How to Protect Yourself with Startups? 122
JustAin'tFair asks: "Last year, I took a chance on a small but promising startup. When they approached me, it was a 3-person operation (all involved were investors) with a functional website, a viable piece of technology, and a problem. Their prototype was just that -- a prototype. They were experiencing serious maintenance and scalability problems, and had exhausted their own technical knowledge. I agreed to come on board as their first employee, in return for a decent salary and a nice vesting schedule."
To make a long story short:"My old boss & his partners netted a very nice payday, on the backs of their former employees. What would you do to protect yourself? I got a fair salary, but in the end, they got far more out of me than I got out of them. Would you contract? Get a parachute written into your contract? What have you done?"
"In 6 months, I rewrote and redesigned most of the key subsystems, built new servers, hired new staff, and got the company rolling on a serious path. Serious senior architect-level stuff. Then it all fell apart: one day, out of the blue, they fired all of us, claiming shortfalls in funding, and so on. It sucked -- it always does (I watched my own startup fall apart in the dotcom 1.0 days). So the other day, I saw they were bought out.
Sucks twice.
In the end, that's their right. At-will employment, and all that. However, it chafes me to get screwed like that."
Sucks twice.
In the end, that's their right. At-will employment, and all that. However, it chafes me to get screwed like that."
Plan B (Score:5, Interesting)
Talked to the new owners about a job yet?
Re:I don't understand (Score:5, Interesting)
That's my thought as well. My only guess is that he didn't exercise his options. If that's the case, then things get a bit tricky. If he was lied to or otherwise mislead about the status of the company, then he might have a chance of recovering his losses in court. He might even find a lawyer to work for him on a pro bono basis, with the expectation of the judge ordering the other party to pay for the lawyer's services.
If he was not mislead about the status and simply chose not to exercise his options, then he's SOL. Thems the breaks.
1099 and reverse-options (Score:4, Interesting)
Then, decide how much less money you're willing to take per year for a shot at a bigger pie later. Call that number $X.
Ask them to pay you for the first 2 years as a form-1099 contractor and give them a vesting schedule for buying out your ownership of the intellectual property you produce. At six months they can buy you out for X cash. At 12 they can buy you out for X cash and X stock. At 2 years they can buy you out for 4X stock. If at any time prior to 2 years they fail to maintain your contract, the offer to sell changes to 3X cash and is good for 3 years. Upon buyout or after 2 years (whichever comes first) you expect to be offered a W2 salaried position at the fair market value of your services.
This way you're both reasonably protected. If things go well, they have a fixed and reasonable buyout. If things go poorly then either you walk away with your work-product or whoever they sell the remains to will have to seperatly buy your work product from you. And if the buyer insists on a package deal, they even have a fixed price for it that they know up front.
Get ahold of new company and see about a job! (Score:4, Interesting)
Ask for partial payment in stock (Score:1, Interesting)
Every two weeks, they have to give you a paycheck and the agreed upon number of stocks. After 6 months, you'll own 5% of the company. Thus, if they later make out like bandits, at least you'll get 5% of whatever they get. If they fire you before the first 6 months are up, then you'll leave with less stock, but you won't have lost as much time, either.
get a lawyer (Score:2, Interesting)
So, my advice is, if the potential money involved is significant, get a lawyer, and let them decide if you have a case.
You ask a very good question (Score:2, Interesting)
I have heard of similar things happening to others at startups.
The times that I've been employed by large companies I have found them to better at sticking to whatever deal was offered initially.
Perhaps this happens because startups know that in general they are not as attractive to job-seekers as large firms are. They can't offer more money, so they offer more talk.
What to do about it? My advice would be to only trust verbal assurance from people that you've known and trusted for a long time. For anyone else be cautious, and think about what they really want from you, rather than what they are saying. Or else just charge a surchage to work for a startup.
Immediate Vest (Score:2, Interesting)
Re:Fair (Score:3, Interesting)
I work in a promising startup now - the options are great if they come through, but if not, I don't lose a whole lot. I made sure that my salary and benefits were adequate when I took the job.
The best thing about working in a startup is that it's a small company, and we're all friends (having worked together at a previous company). That is worth more than all of the money in the world, because it makes working more fun than most other jobs.
I disagree with the parts about well-focused projects and little bureaucracy - it only takes one or two to spoil things. But because the rest of us are so close, we've come up with ways to deal with that.
-- Joe
What century do you live in? (Score:2, Interesting)
The market is dynamic in the U.S. In other words: we hire and fire like it's nothing. Didn't Slashdot the other day link to an article discussing this effect in the U.S. economy and its positive value?
As 1/4 of the business at the time, you should have demanded at least 1/4 of the business.
Taking pay at a startup is the easy way out. And I guarantee you it's why your employers didn't feel bad about letting you go -- they assumed the risks, you took a steady paycheck.
When I started my business, I offered a friend of mine who does graphics work for me the chance to get in on the ground level. He took a pass, and instead took pay. Now he bitches that he doesn't have a say in things.
Guess what? Tough shit.
That paycheck is a huge thing for a startup to fork over. It is money that could have been saved and risk that could have been transfered.
Surprise. Risk and reward are tight.
You skipped risk. Now rewards skip you.
Wanna protect yourself next time? Take a bigger risk and demand a bigger stake. No paycheck -- get the chunk of the business you feel your work constitutes.
Re:How to protect yourself.... (Score:2, Interesting)
I worked for a startup that floundered in startup status far longer than any company has a right to - they're still there after nearly 8 years in operation. I was there long enough for my vesting schedule to be completed (and then some), and should have been able to cash in a very tidy sum. Vacations in Rio, private schools for the kids, and a new home with no mortgage kind of tidy.
Well, that's not the way things worked out. The company had some questionable financial practices - well the parent company did, anyway. The parent saw their stock rise from $20 through 4 splits, and end up at $142 right at the height of the dotcom crash. Of course our VC was no idiot, he sold as much as he could possibly sell - both his stock and ours, within a month of the crash. That crash saw the parent stock fall back through 2 or 3 reverse splits back down to penny stock status, and was finally delisted because they failed to file some financial report with the SEC.
Funny thing, though. When stock was back near the bottom - under $20 if I remember right, the parent company announced a massive stock repurchase. Total net: Over $800 million. Of course, it was all through his own company stock, which had been overpriced based on our expected performance, which never happened due to a "lack of available funding".
During all this, our company was pushed through a 100,000 to 1 reverse split. There had been so much watering down of the stock at this point, that people who initially had options on a measurable portion of the company now had less than one share. And anyone who had purchased vested stock when they left had nothing - to the tune of several thousand dollars in some cases. Those that had a vesting schedule found that they had to wait 5 years for roughly 1 share - though most came out to roughly 1/100th of 1 share. No new option plans were forthcoming, though they were promised at the time.
This was (hopefully) an extremely uncommon chain of events, but I have to reiterate the 3 points presented by the parent. A few other posters have made suggestions to the effect of "make sure one of the golden cuffs are on your employer". In otherwords, get a severance contract, and make it as sweet as you can.
Another thing to remember, as stated by a former coworker:
"It's all about the BS"
BS = Base Salary. (Thanks Captain Boiko!)
Look at this as a paraphrase of the 3 points above. The options are nice, but that's just lottery tickets.
Still, in a case where you're employee #1, and you have such a critical role in getting the company successful, it is often better to negotiate a percentage of the company, rather than a number of stock shares. The VC can always add more stock, but if you negotiate even 0.10% of the company value in the event of a sale, that will always be 0.10% of the company value, regardless of how they water down the company stock.
Better luck next time. Personally, I'm avoiding startups like the plague these days.
Re:1099 and reverse-options (Score:3, Interesting)
When the founders of a small business look to hire their first employee, they're looking for three criteria:
1. Well above average expertise. Like themselves, in other words. Such people are available, but it takes months of interviews to find them.
2. Fanatic dedication to the work. Like themselves, in other words. Nine-to-fivers need not apply. When combined with criteria #1, these people are no longer a commodity. They can be found but it takes a while. By the time you sit in the interview the founders will have figured this out and are willing to negotiate.
3. Will work for well under the going wage. At this stage of a startup, the founders are taking out perhaps a third of what they would be able to get in a salaried job. If they're lucky it pays the mortgage and utilities. Unless they're particularly well funded (and few startups are) the founders will have to cut their own salaries even further in order to make that first hire.
Its incredibly galling to take a paycut so you can hire someone at a salary you won't claw your way back to for a couple years. The founders don't want to do it, so they look for prospective employees who will accept a basement salary in exchange for buying in to the company itself.
Their offer is invariably stock options. They can't simply give an untested guy stock; it wouldn't be fair to them. But options are reasonable from their perspective. There is no down-side risk and the employee gets a nice payday if the company survives.
Unfortunately this offers the employee has no protection whatsoever from the downside risk and no say in how the company is run in order to avoid that downside risk. He's not going to get a say in how the company is run, but he can negotiate in order to mitigate his downside risk. And if its at all possible they'll say yes because nine times out of ten he's the only prospective employee who met all three of their criteria.
From the poster's description, he met all three criteria. That's why they hired him. The problem is, he took their offer instead of making his own deal. It gave him zero protection from the downside risk.
What goes around, comes around... (Score:2, Interesting)
My advice is that you use this experience to your advantage. Next time an offer like this comes around, mention this job. Hopefully, the owners aren't such dicks that they'd give you a bad reference. References are cheap and he deserves a good one. Any business person with half a brain knows that experience like this is golden. Also, any business person knows you keep truly talented people around. Ever notice that top executives work in clusters. A CEO hires people he trusts. He hires people he knows. You reward people for their good work. You should try working as a contractor next time. Charge a fair hourly rate. Try to get some options in company. Heck, make them give you an inflated title. Use that to get your next job. Heck, go get a MBA and put together your own business plan. You've got useful experience. It will help you get into business school and get investors.
Look, it does suck. If nothing else, I feel for the guy. He did a good job, and now he's unemployed.