine about not getting a piece of the pie when you decided to play it safe. Next time? If you believe in the product and/or service, heavily invest in it.