Who really gets hurt when startups blow up, and what to do about it

As an employee, I would advise positioning yourself not to be the one that gets hurt. For example, if you want to be an entrepreneur, then be one and start a company (ideally with other people's money). But if you want to be a programmer, then focus on that. Work in interesting places with interesting people. Build your career based on the work you are doing. If the work you are doing is crap, do everything in your power to move to a place where it is not crap.

The golden handcuffs are more handcuffs than gold. Ask for a reasonable wage and make sure you get it. Anything else is gravy. Understand when you join a start up that it might disappear under your feet and make sure you have a plan B. But, always, always make sure that you are building the career you want.

In startups I have seen so many people (employee #single-digit, usually) who get promoted out of the job they want to do. They hang around doing stuff they hate because, "It might be a big deal in a few years". If there is a downturn, then they are the first ones to be asked to work months (or years!) with no salary because, "I'm sure we can turn it around and they are giving me equity!"

Obviously, it's up to the person, but if I could sum up the antidote for the misery I've seen in my career: 1. Cash on the barrel head, 2. freedom to do good work, 3. interesting co-workers. As a programmer, I never ask for more (or less). (and seriously... if you miss payroll... I'll still be your friend, but I won't be working for you... sorry. See rule 1.)

Interesting that the author mentions disclosing financial performance data but not capital structure. Many startups attempt to induce employees to trade salary (or time) for equity, without making it easy or even possible to understand the company's capital structure, i.e. how many preferred shares have been issued, what the preferences are, etc. I was recently recruited by a startup that made noise about my trading salary for equity, but had been through four institutional rounds. I wanted to know what the preferences were and what would be left for the common if the company sold tomorrow at various valuations. They brushed me off and I haven't heard from them since. If you're going to ask me to basically invest in your company by either working for less money or working longer than usual hours then you had better be prepared to disclose your capital structure. As a former founder myself, and someone who is probably older than the average startup employee, I know to ask these questions. The majority of younger colleagues whom I have discussed the issue with don't even know what I'm talking about.

"The real losers are the employees," fourteen paragraphs in.

O that more writers would rediscover the format of the inverted pyramid (think news stories, lead first).

Instead so many are following the format of: dump to paper the entire warm-up process. This warm-up is often necessary. It's fine to even write it in your first draft. Before publication, excise the long intro.

> The real losers are the employees

It is true that employees are often at the bad end of a power imbalance - which often creates information asymmetry, among other problems - surly the "real losers" are the people who just had their test results voided.

> Who Really Gets Hurt When Startups Blow Up?

Depending on what the startup does, one of the groups that is hurt is "the users". I encourage everybody in a startup to listen to one of Jason Scott's talks[1]. He is the Angel Of Death that descends on failed internet startups with his Archive Team that tries to move as much data as possible into the Internet Archive before the servers are shut off. A lot of ordinary people can be caught in the crossfire when the businesses they trusted with their data and infrastructure are sold off as scrap.

I'm not trying to diminish the problems that employees face in the same situations. Being laid off sucks. Knowing that years of your own work will end up unfinished is terrible. Instead, I'm suggesting that the users should also be considered in that analysis.

[1] https://www.youtube.com/watch?v=aNeE8-iVkwY

Non-US businesses find it baffling that transparency is so extraordinarily low in the US. Even the smallest UK company has to publish information on fundraising and basic finances (admittedly, with quite a big lag). The same applies basically everywhere in Europe. Russia is in many ways far more transparent than the US for company data (both financials and ownership/funding).

Given the regulatory attitude to small business secrecy in the US, it's not at all surprising that companies can implode even when there is a lot of noise and publicity.

Typically the rationale for this though is to protect counterparties, not employees per se as the author suggests. (And also just that sunlight is the best disinfectant).

But professional investors value companies as a full-time job and still get it wrong a lot of the time. My full-time job is writing computer programs, not investment banking or venture capital. So even if I have access to this information, how can I know what to make of it? I don't know what's important, which little number might be the secret sauce or the torpedo in the engine room. And any company will choose and frame those metrics that make its future look brightest. I think this is a fundamental problem with equity as a form of compensation. As the article points out, I can only invest in one job at a time. Even if it's a good job, how do I know what the future will bring in terms of option value?

As for making me feel like an owner, an oft-cited benefit of equity, I think that's a social phenomenon and not something you can conjure up with a piece of paped. Just as putting a ping pong table in the office doesn't guarantee a laid-back culture, issuing RSUs doesn't guarantee that each employee will feel like an integral part of the mission rather than a cog in the wheel. Both come from the relationships you build up as you go along.

According to this article it's the employees, but in the case of Theranos I would have expected the answer to be the patients who made decisions based on bad test results.

Isn't this simply an issue of risk preference? Working for privately held startups is more risky than working for established businesses. Presumably employees are willing to stomach this additional risk for the presumed upsides.

Is the answer really to burden employees with even more data, or just for them to be smarter about where they choose to work?

> The real losers are the employees.

Why victimize the employees so much? It isn't like you go to work for the startup and when it implodes you are left with nothing and no options -- far from it, you likely made a good salary while you worked there and are likely very employable afterwards.

> They are investing their time and their careers without access to any information.

Being that employees ARE investors (their time), they should do their due diligence, too. A company not being transparent about whatever information you need to make a good investment decision should be a reason not to work there ie as a prospective employee you should evaluate how the company shares information with its employees.

There are inherent risks in startups. Those may be better manageable from an employee perspective with more disclosure. A fundamental problem with startup is that data is backward looking, extremely noisy and is not really a good predictor of what's to come. Considering the need of high level negotiations about funding often at the brink of shutting down financial disclosure at the wrong point in time can put the startup at a disadvantage.

There are also risks of misrepresentation and outright fraud. Those can't be solved with data room access but only fact finding audits from the outside and whistle blowers from the inside.

I find some of the attitudes towards equity / cash salary baffling.

If you care about the "safety" of a cash salary, join a big, established company. You'll have limited upside but a more stable cash income. No risk, no reward.

If you are joining a startup, it is by definition because you want to take on risk. The reward for that risk is by far captured in the increase in the value of the equity, not the cash compensation.

It does not make sense to join a startup and not want to maximize your exposure to the upside in the form of equity.

> The real losers are the employees. They are investing their time and their careers without access to any information. Unlike a fund who may have a portfolio of dozens or hundreds of investments, an employee can only make one investment at a time. The cost of a mistaken investment can be unemployment and the opportunity cost of foregone opportunities.

This right here is why I've never worked full-time at a start-up with a large percentage of total compensation coming from un-tradable private stock. I won't be someone else's dart. My current employer pays out a substantial part of compensation in RSUs, which I have set to auto-sell the day they are rewarded. It's almost the same as getting cash salary, except with some market variance (that fortunately has paid off for me so far, as the stock price has increased over time).

"Startups" and "Theranos" are not the same thing.

A fair explanation of the problem. I imagine most start-ups would not easily stomach the proposed solution.

Often, the founders are permitted to embezzle the last 5-10% of the capital by walk away investors. Sometimes, the founders own and profit from vendors to their venture, which dies. Sometimes, a tiny, viable business is started within the venture, whose main business plan fails. The little business survives and feeds the founder and a few cronies. Sometimes, the founder goes back to her lucrative university professorship which she was "on leave" from.

The founders never get hurt.