What stops founders from offering a company wide "vested Share vs. Cash" with an equal cap for everyone on each new round ?
For e.g founders planning to sell 10% of their own share while raising round in the so called "Take money off table", all employees get the 'right' to exercise the same option, hence instead of dilution to the new value its straight selling the value they created ? what are the arguments against this ? For the investors its the same, and if the cap of how much of the vested % you get to sell is kept realistically low it should not risk decreasing the value of the private stock.
while i agree with Jaymzcampbell as an employee you're better off with dropping the "hope" the paper value of what you own means anything, however its contradicting to the popular piece of employee incentive tool that is quite essential in acquiring& keeping good talent.
Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.
This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.
1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death - http://businessofsoftware.org/2013/02/gail-goodman-constant-...
In the end they ran out of money and all the employees got laid off, getting nothing.
Here I am though, working for another startup. This one actually makes money, though.
One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No".
Thanks, but no thanks. If you admit that you're not going to share the benefits, I have no reason to get involved.
I think this is far more common than you'd think. Take YC for example. I'd be really curious to compare SamA's outcome vs. employee #5's outcome (for example). Even when companies "fail", founders do just fine for themselves via acquihire, and it's generally not tied to their stock (acquirer values stock at $0, pays off investors, employees get retention bonuses of ~$50-100k over 4 years, founders get quite a bit more than that).
The systems are always going to be biased to the people who have the most money. You may realize you're getting a terrible deal, and their deal is much better. That's not an accident, and asking them to fix it is just going to cause suspicion and anger, especially if you blow past their facially spurious justifications for this ("I'm taking a lot of risk here!!!"). The real answer is "I have more money than you, so I can set the terms to favor myself".
I'm not necessarily saying there's anything wrong with that per se. Consider the flip side. You've promised an employee that he will make 10% of what you make that year, even if it means you're tithing that to him directly. You make $10M. Your employee makes $1M. Is your employee going to stay employed, or is he going to leave immediately and use that $1M to start something that will make him $10M next year, or even just to buy a fancy house on the beach and invest from home without having to pull a 9-5 every day? Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.
One of the main problems with the current startup culture is that everything is overly commoditized. For something to be considered a unicorn it has to fit a model, have a certain amount of growth, a certain amount of revenue, a certain number of employees. This hurts a lot of companies's success because it forces them to adhere to a model that's designed around a totally different organization, ironically the same thing that created "Startup Culture" in the first place.
I would and have much preferred working at companies where I liked my coworkers managers and reports rather than ones where I was simply paid more.
This is not a problem for law firms, medical practices, consultancies, investment firms, or management in any public company. Your argument is just that employees who are in shitty, exploitative jobs will take the money and run, so try to exploit them harder by paying them less. Are you really "not necessarily saying there's anything wrong with that per se"?
We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.
There's a reason that law firms, medical practices, hedge funds, etc. tend to be small. Each professional is essentially a free agent, hopping aboard on someone else's infrastructure for a limited time and more-or-less free to call their own shots, including going to another practice or starting their own if they're unhappy. There's a lot of lenience in scheduling, work hours, etc., and it's a very ad-hoc thing, because everyone knows that it's a free association based on goodwill and not based on mandate.
These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
Just think about the types of companies you listed and ask yourself if things would work out if every company afforded such luxuries to all of their workers. Normal people don't, and indeed can't, have access to those luxuries or nothing would work anymore (at least not until we get more stuff automated).
It's hard enough to get normal workers to collaborate when their paycheck depends on it. Take away that incentive, and suddenly everything looks like open-source; without the financial incentive and the threat of lost stability if a product has poor reception, people do the fun stuff, and leave the hard stuff for someone else to worry about somewhere down the road.
Like law firms and medical practices, teams of developers break apart and most projects can't sustain more than 3-5 like-minded major contributors (because there's little incentive to keep people around and get them to deal with necessary compromise; if people don't like what's happening, they just leave).
Also like law firms and medical practices, it suddenly becomes very difficult to get the help you need in either a cost or time efficient way.
The 9-5 is a different lifestyle. And we need people who work 9-5 more than we need people who close their practice down to go out to Tahoe for 1.5 weeks every time there's a bank holiday.
I'm saying there's not necessarily anything wrong with people who have more money being able to set the rules of the transactions they're involved in, necessarily. I do think they sometimes set rules that are bad, but my point was that the fact that such a group exists is not bad in and of itself.
Removing the general need to trade labor for financial stability is a disaster at a massive scale, and on many different layers. There is a path out of wage slavery, and anyone is free to choose that path and attempt to earn their way out. But a lot more people are content with the work-a-day grind than one might think (not content enough to do it willingly, but not discontent enough to put in the work necessary to escalate outside of it).
In a utopia, everyone would help everyone out and contribute their skills, knowledge, and resources free of charge, just because they saw a need for them. If literally everyone agreed to do this literally all of the time, we'd be in fine shape. But we don't live in such a place, so the need for financially-motivated human labor will continue to exist until we can teach robots how to replace 100% of it.
The context is early-stage startup employees, not white-collar accountants and blue-collar janitors who you are presumably outsourcing to other companies because they perform functions that are not essential to your business. The profits shared by people working for these outsourcing firms are not great because the profits of these outsourcing firms are not great. Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great. How is that fair and why should anyone agree to work with you on those terms?
> These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
I don't want to address the rest of your rant except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
Firms that resell blue-collar labor are often very profitable. I'm not sure why you think they're not.
>How is that fair and why should anyone agree to work with you on those terms?
It's a marketplace, supply and demand is going to dictate these types of arrangements. There are many more adequate employees who want to work at an early-stage startup than there are early-stage startups hiring employees.
I'm not saying anyone should agree to work under these conditions, but as long as they do, others have to remain competitive.
I don't personally think it's fair. I think early-stage employees should get a much larger slice of the pie than they typically do. But I'm also not going to indulge the fantasy that being a non-founder and/or non-investor can lead to riches; it may have happened once or twice, but it's very unlikely to happen to you. In almost all successful startups, already an infinitesimally small quantity, the founders and investors get the proceeds from the exit and the employees are lucky to see a bonus check for $5k.
>You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
They certainly want you to think that's the case. I'm not going to say that everyone in these professions works a certain way or another, but there are many who have a lax working schedule (admittedly, I don't know any who close their practice for 1.5 wks every time there's a bank holiday, that's called "hyperbole"). I know this because I have friends who are doctors, lawyers, and in finance.
>I don't want to address the rest of your [essay] except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
I went out of my way to discuss because you seemed like you wanted to do that. This is a discussion forum, after all.
If you want the large exit, you're either a founder or an investor. It's been that way for as long as I can remember.
But if we're talking about "Well you make market rate if you value your options like XYZ..." then yeah, that's BS.
But when people take equity instead of compensation at BigCo, they are quite literally risking money + time.
It's not just the time, but the experience and skill of one person can be immensely more valuable than someone else's experience and skill.
i.e. "completely ignored".
When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of outstanding shares, and by 2 years later, I was down to 0.015%.
I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted.
The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is supposed to be a Wonderful Event because it means the smaller ownership percentage is worth more.
E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.
In other words, you can't look at dilution in isolation; it has be combined with the (hopefully increasing) value of the shares.
1. Company needs to raise money
2. Company issues new shares
3. Board realizes "oh shit, this is a lot of dilution"
4. Board decides "okay, who is important enough to keep around" and issues stock grants to those special people to undo their dilution.
Founders and VCs have seats at the board table, and so are always important enough to get grants. Employees do not, especially after exit.
So the two choices left are
a) employees have no protection against dilution, therefore no protection, therefore shares are worth zero, or
b) employees are given protection against dilution.
You can say "b" is never going to happen. That's okay. It means that "a" and it's obvious conclusion happen.
I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.
If a founder promised me "no dilution", I'd have to conclude either...
1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)
2) he does understand math, but he's a dishonest crook and therefore will tell you anything
3) he's mentally ill
4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.
If you were to have some kind of special 'non dilution' clause in your equity position (which by the way, no founder would reasonably agree to), then you should have it in writing.
But it's moot. One or both of you was obviously struggling with how all of that worked, because giving employees anti-ratcheting clauses is not something that should really be done. In fact, it should be avoided if at all possible even with investors.
He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.
The typical mathematical mechanism that offsets dilution is the increasing price of the shares.
E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)
Basically, you own less percentage of a more valuable company.
>Which would be a perfectly sensible thing for the company to do for a valued employee.
But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.
Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.
Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.
It's only unrealistic because of greed. There's absolutely no valid reason this has to happen.
You just have to hope for the best and if it doesn't work out you get lectured by some smartasses that it's your own fault.
Like the other lies the moneyed interests tell, the belief that it takes a fresh young generation to build good products and that's why the oldest guy in a random SV startup is 26 is pure propaganda that they're hoping you won't see through. People take this bait and go out and work for a free room in an apartment shared by 6 other "founders" and a laughably small basic living stipend that doesn't even equate to minimum wage.
Maybe a few hundred of these people have actually ended up getting rich? And they're "founders". How many early startup employees are doing well right now anyway? How much have Dropbox's first 50 gotten, for example, and how does that contract with dhouston's take-home? The early employee race is really baseless.
It's a fool's game, and people realize that after a couple of years, and then go work at a real company, where they can at least collect a market salary and where prudence and experience aren't plainly mocked and discarded [because these attributes threaten the people at the top].
You flatly cannot build a company without capital.
On the other hand, you might be able to build a company by treating good employees badly, because the employees are either a little naive or they really do value working at your cool startup over money.
You might also be able to simply build a reasonably successful company with not very good employees (in fact this is most companies)
I personally believe that in a fair world, the people actually producing the value would be allowed to collect most of it, and the people who grease the wheels would collect an appropriate gratuity. However, I acknowledge that we instead live in a world where the people with cash set the rules, and their interest is in preserving and growing their power (which means keeping themselves much richer than everyone else).
Many successful companies are bootstrapped.
I'm bootstrapping now and I'd generally agree with the statement you quoted.
It's expensive and near impossible to find cofounders/enough-"bootstrapped"-help to make building a tech company from scratch feasible, never mind go to open market and get enough customers for the business to be worth running. A "small" 250k check would solve almost all of my issues right now.