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

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....

[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....

[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.

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.

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...

Obvious?

[rueger]

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

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

[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.

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

[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

[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.

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.

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.