How can early employees defend themselves? What stock structures, if any, fight against this? Is there nothing possible common stock holders can do to protect themselves aside from pray the founders have some shred of morality?
Well, actually, (c) the founders have lost their controlling interest and are being strong-armed by early investors, but early investors' preferred share privileges are usually not very helpful by this point.
I disagree. The founders definitely have an important stake in the outcome but they stand to get very wealthy if it works out and early employees will - in most cases - make back a premium on the lower wages they took because of stock options (which you should never do) and the extra hours they put in to make the company a success.
Note that simply because of the asymmetry between the potential pay-out the goals are not aligned.
Superficially, yes, they are aligned because if the founders get nothing the employees will also get nothing but employee options are not the same as vested founder shares and employees could easily be 'under water' based on the value of their options being lower than the amount of money they left on the table by choosing this particular employer rather than a more established one.
So for founders the incentive to gamble is much higher (all-or-nothing), in fact I'd argue their goals are roughly the same as early (seed round) investors rather than early employees, once they decide to take on venture capital. The pressure will be on to go home-run-or-bust.
Note that the deal outlined above is exactly one of those. Conservative founders running a profitable business would not gamble like this, but since it doesn't matter any more the only way they will get anything out of this is the home-run and what's good for the employees is no longer relevant to the management that inked this deal (for employees it might actually be better to jump ship at this stage because the 'bust' scenario is a lot more likely with this much pressure than without).
"Bust" is the most likely outcome when you sign up to work for a startup, so unless their goals/wants have changed I don't see why they'd want to jump ship now.
Employees as a rule are not looking at the company in the same way that investors and founders do. If you have evidence that employees as a rule understand the amount of risk involved and that they understand fully that the most likely value of their stock options is zero then I'm definitely all ears. But that's usually not how it's being sold.
In fact, it is sold along the lines of 'we're not going to pay you your market rate but you have quite a bit of stock (in reality .000001% (or some other rounding error)) if you work really hard for the next 4 years YOU TOO WILL BE RICH. But the number of employees that actually do end up like this is small. Still larger than the number of founders but the founders really will be rich, the employees are lucky if they make up for their lost income.
Of course some employees will be more savvy than others and will negotiate a wage that reflects the reality of start-up life but more often than not the employees accept (substantially) below market wages in return for a bunch of empty promise. Feel free to blame them for not being informed, but to claim they have 'the same incentives' is definitely not the case in my experience.
However if that's the case, it looks like you've just used a lot of words to effectively say "Accepting equity as payment for working at a startup is a poor decision so therefore employee interests were never aligned with those of the founders".
I'm perfectly ok with it if employees were actually given all the relevant bits of information and if they actually were aware of all the potential outcomes. There is a lot of selling going on here that I'm not ok with.
And yes, I've used a lot of words to say exactly that. Thank you for putting it more concisely, the risk:reward ratio for employees and founders is vastly different. Founders 'risk everything' but looked at in a different way founders risk just as much - their time, and the potential upside for a founder is much, much larger than for an early employee.
Oldest game in town.
It doesn't mean that they don't care about their share in the company (obviously, after spending 5 years of your life at a company, you want your share of the cake) but it's unfair to conclude that they only have their stocks, a lot of the early employees either left the company or occupy rather senior positions at Spotify.
The most cynical take is that the investors are buying them off to be not just more aligned with investors, but less aligned with employees =)
Everything has to work out just-so for employees to end up wealthy beyond making up for the lost pay and the overtime, assuming they even get that (most likely: nothing).
They make up for this with a combination of a lower exercise price, the vesting clock starting earlier, and typically a larger grant for earlier employees.
Companies retain employees by giving additional refresh grants and/or raises.
I'm not sure why it's OK for Uber to raise a few billion $ and there isn't a fuss about how that's hurting employees when it's not okay here. They both are getting diluted.
The best option is to attempt downside protection by selling shares in the secondary market, even at a discount - of course, Spotify being a EU company, I don't know how difficult it is to do that, though I imagine (like most other things) it's more regulated (aka. tougher to do) than in the US. Even if easy, it's getting harder and harder to find secondary market buyers.
Rough out there!