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When a Unicorn Startup Stumbles, Its Employees Get Hurt

nytimes.com

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Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#251

Post by serge2k »

harryh wrote: post #247
ditonal wrote: post #244

Earlier quoted context omitted.

Sure, the primary objective is a huge IPO. It's the playbook in the sense of it was plan B to break even by cutting employees out. Investors might have not made out, but they broke even, and scratched the back of execs who can repay the favor in other contexts.

What do you mean cutting employees out? Cutting them out of what? Their were no returns made on the investor's capital. There's nothing to be cut out from. Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.

Who's talking about getting rich?

If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity.

If the VCs start raking in cash then employees should too.

The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over. That, IMO, is completely immoral and shouldn't be allowed to happen.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#252

Post by Swannie »

rlucas wrote: post #223
ditonal wrote: post #93

Earlier quoted context omitted.

Thank you for the informative response. 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 found…

I have several friends and acquaintances whose exits as founders were in the $5-500 M gross exit value range -- far from a Google / FB outcome. Those people all made an entire career's worth of money, or more, all at once* and with capital gains tax treatment to boot. (* well, after an earnout / lockup) They also exclusively held common shares. The deciding factor is whether their exit value was a meaningful multiple…

"> Tech employees need to wake up about common vs preferred shares"

The important distinction is employee vs founder. You mention founders in your comment.

Founders typically would hold a double-digit percentage of common shares.

Employees that might get offered 0.1% if they are an early hire, or less assuming later stage (discounting exec hires here, because the OP of this thread was about engineers).

Founders also typically got their common shares at a very low valuation - let's say they were issued pre-money, then their value to the tax man might be $200K (of a 2M pre-money valuation), but with a vesting schedule that makes them tax efficient.

Employees typically get their common shares at a higher valuation, post money, with a 200M valuation. Their 0.1% is also worth $200K to the tax man.

See how this is different?

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#253

Post by ChuckMcM »

sjg007 wrote: post #225
rday wrote: post #182

Earlier quoted context omitted.

>Employees don't cash out some of their holding at $3/share expecting a bigger IPO lift. Both angry because nobody came from the future to tell them, hey this is the best offer you are ever going to get for this stock, take it. Quoting from the article: >Employees had little idea that an outside appraisal firm had valued Good at $434 million and the common stock at about 88 cents a share as of June 30, according to i…

Question: If you are a share holder (e.g. you've converted say 1 option to stock. Do you not get access to the outside appraisals?

Not generally. There are two things at work here, one is the 409a valuation which is somewhat formulaic and then there is the valuation of preferred shares which have different rights than common stock. Typically you have to own a preferred share to get rights to information about outside appraisals.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#254

Post by harryh »

serge2k wrote: post #251
harryh wrote: post #247

Earlier quoted context omitted.

What do you mean cutting employees out? Cutting them out of what? Their were no returns made on the investor's capital. There's nothing to be cut out from. Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.

Who's talking about getting rich? If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity. If the VCs start raking in cash then employees should too. The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over.…

Employees only lost money due to taxes because they tried to manipulate their tax rates. There's really on the employees, not anyone else.

I agree with you about the CEO.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#255

Post by [deleted] »

serge2k wrote: post #251
harryh wrote: post #247

Earlier quoted context omitted.

What do you mean cutting employees out? Cutting them out of what? Their were no returns made on the investor's capital. There's nothing to be cut out from. Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.

Who's talking about getting rich? If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity. If the VCs start raking in cash then employees should too. The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over.…

[deleted]

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#256

Post by gozur88 »

ChuckMcM wrote: post #194
balls187 wrote: post #186

Earlier quoted context omitted.

Awesome thanks for sharing. While working at Boeing, their EPP allowed you to purchase Boeing Stock, or invest in a managed fund. This was post 9/11 so their stock was hurting, so I invested 90% into their stock. These days in the startup world, folks are given Restricted Options, which don't offer a lot of flexibility. Even with a public event, employees have a 180 day lockup period before they can sell any vested o…

> Even with a public event, employees have a 180 day > lockup period before they can sell any vested options. It varies, when I was acquired in 1999 we could choose to dispose up to half our proceeds, it was negotiated as part of the deal. I also had an insane 18 month lockout which took me from pre-crash to post-crash and a 144x difference in stock price ($120/share vs $0.83/share)

I've always wondered about that. Isn't there some way you can hedge against that possibility, say, by buying puts? Or is that forbidden by contract?

I had a friend who worked at one of the early e-retailers. During the lockout period she was a multimillionaire (on paper), and by the time it ended her options were under water. It made me wonder if you could give up part of your potential payday for a little certainty.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#257

Post by gozur88 »

serge2k wrote: post #221
jerf wrote: post #94

Earlier quoted context omitted.

Unions can't do anything about the company you're working for running out of resources. That's not what they are for.

They can help protect you from getting screwed over while the execs walk away with millions.

Not generally, no. The exception was the GM bailout, where the unions used political muscle to get moved ahead of secured creditors. That's the only case of which I'm aware, though.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#258

Post by rebootthesystem »

pm24601 wrote: post #170
rebootthesystem wrote: post #107

Earlier quoted context omitted.

> How many programmers belong to a union? Thankfully none. One of the main reasons the car companies stumbled are unions. The whole thing has degenerated to insanity squared. For example, GM had a clause in their contract requiring them to not fire employees displaced by technology or automation. In other words, if you improve your workflow and process and can do the same work with 25 people instead of 100, you can't…

Ah, yes. The unions got GM to kill electric vehicle investment. Ah, yes. The unions got GM to become lazy with quality and innovation in the 60's and 70's when GM had 60%+ market share. Ah, yes. The unions forced automobile manufacturing management to take huge pay packages. Ah, yes. The unions with their silly demands for a 40hour work , and sick leave (which the majority of Americans still don't have) Read somethin…

I was in a union for almost ten years. I was young and was told I had to become a member if I wanted that job. Please spare me the empty pro-union hit points. I have seen, from the inside, just how caustic they can be. I was Union Steward for my last year. All I can say is, disgusting.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#259

Post by rebootthesystem »

mtberatwork wrote: post #160
rebootthesystem wrote: post #107

Earlier quoted context omitted.

> How many programmers belong to a union? Thankfully none. One of the main reasons the car companies stumbled are unions. The whole thing has degenerated to insanity squared. For example, GM had a clause in their contract requiring them to not fire employees displaced by technology or automation. In other words, if you improve your workflow and process and can do the same work with 25 people instead of 100, you can't…

I'm having a hard time taking the links seriously. The WSJ article is behind a paywall so I am unable to read it. However, it's dated 2006 which would mean it was authored at the height of Wall Street "shenanigans" (for lack of a better term) while the Forbes article appears to be a canned editorial written by the Ayn Rand Institute.

I understand your point. The beauty of it is: This is math, not opinion. If you doubt any of it, all you have to do is fire-up Excel and work the numbers.

For example, try to answer the question about how GM can survive, grow and innovate when it has nearly 5 retired employees for every one current employee. And, every single one of those retirees is drawing a huge percentage of their salaries as their pension, for life, as well as enjoying tremendous paid benefits.

The problem here is the divide between people who have business experience and those who do not. Any small business person understands, without having to run any calculations, that having the cost of a position multiplied by 6 (because you are paying 1 active worker and 5 retirees) is utterly unsustainable. Or that, installing a series of automated welders while not being able to lay off 50 people is a formula for bankruptcy.

Do you hire a gardener, cleaning service or pool person? Imagine having to continue paying them 80% of their monthly fees after they retire. And then you have to hire a new service to do the job.

Now you go out and buy a robotic lawn mower, vacuum or pool cleaner.

And you can't fire them.

You have to continue paying those service providers for a service they will not be performing because their contract says so. Forever.

Get the point?

We can engage in the fallacy of attacking the source all we want, yet, it is impossible to attack the math, which is the point here. These arrangements are mathematically predetermined to result in the destruction of companies and jobs unless Superman comes down from the skies and brings with him a supernatural solution of some sort.

Or, we pretend all is well, grab some tax money to continue propping them up and shift the problem forward to another generation. Which is exactly what we've been doing with both unions and government programs.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#260

Post by rebootthesystem »

prostoalex wrote: post #245
rebootthesystem wrote: post #236

Earlier quoted context omitted.

It isn't about not wanting them. It's about them being constructive as opposed to destructive in the long term.

Right. I'm just pointing out proponents of unionization usually pretend that unionization costs zero to the workers' wallets. Well, there's the dues, but in theory they pay for themselves in increased benefits, therefore any rational employee should join the union. The elephant in the room is the migration strategies the employer starts exploring when faced with an added cost (offshoring, moving to a right-to-work st…

For many industries a hike in costs (with unionization related costs being one example) triggers a chain reaction causing companies to seek lower costs. This often means leaving the US or Europe.

Going to China isn't, as some like to put it, due to greedy executives. It's actually due to responsible executives who are left with not choice but to go to China. As competitors stared to offshore many, many years ago, companies who did not were left with significantly greater cost structures and unable to compete.

I had exactly that problem 15 years ago when my competitors started to manufacture products in Korea while I was manufacturing in the US. And it wasn't just about labor costs. Our supply pipeline can be incredibly expensive. Our costs are higher every step of the way, the more you "touch" a component or assembly the more cost increases. The same electronic components --same part number, same manufacturer, not clones-- can cost five or six times less in China due to supply chain advantages.

Sometimes I feel folks who push unions in the US and think they are good for workers truly don't have a clue. All one has to do is try to manufacture something, anything, in the US to start understanding why we can't think 1930's mentality will continue to work. Even something as seemingly simple as a dog leash is almost impossible to manufacture in the US on a competitive basis. People just don't get it.

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