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.

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.

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

[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.

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.