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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."
Sucks twice.
In the end, that's their right. At-will employment, and all that. However, it chafes me to get screwed like that."
Talked to the new owners about a job yet?
One line blog. I hear that they're called Twitters now.
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.
Javascript + Nintendo DSi = DSiCade
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.
Moderating "-1, Disagree" is simple censorship. Have the guts to post your opinion.
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.
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.
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.
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.
I'm a software visionary. I don't code.
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.
Hear, hear!
:) 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.
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.
-- Joe
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.
I scream. You scream. I assume that means we're both acquainted with the problem. We proceed.
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.
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.
What do you mean my sig is repetitive? What do you mean my sig is repetitive? What do you mean....