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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."
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).
You could've hired me.
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.
Talked to the new owners about a job yet?
One line blog. I hear that they're called Twitters now.
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.
Infiltrated dot Net
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...
+++ UGUCAUCGUAUUUCU
Don't be an employee, be a partner. Should have bought a chunk of the company.
Three Squirrels
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.
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.
Trust the Computer. The Computer is your friend.
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.
Help me take back Slashdot. When did 'News for Nerds' become 'FUD and Conspiracy Theories for Extremist Nutjobs'?
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.
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.
Employees are the rungs on the ladder to success. Don't hesitate to step on them.
Take the cheese to sickbay, the doctor should see it as soon as possible - B'Elanna Torres, "Learning Curve"
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.
If you want to protect yourself from ungrateful, uncaring employers... there's just one word: rootkit.
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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.
Most people believe that equity is equity. It isn't.
.1% of the company. You still have the same number of SHARES as spelled out in your agreement, but they're now effectively valueless.
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
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.
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.
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....
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.