People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.
I know it can happen, and maybe it happened here. If so that's shitty, and people will have learnt a hard-earned lesson they shouldn't have to have had.
[Also in case anyone do face this argument: as a general rule don't unless you feel like a founder and your share holding gives you good reason to; e.g. even in one of the startups I got 7.5% of on joining I was paid above my previous salary - the one case mentioned above where I was "underpaid" for 6 months, I had 25% of the shares when the company was founded]
> But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.
"The investor" here are mostly VC funds that almost certainly lost money on the return they did get, as they in turn take investments on terms that leave them with a minority of the profit after clearing certain hurdles. Given the duration from the last round and the amount of the exit, it's highly unlikely that exit cleared the hurdle, and so this likely at best did nothing towards the VC fund managers profitability either. At best it will have offset even worse investments a little bit.
The investors putting money into those VC funds again, got some returns, but lower than they would have if they hadn't taken the risk in the first place and just put the money in an index fund. If you're going to account for lower salary as a loss, then the limited partners and the general partners in the VC fund also suffered a loss by not getting the return they would have if they didn't invest in this company.
That is the risk you take when you choose to make an investment - be it in cash, or labour. Don't take those risks if you're not prepared for them.
I'm all for lots more workers rights than most people on this site would have the stomach for. But this was not a successful company. This exit was a failure. There's no realistic scenario where staff would get much - if any - return from an exit on terms as bad as this one.
You accept greater job insecurity than more established companies, and lower salary than more established companies, but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket. You don't sign on with Meta expecting a great exit, but you gamble that you might see a great exit when you sign on with Series-B-R-Us.
I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
And I agree completely that the gamble did not pay off for anybody here. The investors lost money, the workers lost money, the founders lost money. And that's the risk you take on when you make that kind of investment.
I've definitely declined further interviews with companies with something to the effect of "I don't have the stomach to be in an early stage startup right now".
It's a common negotiating tactic. As I said, I've only once (in 30 years) accepted less, and then I owned 25% of the company prior to the investment. Sometimes they do mean it, but far less often than people think.
> You accept greater job insecurity than more established companies
This is true, and a reason to not accept a lower salary because you are more in need of an ability to maintain or expand your cushion.
> and lower salary than more established companies,
There are certainly companies that want you to think this is just the way it is. And it depends on what you compare against. You won't get FAANG salaries at a startup, but most people don't work at FAANG's.
Some startups will not hire at non-FAANG market rates either. If you have the skills to be attractive to them, however, odds are you don't have to settle, and that includes choosing other startups. Unless you're convinced this specific startup is the next Google, odds are it's a bad bet to concentrate your risk by accepting a trade like that.
Most of the time you'd be better off getting a market-rate salary and investing the money in a way that spreads your risk.
> but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket.
The problem is that it is exactly like buying a lottery ticket: The odds are extremely heavily against you and most such jobs do not provide enough shares to be worth it when you factor in likely dilution and things like liquidation preferences and the very, very high odds that the company will fold before any exit event.
If the company is pre-seed and you're offered 5-10%+ and a guaranteed (in writing!) salary increase after the A round maybe. If you're coming in as employee 10+ after A and you're being offered sub .1%, sure you could win the lottery, but you could also find another startup and get the lottery ticket and* the salary, and put the extra salary in an index fund and be far more likely to get a high return.
I'm not saying there aren't ever deals that are worth it, but put another way: If you accept a lower salary for shares, you're investing in the company. Have you done the calculations of risk-adjusted potential returns and done the due diligence you would if you were to put money on the table? If not, why not? It's the same thing.
Unless you're really sold on that startup in particular to the point where if you weren't hired you'd like to participate in their investment round with your own cash, it's likely not just a bad deal, but you're concentrating your risk.
> I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
Most tech workers also don't negotiate their salaries. I've hired dozens over several decades, and I've had less than I can count on one hand actually try to negotiate, and in each case, we went back with a higher offer. Conversely, I've never accepted a first offer. I've sometimes walked because we were too far apart, but I've never had a prospective employer decline to up their initial offer.
I've been offered substantially higher pay than the CEO by startups who did want to pay below-market but were more concerned about getting the right person.
My experience is that if you can get offers, you can get offers from startups at market rate, and it's down to whether or not you consider that investment worthwhile if it had been separated from the employment. If you struggle, and a startup offering below market is the only option, sure, don't be too proud, I wouldn't be either if times were tough.
I'm not sure why I would work for less unless I was founder, or it was a charity or other public good.
The bottom line is these guys were not profitable.
But the investors got very lucky to not see -100% return.
What's the point of accepting 400M to build a business if you essentially don't own any of that business (because of the 559M buyout ceiling).
Were they gambling on a buyout more than 559? I don't understand why someone building a business would accept these terms.