When a Unicorn Startup Stumbles, Its Employees Get Hurt

1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on founders looking after common shares out of self-interest. If you read the article, it looks like that's extremely similar to what happened in this case.

2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe.

3) Real protection would also be voting rights, which generally preferred shares get a lot more of, and then less tangible things like invitation to board meetings, something mere employees accept is absurd to expect. As long as employees agree to sacrifice compensation while being told they're not investors and don't deserve to be treated like one, they're getting hoodwinked.

I've turned down more startup jobs than I can count. When I interview at a startup, I thoroughly research their market, their competitors, their product, and their business model. I ask questions about how they came up with the idea, and how they know other people want it, and what questions they asked when they did their market research, and how the idea has evolved in response to new information. How did the team meet? What's the company culture like, and what do they value? I ask about financials - are they profitable? What's their runway? What's their revenue and revenue growth rate? Is it recurring revenue or revenue for one-off contracts? What's their churn rate? I ask about funding - who is their VC? How many rounds have they taken, what's the preference overhang, how many more do they anticipate taking? (And then in my head, I'm running over the financials to see if this squares with their growth & revenue plans.)

If they're cagey about this, I walk. Some companies are, and that's their right, and I'm not going to work for them. Others are very impressed that I'm doing this level of due diligence, because it shows that I view my time there as an investment, and will invest the same level of diligence and effort into the job itself.

Equity compensation itself is not the problem. Equity itself is great for employees - they have an information advantage over every other shareholder of the company (including the VCs), and if they're an early hire, they can have a meaningful effect on the value of that equity. But to take advantage of this, they need to do due diligence as if they were an investor - they are, after all, they're investing their time, which is far more valuable than a VC's money. Equity is much more highly levered than salary - its value depends on how events play out, not just on what you've agreed beforehand - and so you should make sure you have enough information to make a reasonable guess at its value before accepting it.

The first is "what the founders have, but less of it." It's very difficult for the founders to make a boatload of money off the company without also compensating you. These have some sort of value - if the founders want to make $10MM off it, you're getting something like $100K.

The second is everything else. There's an obvious incentive to screw over the "founders don't have this" class of equity, so I value these at zero. This includes the vast majority of stock options.