Hotshot Tech Founders Face a Dilemma: Lie Low or Live Large
wsj.com
wsj.com
I recall a chapter that struck me from Bob Taylor's book (of Taylor Guitars). The first half of the book was all about him building guitars in a shed, then loading them in a car and visiting guitar shops one by one, trying to convince them to buy his guitars and display them next to the Martins and Gibsons etc. that had a lion's share of the market.
Many years later, when he became one of the most successful guitar companies in the US, he built himself a nice house, and he used to invite his staff around for an annual BBQ to show his appreciation of them.
Then one day, at the BBQ, he overheard some senior management pointing at his new pool rockery and saying "So THAT's where my bonus went this year...". He stopped inviting staff to his house after that incident.
"Tall poppy syndrome" exists in all industries and cultures. Personally, I don't see why people who have sacrificed a lot in order to make money in the early days cannot enjoy it later when they _do_ make it. As long as they maintained a high standard of ethics and principles doing so, of course.
Many of these founders have only "made it" in a paper sense. It's at best ungracious to be living large while your employees and investors are still sweating it out and/or losing money.
Also, I find the "years of struggle" trope irritating. Many of people live on beans while working 70-hour weeks and don't end up rich. Plenty of those people work at companies whose executives do get rich.
Is it only in a paper sense until what? The IPO? Many companies are staying private much longer, because it's better for them. Can you really say that a company that has a valuation in the billions, that, let's be clear, has been paying thousands of employees, suppliers, etc. for years, and that is choosing to stay private because it's the smarter move for all its shareholders, is not considered a success warranting of the founders taking some money off the table?
Not to mention the fact that lots of companies simply remain private always, that's a perfectly legit option although not as often used in the startup world for various reasons. Nor to mention the fact that the founders who are "taking money off the table" are quite literally doing it by investors buying shares from them, meaning the investors themselves necessarily have to agree to this arrangement. (Although admittedly, those are later stage investors, and this could be against the interests of earlier shareholders, but then they made a business deal with a company, it's on them to do it in a smart way).
I don't get why suddenly when it comes to tech startups and founders, the normal rules of business are suspect. People start companies and sell off parts of them to outsiders all the time, and it's mostly up to the parties involved to agree on the details that seem right to their situation. If they are willing to do a deal with a company that isn't currently making a profit, fine! That's their business.
> Can you really say that a company that has a valuation in the billions [...] is not considered a success warranting of the founders taking some money off the table?
I can definitely say that. Are the employees and investors getting rich at the same time? If not, then there may be pragmatic arguments for paying off founders (e.g., they will have an incentive for selling the company too soon), but I don't think there's much of a moral one. And if it happens, I think there is still zero excuse for the founders living large while the people actually doing the work and providing the capital have not received the same rewards.
> Not to mention the fact that lots of companies simply remain private always
This is just muddying the waters. This article is clearly about VC-backed companies, which are all about the exit. For truly private companies, founders get their dough when the company is in the black long enough that they start paying dividends or partner draws.
> I don't get why suddenly when it comes to tech startups and founders, the normal rules of business are suspect.
They aren't. Money-losing companies giving their founders tens or hundreds of millions of real cash dollars is not within the normal rules of business.
Your logic is flawed. When I start a company I will be leaving my cushy job that pays damn well and living low in hopes of making it big one day. A founder making a deliberate choice here is very different from unskilled/unlucky/not-qualified (in whatever sense) people living on the beans. They don't have a choice. They are not part of the game.
Tall poppy syndrome would be more applicable if it was peers being upset at the success of one of their own, not between subordinates and leaders
> every dollar the boss keeps _is_ a dollar that the employees don't get and the boss is the one deciding how much both sides get.
I've thought a lot about this over the past few years. There's definitely a difference between being an owner and an employee. An owner lives with a whole different level of stress and risk. An employee has a choice to work for an owner, or go work somewhere else, or become an owner by starting a company.
I'm not sure where the balance of power between business owner and employee is determined...it's fairly complex.
Owners become employees when they accept too much outside investment. They become employees of investors...and investors buy ownership.
I think the balance of power is primarily affected by two things: 1) Barrier of entry into starting a business, such as laws that inhibit/regulate small businesses, or independent workers (owners) 2) Regulation that gives bigger businesses an inherent advantage over smaller businesses, such as limited liability, indemnification, bnakruptcy, mandated group health insurance plans, etc.
Sure, an owner can make 1MM per year and only pay the employee 100K.
But I think the question we really need to understand is, what's stopping the employee from quitting and starting his own company? I don't know the answer.
There is also a lot of pro-management literature that defines a work culture where employees should be loyal to their company, boss, etc., give two weeks notice when quitting, among other things that psychologically disenfranchise employees.
In reality though, at least right now in the tech industry, if you don't like your salary, job or work environment, it isn't hard to re-tool and find a new job...
In blue-collar/unionized industries, it might be totally different. I don't totally understand the work cultures of other industries, especially lower paying ones.
Obviously you might leave after a few years of really unfair bonuses. But truly, they seem a little disconnected from regular market forces.
Everyone knows that if you go work for e.g. Google, you're getting a certain base salary, plus a bonus package (plus options/RSUs, plus free food, plus a lot of things). People consciously subconsciously price these in as much as they can. Of course if bonuses are variable it's harder to price them, but the same can be said of stock grants in companies. And no one can afford to ignore those - they can in practice make up a huge part of your pay package.
Well, you're correct. If the bonus is unacceptable, the employee can just quit. But a year of work (or more if it's event based instead of annual) is a big opportunity cost to find out that info.
In other words, employees never take an unexpectedly huge bonus to the chagrin of the employer. So there is a power imbalance there.
It at least partially is. The employer needs to meet reasonable expectations and any commitments they made.
The boss/employee relationship is an interesting one as well. If the boss is a self made entrepreneur that built his/her company from scratch and lived by the skin of their pants for years, then I believe it should be their decision as to how much of every dollar coming into the company goes into their pockets.
I would also assume that being successful from those beginnings would indicate that they are shrewd business people, and that they can figure out a ratio of boss/employee allotment that would be fair and also be beneficial for future company growth and reinvestment.
Why would the boss give anything to the employees then? I think you’ll find that the employees decide how much they want.
Employee signed the contract out of his own free will? Then no, the boss is not the only one who's deciding that.
I think they'd prefer that you take the perspective that you've only really made it once you've made a profit for your investors. Or even, gasp, until you've built a self-sustaining, actually-profitable company. Otherwise investors will worry that their investment is in your lifestyle rather than a company that will eventually earn them a return on their investment.
Once a founder has built a company that's exited or doesn't need any more funding and is turning a profit, I doubt anyone particularly cares how they spend their money.
I remember there was a great deal made in the press a few years back about a famous Indian movie star spending several million dollars on his wedding in a poor city that he grew up in. He was criticised for his 'wastefulness'. However, a follow up report on the event a few months later pointed out that his one wedding actually was massively beneficial for the entire city's economy. Catering and hire companies made several year's profits in one day, and were able to hire more people and take them off the streets.
Similarly, we may criticise the extravagant marble entrance stairway in a startup founder's mansion, but that stairway may have probably put the stonemason's kids through college or helped to extend that dying artform for another generation.
If they have an empty house, they still contribute to the local government's activities via land tax or rates bills, and they probably also employe local cleaners, garden maintainers etc. Far better than just snorting it all away in cocaine and other heavy drugs.
But when they buy cocaine they still contribute to the income of local dealers and the activities of gangs. Their money may well put a gang leader's kids through college. And drug lords can have huge weddings as well.
It seems to me like you as well fail to see the downstream consequences of that spending.
I do agree that building a house and letting it sit empty is usually slightly better than spending the money on drugs, but that can easily reverse itself depending on the specific building materials and drugs in question.
More importantly, there are not just two alternatives. Why spend money on a house you don't need and pat yourself on the back for helping the people you paid, when you could have used the money much more efficiently to directly improve people's lives?
The fact is - no matter how it happens, that money sloshing around is good for the economy. I guess the worst thing they could do is to convert it to bank notes or gold bars and bury it somewhere.
P.S.: I'd love to have a big house, and don't jusge people who can afford it that do. Luxury is fun, but in this case its wasteful non the less.
I guess some of the worst investment advice ever was repeated to us as kids - viz Scrooge McDuck swimming in his vault full of money, or pirates constantly burying their loot... :)
I think the problem is that they are still working for the investors, having sold them the dream. Because they are also acting as CEO, they are still on duty to the investors to create an exit.
They haven’t “made it” yet, unless you consider raising investment as the goal. But it isn’t. Until you’ve made your investors a great return, the point of the article is to show some modesty.
Most don't though.
Most come from upper middle class families.
They live 'Grad School Life' until they are successful.
Meaning: ok, nothing phat or fancy, but they don't have any real trouble or risk.
Of course - many do struggle for a long while.
I think they should buy what they want ... but they shouldn't be showy about it.
Don't drive your Ferrari into work when there's a layoff :). Or ever maybe.
EDIT: there's quite a lot of data to validate that richer kids are more likely to be successful founders [1]. I'm not indicating that this is always the case of course, but it's pretty common.
I worked for a while at a Fortune 50 and the kids we saw coming in as interns were really well prepared - I also noticed a pattern - their parents were Doctors, CEOs, high level government officials. I'm not saying they didn't earn the positions, but there's no doubt that their status helped, moreover, they already knew how to behave properly in a corporate/professional setting. I had no idea, that's not something my parents could teach me.
Two of my 'rich kid' interns went on to found major companies, one of which there's 100% chance you've heard of and probably 80% chance you've used - the other just raised $50M.
Coming from a remote Wyoming ranching childhood, I will claim that signalling can be learned, and that most if not all customers, VCs and bankers I might talk to are shocked to learn that I was not brought up just like them.
It's no different than lawyers or doctors, though. Every group has tribal signaling to help them identify if a person is in or out of their group. Learn to speak the language. Heck, even poor people (like me!) can do that.
You can have a large house or mansion, somewhere isolated (if that's what you want), but unless you have a family with 4 kids running, it can get lonely pretty fast.
Also as the article points out, people aren’t using their stock to buy these places (Evan Spiegel being the exception). They are almost certainly using money they got when they (and often the rest of their employees) were offered the chance to take some money off the table in a later round of funding. Investors do this for a few reasons — they want a larger percentage that would cause more dilution than existing shareholders want to take, they want the founder focused on the home run IPO instead of potentially taking a buyout offer that would net the founder life-changing wealth but only be a single or a double for their fund, and probably more I’m not aware of. Point being, investors are fully involved participants in this — no one is being taken advantage of. (Again WeWork may be an exception — the external optics there are very bad.)
Finally, using something like Dropbox as an example, Drew has built a multi-billion dollar company and his investors (with the possible exception of the last round which was basically an IPO without the listing) are very happy. Is a $9M condo really a sign that he’s not working hard? Anyone who knows him knows nothing could be further from the truth.
Just pointing out that, just because a house is massive, it won't make you happy. It's often seen as a status symbol, though it doesn't make much sense anymore in this day and age in my eyes, unless you constantly have people around and you have a large family.
Yes, a big house won’t make you happy by itself. Neither will money, a girlfriend, kids (especially kids!), a bar where everyone knows your name, etc. You can be happy sharing a bedroom with two other people you don’t particularly like and you can be unhappy despite everything in your life going exactly how you hoped it would (speaking from experience here). But that’s human psychology, and I don’t think it’s useful to try and paychoanalyze why people are choosing to buy what they buy. Honestly, we all have better things to do with our time.
You shouldn’t hire people with whom this is a legitimate concern.
These companies were "best places to work"
The baseline six-figure software engineer lifestyle is a room in a shared apartment in Oakland or the deep East Bay. Living in San Francisco, having your own place, and (gasp) buying a tiny condo are the various degrees of living an exorbitant lifestyle. Buying any sort of freestanding structure is approaching a pinnacle of decadence that’s an extreme stretch to even the most elite tech employees. But oh, they’re “lying low” because they’re buying houses where the qualifying income is $300k instead of $500k. Give me a break.
It’s expensive, but it’s not that bad.
Growing up, I went to a handful of parties in rich friends' stunning lakefront mansions that cost barely $1.2m. The nicest houses my parents and I could even conceive of are worth less than a median San Francisco house now. So I dunno. Feels like something has really changed.
Seriously though, people need to see the big picture. There are many, many households in the SFBA with incomes in the 200-300k range. Buying a 600-900k house on that just isn't that hard. You put away 50k-60k/year for a few years and there's your down payment.
I'm not saying everyone falls into this bucket. But when I hear well-paid software devs whining, and let's be serious, that's what you're doing here, about how expensive it is, it makes me wonder what kind of personal choices people are making that they "can't afford their lifestyle". Too much eating out, not enough packing lunch.
Thanks for sending me on an interesting stats search. Looks 19% of Bay Area households do indeed have household income over $200k [0]. However, this is not typical of tech salaries (and two-earner tech couples are certainly not 20% of the Bay Area population, given the gender ratios).
Glassdoor has the median software engineer at $129k, or $150k with 15+ years experience [1]. I'll go with the whole population. With a $100k down payment, 1.18% property tax rate (San Francisco), and no other debts, Trulia says that that median software engineer can afford a $720k house [2]. Per ADP, with a maxed 401k (as everyone should have), this person takes home about $6000/mo [3].
If we actually look at some inventory in this price range [4], we're talking housing expenses right around $4000/mo, or 2/3rds of take-home pay.
Assume we're targeting a 6-month emergency fund (as everyone should, if not more) and a 20% down payment. You'll need $145,000 for the down payment + $24,000 to be able to service the mortgage in case of unemployment. So, how fast can you save an after-tax $169,000?
Personally, in a good year I can save about $2000/mo in addition to the 401k. So we're talking about 7 ideal years after establishing an emergency fund (0.5-2 years after college, no moves, no significant copays, no rent increases above salary increases). In order to commit 2/3rds of your take-home to housing, for a starter condo or faraway house in a mediocre school district, as a ~32 year old).
What happens to Bay Area house prices in 7 years? Over the last 30 years, somewhere between 50% and 100% appreciation, depending on your choice of interval [5]. How fast can the median engineer save $338k?
>Too much eating out, not enough packing lunch.
Let me check YNAB for the last year... yep, it would take 26 years for the last 12 months of my (admittedly pretty lavish) entertainment spending to fund today's down payment. 75 years for the dining out portion. Also, what the hell kind of tech job doesn't provide lunch? Try again.
[0] https://censusreporter.org/profiles/31000US41860-san-francis...
[1] https://www.glassdoor.com/Salaries/san-francisco-software-en...
[2] https://www.trulia.com/house-affordability-calculator/
[4] https://www.redfin.com/CA/San-Francisco/451-Kansas-St-94107/...
[5] https://www.paragon-re.com/trend/3-recessions-2-bubbles-and-...
If you want to continue this conversation my email is in my sig. I am your living counter-example. I've worked middling tech jobs for the past few years making roughly what we're talking about here, and I'm buying a house...right now. No huge earn-outs, no big equity payout, no AmaGooFaceSoftPle job.
I think it just takes a bit of saving and willingness to say no to things once in a while. Also, a lot of people don't put 20% down in the SFBA.
My arguments about the big picture still stand, though. Your cash comp numbers grossly understate dev income here because most of them don't include RSUs, options, or other non-cash (and sometimes even non-bonus) comp.
I'm not saying it's sane or rational. But I just don't see a case where there's going to be a dramatic crash. As long as people are using Google for search, as long as iPhones, and Teslas are selling, and people are wasting time on Netflix and facebook, there's just going to be a lot of money around here and prices will reflect that. We're inventing the future and just take a look at stock prices of these companies if you need proof. It's all happening right here so of course, things are going to be a bit expensive.
It's just not that complicated, really.
If you're a homebody type, that's different.
That's a very odd perspective. It applies to the United States, but the United States is at best 500 years old. In the Old World land hasn't been cheap at any time in recorded history.
You’re wrong.
There's plenty of land available cheap or free right now because it's worthless. That's always been true; it would make no sense to think of it as something that changed in the last few hundred years. Land cultivated before the Black Death and left unused since then would fall into this category.
I was aware that the Black Death severely depopulated Europe such that everyone left was much wealthier (well, the peasants -- the nobility were poorer, in that their wealth included their supply of peasants), but it seems odd to say that land was cheap then since as far as I know European feudal law prohibited the owner of land from selling it. I'm aware of some other examples of land going unused despite high potential for productivity:
Ukraine was historically very underpopulated because unrelenting slave raids kept the population down.
Most of tropical Africa never experienced much population pressure because human populations were suppressed by diseases and elephants.
What is now Xinjiang would have been pretty depopulated by the Zunghar genocide. On the other hand, it's not like the Chinese rushed to settle it voluntarily -- it was settled by forced relocations.
The existing population of what is now the United States was wiped out in advance of European settlement, and the land was highly fertile. Cultivating it was purely a manpower problem - you could go out, settle land, produce enough food for a household of a dozen people, and not be subject to much in the way of environmental dangers, or competition from other people who wanted your land.
Which of those sounds more like a period of "when land was cheap or free"? How are you defining "when land was cheap or free" such that it's not cheap or free right now?
So, when Catherine the Great called for settlers, saying they could have free land, didn’t have to pay taxes, and didn’t have to serve in the military that land was not just cheap, but free. The Mennoninte of Canada and the USA are descended from those people. They’re Protestants, so that’s the last 500 years.
What the hell is European feudal law? Property held in fee simple, dates from the 1200s in English law. I’m not familiar with other European legal systems but I know that Eastern European economic development is basically the story of German settlement and the good burghers were not serfs. They owned their own businesses and farms.
The Ukraine is an example of a place where land was cheap. You gave some of the reasons why, but that does not detract from the fact that there have been times since 1500 when land was cheap.
Founders have a very specific job to investors: to return their money with a hefty return on investment. If the expected ROI is higher buying a mansion, then maybe the investors should invest in mansions rather than the tech start ups.
A C suite (and often to developers and pos) position at a startup that has raised funding is likely to experience 1) offers at or above market rate in leadership positions 2) A professional network of people able to afford a certain comfort 3) a stressful or dismal looking event at work.
Of course everyone called him crazy and when the bubble popped he had insurance for that. Friends of his and coworkers who didnt listen to his advice lost most if not all their paper net worth.
On one hand, starting a business and being successful (at least financially) is highly encouraged, however as soon as someone makes it, then it's all about how they dare to spend what they've earned instead of considering the billions of other people on the planet with every decision. Perhaps it's best to just let people do what they want with what they have.
Having money is simply a means to an end. For some people, that end is the freedom to not have to go to work every day. To focus on things they care about. To have new experiences that don't involve sitting at a desk for 14 hours straight, 5 days a week. But there are many ends. For me, I respect those who don't have to work to survive as having made it, because I know the guy driving the BMW probably financed it and is driving to work.
https://www.zillow.com/homes/for_sale/19469270_zpid/globalre...