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Pitfalls of Equity for Employees In Startups

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Re: Pitfalls of Equity for Employees In Startups

#41

Post by happened2me »

So this happened to me...

I am 3rd layer share holder, and also the 3rd employee. I got 4%. There was a 4th and 5th layer employees added, each about 1.5 years apart. 4th got 30%, 5th also I think got 4%.

Now when the economy really crashed in 2009 we had a couple of months of temporary 20% pay cuts (not getting contracts trying to bootstrap, IOU when we get $ again). Since then we have had more pay cuts sometimes as much as 40% for a month or 2, and once we had a 100% cut for 1 pay period.

We are an s-corp, when there is profit we get payments (and subsequent tax bills for our share of profit), so these aren't stock options. However, is it right that everyone shares the pain on the same level (x% across the board temp pay cut) but has a very great difference of reward possible? Is this normal?

Re: Pitfalls of Equity for Employees In Startups

#42

Post by michaelochurch »

imagnitude wrote: post #37
michaelochurch wrote: post #27

Earlier quoted context omitted.

The rest bootstrapped for many months, paying themselves virtually nothing, getting deep in debt, before their Series A. Even after raising an A round, they pay themselves subsistence wages, just enough to eat so that they can pay market rate six figure salaries to the engineers on their team. I actually agree with you that, if they're truly suffering financial hardship (but I'm never impressed by a rich guy taking a…

You are completely right in this case. Sometimes, when the company is not doing well and the founder CEO is not hitting the performance targets agreed on earlier, the VCs will fire the founder and install one of their MBA buddies to try to turn the company around. This is usually a condition of further funding when the company is in a weak negotiating position and on the verge of shutting down, and it's incredibly un…

All of the things you describe are aspects of bad startups. Things are very, very different in good startups that are doing well, even the VC funded ones.

That could be. I supposed I'd benefit from a different set of experiences to understand more of the spectrum.

Re: Pitfalls of Equity for Employees In Startups

#43

Post by mjn »

imagnitude wrote: post #10
michaelochurch wrote: post #6

Earlier quoted context omitted.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

I know you're just trolling, but I'll comment anyway, because it's important to set the record straight. The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. Before getting funding, most bootstrap for years, neglecting family, friends, vacation, working 14 hour days, all for a business idea they believe…

The vast majority of founders are not spoiled rich kids playing with daddy's money.

I can believe most aren't rich, in the grew-up-in-a-mansion sense. But it'd be interesting if there were some hard numbers on it. What is the distribution of socioeconomic backgrounds of founders who raise VC? I've got some anecdotes myself (mostly suggesting solidly upper-middle-class), but data would be more enlightening.

Re: Pitfalls of Equity for Employees In Startups

#44

Post by michaelochurch »

U32LnJfiYoiLQP wrote: post #34
tptacek wrote: post #15

Earlier quoted context omitted.

I was funded in 1999, at 2013 A-round levels. No EIR position awaited the failure of that company. Again: I don't even know anyone who's ever been offered an EIR position, and I know a fair number of people, many of whom have been funded, some of them by huge name VCs. So, why don't we do it this way: why don't you name a couple people who've been recipients of "EIR sinecures"?

I know of a company where the parent of one of the founders made a ton of money for the VC. Twice. In exchange, one of the partners has put some seed money into the kid's startup. The seed money is a pittance compared to how much money the VCs got. What's sad about it is that there's no entrepreneurial spark in the founders. They're not hungry for success. They're paying themselves way too much and working with no ef…

What's sad about it is that there's no entrepreneurial spark in the founders. They're not hungry for success. They're paying themselves way too much and working with no effect. The company will fail, and they'll go on to whatever nice lifestyle awaits them.

This is interesting and insightful. I suppose the learned laziness these kids have is just as adverse to creative accomplishment as the learned helplessness that the rest of us end up with.

I should add that I don't actually think every VC-funded startup is bullshit. It just seems that the good ones are quite rare. They're also very selective (which they should be) but that becomes a problem when you've worked for garbage startups that have damaged your career. So you have to be really careful in the VC-istan game.

Re: Pitfalls of Equity for Employees In Startups

#45

Post by bokonist »

tptacek wrote: post #9
michaelochurch wrote: post #8

Earlier quoted context omitted.

VC-funded founders? Not rich? I have no problem with you four.

This new trope of yours is extremely irritating. I come from a solidly middle class background. My parents didn't even pay for college --- I didn't go. Two of my siblings are in the arts, and one is a lawyer at a domestic violence clinic. I'm on startup #5 (year 8), with no VC funding at all. 2 of the previous startups I was at (one of which I cofounded) were VC funded. Not only am I not a trust-fund type, but nobody…

"Am I just extremely lucky, or are you a little bit full of it?"

My own observations corroborate your data.

I've personally known about a dozen founders who have built a seven or more figure net worth from startups. About ~6 were upper middle class. That is they had parents wealthy enough to pay for a "good" school. But the parents did not have enough money to fund their kids startup or pull on VC connections. Around ~3 people came from well off parents, who might have had enough money for a small trust fund (I do not know whether they actually had a trust fund). One had parents with VC connections. Overall, the career arcs of the well-to-do founders were indistinguishable from the upper middle class kids. The founders from upper class backgrounds were just as smart and hard working as any other founders. The other three founders in my personal dataset were immigrants with very little family support and had to hustle their whole way up.

In my observations, getting VC funding requires at least one of five paths:

a) building a product via bootstrapping and/or seed money, and then either getting significant traction or have a prototype of genuinely novel tech.

b) developing a proven track record as an employee at a company. Maybe you joined a startup early that became big. Maybe you joined a big company and worked your way up to VP of Sales.

c) Having some specialized and valuable knowledge. Maybe you consulted for a particular industry, and thus have inside knowledge about a valuable product that industry could use. Maybe you a professor that just developed some new technology that can be commercialized.

d) going to business school, getting a job as VC associate, and then launching a company with some funding from that firm.

e) having started and exited a previous company

Getting VC funding requires connections. But building these connections is a trivial problem compared to the problem of establishing a track record via either bootstrapping or working your way up at a company. If you cannot establish those connections, you probably do not have the hustle it takes to found a company. If you have VC connections, but no product with traction nor track record of success, then you are not getting funding.

The world michaelochurch describes, "the VC-funded startup CEOs ... I know didn't take any real risk, because they're all trust-fund kids " is a very different world than the one I have experienced.

Re: Pitfalls of Equity for Employees In Startups

#46

Post by bokonist »

imagnitude wrote: post #37
michaelochurch wrote: post #27

Earlier quoted context omitted.

The rest bootstrapped for many months, paying themselves virtually nothing, getting deep in debt, before their Series A. Even after raising an A round, they pay themselves subsistence wages, just enough to eat so that they can pay market rate six figure salaries to the engineers on their team. I actually agree with you that, if they're truly suffering financial hardship (but I'm never impressed by a rich guy taking a…

You are completely right in this case. Sometimes, when the company is not doing well and the founder CEO is not hitting the performance targets agreed on earlier, the VCs will fire the founder and install one of their MBA buddies to try to turn the company around. This is usually a condition of further funding when the company is in a weak negotiating position and on the verge of shutting down, and it's incredibly un…

I have been working for a fast growing/successful startup that has brought in a number of outside executives (though not a new CEO). I am sure those executives have 100x the stock of the average engineer on the team.

These executives get paid the big bucks because a) they are scarce and b) their job has way more leverage than the job of an engineer.

The nature of hierarchies is that there are fewer people at the top. Thus the number of people with a proven track record as executive is always much lower than the number of engineers. Thus there is a small pool of executives for a company to hire from.

It is worth it for a company to pay top dollar for proven executive talent, because an executive has 10-100X more leverage than that of an average engineer. The old line is that engineers can differ in productivity by orders of magnitude. Well, the executives determine which engineers you end up with. So the difference in executive talent is that order of magnitude times the number of engineers. The executive determines how well they the team works together and how much distraction and interference the team gets from the forces of entropy and chaos that surround the department. We have hired outstanding executives that have brought their divisions to new levels. We have hired bad directors and VPs who were disastrous and were fired. In some cases, a person who grew up with the company did not scale, and had to replaced. In other cases a person has risen with the company and taken on enormous responsibilities.

I'm guessing that the outside executives brought in at a startup that is struggling are on average much, much worse than the outside executives we have brought in. After all, the good executives will opt for a position at the company that is growing fast. Who wants to try and save a sinking ship?

Re: Pitfalls of Equity for Employees In Startups

#47

Post by pcwalton »

gfodor wrote: post #39
michaelochurch wrote: post #6

Earlier quoted context omitted.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

Even rich kids have to deal with opportunity cost. (Besides, claiming VC funded founders are all rich kids requires evidence, and you haven't provided any.) Besides, why do you get to say what a founder "deserves" of their own company? If I bake a cake, and agree to give people small slices of it in exchange for things, you still think I don't deserve the rest of it even though I made it myself?

I don't agree with michaelochurch here at all, but I don't think I agree with your cake analogy either: early employees of startups often work very hard. Of course founders do an exceptional amount of work and take an exceptional amount of risk, and, having not been in the founder position, I won't take the position that they don't deserve the equity they receive, but they aren't baking the whole cake.

Re: Pitfalls of Equity for Employees In Startups

#48

Post by gfodor »

pcwalton wrote: post #47
gfodor wrote: post #39

Earlier quoted context omitted.

Even rich kids have to deal with opportunity cost. (Besides, claiming VC funded founders are all rich kids requires evidence, and you haven't provided any.) Besides, why do you get to say what a founder "deserves" of their own company? If I bake a cake, and agree to give people small slices of it in exchange for things, you still think I don't deserve the rest of it even though I made it myself?

I don't agree with michaelochurch here at all, but I don't think I agree with your cake analogy either: early employees of startups often work very hard. Of course founders do an exceptional amount of work and take an exceptional amount of risk, and, having not been in the founder position, I won't take the position that they don't deserve the equity they receive, but they aren't baking the whole cake.

The cake isn't assets or liabilities, products or customers, it is the equity of the company, and equity is created when the founders decide to incorporate the business and it belongs to them. As such it's theirs to do with as they please, from the time it is worth nothing to the time when everyone wants some of it, if they are so lucky.

It's kind of lame to say what they do with it is or isn't "fair" since the exchange of equity for something else is always done between two agreeing parties. It's extremely over-simplifying things to look at a liquidity event and then at the equity division to say if it was "fair" based upon who contributed what to the company. The equity and its distribution happens on a separate plane from the actual operating activities of the company itself, and the individual efforts or contributions of employees. There is no particular reason to believe that someone who provided huge amounts of value to a company "deserves" equity based upon this fact alone, though often founders will give up their equity to these people in exchange for their good work.

Any equity in the hands of a non-founder can be traced back to the founders giving up the equity they had up to another party in a mutual agreement, so it's quite bizarre to try to apply some external notion of fairness since nobody is forced to take such an offer.

Re: Pitfalls of Equity for Employees In Startups

#49

Post by [deleted] »

gfodor wrote: post #48
pcwalton wrote: post #47

Earlier quoted context omitted.

I don't agree with michaelochurch here at all, but I don't think I agree with your cake analogy either: early employees of startups often work very hard. Of course founders do an exceptional amount of work and take an exceptional amount of risk, and, having not been in the founder position, I won't take the position that they don't deserve the equity they receive, but they aren't baking the whole cake.

The cake isn't assets or liabilities, products or customers, it is the equity of the company, and equity is created when the founders decide to incorporate the business and it belongs to them. As such it's theirs to do with as they please, from the time it is worth nothing to the time when everyone wants some of it, if they are so lucky. It's kind of lame to say what they do with it is or isn't "fair" since the excha…

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