
Memo to CEOs & Founders: Stop Being Such Cheap Bastards - rajeshrajappan
http://techcrunch.com/2010/02/25/memo-to-ceos-founders-stop-being-such-cheap-bastards/
======
mrshoe
The situations he describes are _entirely typical_ , and he's right to call
the founder-takes-all scenario the elephant in the room. Early employees often
work incredibly hard and receive a payout that is _a thousand times smaller_
than the founder's. I know because I've been one of those employees.

After being on the wrong end of that deal once, I've decided to never make
that mistake again. I'd rather work at a larger company (where I enjoy normal
hours, lots of benefits, and 3-4x more $$ of stock _every year_ than I got in
4 years from a startup) or be one of the founders actually winning in the
startup game. Right now I'm actually doing both. ;-)

~~~
heycarsten
From my own experience this is _exactly_ what happens. Only they intelligently
manipulated my shareholder agreement in a way that I had to actually buy the
options, no paper transfer, I needed cold, hard cash. Having very little money
at the time (being between jobs) I was unable to do so, which meant that I
forfeited my options. Probably for the best anyway, because buying them didn't
guarantee a buyout, only the _option_ of one. I would have been out $5000,
just waiting for the day to be bought out, which would probably never come.

Lesson learned: read things very carefully, confusing language is intended to
be confusing. I basically gave away two years of my career to kool-aid equity.
Just be really careful, and if you don't fully understand something ask
someone who does understand. If you can't get a direct answer, leave. Don't
waist your time; you're being gamed.

~~~
enjo
Wait.. in the most typical case you are granted the option, not an option on a
option. Thus if you actually exercise the option your not receiving the option
of cashing out, your receiving very real shares in the company.

Was that not the case in your situation? I've seen some incredibly poor option
deals (NQO options that exercised to non-registered shares spring to mind),
but never the scenario you described.

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bestes
This is a big part of the reason I'm doing a startup. I worked for a company
pre-IPO (back on the good 'ol days) and saw very little actual cash.

I'm paying for the sins of others now: I have heard nothing but snickers or
outright laughter when I offer equity.

Net-net: single founder, no chance of getting any real talent on board (I'm
way past the college buddy thing), all taxes and fees, like incorporation, due
up front, my wife is about to divorce me because of the stress.

But, I would still rather do the startup than anything else. At least I have a
_chance_ to make some big money, whereas that chance is near zero at a job.

~~~
techiferous
Equity is a weird thing. From the eyes of a businessperson trying to attract a
developer, equity is very valuable. You don't want to give too much away and
you want to vest it properly.

From the eyes of a developer, equity is not very valuable. Equity is a chance
at money in the future, not money today. Vested equity then feels more like a
chance at a chance of earning money in the future. And most startups don't
ever make money. If you're a developer worth his/her salt, you can make really
good cash _right now_ at a typical job or working as a consultant.

One thing I've learned is that I'd rather be a developer than a
businessperson. I realize that I have the opportunity to run a single founder,
bootstrapped startup if I wanted. If I were a businessperson, I wouldn't have
this option. If I had a product idea I would have to attract a developer
and/or investment money first. As a developer, if I have a product idea I can
just launch it and see what the market does and worry about investment,
attracting another partner, etc. later.

~~~
100k
Business people are also too often convinced of the genius of their own ideas,
when in reality ideas are practically worthless.

------
hans
Anyone ever read what Calacanis says about his employees? He demands way
beyond what even most startups require, yet you can tell in clear text that
there's not going to be any payout to his people, I'd love to see his term
sheet. Nothing against him, I really enjoy his writing. But working at mahala
hmmm n0t.

~~~
jasonmcalacanis
actually, i don't have to demand much of my team--they demand it of
themselves.

I just pick the most driven people and fire the ones who are clock punchers.

~~~
_delirium
Isn't "you will be fired unless [x]" equivalent to demanding x?

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dnaquin
Far too many employees at early stage startups have completely unreasonable
expectations for how much their options are worth. So even though they're
getting shafted, there's a sizable chunk of the population willing to work for
scraps on someone else's dream.

I don't quite understand it, but I'm not exactly worried the startup employee
pool will shrink anytime soon. But they won't be getting me and a sizable pool
of the top talent.

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jackowayed
How does it make sense that the investors get their money back AND get a % of
the remaining money equal to their equity?

They own half the company, shouldn't they simply get half of the total
proceeds of the acquisition?

~~~
evgen
Welcome to the world of preferred shares vs common shares and "liquidation
preferences"...

~~~
jackowayed
Is that how pretty much all investment deals are done? or are some done ...
rationally?

~~~
gyardley
That depends on your definition of 'rationally'.

Sometimes preferred will be fully-participating preferred, and the investors
will get their money back and then take a share of what's left equal to their
ownership. Sometimes preferred will be non-participating preferred, and the
investors can choose between getting their money back _or_ converting their
preferred to common and getting a share equal to their ownership. Never ever
will a VC do a deal where they don't get at least 100% of their money back
before common stock holders (aka you) see a dime.

Complicating this is that 'getting their money back' is actually just a 1x
liquidation preference - and while 1x is common (the VCs get 1x their money
back before you get anything), it's possible for this preference to be higher.
If there's a 2x liquidation preference, the VCs get 2x their money back before
the common gets anything. If there's a 2x liquidation preference and the stock
is fully-participating preferred, the VC gets 2x their money back and then a
share of whatever's left equal to their ownership.

Early-stage rounds are often relatively simple and more 'rational' - it's
multiple rounds with many different investors that make things interesting.

Brad Feld's 'Term Sheet Series' is the best resource I know of for basic
definitions of all this stuff: <http://www.feld.com/blog/archives/term_sheet/>

------
Todd
I think part of the reason founders try to keep as much stock as possible is
to retain control for as long as they can through each investment round.

If you can demonstrate two cap sheets with the typical scenario and the feel-
good scenario and it can be shown that founders loose control at about the
same stage, this would probably be more digestable.

~~~
anamax
> If you can demonstrate two cap sheets with the typical scenario and the
> feel-good scenario and it can be shown that founders loose control at about
> the same stage, this would probably be more digestable.

You're assuming that employees are willing to take less money to help the
founders retain control. Maybe, but I doubt it.

If control is worth so much, perhaps founders should be willing to pay for it.
One way to do so is to give liquidation preferences to employees.

------
pxlpshr
i'm waiting to see his cap table. my guys get paid market rate, i'm paying
myself less than a teacher; the least i've ever made in the last decade. i
also work about 20-30 hours more than my team.

~~~
ardit33
and you will reap the benefits.

But the majority of startups expect "start up hours", from their employees,
yet there is no stability, no glory (nobody knows your products), and what's
the best scenario? The founders get rich, while the employees get one or two
100k after at least 4 years of work, which will probably never make up for the
lost years/health and salary.

Next startup is something I am either founding, or I have double digit equity
in it. Never ever going to settle for 0.1% standard series b equity, or the
measly 0.5% series A.

Fuck that.

~~~
pxlpshr
There is a fine line and it comes down to the situation at hand; ultimately I
don't disagree with you, I've extended my early guys 4% each on top of their
salary.

The thing is, not everyone is founder-material either. Prior to hiring our
first two employees, I chased this deal over 9 months... most people would not
forfeit a salary and other opportunities for that long. It was a rather
painful sacrifice that's also taxed my relationship and quality of life.

I'm cautious of people who parade around "entitlements" because the idea can
become political/toxic and disrupt a team -- you gotta earn those stripes. I
hope you are considering starting your own company, things are a lot different
when you're the one responsible for everyone's paycheck and returning money to
investors.

------
maxklein
What I will give my employees when I get to that point is this: job stability,
a job guarantee of a certain fixed period, and set them up as they leave to
start their own business.

I learnt that from my parents. If someone is leaving your company to start a
business, loan them the money they need to startup.

------
mikedouglas
Is there any evidence of that programmers avoid working at startups?

Is there any evidence that disproportionate returns (as opposed to risk
avoidance) is the major reason?

I'm not saying increased compensation wouldn't increase interest (that applies
to any job). But, there is nothing in this article to suggest that startups
are hurting to recruit and that this is due to compensation rather than
life/work balance and job stability.

~~~
mattiss
I would never work at a startup without 1 or more of the following:

1.) Same pay as big-corp + much more interesting problem domain.

2.) More pay than big-corp scaled by the extra hours (not a 1:1 scaling)

3.) Large amount of equity. Enough that if the founders become tens of
millionaires, I become a millionaire.

~~~
enjo
The issue being actually accomplishing #3. As a founder I can't afford to give
you a huge chunk of the company (lets say 10% all by yourself). So I give you
and the other 4 employees each 5%. That is going to be diluted down to god
knows how little by series C. Probably something in the range of 0.5%-1% in a
lot of cases. Now your screwed either way.

The simple fact is, when investors are involved there is NEVER enough equity
to go around.

~~~
dustingetz
" _In the general case, if n is the fraction of the company you're giving up,
the deal is a good one if it makes the company worth more than 1/(1 - n)._ "
<http://www.paulgraham.com/equity.html>

you took money because it made your smaller % worth more. so why are we even
talking about %s?

------
josefresco
"But if you give an extra $10 million to the folks who fought shoulder to
shoulder with you, everyone will feel better about what you accomplished
together."

Sorry, I'm not in this to make everyone 'feel better'. And let's say I was,
why would I keep anything for myself? Wouldn't giving 100% away give me
maximum feel goodness?

~~~
JoeAltmaier
"Feel better" translates to "hire on at all". I don't know how many times I've
heard the empty promise of "nothing now, but a share in the company later!"
meaning give up a steady paycheck for 2 years to get Surprise! less than 1
years paycheck payoff.

------
ajdecon
Net message (of this and other posts on the startup experience) seems to be
that it can be great to be a founder, but startups suck as employers. If you
aren't the company-founding type, you're far better off working for an
established company.

------
gyardley
If employees don't like what they're being offered, they should vote with
their feet.

~~~
lallysingh
They do, by never talking to startups. Startups suffer without every knowing
any better.

~~~
gyardley
Maybe some do, but option grants, like salaries, are subject to supply and
demand. The prevailing amounts are what they are _because_ startups can
successfully acquire talent at them.

~~~
JoeAltmaier
Have you tried lately? You can get any number of chumps willing to gamble. How
about the really good ones?

~~~
sokoloff
To me that just means that there's a market rate for equity grants for chumps
and a different (higher) market rate for "the really good ones".

------
axiom
Or give early employees decent option grants.

~~~
akkartik
I don't understand the 'or'. Isn't that what the article is suggesting?

~~~
axiom
Well no, the article is suggesting not exiting early, since and early exit
means only the founders get any real money (hence my suggestion to instead
give early employees lots of stock so they don't get screwed.)

------
dmarble
I think there are 2 kinds of engineers out there. Those who simply like
solving technical problems and innovating to earn a living, and those who
themselves are entrepreneurs deep down to some degree.

Group 1: The first group is not the target of this discussion, because they're
more interested in being employed and having a steady income -- they'll work
for you if you have an interesting problem to solve and you pay them market
rate for their skills. And companies should value their risk aversion, because
it's good to balance insane entrepreneurs with realistic detail-conscious
normal people.

Group 2: I've been in the second group, and now am in a founder's position
bootstrapping a company with my own piggy bank. I have no problem with the way
things are. I've worked not only for low pay to do something that was
interesting, but also for free to learn the ropes or have a chance at gaining
experience at something new. There are very few opportunities to do that in
the big corporate world -- especially to have a chance, based much more
uniquely on who you are and what you want, to do something very different from
your career past or something for which you have little experience. This is
especially true if you don't have a stellar academic history, which most of us
know means nothing but which the corporate and academic world value so much it
prevents group 2 engineers from getting into a lot of doors. And there are
other benefits. New ideas come along the way when you're concentrating in the
fast-paced smalltech world, along with new friends and knowledge that come in
handy regardless if you decide to ever found or be an early executive team
member of a company. It's not just about the net monetary gain between today
and exit.

As an engineer with an entrepreneurial core, I definitely don't despise those
who happen to have greater persuasive skills and use those skills to build a
productive workforce that's less expensive and adds more value than the next
guy. Isn't that one of the reasons they're successful? And isn't it one of the
reasons an investor is more likely to give that entrepreneur capital to grow a
business? If that guy can convince me to work for his company for less overall
monetary gain between now and when I leave his company than if I had gone for
some other option (in a wildly imaginative world where engineers have lots of
options every time they look for work), then who am I to be upset later over
what's in the bank? If he was a better salesman than the next guy (or an
i-bank, or Google, or your dad's friend's tire company who needs a web dev),
I'm happy to be aboard as the collateral benefits will be great. In addition,
if I'm worth something more than the next guy, being a group 2 entrepreneur-
engineer, I take it as a test of my own maturity in the entrepreneurial world
to bargain for and be able to convince others of what I'm actually worth to
them.

QUESTION: What about profit sharing instead of equity? I've always wondered if
this an option explored by any software startups.

------
wakeupthedawn
If your goal in a startup is to become rich, become a founder.

~~~
dannyr
Well, if everybody who wants to get rich becomes a founder, there will be no
employees or at least there will be no highly-motivated employees.

It takes more than the founders to build a successful company.

~~~
plinkplonk
"It takes more than the founders to build a successful company."

Not if you are looking for a 50 million payout. Which, the article seems to
imply, is the average buyout amount these days. I believe pg and co managed to
make around that much a decade ago. By the time you hire employees you'd
better be shooting for a lot more and have some convincing reasons/data why
you have a shot at succeeding if you want to get talented people to join you.

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sabat
This is depressing.

