Ask HN: Why not more transparency (says the guy who was just laid off)?

There are three reasons: fear of losing people, outright greed, and ignorance.

Fear of losing people is simply that people will jump ship before the company sinks if there's a strong chance that it'll fail; losing key employees then sinks the company. Pretending everything is awesome up until the last day can actually save the company if you come up with a last second investment, which does happen occasionally.

Greed is obvious - founders don't want you to know how much money there is so they can lie about how much they can afford to pay in order to keep your salary low.

Finally, and I suspect most commonly, a lot of startup founders are so bad at keeping track of their cashflow that they can't be transparent about it. They literally don't know what money is available, and they're just as shocked as you are when the business runs out.

Ignorance is likely a bigger cause when the company is not funded.

Funded companies have people they have to report to with milestones, financial status etc. So they should not have an ignorance problem when it comes to cash flow etc. But I totally agree that most small businesses/startups without funding or outside assistance will likely not really know where they stand day to day which can cause the big uh oh.

Funded companies that let it get to this point, know they let it go to far. If they can't meet the milestones or get more funding etc, then they should really have the wind down plan available and the cash on hand to pay for it.

My startup was funded. During the 18 month runway when we were spending the investment money we had a grand total of 2 meetings with the investors. We did a lot wrong, but so did the VCs in my opinion - we were a 'boring' business tools company from an accelerator full of exciting B2C, 3rd sector, big data and social media companies. They ignored us. If I did it again I'd absolutely insist on more oversight and input from the VCs but that's something you only learn with hindsight. We were definitely one of the ones that let it go too far.

Ouch, sorry to hear that, but I believe everyone does a lot wrong, just hopefully we can outweigh the screw ups with enough successes to make it work.

To me the support from an institutional type investor (VC) is to help you dodge preventable mistakes and open doors, which is the bigger attraction than just cash (not that cash can be dismissed). It sucks to hear you didn't get that. Do you think your experience is more normal from what you know or that it was more an anomaly?

I ask because I have raised money for a couple of my own companies in the past, mostly from high net worth individuals and every time I was required to provide monthly/quarterly financial reports and projections. And they were reviewed and if stuff didn't line up or they saw something I didn't I would get a call to discuss it. I sometimes resented it right at the moment because I was knee deep in a customer issue or feature, but I learned a lot and it continues to help me now.

First, I don't think you were treated fairly. No one should find out at the last second that the company is out of funds and unable to keep you. It should be a dialog that is on-going for a little bit to give you options and time to prepare etc. Their method and motive was selfish, or inexperienced (myself having done this in the past and having learned my lesson).

Speaking from running my own company (and from a bootstrapping perspective), it is hard to be 100% transparent. Likely it is easier if you start that way, but it is hard either way. I also think it is likely easier when you are well funded because Cash on Hand goes a long way to keeping people comfortable. But there are so many close calls when you are starting out as a company that a lot of employees would likely have a really hard time with full transparency unless they also knew there was 12-18 months of runway in front of them.

Bootstrapping there are months that start and you don't know where the entire payroll will come from, your job is to keep people focused and find the funds. Many times that means not taking much or any money yourself, to make sure employees are paid. Other times it means having to find another small contract or signup another X people etc by a certain date to cover everything. Partners accept this risk, but employees many times are employees because they fairly don't want that risk. So that is why I think more small businesses and startups don't practice a Buffer level of transparency. BTW -- IMO if a company is constantly having this issue then its time to talk to employees and cut back some. And not wait until the last second as what happened to you.

Most other aspects of the transparency is pretty easy to do IMO. Publishing the burn rate, churn, revenue stats etc isn't really that difficult. Publishing peoples actual salaries is a little extreme but publishing the bands and cost of living variances is fair game anywhere. I think when you get into cash flow and cash on hand is where things get harder for a bootstrapped business and is the primary reason most don't publish those numbers to employees until they are quite profitable (if ever).

Actually, there's a competitive advantage to being dishonest if you're close to insolvency.

If you admit that you only have 2 months of runway left, your employees will start shopping around. You'll lose your best employees first.

If you keep it a secret, two things can happen:

1. You raise more money, problem solved! (or market conditions change)

2. In 2 months, you lay off everyone. Sucks to be them, but you got 2 more months to try and raise money.

In a nearly insolvent business, dishonesty is a better strategy, because that maximizes the value of the implied call option if you do turn things around.

There's usually no social penalty for being dishonest. You can always find new employees.

fsk, thanks for voicing what may be an "unpopular" opinion. for the sake of debate, let me provide rebuttal.

in game theory terms, I think you're arguing that the founder's assume all parties will act only in their self interests, and if they disclose their financial difficulties, the result will be "Option A", as a result, they choose to go the "Option B" route, where the founder gets off "free" and the employees get screwed.

However, I would argue that "Option C" is possible too, where all parties work together to try to save the ship. I've heard stories of employee's willingly reducing their salaries to extend runway. I personally am in a financial situation to do such a thing and would have. For other reasons, I also could have helped out in a meaningful way with fundraising but wasn't even aware that such a thing was needed until the day I was fired.

Again, this might be naive, but I do think it's possible in situations where there is mutual trust and respect amongst employees. I wouldn't be surprised if there are many stories out there where founders and employees all make sacrifices to extend runway.

--

Option A: If A and B each betray the other, each of them serves 2 years in prison

Option B: If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)

Option C: If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

http://en.wikipedia.org/wiki/Prisoner%27s_dilemma

This isn't really a prisoner's dilemma scenario. Why does everyone try to match a scenario to Prisoner's Dilemma when it doesn't fit.

Consider the payoff matrix for the employee:

Employee finds a new job, old employer fails: +5

Employee finds a new job, old employer succeeds: +5

Employee stays, old employer fails: +0

Employee stays, old employer succeeds: +6 (+10?, +20?)

I wouldn't say finding a new job is equivalent to "defecting".

A better analogy is if the employer really put together an awesome team, and he hopes to work with them again in the future. In that case, honesty is better. But that's iterated game theory rather than a single game.

If you play Prisoner's Dilemma once with a complete stranger, you could argue that the Nash equilibrium is to defect. When you play with the same people over and over again, then defectors can be punished.

Unfortunately, the modern economy is more like a group of strangers playing with each other for one game. If you defect, you can always find someone else gullible to play with next time.

1. shouldn't you be looking at the founder's payoff matrix, since they're the decision maker (wrt to disclose or not to disclose)?

2. I think you focused on the employee payoff matrix to argue that they'll always pick to defect. but I would argue that humans have "emotions" and sometimes even loyalty. like i said, I personally would have stayed the course and sacrificed some of my "payoff matrix" but never got the chance.

disclaimer: i may have again butchered the theory of prisoner's dilemma, but i think you get my point so hopefully we can avoid arguing the technicalities of prisoner's dilemma.

Lastly, I would argue that in startups, this is a game you do want to play over and over. if you're only hiring expendable, replaceable employees, then you're probably playing the wrong game, with the disclaimer that I definitely don't have all the answers and reserve the right to be wrong.

It sucks. Hopefully you will land on your feet. I went through a similar situation. The founder at least let us know the approximate runway length before our series A funding would run out. It was clear to everyone as employees that we were still struggling to get meaningful revenue growth. Still in the end it was a bit of surprise because it sounded like he had verbal commitments to do series B funding - and then it all seemed to fade away over the course of a week and all 12 of us employees got the call on the same day -- "can't make payroll at regular rate - you will get the minimum wage required by law and everyone is laid off as of today."

So I would say my boss at the time tried to do the middle road - it was enough transparency that we weren't surprised at any fundamental level. We had a last straw hope that then went away. I think that level of transparency helped me to not to be bitter toward to the founder.

I don't think they can retroactively change your payroll to minimum wage, even over a single period. I think I would have lawyered up under those circumstances.

You can't collect money that doesn't exist. It is normal and legal for businesses to go out of business while owing people money, and for them to never get that money. This company couldn't make payroll and laid off all employees: it's broke and folding. They'll declare bankruptcy, liquidate the furniture and other assets, distribute whatever they get for it (probably entirely to secured creditors, not employees), and cease to exist. All the remaining debt just disappears, and there's nothing a lawyer can do to change that.

Missing payroll is one of the few items that can pierce the corporate veil. Laying off employees is one thing; saying that the work they've done over the last two weeks will now be paid at minimum wage is quite another.

Actually, so long as you pay minimum wage before folding, there is virtually no chance a state or federal court would pierce the corporate veil and impose personal liability. This has been upheld in both California's supreme court and federal courts. FSLA for example is written broadly enough that a company officer may be considered an employer and personally liable for FLSA violations, but only liable to pay minimum wage, not contractual wages and benefits.

What mswen's employer did would shield them from any personal liability in California and most every other state.

Here's a good review of the relevant case law on this: http://www.latham.com/thoughtLeadership/officers-and-directo... [PDF]

But if you retroactively reduce someone's salary to minimum wage, don't they cease to be "exempt" employees, at which point they're retroactively entitled to overtime pay?

The Department of Labor says:

"Exempt computer employees may be paid at least $455 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour."[1]

So the minimum salary to be exempt from overtime is a lot higher than the federal minimum wage.

[1] http://www.dol.gov/whd/regs/compliance/fairpay/fs17g_salary....

Fair enough. Well, fair enough in that you're probably right; it doesn't seem fair on an individual basis. I would still have consulted a lawyer in the case mentioned.

Because most startup founders don't care about their employees. Just like any other business owners, they have this mentality that developers are tools. It's the common management mentality that you'll find in any business, most startup founders learn the same management skills and are no different.

Getting laid off sucks. And though it in no way lessens the suck for you, it also sucks for the people doing the layoffs...and since having to lay people off can be an admission of potential failure of the company, laying people off can profoundly suck. There's no "they had to do it to me" for an owner laying off staff. The owner is the doer-it-toer.

Imagine Friday morning, the Owner got the financials, made a decision, and laid people off in the afternoon. Or maybe they got the financials on Monday, couldn't close a deal all week, wrote paychecks and on Friday did what they had been dreading and trying to prevent all week [or month or year].

It's hard enough to be transparent with oneself, we all know that most startups fail. Sorry to hear about your misfortune.

Good luck.

"Last Friday I was told I wouldn't have a job on Monday."

I suspect that the same business owner who'd fire all their employees without notice would be hugely offended if one of their employees would walk into their office on Friday and announce they were quitting, and would be working somewhere else as of Monday.

I agree with the thoughts others have written about fear of losing the best employees. In addition, I think a lot of managers keep things secret because they hope to avoid difficult conversations. Also, if there is one person who you really don't want to share something with for whatever reason, it's tough to let everyone else in. Those things don't excuse a lack of transparency, but I think they contribute.

Regardless, absent of some extenuating factor related to performance, no way should you have been given no notice and no severance. I'm sure they would have taken it poorly had you (when things were going well) have given them no notice.

Good luck getting back into the game.

I've found that transparency comes with strength. When you have nothing to hide, it takes a lot of extra unnecessary effort to be opaque, so you might tend to lean towards openness.

When you're weak, you lean towards opaqueness and even deception (think Sun Tzu).

I think it's natural human behavior. So rather than asking "Why not be transparent?" I'd ask "Why align with a company that is opaque? Isn't that there way of saying they have something to hide?"

good point malcolm. i definitely agree with your point on choosing who to align with -- this process has been a good learning experience on picking the company you keep.

I have slowly been more and more transparent to my employees during the last three to four years. Through this opening up process I have realised that the main reason for not being transparent was my fear of other seeing me as a failure and my fear of how other judge what I did and how I ran my business.

As my self confidence has grown so has my openess!

startup i was part of was one of these transparent ones. founder told this he is doing for the first time and this is his 4th or may be 6th company (don't remember exactly.) Not sure about employee morale - some stayed, some were hit and left when financial problems came in. But most importantly found told he will never will do it again, because it cause way more stress than keeping everything closed..

So... there might be also personal stress management involved.

Bidness is bidness, no matter how small.

I hope you had a nice weekend. :)