Memo to CEOs & Founders: Stop Being Such Cheap Bastards
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After being on the wrong end of that deal once, I've decided to never make that mistake again. I'd rather work at a larger company (where I enjoy normal hours, lots of benefits, and 3-4x more $$ of stock every year than I got in 4 years from a startup) or be one of the founders actually winning in the startup game. Right now I'm actually doing both. ;-)
Lesson learned: read things very carefully, confusing language is intended to be confusing. I basically gave away two years of my career to kool-aid equity. Just be really careful, and if you don't fully understand something ask someone who does understand. If you can't get a direct answer, leave. Don't waist your time; you're being gamed.
Was that not the case in your situation? I've seen some incredibly poor option deals (NQO options that exercised to non-registered shares spring to mind), but never the scenario you described.
Rather than work as an employee at a startup, I'd rather work at a big multinational (where I have the chance of rising high in the ranks).
And I'd rather work at McDonalds than be the first employee of a startup. That's like the shittiest job ever. You are on the same level as the others, you put the same amount of work, and all you get is a salary, and when the startup sinks you're out and broke.
I'm paying for the sins of others now: I have heard nothing but snickers or outright laughter when I offer equity.
Net-net: single founder, no chance of getting any real talent on board (I'm way past the college buddy thing), all taxes and fees, like incorporation, due up front, my wife is about to divorce me because of the stress.
But, I would still rather do the startup than anything else. At least I have a chance to make some big money, whereas that chance is near zero at a job.
From the eyes of a developer, equity is not very valuable. Equity is a chance at money in the future, not money today. Vested equity then feels more like a chance at a chance of earning money in the future. And most startups don't ever make money. If you're a developer worth his/her salt, you can make really good cash right now at a typical job or working as a consultant.
One thing I've learned is that I'd rather be a developer than a businessperson. I realize that I have the opportunity to run a single founder, bootstrapped startup if I wanted. If I were a businessperson, I wouldn't have this option. If I had a product idea I would have to attract a developer and/or investment money first. As a developer, if I have a product idea I can just launch it and see what the market does and worry about investment, attracting another partner, etc. later.
Focus on business saas like 37signals and you'll be on the right track.
I just pick the most driven people and fire the ones who are clock punchers.
I don't quite understand it, but I'm not exactly worried the startup employee pool will shrink anytime soon. But they won't be getting me and a sizable pool of the top talent.
They own half the company, shouldn't they simply get half of the total proceeds of the acquisition?
Sometimes preferred will be fully-participating preferred, and the investors will get their money back and then take a share of what's left equal to their ownership. Sometimes preferred will be non-participating preferred, and the investors can choose between getting their money back or converting their preferred to common and getting a share equal to their ownership. Never ever will a VC do a deal where they don't get at least 100% of their money back before common stock holders (aka you) see a dime.
Complicating this is that 'getting their money back' is actually just a 1x liquidation preference - and while 1x is common (the VCs get 1x their money back before you get anything), it's possible for this preference to be higher. If there's a 2x liquidation preference, the VCs get 2x their money back before the common gets anything. If there's a 2x liquidation preference and the stock is fully-participating preferred, the VC gets 2x their money back and then a share of whatever's left equal to their ownership.
Early-stage rounds are often relatively simple and more 'rational' - it's multiple rounds with many different investors that make things interesting.
Brad Feld's 'Term Sheet Series' is the best resource I know of for basic definitions of all this stuff: http://www.feld.com/blog/archives/term_sheet/
Having that guy on your board, and actively involved in the deals themselves is huge if your taking on institutional money.
If you can demonstrate two cap sheets with the typical scenario and the feel-good scenario and it can be shown that founders loose control at about the same stage, this would probably be more digestable.
You're assuming that employees are willing to take less money to help the founders retain control. Maybe, but I doubt it.
If control is worth so much, perhaps founders should be willing to pay for it. One way to do so is to give liquidation preferences to employees.
But the majority of startups expect "start up hours", from their employees, yet there is no stability, no glory (nobody knows your products), and what's the best scenario? The founders get rich, while the employees get one or two 100k after at least 4 years of work, which will probably never make up for the lost years/health and salary.
Next startup is something I am either founding, or I have double digit equity in it. Never ever going to settle for 0.1% standard series b equity, or the measly 0.5% series A.
Fuck that.
The thing is, not everyone is founder-material either. Prior to hiring our first two employees, I chased this deal over 9 months... most people would not forfeit a salary and other opportunities for that long. It was a rather painful sacrifice that's also taxed my relationship and quality of life.
I'm cautious of people who parade around "entitlements" because the idea can become political/toxic and disrupt a team -- you gotta earn those stripes. I hope you are considering starting your own company, things are a lot different when you're the one responsible for everyone's paycheck and returning money to investors.
I learnt that from my parents. If someone is leaving your company to start a business, loan them the money they need to startup.
Is there any evidence that disproportionate returns (as opposed to risk avoidance) is the major reason?
I'm not saying increased compensation wouldn't increase interest (that applies to any job). But, there is nothing in this article to suggest that startups are hurting to recruit and that this is due to compensation rather than life/work balance and job stability.
Sorry, if that's the expectation I think I rightfully expect at least a "best case" scenario of getting rich.
1.) Same pay as big-corp + much more interesting problem domain.
2.) More pay than big-corp scaled by the extra hours (not a 1:1 scaling)
3.) Large amount of equity. Enough that if the founders become tens of millionaires, I become a millionaire.
The simple fact is, when investors are involved there is NEVER enough equity to go around.
you took money because it made your smaller % worth more. so why are we even talking about %s?
(But i do plan to hire some people soon and demand that from them)
The point is that a better compensation migth, well, compensate this.
Sorry, I'm not in this to make everyone 'feel better'. And let's say I was, why would I keep anything for myself? Wouldn't giving 100% away give me maximum feel goodness?
I read it as saying that early employees will not get rich under current compensation packages if the firm is acquired for $50m (the most likely exit), and if they think they will, they're deluding themselves.
I think if it were widely known that early employees at startups that get bought do not make particularly significant amounts of money from the exit, it would decrease the number of people willing to work for startups, or at least, they would demand more up-front salary. A lot of people currently think the opposite is true--- based on the example of the rich early Google employees and such, they have a misunderstanding that early employees of a successful startup typically get significant payouts, while that's actually only true for massive IPOs, not for most exits.
A lot of people are viewing the argument in moral terms. I wonder if it was meant as an economic argument: if you give your employees a chance at a big payout if you succeed, perhaps you'll have a better chance at succeeding.
Group 1: The first group is not the target of this discussion, because they're more interested in being employed and having a steady income -- they'll work for you if you have an interesting problem to solve and you pay them market rate for their skills. And companies should value their risk aversion, because it's good to balance insane entrepreneurs with realistic detail-conscious normal people.
Group 2: I've been in the second group, and now am in a founder's position bootstrapping a company with my own piggy bank. I have no problem with the way things are. I've worked not only for low pay to do something that was interesting, but also for free to learn the ropes or have a chance at gaining experience at something new. There are very few opportunities to do that in the big corporate world -- especially to have a chance, based much more uniquely on who you are and what you want, to do something very different from your career past or something for which you have little experience. This is especially true if you don't have a stellar academic history, which most of us know means nothing but which the corporate and academic world value so much it prevents group 2 engineers from getting into a lot of doors. And there are other benefits. New ideas come along the way when you're concentrating in the fast-paced smalltech world, along with new friends and knowledge that come in handy regardless if you decide to ever found or be an early executive team member of a company. It's not just about the net monetary gain between today and exit.
As an engineer with an entrepreneurial core, I definitely don't despise those who happen to have greater persuasive skills and use those skills to build a productive workforce that's less expensive and adds more value than the next guy. Isn't that one of the reasons they're successful? And isn't it one of the reasons an investor is more likely to give that entrepreneur capital to grow a business? If that guy can convince me to work for his company for less overall monetary gain between now and when I leave his company than if I had gone for some other option (in a wildly imaginative world where engineers have lots of options every time they look for work), then who am I to be upset later over what's in the bank? If he was a better salesman than the next guy (or an i-bank, or Google, or your dad's friend's tire company who needs a web dev), I'm happy to be aboard as the collateral benefits will be great. In addition, if I'm worth something more than the next guy, being a group 2 entrepreneur-engineer, I take it as a test of my own maturity in the entrepreneurial world to bargain for and be able to convince others of what I'm actually worth to them.
QUESTION: What about profit sharing instead of equity? I've always wondered if this an option explored by any software startups.
It takes more than the founders to build a successful company.
Not if you are looking for a 50 million payout. Which, the article seems to imply, is the average buyout amount these days. I believe pg and co managed to make around that much a decade ago. By the time you hire employees you'd better be shooting for a lot more and have some convincing reasons/data why you have a shot at succeeding if you want to get talented people to join you.