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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
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.
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"
If you want to protect yourself from ungrateful, uncaring employers... there's just one word: rootkit.
7h3$3 4r3n'7 7h3 Ðr01Ð$ ¥0 4r3 £00|{1n9 f0r. M0v3 4£0n9. --OB1
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.