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It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get it without money we can't build anything, but without good employees everything else is multiplied by 0. The math in the article is unique to the U.S but I think the "essence" behind it is quite universal. 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.

Osiris 10y ago
I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted. 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%.
- jasode 10y ago
  >I was promised that more options would be issued and we wouldn't get diluted from future rounds, 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.[1] 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] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_economy/t/google-founders-sitting-billion-stakes/ http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...
  - Osiris 10y ago
    It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.
    - jasode 10y ago
      >I specifically asked if our options would be diluted in the next fundraising round 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.
      - Osiris 10y ago
        Because it was my first startup and despite days of research into how options work, I clearly still didn't understand it all. So I trusted his answer. I had no previous experience or knowledge that would have led me to believe that they wouldn't follow through with the promise to grant additional options over time.
        edblarney 10y ago
        Your company does not 'promise' you compensation - they have a contract for that. 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.
adamnemecek 10y ago
Because an angry investor can fuck you over more than an angry employee.
- bsenftner 10y ago
  Any truly angry employee can fuck over a business far worse than an investor. Sure, the rare investor with industry swaying clout is dangerious, but low level employees can cripple any technology dependant company immediately with a few minutes effort.
  - adamnemecek 10y ago
    Not without incurring significant damage to himself in the process.
adekok 10y ago
I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money. 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.
- JonFish85 10y ago
  >> I worked for one startup which got bought. The founders made money. All of the employees lost money. 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).
- cookiecaper 10y ago
  Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big. 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.
maxxxxx 10y ago
When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution. 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.
- cookiecaper 10y ago
  Yeah. There are a lot of naive people out there, and in particular, "young" is virtually synonymous with "naive" (through no fault of the young people directly, they simply haven't had the experiences yet). 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].
- danielweber 10y ago
  There's this mug's game where you are treated as belligerent for wanting access to the essential data to value your shares, and stupid if you value your shares at zero.
novocaine 10y ago
I don't find it baffling. 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)
- cookiecaper 10y ago
  Lots of companies start with minimal capital infusions. The VC roulette is not the way that sustainable companies have been built, historically speaking. Atlassian is a recent example of a bootstrapped tech company that IPO'd. 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).
  - jartelt 10y ago
    Considering VC only really started in 1970s, it is easy to say that it's not the way companies have been built historically. That said, Atlassian is more an exception than the norm. Most really big, successful tech companies took VC or PE money during their history to help them grow (Google, Facebook, LinkedIn, Cisco, Apple, Microsoft, etc.).
- billmalarky 10y ago
  >You flatly cannot build a company without capital. Many successful companies are bootstrapped.
  - mjolk 10y ago
    > 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.
michaelbuckbee 10y ago
I think we need to coin a new term like: "early employee valley of death" [1] 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-contact-how-to-negotiate-the-long-slow-saas-ramp-of-death/ http://businessofsoftware.org/2013/02/gail-goodman-constant-...
- mason55 10y ago
  It's pretty common advice that you want to be the last founder and not the first employee for this exact reason.
- deevus 10y ago
  So many times this. The startup I was working for was exactly as you described. 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.
- pyb 10y ago
  Yes totally agree with this. I've been there, but with my eyes open. It's still a good experience being employee #1 or #2, as long as one doesn't expect any financial upside for it. Therefore, the key is to put a time limit on your involvement.
baursak 10y ago
Or it's just a larger, systemic issue. Saw this post yesterday on Reddit, which I think is quite relevant here as well: https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy/former_anyone_who_is_poor_isnt_working_hard/ https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy...
- randy_lahey 10y ago
  You're kidding right? From that page: This subreddit is a safe space for Socialist discussion. Defending capitalism or capitalists is a bannable offense. Debating Socialism is also not allowed. Take this to /r/debatecommunism Bigotry, ableism and hate speech will be met with immediate bans; Socialism is an intrinsically inclusive system.
dreamfactory2 10y ago
The relationship is always and rightly asymmetrical between founders and employees. What's dishonest is offering shares that can be diluted, can't be transferred, and have no voting rights with the understanding that they are any more than shares in the current company bonus scheme. Employers should just pay a competitive salary and bonus. And employees should wise up - if they want a piece of the action they need to take founding level risks and put a lot of skin in the game.

Osiris 10y ago

I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted. 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%.

jasode 10y ago
>I was promised that more options would be issued and we wouldn't get diluted from future rounds, 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.[1] 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] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_economy/t/google-founders-sitting-billion-stakes/ http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...
- Osiris 10y ago
  It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.
  - jasode 10y ago
    >I specifically asked if our options would be diluted in the next fundraising round 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.
    - Osiris 10y ago
      Because it was my first startup and despite days of research into how options work, I clearly still didn't understand it all. So I trusted his answer. I had no previous experience or knowledge that would have led me to believe that they wouldn't follow through with the promise to grant additional options over time.
      - edblarney 10y ago
        Your company does not 'promise' you compensation - they have a contract for that. 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.

adamnemecek 10y ago

Because an angry investor can fuck you over more than an angry employee.

bsenftner 10y ago
Any truly angry employee can fuck over a business far worse than an investor. Sure, the rare investor with industry swaying clout is dangerious, but low level employees can cripple any technology dependant company immediately with a few minutes effort.
- adamnemecek 10y ago
  Not without incurring significant damage to himself in the process.

adekok 10y ago

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money. 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.

JonFish85 10y ago
>> I worked for one startup which got bought. The founders made money. All of the employees lost money. 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).
cookiecaper 10y ago
Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big. 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.

maxxxxx 10y ago

When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution. 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.

cookiecaper 10y ago
Yeah. There are a lot of naive people out there, and in particular, "young" is virtually synonymous with "naive" (through no fault of the young people directly, they simply haven't had the experiences yet). 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].
danielweber 10y ago
There's this mug's game where you are treated as belligerent for wanting access to the essential data to value your shares, and stupid if you value your shares at zero.

novocaine 10y ago

I don't find it baffling. 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)

cookiecaper 10y ago
Lots of companies start with minimal capital infusions. The VC roulette is not the way that sustainable companies have been built, historically speaking. Atlassian is a recent example of a bootstrapped tech company that IPO'd. 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).
- jartelt 10y ago
  Considering VC only really started in 1970s, it is easy to say that it's not the way companies have been built historically. That said, Atlassian is more an exception than the norm. Most really big, successful tech companies took VC or PE money during their history to help them grow (Google, Facebook, LinkedIn, Cisco, Apple, Microsoft, etc.).
billmalarky 10y ago
>You flatly cannot build a company without capital. Many successful companies are bootstrapped.
- mjolk 10y ago
  > 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.

michaelbuckbee 10y ago

I think we need to coin a new term like: "early employee valley of death" [1] 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-contact-how-to-negotiate-the-long-slow-saas-ramp-of-death/ http://businessofsoftware.org/2013/02/gail-goodman-constant-...

mason55 10y ago
It's pretty common advice that you want to be the last founder and not the first employee for this exact reason.
deevus 10y ago
So many times this. The startup I was working for was exactly as you described. 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.
pyb 10y ago
Yes totally agree with this. I've been there, but with my eyes open. It's still a good experience being employee #1 or #2, as long as one doesn't expect any financial upside for it. Therefore, the key is to put a time limit on your involvement.

baursak 10y ago

Or it's just a larger, systemic issue. Saw this post yesterday on Reddit, which I think is quite relevant here as well: https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy/former_anyone_who_is_poor_isnt_working_hard/ https://www.reddit.com/r/LateStageCapitalism/comments/5oeiyy...

randy_lahey 10y ago
You're kidding right? From that page: This subreddit is a safe space for Socialist discussion. Defending capitalism or capitalists is a bannable offense. Debating Socialism is also not allowed. Take this to /r/debatecommunism Bigotry, ableism and hate speech will be met with immediate bans; Socialism is an intrinsically inclusive system.

dreamfactory2 10y ago

The relationship is always and rightly asymmetrical between founders and employees. What's dishonest is offering shares that can be diluted, can't be transferred, and have no voting rights with the understanding that they are any more than shares in the current company bonus scheme. Employers should just pay a competitive salary and bonus. And employees should wise up - if they want a piece of the action they need to take founding level risks and put a lot of skin in the game.