
Who really gets hurt when startups blow up, and what to do about it - prostoalex
https://medium.com/@stuartawillson/therohnos-who-really-gets-hurt-when-startups-blow-up-and-what-to-do-about-it-2110330d7880
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mikekchar
As an employee, I would advise positioning yourself not to be the one that
gets hurt. For example, if you want to be an entrepreneur, then be one and
start a company (ideally with other people's money). But if you want to be a
programmer, then focus on that. Work in interesting places with interesting
people. Build your career based on the work you are doing. If the work you are
doing is crap, do everything in your power to move to a place where it is not
crap.

The golden handcuffs are more handcuffs than gold. Ask for a reasonable wage
and make sure you get it. Anything else is gravy. Understand when you join a
start up that it might disappear under your feet and make sure you have a plan
B. But, always, always make sure that you are building the career you want.

In startups I have seen so many people (employee #single-digit, usually) who
get promoted out of the job they want to do. They hang around doing stuff they
hate because, "It might be a big deal in a few years". If there is a downturn,
then they are the first ones to be asked to work months (or years!) with no
salary because, "I'm sure we can turn it around and they are giving me
equity!"

Obviously, it's up to the person, but if I could sum up the antidote for the
misery I've seen in my career: 1. Cash on the barrel head, 2. freedom to do
good work, 3. interesting co-workers. As a programmer, I never ask for more
(or less). (and seriously... if you miss payroll... I'll still be your friend,
but I won't be working for you... sorry. See rule 1.)

~~~
OpenDrapery
Interesting co-workers is a big one. Very hard to vet before accepting a job,
however. You won't know how uninteresting they are until after you start.

~~~
nunez
YES. This is impossible to gauge during an interview or even within the first
week on the job. The only way to de-risk this is to have known the team
members for some time prior to working with them (hence Buffer's bring-your-
own-team experiment).

~~~
mikekchar
To some extent you can at least gauge management's attitude to hiring in the
interview. Are they hiring anybody they can get? Or are they being choosy? If
the latter, what is it that they are looking for? Do you feel confident that
they can discriminate and find those people?

Some questions I recommend asking are: What attributes are you looking for in
candidates? Have you ever hired someone and wished that you hadn't? How do you
resolve that problem? What are the best attributes of the people on the team
for which you are hiring? During this interview process, you are obviously
trying to make sure I'm a good fit for the team. How do you normally recognize
this?

The last question is quite cheeky because you can then change your behaviour
to what they are looking for ;-) But the main thing you are trying to discover
is: Have they thought hard about their team composition and do they understand
what it is they want? Do they hire all the exact same people (good if you like
that kind of thing, but potentially very boring)? Have they thought about the
difficult problem of recognizing the attributes that they are looking for?

------
markbnj
Interesting that the author mentions disclosing financial performance data but
not capital structure. Many startups attempt to induce employees to trade
salary (or time) for equity, without making it easy or even possible to
understand the company's capital structure, i.e. how many preferred shares
have been issued, what the preferences are, etc. I was recently recruited by a
startup that made noise about my trading salary for equity, but had been
through four institutional rounds. I wanted to know what the preferences were
and what would be left for the common if the company sold tomorrow at various
valuations. They brushed me off and I haven't heard from them since. If you're
going to ask me to basically invest in your company by either working for less
money or working longer than usual hours then you had better be prepared to
disclose your capital structure. As a former founder myself, and someone who
is probably older than the average startup employee, I know to ask these
questions. The majority of younger colleagues whom I have discussed the issue
with don't even know what I'm talking about.

~~~
hkmurakami
I advise my friends to do the same, but often realize that like you have
found, they aren't really equipped to ask the question in an effective manner
even if I tell them what they need to ask.

In that light the "assume your equity is worth zero" really starts to be a
good self protection mechanism.

~~~
markbnj
That's the approach I take. I tell them that I will think of their equity like
a bonus, and I will be happy to work hard in anticipation of getting something
from it, but probably will not trade real dollars in return.

------
combatentropy
"The real losers are the employees," fourteen paragraphs in.

O that more writers would rediscover the format of the inverted pyramid (think
news stories, lead first).

Instead so many are following the format of: dump to paper the entire warm-up
process. This warm-up is often necessary. It's fine to even write it in your
first draft. Before publication, excise the long intro.

~~~
manuelflara
I'd also argue the customers are also real losers, more so than employees
sometimes that often times can find another job really easy.

~~~
FussyZeus
In the specific case of Theranos I'd agree, but almost everywhere else it's
exactly the opposite. If a company's services are irreplaceable they likely
wouldn't be going out of business, so going out of business means there are
better alternatives.

Again Theranos is unique: The product they served may have costed customers
dearly either financially or worse.

------
pdkl95
> The real losers are the employees

It is true that employees are often at the bad end of a power imbalance -
which often creates information asymmetry, among other problems - surly the
"real losers" are the people who just had their test results voided.

> Who Really Gets Hurt When Startups Blow Up?

Depending on what the startup does, one of the groups that is hurt is "the
users". I encourage everybody in a startup to listen to one of Jason Scott's
talks[1]. He is the Angel Of Death that descends on failed internet startups
with his Archive Team that tries to move as much data as possible into the
Internet Archive before the servers are shut off. A lot of ordinary people can
be caught in the crossfire when the businesses they trusted with their data
and infrastructure are sold off as scrap.

I'm not trying to diminish the problems that employees face in the same
situations. Being laid off sucks. Knowing that years of your own work will end
up unfinished is terrible. Instead, I'm suggesting that the users should also
be considered in that analysis.

[1]
[https://www.youtube.com/watch?v=aNeE8-iVkwY](https://www.youtube.com/watch?v=aNeE8-iVkwY)

------
dbuxton
Non-US businesses find it baffling that transparency is so extraordinarily low
in the US. Even the smallest UK company has to publish information on
fundraising and basic finances (admittedly, with quite a big lag). The same
applies basically everywhere in Europe. Russia is in many ways far more
transparent than the US for company data (both financials and
ownership/funding).

Given the regulatory attitude to small business secrecy in the US, it's not at
all surprising that companies can implode even when there is a lot of noise
and publicity.

Typically the rationale for this though is to protect counterparties, not
employees per se as the author suggests. (And also just that sunlight is the
best disinfectant).

~~~
beachstartup
you're not seeing it from the other side.

in those countries, you couldn't hope to land your first client if you are a
small unfunded startup with no brand-name investors or significant revenue.
i.e. you have to be connected to start a business, good luck trying to
bootstrap anything. i believe this is a net negative.

in the US, you can, because nobody can just click a few buttons and see you
have no significant customer base or brand name investors.

~~~
enraged_camel
How is it a net negative? Should people not have the right to know exactly
what kind of company they are about to do business with? When you invest in a
product or platform, do you not want to be able to evaluate whether it will be
around in 3 years?

~~~
gregmac
> When you invest in a product or platform, do you not want to be able to
> evaluate whether it will be around in 3 years?

How do you judge based on that? Even Apple had a customer #1.

~~~
friendzis
There are fundamental differences between tangible products and services -
change and company shutdown. Tangible goods are sold as-is, can be evaluated
as such and remain functional even in the event of company shutdown (unless
its heavily backend dependent). Services, on the other hand, are expected to
receive improvements (and startup services are quite often sold with future
improvement roadmap) and die with the parent company, possibly with all your
data.

~~~
beachstartup
and when google/apple/facebook buys your service and shuts your service down,
where does this logic leave your customers?

these heuristics are completely invalid in today's economy. sure they sound
intuitive, but they're not.

[http://ourincrediblejourney.tumblr.com/](http://ourincrediblejourney.tumblr.com/)

in fact i could make a reasonable case _that having brand name funding means
you 're more likely to NOT be around in 3 years_

------
tdeck
But professional investors value companies as a full-time job and still get it
wrong a lot of the time. My full-time job is writing computer programs, not
investment banking or venture capital. So even if I have access to this
information, how can I know what to make of it? I don't know what's important,
which little number might be the secret sauce or the torpedo in the engine
room. And any company will choose and frame those metrics that make its future
look brightest. I think this is a fundamental problem with equity as a form of
compensation. As the article points out, I can only invest in one job at a
time. Even if it's a good job, how do I know what the future will bring in
terms of option value?

As for making me feel like an owner, an oft-cited benefit of equity, I think
that's a social phenomenon and not something you can conjure up with a piece
of paped. Just as putting a ping pong table in the office doesn't guarantee a
laid-back culture, issuing RSUs doesn't guarantee that each employee will feel
like an integral part of the mission rather than a cog in the wheel. Both come
from the relationships you build up as you go along.

~~~
mannykannot
Feeling like an owner is not a benefit, except arguably in the very rare cases
where it is true. In all other cases it is a delusion that benefits someone
else. If you are getting that feeling, ask yourself if you can act like an
owner.

------
skybrian
According to this article it's the employees, but in the case of Theranos I
would have expected the answer to be the patients who made decisions based on
bad test results.

------
parsnipsumthing
Isn't this simply an issue of risk preference? Working for privately held
startups is more risky than working for established businesses. Presumably
employees are willing to stomach this additional risk for the presumed
upsides.

Is the answer really to burden employees with even more data, or just for them
to be smarter about where they choose to work?

~~~
chasing
By "burden employees with more data" I assume you mean:

"Give employees concrete information that they can use to make financial
decisions."

------
rguzman
> The real losers are the employees.

Why victimize the employees so much? It isn't like you go to work for the
startup and when it implodes you are left with nothing and no options -- far
from it, you likely made a good salary while you worked there and are likely
very employable afterwards.

> They are investing their time and their careers without access to any
> information.

Being that employees ARE investors (their time), they should do their due
diligence, too. A company not being transparent about whatever information you
need to make a good investment decision should be a reason not to work there
ie as a prospective employee you should evaluate how the company shares
information with its employees.

~~~
st3v3r
"It isn't like you go to work for the startup and when it implodes you are
left with nothing and no options -- far from it, you likely made a good salary
while you worked there"

Aren't startups notorious for paying crappy, below market wages?

"Being that employees ARE investors (their time), they should do their due
diligence, too. A company not being transparent about whatever information you
need to make a good investment decision should be a reason not to work there
ie as a prospective employee you should evaluate how the company shares
information with its employees."

Maybe. But given that they are required to give that information to investors
who invest with money, why shouldn't they be required to give that information
to investors who invest with time and effort?

~~~
ci5er
They aren't legally required to provide _any_ particular set of information to
an investor. (They are, though, forbidden from mis-representation and fraud).

The investors ask for it, and if management wants the investor's money, they
provide it.

Employees could easily drive the same bargain.

What about periodic updates? Investors are often board members as well as
shareholders. Certain amounts of disclosure may be made to the first (depends
on the by laws) and must be made to the second.

On might say that the employee is working for stock, but they really aren't:
stock would be taxable income with no cash with which to pay the tax. They're
really working for stock options, which are not stock. Which means the
employee isn't a shareholder. So they don't get the same shareholder
disclosure. This is easily fixed: exercise an option for one share. You even
then have "your board member" to represent you! Or course, that's probably one
of the founders (common stock), so your day-to-day experience may not change
much.

In my (limited) experience with founding a company, raising angel investments,
restarting it with the person who would then be CEO (the old investors were
made whole) and then raising equity from outside investors in multiple
rounds... the biggest problem with employee disclosure is that they are
financially functionally illiterate. It's a bit burden! We chose to be fully
transparent (for good or bad) where the entire sales pipeline was printed and
posted every Friday, together with the balance sheet and the income statement.
We summarized this with a one-weekly-tick-update on a large (and maybe grim?)
"days-to-death" chart. In short -- just everybody "knew the deal". Not
everybody "understood the deal", but whaddyagonna do?

As the number grew lower, people would (rationally) become concerned.
Sometimes (not often) I had a line outside my door from people wanting a
private session to discuss "what should I do?". And although the real answer
was "Leave me alone and let me work on closing this deal", I never said that!
:-)

As a person being asked to work for free ("just until we get funding!"), I
can't remember the last time I was refused a chance to glance over the cap
table and balance sheet.

Maybe the answer is: Just ask. If they say "no", that may be all you need to
know.

------
heisenbit
There are inherent risks in startups. Those may be better manageable from an
employee perspective with more disclosure. A fundamental problem with startup
is that data is backward looking, extremely noisy and is not really a good
predictor of what's to come. Considering the need of high level negotiations
about funding often at the brink of shutting down financial disclosure at the
wrong point in time can put the startup at a disadvantage.

There are also risks of misrepresentation and outright fraud. Those can't be
solved with data room access but only fact finding audits from the outside and
whistle blowers from the inside.

------
psadri
I find some of the attitudes towards equity / cash salary baffling.

If you care about the "safety" of a cash salary, join a big, established
company. You'll have limited upside but a more stable cash income. No risk, no
reward.

If you are joining a startup, it is by definition because you want to take on
risk. The reward for that risk is by far captured in the increase in the value
of the equity, not the cash compensation.

It does not make sense to join a startup and not want to maximize your
exposure to the upside in the form of equity.

------
CydeWeys
> The real losers are the employees. They are investing their time and their
> careers without access to any information. Unlike a fund who may have a
> portfolio of dozens or hundreds of investments, an employee can only make
> one investment at a time. The cost of a mistaken investment can be
> unemployment and the opportunity cost of foregone opportunities.

This right here is why I've never worked full-time at a start-up with a large
percentage of total compensation coming from un-tradable private stock. I
won't be someone else's dart. My current employer pays out a substantial part
of compensation in RSUs, which I have set to auto-sell the day they are
rewarded. It's almost the same as getting cash salary, except with some market
variance (that fortunately has paid off for me so far, as the stock price has
increased over time).

------
hoodoof
"Startups" and "Theranos" are not the same thing.

~~~
CydeWeys
There are plenty of other start-ups similar to Theranos that have gone bust
and also caused harm to their employees. Hell, it's the way of most start-ups.

What distinction are you trying to draw here? That Theranos was particularly
egregious, more so than just most start-ups simply failing to gain traction
and closing for reasons of unprofitability?

------
dmitrygr
A fair explanation of the problem. I imagine most start-ups would not easily
stomach the proposed solution.

~~~
true_religion
Most private companies of any kind would rather share nothing about their
performance with anyone.

Heck, many private companies have terrible metrics on overall performance
because they're not really required to do any bookkeeping past tax purposes.

------
aj7
Often, the founders are permitted to embezzle the last 5-10% of the capital by
walk away investors. Sometimes, the founders own and profit from vendors to
their venture, which dies. Sometimes, a tiny, viable business is started
within the venture, whose main business plan fails. The little business
survives and feeds the founder and a few cronies. Sometimes, the founder goes
back to her lucrative university professorship which she was "on leave" from.

The founders never get hurt.

~~~
zeemonkee3
Often the founders have trust funds and connected families, so never have to
worry a day in their lives about missing rent or going hungry.

~~~
Carrok
As a current founder in a startup, these comments are hilarious.

Yea, I'm definitely a trust funder, my parents know the Kennedys, and I have
at least 10 shell companies set up. /s

In reality I'm broke because I've been taking an extremely low salary for
almost a year now, my parents are about as connected as a pair of sea turtles,
and my rent/next meal is a daily concern.

Lot's of undeserved hate for 'founders' here it seems.

