LivingSocial: Employees' and Founders' Common Stock Now Worthless
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The rise of daily deal businesses have brought up a couple of fundamental issues for us: 1)Customers are often daily deal hunters - We would be willing to take the one-time loss on a daily deal, if we had a chance of converting the customers into regular diners. However, we have found that most people who purchase these deals, simply move on to the next deal after they are done.
2) Cheapens the product - Once you have lowered the price for a product, in this case food, the guest automatically ties the value of that product back to the price they paid. This is a huge problem for restaurants in particular because the guest is not willing to pay full price for the product even if they liked it. Now your product is valued at half of your current price, and to get that customer back in the door, you have to offer a significant discount again (most likely another daily deal).
3) Cannibalizes our existing customer base - One of the worst unintended consequences of using daily deals is that some of your regular guests start waiting for these deals, and only come in when they are available. This hurts in two ways: 1) regular guests are now spending less than they were the last time they came in, 2) regular guests are now waiting for a LivingSocial/Groupon deal to become available before returning to the restaurant causing them to wait longer before returning to the restaurant.
I believe that a company that provides customer acquisition via deals could be extremely valuable, but they must do it properly, and most importantly it must benefit their customer (in this case the restaurant). Until a company learns how to ensure that a business is obtaining a profit from providing this massive discount, without cheapening the product, and cannibalizing existing sales, the daily deals industry will continue to fall by the wayside.
If they took less money, and were less agressive in driving prices down, businesses could price deals correctly so that they're not making a loss on each new sale and the deals benefit everyone (site, businesses, customers).
Edit: later on someone pointed out the usefulness of discounts for repeated transactions. The question is for daily-deal discounts.
The biggest problem that a lot of restaurants face is that we simply don't know which marketing tactics are working. The only thing we see is if total revenue goes up or down. This causes us to just throw everything at the wall and guess what sticks based on revenue changes.
To some extent coupons work because we can simply track how many are redeemed, but like I mentioned in my original post, this cheapens the product often and causes the guest to perceive that the food is worth less than the normal price.
With that said, there is no homerun (at least that I know of) customer acquisition method as of right now.
I can't wait for these daily deal business to go away because I don't think it benefits anyone.
If you don't like these deals, then don't use them but don't say that they don't benefit anyone. Customers benefit from these deals all the time. 50% off a meal is a great offer!
I think the biggest problem with these deals (for the wait staff at a restaurant) is that people think they should tip based off the discounted meal, instead of the full price.
It's a deal on the meal, not a deal on the tip.
The tip is obviously dependent on the price of the meal: most people will tip more for a more expensive meal, usually following a ratio. (20% or what have you.) People ordering the more expensive meal on the menu by and large tip more than those ordering the least expensive meal. Why should this change for the groupon meal?
When I tip on a discounted meal, I calculate based on the retail price. My original comment suggested that many people might be tipping on the discounted price and that could be why waiters don't like daily deal customers.
I'm sure when waiter's see my wife and I with three little ones come in their heart sinks a little thinking they're going to get a bad tip. Especially when we split a plate for ourselves and/or our children. However, when the bill comes I tip around 25% of the bill and then add approx. $5 per split dish [when the restaurant doesn't already have a charge for doing such] when means they come out with a very nice tip percentage wise. ($5 is often less than a dish so I still save money, and a $5 tip would be 20% of $20 so the waiter is still tipped for putting up with my family and bringing out an extra plate.)
> Because when you get the bill, it's reduced from the retail price.
So? When you get the cheapest meal, it's 'reduced' from the average meal price too.
If hypothetically a restaurant's management was going to permanently drop its meal prices by half, would you still tip on the old price?
> that could be why waiters don't like daily deal customers.
If the restaurant is running a groupon, waiters have much more reason to dislike the management than to dislike the customers.
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The tipping mechanism for paying restaurant staff semi-decent wages creates some really weird cases like this one. The dislike of discount shoppers would never be an issue in locations where meal prices pay for semi-decent staff wages - the financial risk would be taken up solely by the owners/management making the decision.
When all your competitors are? Go make a business and try that strategy.
>50% off a meal is a great offer!
So great the company who set it up went right out of business despite an insane amount of funding.
>I think the biggest problem with these deals (for the wait staff at a restaurant) is that people think they should tip based off the discounted meal, instead of the full price.
I don't think people should tip at all. Tipping is just a sneaky way of having the customers pay the labor costs directly. It's ridiculous to say a steak costs $7 when I'm paying the the server as well.
"I don't think people should tip at all. Tipping is just a sneaky way of having the customers pay the labor costs directly. It's ridiculous to say a steak costs $7 when I'm paying the the server as well."
Not wanting to tip and actually not tipping are two different things.
I agree with you that the whole tipping concept can get ridiculous but like it or not, that's the system we have.
To not tip in all cases, in a system that has tipping as a critical part of the labor costs, is flat out wrong. You know the system is based on tipping and you're punishing the wrong person for your distaste for it.
If you don't want to tip, don't participate in the entire system. Don't go to any restaurants or other place of business that advocates tipping and makes it a critical part of the staffs salary.
Again, it's absolutely wrong to not participate in only one aspect of the system you dislike when the people who get hurt are the ones with little power to change things.
Employees aren't the ones signing up, their bosses are.
Also, it's pretty common for people to not tip when they get something for free: I never get stiffer drinks than when I tip the bartender at an open bar. First drink is like water, second is always pure alcohol.
When mom and pop businesses launch a Web marketing effort, they often have little appreciation for, let alone a rudimentary understanding of the Internet, and just in general have NO IDEA what they're dealing with. And yet they'll happily launch their business into a jungle full of rabies-infected cannibals, without so much as a guide. Why? Because the brochure said it was all sunshine and rainbows.
If you don't run the numbers beforehand, don't do a group buy offer. And please, don't blame Groupon for your own actions if running a daily deal wasn't the right choice for your business. It's risky indeed to run a daily deal, especially when you're selling a commoditized product in a big market with dozens of entrants all vying for limited regional traffic. Your average customer lifetime value probably won't be high enough to justify a 70+% hit to front end revenue, assuming repeat business is rare and loyalty is low.
What you're doing with a daily deal is similar to running a free trial offer for a consumer good that converts to a $10/mo paying customer for 3.5 months, 2% of the time. In this scenario, giving up any amount over $2.00 on the front end per customer is the equivalent to lighting your money on fire. For context, the most successful marketers online wouldn't attempt anything approaching that without a fully built back end sales funnel, probably with a call center and thoroughly tested followup method. And yet the owner of Daisy's Ice Cream Scoops thinks she can somehow make it work with her homemade strawberry sherbet.
Yet, many anti-groupon commentators would have you believe daily deals are objectively worthless to any and all other businesses. This is not particularly directed at the OP, but for the love of all that is holy, Do Your Due Diligence. The daily deal promotion is merely another promotional tool at your disposal in a free market, and if you shoot yourself in the foot with it, you have no one to blame but yourself.
LivingSocial AFAIK had deep roots in CPA and online advertising. You see people criticising CPA as seedy all the time, but the fact is the online advertising giants know what makes people buy, and they do it over and over, and over again. They live and breathe direct marketing like it's a requirement for survival in the industry, because it is. That expertise does not, however, mean you stick your neck out for your customers, or even pretend to care about your business partners. Too often in the online advertising industry are immediate profits sought above all else, with reputation and honesty being tossed aside sometimes. I'm not privy to any of LivingSocial's financials or business practices, but it really wouldn't be that surprising if they had trucked over everyone and made off like bandits. Hopefully they're smart enough to run a sustainable business.
They ultimately passed on the investment, our last gasp to survive, because "Living Social was obviously their flagship, and they didn't want something who's core value proposition was that Living Social was doomed, which is obviously isn't." That's very close to a direct quote.
This doesn't make me happy. I hope Living Social figures it out. They realized Daily Deals were doomed even before Groupon did and tried to work out other revenue streams. I hope this report isn't even true. But God damned if I didn't tell'm so.
In my layman's view, that's a prudent move, similar to neutral/risk reversal stock trading strategies. Of course VC is about more than just money, but still.
So, IMHO, the smart money finds the best alternatives and bets on them too, at some point... (or they exit, if the market is simply going to die, but that's another angle).
I tend to think there's nothing wrong with them other than an over-saturation of the market and a prevailing attitude that says all you need is a sufficiently large mailing list to win. But that's just my outsider's view.
The problem is that it rarely generates repeat customers and/or customer loyalty - they tend to generate customers that come once, when they have a coupon, and never come again.
So unless your business is high margin, you're almost guaranteed to lose money from daily deals.
Thus, it's very good for things like paintball and skydiving and very bad for restaurants.
These can bring in a short term influx of customers but unless the small business has some sense about how to convert those "daily deal" people, it's just blowing money.
In the end, daily deal sites are just another marketing channel. It helps to bring people in but if you can't convert, your ROI will ultimately be negative. This isn't something that small businesses can't understand, it is just not how they view these sites... they only see dozens and dozens of people coming in the door.
For us, we solved this problem for bars, who have this really specific opportunity/problem where when they really need to fill up their bars at very specific times, when they're empty but didn't expect to be. The reasons are too numerous to mention, but it's something every single bar owner will tell you if they've thought about it at all.
However, other industries have other problems, and DAILY Deals solve so few of them. From our analysis, massage therapists and similar businesses (luxury, high margin, service based companies) were the only ones who benefitted across the board.
Daily deals works by drastic price cuts, the end. That means it costs the merchant far more than just what they pay the middleman. The middlemen can't charge more than pocket-change for the service or it just don't work.
So the future as I see it for daily deals sites is small companies making decent money charging huge numbers of businesses tiny commissions to promote their sales through largely automated platforms. It's perfectly suited to a ten-man company, which is why I personally think the over capitalized megacorps are doomed.
Has anyone tried the concept where the "deal" is that you go, name the site, and get a coupon giving you a deep discount the SECOND time you go back to that store? That would seem to make more sense. Because everyone that the store gives the deal to, has actually paid full price once. And wanted to go back. And if you've been twice, you're more likely to go 3x. And furthermore most of the failed leads were a sale, so nothing was lost.
Daily deal sites that offer a discount coupon at a price to the consumer which they have already negotiated a steeper discount for themselves, while cheaper for the discount site, is too cheap for comfort for the vendor.
This is a negative incentive for the vendor to keep going with with discounts, thus reducing inventory. further, the discounts are typically on ephemeral things that people dont NEED but just want.
The model should be flipped a bit: offer progressive discounts on repeat business. i.e.: 20% off on first visit, 30% on second, 50% on third - etc.
Incentivise repeat business.
(I know at the budget conscious end of the cafe/coffee business, the "buy $n, get the $n+1th coffee free" cards do pretty well around here. Not so much in specialty coffee places though, most of them do a good job of giving free coffee to their regulars pretty often. I rarely pay for espresso shots at any of my regular cafés if I buy them at the same time as a latté/piccolo/cappuccino…)
I don't know their margins, but I doubt a 20% discount has them losing much on that item.
I learned early on with my company that when people say things like "give me a deal - I promise I'm going to be your #1 customer if you give me a discount for my first purchase" that the best (for me) possible response is: "How about your pay full price now and the next time you come back I'll give you that 20% off you're asking for." Those that bite actually become loyal customers and appreciate it. Those that don't probably wouldn't have come back anyway.
And, btw, I learned the hard way that 99% of those "future #1 customers" never came back - even when I caved and gave a discount. Hence the revised model.
Punch cards are the original loyalty program, but I'm not sure how well they work for new customer acquisition.
Give the market two to three years to consolidate and reach a sustainable level that doesn't overwhelm or burn the merchants and end consumers.
The HTTP status code thing went something like "Why don't you name off some HTTP status codes?" So I rattled off the ones I knew off the top of my head, but then he asked me for more. It's the kind of question you can look up in about 30 seconds if you need to, but in an interview setting it's difficult to recall the ones you don't see often.
The manager guy also asked me to describe CSRF and XSS and the details of how those exploits work. I knew what they were, but I hadn't actually examined or written one before. I did learn about them inside and out when I completed the latest Stripe CTF though. I thought that question was reasonable, and I just didn't know it.
There were also some questions about caching in high-traffic environments, which I didn't know much about but I knew enough about it to tell them that I would be able to pick it up quickly. I don't think they liked when I admitted not knowing something though. It also seemed kind of interesting that there was so much emphasis on it since I wasn't interviewing to work with the main developer team but with one of their splinter offices who builds proofs of concept and prototypes.
I did pretty well on the rest of it, including the 2nd part of the interview with one of their in-house tool developers. There was supposed to be a third part where I would have interviewed with a non-developer to assess culture fit, but they ended my interview before that part.
I think I probably bombed it because I've been consulting for a long time and have a different development approach than they were looking for.
There were also plenty of bugs and "issues", etc, however, and after a while it became clear they were overwhelmed or something, and things just kept getting worse. The feeling that I was putting lots of personal data into a database that seemed likely to implode at some point was obviously a big turnoff, and I lost interest.
But if they had been on top of things, it might have turned into something pretty cool (I guess you can say that about most startups though!)...
Early on I was impressed by how well these startups were able to capture mainstream attention and change the way so many people live and behave.
But at the end of the day, what value does Groupon and Zynga actually add to society? I'm of the opinion that most daily deals and social gaming companies bring out our most primitive and animalistic tendencies (addiction and impulsiveness), and are antithetical to human progress.
If this is the beginning of the end of LivingSocial and daily deals then good riddance I say.
This can be said of many startups, and this fact is causing a reactionary feeling toward the Valley in many tech/neckbeard circles.
I love so much of what YC does but I wish their motto was not "Make something people want" but rather "Make something people need" because the two can often be diametrically opposed. Kinda like how a parent should not always give their child everything he/she wants (candy at every meal, constant attention, making a mess/scene everywhere you go, etc).
If we as startups only tried to make stuff people "want" then the world might end up looking like the dystopian society in the 2006 film "Idiocracy".
EDIT: How can you conclude that I'm wrong if even you haven't defined "good" and "human progress" in your argument?
I'm pretty new around here and the last thing I want to do is be starting political/moral/religious flame wars in a post about LivingSocial.
The other guy is wrong, good and human progress can be paired well with technology and business solutions. It's called social venture, and it's possible. It's just not what the valley focuses on.
of course this is only true if the market is free.
In fact, if the gov't legalized drugs, and let big pharmaceuticals produce these drugs, i reckon it'd drive the scarcity of the drugs down, leading to their devaluation, and the market would correspondingly collapse (as its no longer seen as the forbidden fruit).
Selling drugs to an addict is in no way creating value for society. None. You're taking money that was hustled/stolen in order to leave someone worse off than if they got clean. It might be that legalization is better than the black market but what I'm contending here is that "just because you made money, does not mean you were serving society".
Some examples: life, truth, and/or pleasure. If it's a combination, how do you prioritize?
Discussing "X has no value" is absolute garbage if you don't discuss "value."
Otherwise, there are plenty of small business marketing and entertainment companies I really like.
I once considered a daily deals type site where the premise was there is a strictly limited number of deals driving up the demand and at the same time, not bankrupting the family owned hardware store because 800 people bought their $500 worth of tools for $120 voucher because they thought more vouchers would mean more return business. Sucks about the stock though, I'm sure every single employee of LivingSocial deserves that money, they had a good thing going. I feel sorry for the families of the employees who are about to lose their jobs. They say the economy is on the mend, the increasing number of failing business stories I read every week says otherwise...
1. Take the least amount of stock possible - your startup is statistically unlikely to succeed. It'd be better to bump your salary up $10-20K than to get the stock.
2. Unless it's liquid - it's worthless.
3. Valuations pre-cashflow - are useless. Anybody can value anything at insane levels using just one dollar. I value HN at $1 billion by offering to buy only 1 share of 1 billion in common stock for $1 right now. See the implicit valuation leverage. I took a dollar, then invented the billion.
4. If you work for a "nasty" startup - one which people can consider to be negative long term to one or more parties - expect eventual collapse or flat line growth (Zynga/Groupon).
5. Companies exist to make management, investors and founders rich - they hold the vast majority of the stock - and benefit greatly from path dependence and network effects. You on the other hand don't. Expect to be screwed at any time.
Think of it like this. Managers/founders of most companies are pretty dipshit - how is it that they can own so much more stock? Simple. Be there earlier! Akin to how old money works. Imagine if you were the first person to squat land near what has now become Manhattan. You'd easily be worth hundreds of millions. There is obviously some skill in researching, predicting, working and acquiring land that will soon appreciate in value. But it's not worth nearly that much. Path dependence, luck and network effects do that. See GFC boom and that dumbass cousin who made and almost certainly lost millions in housing to understand how this works out.
Startups really aren't that different to a speculative investment in a house during boom times. Once you understand this - a lot of things start to make a hell of a lot more sense.
6. PG says be relentlessly resourceful. That's useful. But even better is to be relentlessly cynical.
Free t-shirts? Just an easy way to drop your salary and indoctrinate you - scratch that - it's a god damn uniform - freedom be damned! Free food? You took a $30-$40K pay cut to take the damn job - the food isn't worth a tenth of that + you're now working during lunch hours! Free hardware? That's only $2-$4K.
Hackathons? That's just work during your free time - or if it's during work time, it's a startup product you should own, but don't. More days off? Aren't you already working 60+ hours a week today! Culture shit after work? That's just more indoctrination. Gym membership? Only $200-500 - peanuts! Flexible work hours? That just means work more, but do it at times that aren't 9-5. Parental leave? Big companies and Europe have had that for ages.
Oh, and that culture fit crap? That's just discrimination - rebranded! What? You don't like what other late 20s upper-class educated males like? Be gone heathen!
End advice.
Not saying big companies or government jobs are any better. But at the very least you're already cynical about those things and demand to get paid well enough in risk-adjusted terms.
Agreed. It bothers me to see hyper homogenous work cultures celebrated as some kind of ideal [1].
[1] http://blakemasters.com/post/21437840885/peter-thiels-cs183-...
(Yes, founders take more risk--though "fuck, out of a job" is not a risk to be minimized. Founders do also get much more exposure and have a better chance of finding somewhere to land immediately if things go south, as well as foreknowledge of the southerly state of things and a head start on finding that escape route.)
Did they forget to incorporate and will be personally liable for the debts?
They took the risk of renting out a couple $5 a month servers, and buying a domain?
The last startup I was at I had 33 times the equity a guy hired a month later did. I didn't take anymore risk, I just negotiated better and first.
Opportunity costs are a form of risk; being paid a salary reduces (or eliminates) those opportunity costs and thus reduces risk.
What companies really need are wide-eyed, earnest, new college grads who have no idea what goes on in the real world, and how much they are truly being screwed by their current startup.
Those guys rock! They work 100+ hour weeks, they don't have families, or commitments and are willing to do it all for mere peanuts and empty promises of golden rainbows!
Sadly - a few years of this turns them into realistic employees - and you need a whole new batch to replace them.
Why arent you working harder to give shareholders a disproportionate share?
They called 'dibs' on it before you did, so don't go around with sour grapes.
If so, why not work in that job (rather than at a startup)? Or why not found a startup (rather than be an employee)?
Do I think I'm above average? Depends on what you mean by average.
There are zero barriers to entry in becoming a founder - so yes I'm founder material. As is everyone else. The question that actually needs to be asked is: How lucky can one get?
This may just be a situation where the grass looks greener.
One of the employees I had the most respect for was one of our core crypto consultants who explicitly said, "As soon as I walk in the door each day the clock starts, and I charge $500/hour. It stops when I walk out the door." In pretty much those words.
There was no bantering of free lunches or beer bashes (or, for that matter, stock options) with him. All business and execution.
Look at this person, using the word "employee". Obviously the suffix -ee is always passive and deprecating, and -er always active enhancing. Employer and employee. Trainer and trainee. Appointer and appointee. Payer and payee.
Which is why people who create wealth, workers, call themselves workers. This person uses a more derogatory, passive term, "employee", who I suppose should thank the heavens that "employer" is a job creator. This says more about them then about you.
Karl Marx said in the Communist Manifesto that "The history of all hitherto existing society is the history of class struggles". With unemployment at highs it has not seen since the mid 1980s, with wealth being drained to the wealthiest heirs of the 1% while the people creating wealth get nothing, this hubris and contempt will backfire on these parasites in time.
[1] http://stason.org/articles/money/investing/everything_you_ev...
You only have so many productive days in your life. Wasting them being exploited is throwing away money you can never get back. You think actors don't enjoy doing movies? Of course they do, but they expect to be compensated for it. You think sport players hate their sport and only play for the money? Of course not, they just recognize that without them the managers wouldn't be making any money so they demand their part.
Never feel bad about demanding what you are owed.
Who wouldn't take a pay cut make 40 hours of their week more enjoyable?
"Equity is worthless, never work for equity, always demand cash up front."
"Those darn investors and founders keep all the equity for themselves and get rich off your back!"
You can't have it both ways. Either the equity is worthless or it isn't. Are the investors, who get no salary and only equity, even bigger suckers than the employees? What about the founders who usually take big paycuts when they start the company?
It seems like the real message here is "Make sure you get a BUNCH of equity" not "Don't take any equity at all". Which I can totally get behind. If you're an early employee at a startup, working for equity, make sure you're being compensated appropriately!
No, they are not contradictory statements. Equity is one way to see upside in a startup, but that upside can be completely destroyed for employees. For example, common stock or when founders don't negotiate with investors on your behalf. An employee's relationship with equity can be very different from a founder's relationship with equity (and not just quantity). Situations aren't always this bleak, but the OP was asking for a dose of cynicism.
For example, a well-funded late stage startup recently offered me a salary that was $35k/year below the market rate, plus X hundred thousand stock options. These came with no strike price, and their grant was subject to final board approval after hiring. When I asked how I might possibly valuate these at anything other than zero dollars, they told me that this was just a standard bay area offer structure. When I persisted, they reminded me of the free lunches. When that wasn't convincing, they fell back on the old, "People don't work here for the money, they do because they want to change the world! You may just want to get rich, but we'll be happy if we can cure cancer someday."
Add that to the list of ways to get denied your options. How do you exercise if they just ignore you?
Similarly, they can't specify the strike price because for legal reasons the strike price is set when the options are issued.
Nonetheless, options of this kind are worth a potentially huge amount of money. X00,000s of google shares, given to you subject to board approval and with an unknown strike price, would have been fabulously valuable.
However, perfectly legitimate questions:
How many outstanding shares of stock do you have on a fully-diluted basis? X00,000s of stock options is meaningless, only percentages matter. You should always ask this question.
What was the last 409a valuation for common stock? When did you get your last 409a valuation? This will determine the strike price your options get, assuming that their 409a valuation is less than a year old.
So actually, their answers were perfectly legitimate. $35k under market is quite a bit, though depending on the percentage of the company you were getting it might be fair.
My sibling comment offers a counterexample [1].
> X00,000s of stock options is meaningless, only percentages matter. You should always ask this question.
Exactly right. They weren't willing to answer this question in writing.
> Similarly, they can't specify the strike price because for legal reasons the strike price is set when the options are issued.
I believe it's legal to set the strike price at X percent of the stock price, which seems to be what you'd really need to try to valuate private company stock options anyway.
Bingo. I have no idea why they routinely fail to give enough information to make the option grant even remotely meaningful.
Fortunately, where I work, the head of finance told me how many shares were outstanding, fully diluted, and in writing, when I asked.
I have worked for fortune 10 companies and for 3 man crews. Yet my own assessment of my value has not changed. If an individual understands their own value then they can not be taken advantage of and an employer would not want to. I have taken payment for my services in stock, units, FRNs, gold, beer, and good will. I did so knowing the value of my work and accepting, in my perception, an equal or greater value in return.
To many the culture fit crap you deride has value. Your statement that companies exist to make managers/founders rich is misguided as can be demonstrated if you speak to zealous founders who obsess over their passion. And no person, Mr. Graham included (whom I believe would agree anyway), will ever convince me employees risk as much as a founder or even an early stage investor. I will not enumerate all that I have lost (more than money to be certain) in the two companies I have started. I don't say this to diminish the employee role or risk but to correct a grave misunderstanding.
The very few founders who do get rich damn well deserved it and I guarantee the money doesn't cover all of their losses.
That argument is circular. Of course it has "value" to those who practice it (presumably why the practice exists in the first place).
>The very few founders who do get rich damn well deserved it and I guarantee the money doesn't cover all of their losses.
By that logic, being a founder is always net loss even in the very best case scenario.
I understand you're making reference to the personal cost of a venture, the debating of which is a dead-end of anecdote and opinion.
You make some great points that a lot of "wide eyed" grads could use to hear more of. There are also a few things I take issue with.
About equity: one thing I make sure everyone I hire understands very clearly is that equity is not a sure thing. I have this same conversation on every phone call where I make a job offer: "Here is the percentage of the company you would get. Here is what we think it might be worth today based on realistic multiples of our revenues and profits. Here is what we think it might be worth in 3-4 years if we continue growing as quickly as we are today, you should think about and come up with your own expected value. It's very possible it will be worth nothing if things don't go well." I want people to value their equity, because I think it is and will be worth a lot, but I want them to go in with their eyes open, and understand there are no guarantees.
On the other points:
1. Take the least amount of stock possible is not a good generally-applicable rule. It might have worked for you in the past, but it sure wouldn't have worked well for any of the employees of Google, Facebook, Dropbox, Weebly, etc.
2. Technically correct, but a better way to look at it might be to figure out a current value and the chance of the stock being liquid and coming to an expected value. At least that recognizes some potential for value. If you think the chance of liquidity is very low, then your expected value could effectively be zero. It's probably not a good idea to work at a startup where the chance of liquidity is minuscule, anyway.
3. No, that would not work, because no one would accept one set that way. If you want to make it equally ridiculous, I could invent a valuation that I tell everyone, nobody is stopping me from doing that. A smarter bet would be to ask "What was your last funding round valuation?" or "What is the current 409A valuation?" These are valuations set by third parties. Sometimes VC valuations miss their mark, but at a minimum you know an intelligent third party believes they are going to make money at that valuation.
5. This is not true. The reason earlier employees receive more stock than later employees is that everyone is receiving the same dollar amount, but how much stock you get for that dollar amount changes. To keep it simple, if you are employee #1 and you get $100k of stock at a company valued at $10M, you get 1% of the company. Later, if you get $100k of stock valued at $100M, you get .1%, etc.
This makes a whole lot of sense: first, the company was super speculative and full of risk when the earliest employees joined. Then, their efforts directly contributed to the company being (much) more valuable. This was not a guaranteed process, they took on a lot of risk (things could have gone miserably south). They are rewarded for that risk when the company grows.
About founders being there earlier..... that is a pretty asinine argument. Maybe the founders shouldn't have been there and there wouldn't even be a company we are complaining about in the first place?
6. Don't take a pay cut to join a startup, then. Plenty of us (like Weebly) pay market or better. We don't expect you to work 100 hours a week, in fact we are happy with 40. What we do focus on is output, which some achieve in 40 productive hours, and it takes others 60. Any startup has sprints, but we try to be very cognizant of burn-out and follow up with vacation or more relaxed periods.
If you never want to take a pay cut, then join a startup with traction that's profitable or well-funded. If you want to add on some more risk (for potentially larger reward), then go take a pay cut at a brand new startup and play the game. It may or may not work out, but if it does, then you'll be one of those early guys with lots of stock that the OP is complaining about.
And the free food? What about just doing nice things? Am I automatically a sociopath in every thing I do? Honestly, the free food for us is just nice & convenient. It's a bonus that people tend to end up eating together, talking, getting to know each other better, etc.
We're trying to create a place where we want to work, and that drives a lot of our decisions, not some kind of sociopathic desire to extract another 30 minutes of work.
A more accurate statement would be "...is not a good universally-applicable rule...".
To add some numbers to the discussion, there are currently 203 startups listed on Angel List as hiring for full-time dev roles in the SF Bay Area. How many will exit in such a manner as to yield financial rewards via equity / ownership / deferred compensation?
Note the bar has been set considerably lower than for the companies you listed (e.g. big-name successes), and my sense is that we're still talking about fewer than 50%.
It's quite difficult for new hires to correctly gauge a startups long-term potential. After all, professional investors (who by definition do this for a living) routinely mis-calculate. Given this, it seems fairly sensible for potential hires to err on the side of caution.
Candidates have no way to evaluate the value of the equity pressed upon them, but even in the case of a successful exit, it's usually quite small.
Indeed if you put a margin of safety on valuing any arbitrary startup before they get traction - EV does hit on or near zero.
2. No one knows these odds or who will actually succeed - it's the reason why being a VC is so random. Furthermore - failure rates still push the EV towards zero.
3. The difference between say $3 million at a $15 million valuation post money and my example aren't really that different. Valuation leverage is a huge issue that no one seems to talk about.
5. You say this as if startups grow linearly and smoothly - this is not the case. They do so in fits and bursts - and I've seen too many cases of zombie founders and terrible early employees to honestly think this is true. More often than not later employees carry the company.
6. That's not really a denial. You just reworded 100+ hour work weeks and sprints in nicer terms.
Most frivolous benefits at startups are merely extreme examples of psychological arbitrage.
Dave phrased his answer in very reasonable terms that, based on my experience, closely match reality. You just flat out ignored them and went back to your original claim as if his points simply had no merit.
Aside from that typo, confluence's points closely match my perspective. Just rational risk management. Understand the system you're you're getting into, without illusions. drusenko rhetorically asked if this all makes him sociopathic. (That is, an ideal rational amoral self-interest.) Frankly, I think that's a type error -- he's not sociopathic, but his corporation probably is. And that's just plain institutional constraint; startups already have a huge failure rate, even when acting in that kind of rational way. I am not a sociopath, but my corporation overall acts like one. With my support. Otherwise we court extra chance of failure.
2. It all depends on what your failure rate is. It'd have to be astronomically high to truly "approach zero".
3. You're acting as if somehow VCs putting in millions of dollars are doing it for the express purpose of creating a fake valuation to screw employees. This is a spectacularly self-centered point of view.
The reality is that what you call "valuation leverage" doesn't matter. The valuation set just determines what % of the company the investor owns and if they can make a return if someone else decides that the company is worth more than that or if the company goes public.
The valuation of an investment round is actually fairly meaningless if you really think about it. The only one that really matters is a sale or IPO.
Besides, you could say the same thing about valuation leverage with an IPO. It's rare for 100% of a company to be traded, that doesn't mean that each independent party isn't acting in their own rational best interest by trying to accurately place a value on the company.
5. There are certainly counter-examples, I won't deny that.
6. I've had this discussion here a million times before and I don't want to have it again. We're not EA, we're not forcing anybody to do anything, and I wager our average work week is 45 hours. But suffice to say, if you never want to work a minute over 40 hours, then don't. Nobody is forcing you to take the job, make your intentions clear when you interview.
No, it doesn't. A low failure rate can still work out to an EV of near-zero for the employee. You're disregarding powerful effects:
- dilution between grant and exit
- amount of equity being offered in the first place
- opportunity cost of passing up traditional cash/stock bonus structures at BigCos
The fact of the matter is, a meaningful exit for the founders is almost always an insubstantial exit for the employee. Owning 20% of a company is very different than owning 0.05% of a company, post-dilution through additional rounds of financing.
The culprits here aren't VCs. The VCs are putting in the money the company needs to do its thing. Valuation isn't the problem - the attitudes of founders is. I've found that founders mentally grossly overestimate the value of the equity they're handing out. I've seen people demand 5-figure pay cuts for 0.1%-level equity, and this isn't uncommon.
The amount of equity being handed around by founders, even to early employees, is not high enough for anyone to seriously consider taking a pay cut.
If you want me to take a pay cut, give me an amount of equity that might actually result in a meaningful exit. Of course, at the current salary/comp level of competent engineers, we're talking >1% levels of equity, and no founder is willing to part with that.
2. Dilution, liquidation preferences and different stock class rights do indeed push it towards zero.
3. No I'm not. I'm merely indicating that valuations are bogus.
6. Implicit force is still force - just because you haven't mandated it doesn't mean it's not enforced via threat of firing and peer pressure dynamics.
In short, 13% of VC-backed startups exit for over $10M, 5% exit for over $50M, and 2% exit for over $100M, which is what I'd call a meaningful exit for all parties involved.
An investor's job is to catch the winners. An employee's job is to avoid the losers.
As an employee, your main interest is not in what the top end of the stock may be, you don't have a portfolio, you aren't doing "black swan investments" you are investing your life and your time. It makes sense for professional investors to go in even at ridiculous valuations because one win can carry 19 losses.
As an employee you do not have a 20 strong portfolio. If you start young you have maybe five or six swings at bat and then you'll have a mortgage, kids, family. The return as an employee simply doesn't justify high levels of risk, the main job is just to ensure you're a part of something that works.
So how can you do that? Ask the questions you know make sense. Are you working for company run by founders who can sensibly and calmly articulate why they will succeed. Do the people around them also believe this and do you trust their judgement? Does the company have a justifiable burn rate and is it on track to make sustainable money in a market that's not unreasonably small? Would you pay money for the product or do you feel your customers are being duped? If the answer to the above questions is yes then put value in your stock. If not then don't.
And for the people who won the Powerball, "Don't buy lottery tickets" wouldn't have worked well for them. That doesn't mean "Don't buy lottery tickets" isn't a good generally-applicable rule.
Cashing out big on your startup might not be quite as rare as winning the Powerball, but it's still awfully unlikely.
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Since there's a lot of assertion and not much data here, let's bring some in. After some quick research, this Quora article seemed to have some useful statistics: http://www.quora.com/What-is-the-truth-behind-9-out-of-10-st...
In short, 13% of VC-backed startups exit for over $10M, 5% exit for over $50M, and 2% exit for over $100M, which is what I'd call significant.
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Besides, there are a lot of startup opportunities that pay market, so you aren't "investing" anything in the equity, it's a bonus over what you'd get paid elsewhere.
> This makes a whole lot of sense: first, the company was super speculative and full of risk when the earliest employees joined. Then, their efforts directly contributed to the company being (much) more valuable. This was not a guaranteed process, they took on a lot of risk (things could have gone miserably south). They are rewarded for that risk when the company grows.
If they are giving the same value of stock, isn't that less reward for the risk? I would hope that risk plays into the value of stock granted by employees (ie: 100k and then 50k grants).
Some points you make are valid though, it's a shame you are so single-minded.
The problem with the issue is what constitutes "deserving" of a larger share of equity. Obviously there are different perspectives on this, but in terms effort, there certainly are many cases where employees eclipse founders. I literally just finished a conversation 30 minutes ago with a c-level exec about how the one founder of her company who is still present (there were two) never actually did anything other than give talks and never had anything to do with operations or strategy.
Even in the case of taking on risk, a founder with enough personal wealth and/or strong professional network that failure doesn't severely impact them is certainly not taking as much risk as an employee who is living paycheck to paycheck.
In short, I've seen more than enough cases where strong, effective employees worked harder, took more risk, and contributed more to the success of the company than one of the founders. I'm not sure by what metric the founder "deserved" more equity in those cases besides being there from the beginning.
But what's really the difference between the first few employees and a founder? This is especially true for employees who are ridiculously crucial to the early success of a project when the value of the equity is non-existent. Is being part of a company 6-12 months earlier truly worth 10x-20x more than the next person?
Of course once employee #1 joins he usually works as hard as the founders and I understand if he wonders why he got so little equity but those first months are more crucial than appears.
Let's take the example of the company I'm cofounding (tldr.io). When we started 10 months ago it was nothing more than a crazy idea with a very low chance of success (summarizing the web). Fast forward to today. We're still not ready to hire but we're getting close. The crazy idea has become a "there actually is a chance, although small, that it will succeed". I feel that the difference is huge.
That's really not the case.
the risks of starting before salaries are that you will accumulate a ton of debt (or waste away your savings, or both) for a project that ends up going bust. you will lose many friendships, perhaps even your marriage, because you believe so strongly in an idea that ultimately may or may not work out, and you put 100% of your available time and effort into it.
there's nothing particularly glamorous about that statement i just made. starting a company is hard and it sucks and it usually ends in failure with the founders hating each other.
On this point I couldn't agree more – thanks for putting it so bluntly. I've been trying to figure out what irked me about "culture fit" for a long time.
You should work for a company you are passionate about, take it's stock and assume it will be worth next to nothing and hope for the best.
I too am a cynic, but I also believe that the startup culture we have created has many more benefits than you seem to weigh in on.
I don't work at a startup to get rich, I work at a startup to figure out what I did wrong with my own business(es) in the past. I joined each of the companies I have worked at in the past 3+ years to learn and love my job... big emphasis on these two ideals.
I want to better myself, I want to see how other people succeed and fail, I want to see how I deal with failure without risking my own investment(s) like I have in the past.
I think -- I hope -- that other people in the scene feel the same way.
This is a learning experience, and so far I have learned that this approach to raising massive amounts of money for an inevitably doomed business is totally fucking flawed.
I will start a business within the next year, and like my previous business(es) I will do it with my own money, it will be cashflow positive at launch, and it will succeed because I will not make the same mistakes as others before me.
I only know this because I have joined startups that have failed miserably, as I sat and watched the management teams, and board members struggle to cooperate.
I hope others see this as the same opportunity. This is a chance for us to learn how to be better business people, engineers, and designers without taking the burden of risk.
Sure we will work hard, we will also play hard, and hopefully love our jobs. Some of us will move on to start a business of our own, and with the knowledge we gained from these experience, we get our value out of it. Its not the equity, or compensation, its learning.
When one works for substantially below-market salary and flimsy equity, that's often essentially what he is doing.
However, in the current job market you really cannot hire without offering market rate. The perks are nice and part of classical negotiation game. The "culture fit crap" is their loss - the job market is very competitive now. So I don't think any reasonable startup is offering salary below market rate.
But, the main point I want to say is that the critical problem now is that all these new companies do not offer anything additional to compensation: no learning, no great mentorship, etc. Their entire secret sauce is in their business model: not in technology or software product. So young engineers will not learn new technologies, algorithms, etc. and have great mentors.
So the first thing I tell to my younger colleges is to find a job in some software company - preferably related to systems, networking, and storage. That where you find very very interesting projects (that you can put on your resume) and have great mentors.
I'm a bit surprised the company is so nonchalant about running that far behind on merchant payables. An easy argument could be made that it should not have dipped in to merchant funds at all and all that cash should have been "restricted".
Also, the cheap shot on Groupon is pretty lame considering that Groupon has something like 2x the cash on had as it owes merchants (if I'm reading Sep '12 Balance Sheet correctly).
What's with the Groupon deflection spin? LS clearly screwed up here. Pointing fingers at Groupon as an even-worse-offender achieves literally nothing.
It's like the dot com hype all over again but with crazy short term revenue that's unsustainable
The "Hungry Academy" mention is easy to miss, but that's actually an entire floor unto itself.
I think that if the valuation for companies, which have been overvalued corrects itself, that is ultimately a good thing for the industry and society at large. It means that resources are being freed up to work on more valuable things. It is also another case study from which this young industry can learn.
As for the employee and investors, they have taken a deliberate bet on the company and lost their stakes. This is what you sign up for when you decide to work for / invest in a start up.
http://www.washingtonpost.com/business/economy/livingsocial-...
http://www.reuters.com/article/2013/02/20/us-livingsocial-id...
I don't know if that perhaps hints at the desperateness of daily deal companies to get new business in running such promotions, but it certainly dampens any enthusiasm I have for checking these sites again in the future.
People talk about these companies as if they are tech yet there is such a huge people component that does not scale. Groupon at peak had over 7000 sales people which is insane!
It doesn't mean that most of the advices here aren't just that PrivCo might be making up stuff stories.
The marker is saturated, businesses have had enough of getting little in return and consumers are getting annoyed with their inboxes full of annoying offers.
I honestly don't understand how these sites manage to raise any money at all, regardless of valuation.
The sites had off the charts growth, huge revenue dollars that were growing just as fast and the land was up for grabs.
Even Google got suckered into this when it tried to buy Groupon for billions in cash, I can see where the investors were coming from, well at least before 2011.
People seem to really focus on the negative. Startups are known to be bimodal outcomes. Either you retire from them or your income is down a few years. If you don't believe in a specific startup, don't work for them. If you don't believe in any startup, go work somewhere else.
* Who Designed This Piece Of Art?
Once this funding runs out they will probably be a great bargain basement acquisition for a handful of companies.
I feel really bad for the hard working employees who were counting on the stock options =(
Join a startup because you think it'll be a fun ride, not to make a million dollars.
Not mission statement values, but the actions that are consistently taken on a daily basis.
Is your startup or employer profitable? No? Then why are they spending money on nice offices and expensive dinners and so on? I can almost guarantee that LivingSocial could have done with less than the 800 million it raised had they valued frugality and breaking even more than being some giant media darling worth-a-billion company. Deficit spending can work longterm for governments, but not for companies or individuals.
It's a real shame everyone got cleaned out, but they had to know this was going to happen at some point.
These margins are required to pay for a large sales team to convince businesses that they need to run these deals.
I think a more sustainable model is one closer to traditional affiliates marketing or self serve advertising. Where the deals site provides a platform that is largely self service and takes say a 5% cut rather than 50%.
This does loose one of the original ideals of group deals, that there was only 1 for an area (or at least a small amount each day) so each business running a deal was able to get a ton of exposure.
Startups do give you the opportunity to have a more hands-on role at the company considering the size of the engineering staff. Naturally (if you're driven and you're confident in your ideas and can work well with people), can make a bigger impact at a smaller company/startup than at some of the more established tech giants. I think experience you gain far outweighs the slim chance your 3000 shares of common stock will amount to anything. You can take that experience with you to a larger tech company.
Try to remember how many times it ends up being worth something, and staying something.
otoh, getting valuable mentorship like YC is probably worth paying for.
that said, the daily deal model is clearly broken.
The daily deal model was an experiment that went on too long, overfunded by delusional investors - some playing with other people's money - and media and social media hype.
You know what model isn't broken?
Positive cash flow businesses. :)
Edit: totally forgot, amazon already wrote most (all?) of the living social investment last year. So I guess they got out when the gettin was slightly less terrible.