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Gumroad is an interesting cautionary tale for employee equity compensation. The company was declared to have failed several years ago. Employees were laid off

Gumroad is an interesting cautionary tale for employee equity compensation. The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-startup-failed-2019-2 https://www.businessinsider.com/startup-failure-gumroad-why-... However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it’s now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed. On one hand, it’s great to see a founder persevere and rise from the ashes. On the other hand, watching the early employees lose out on their equity because they were told the company was a failure is not cool. I’ve made some money from startup options through my career so I won’t agree that they’re worthless as often claimed. However, this is a good reminder that the game is very stacked against the employees.

duxup 6y ago
I like the idea that a startup that fails to be a unicorn can still be something. The alternative are these companies vanish because they're not worth an enormous amount in a short time.. I'd argue the first issue is not being more direct / everyone understanding what it means to be an employee at a start up as it is equity wise. I'm not sure some token Grumroad tidbits thrown old employees way really would change much / I'd argue obligations like that would complicate any such resurrections.
- PragmaticPulp 6y ago
  > I like the idea that a startup that fails to be a unicorn can still be something. The problem isn’t that the company failed to be a unicorn. The problem is that the company was declared to be worthless and was given away to the founder (but not employees who built it), but it obviously wasn’t worthless as it’s currently valued at $100 million. Early employee equity was wiped out in the process. The point is that you can work for a $100mm company, build the foundation of a $100mm company, yet walk away with nothing because the investors and founders can play games with your equity. Unlikely to happen again given how this played out. However it must hurt to be an early Gumroad employee doing the math on what their equity would have been worth today after being told the company was worthless.
  - ROARosen 6y ago
    The alternative was to close down the company completely, I'm not sure how that would help the employees equity. Besides, options are by nature expiratory unless certain milestones are reached, which obviously wasn't the case. And if the employees did have real equity there is no way the founder could have gotten that without their consent.
    - PragmaticPulp 6y ago
      > The alternative was to close down the company completely No, the alternative was to give the IP and equity ownership proportionally to the employees, not 100% to the founder. Instead, they gave it all to the founder and none to the employees who built the IP (as far as I can tell from public documents). Employees were told they received nothing because their work was useless. Apparently it wasn’t so useless.
      - duxup 6y ago
        I'm a little confused about how this works in a sort of mechanical function. At the time it was deemed worthless or whatever term we want to call it, the owners were the initial investors. They sold it (well some of them) back to the initial founder. It's their ownership to sell.... I go back to my point that we need to be honest about what the equity and rights of individual contributors really IS more than some ephemeral expectation that someone should get equity ... after most everyone has given up... or after others work to resurrect it.
        itronitron 6y ago
        Dropping the price to exercise the options to zero dollars seems like it would be an equitable solution. If the company is really worth nothing then why should an option to buy a share of the company cost more than that?
        duxup 6y ago
        >If the company is really worth nothing I'm not sure I understand why that would be or why that would even come up if you were investing in 'worth nothing'.
jasode 6y ago
>, he continued running the company with new part-time employees, I think he continued with part-time contractors instead of employees if I read his blog post correctly: https://sahillavingia.com/work https://sahillavingia.com/work > Instead, I found an Indian firm called BigBinary and hired a few engineers as contractors. >These contractors saved the company. They fixed bugs and maintained the site while I answered support tickets, designed features, and wrote about new initatives. [I'll delete this post if it's inaccurate]
elnygren 6y ago
This is why you want stock/equity instead. Everything else is just toilet paper until it becomes stock/equity. Usually countries have lots of laws and regulations protecting small shareholders, but not really anything to protect people who might become shareholders one day. I wish companies had easy ways to give out real stock instead of options... it's up to regulators to make this smoother, easier, cheaper.
- jelling 6y ago
  The problem is that the employee would have to pay taxes on the value of the stack at the time it was issued. Given how high valuations can be and still never pan out, giving employees stock directly would cost them significant amounts of money in most cases.
  - kirubakaran 6y ago
    RSUs + double trigger gets around this
whack 6y ago
> However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it's now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed. Let me start off by saying that I think most startup compensation is downright bad for employees, compared to FANG alternatives. I would like to be a startup founder one day, but I realistically can't see myself as a startup employee. That said, I don't think Gumroad did anything morally wrong here. The layoffs were absolutely necessary, because the company would have gone bankrupt without them. But it's false to say that this caused employees to have no equity. Even if you get laid off as a startup employee, you can still choose to exercise your options and hold on to the company's equity, if you think that they will eventually be worth $100M. No one misled the employees about the company's future. They saw that the investors were pulling out. They saw that the engineering team was getting shredded. And they made the very reasonable assessment that the company's equity isn't worth the cost of exercising their options. Blaming Gumroad for employees not having equity, is like blaming AMD for their previous employees selling off their stock during their near-bankruptcy days. Any company can and will go through dramatic reversals of fortune. And whenever there's such a turnaround, there is bound to be people who missed out on the upside, because they didn't continue holding through the dark times.
- adamhp 6y ago
  I've seen similar sentiment being repeated about Sahil, even by other successful founders like Nathan Berry. It is a bit unfair to look at everything in hindsight and assume Sahil acted maliciously. He did what he could to scrap together the resources to save a failing company. It's not like he ran some sort of shell game to rob the original contributors of their equity. People always view the past in this way and it is incredibly biased. You have to go back and step forward in time with each piece of information as it was available, and at the time it appeared the company was surely going to fail. In any case, I'd be curious to hear from some of the original contributors as to how they felt they were treated or how Sahil behaved.
  - 6y ago
vmception 6y ago
The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. Yeah I guess cautionary tale is the good word here. > watching the early employees lose out on their equity because they were told the company was a failure is not cool eh, they had the choice, this isn't a story of the share class changing or the entity being changed, and you had to write presumably because you don't know and are relying on the financial unsophistication of many tech employees can be a tough choice to both earn below market salary and then be expected to use that income to buy your shares. sadly this is due to various tax law changes over the last few decades. but yeah this isn't "egregious enough" for me to garner anything from it. its a case study about how much you can do with contractors and that you don't need venture capital or the employee structure if you know what you actually want to build
- PragmaticPulp 6y ago
  > The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. That’s a side effect of the problem, not the cause of the problem. Why did the employee options expire worthless? Because they were issued at one valuation, then the investors changed the valuation to $0. Yet the company and technology didn’t change. In fact, it kept operating with the same brand, same customers, and website. The investors and founder both dipped the valuation to zero because it was in their best personal interests, dropping employees with options in the process. That’s why I framed this as a cautionary tale for employees looking to help startups. This wouldn’t have been a big deal if the company simply went through the normal failure process where the IP was sold on the open market in the normal process. Even if the founder had bought the company IP back for $1 if no one else wanted it, that would have at least persevered some appearance of fairness.
  - vmception 6y ago
    I see, thats strange, do we know who the investors were? I didn't look at Crunchbase or anything yet Just an odd thing to agree to, if the IP had value and there were no creditors but the prospects were bad then this was improper. If there were creditors, what happened to them?
haltingproblem 6y ago
Disclosure - I don't know Sahil and have never had any interaction with him or Gumroad except as an ocassional Gumroad customer. I find this take to be disingenuous at best and outright misinformed at worst. Sahil has been very public with what happened [1]. Gumroad turned out to be a lifestyle business and not a VC funded boom or bust rocket. He could have easily shut down Gumroad and gone on to bigger and better things. He persevered and today Gumroad has risen from the ashes and creators are better off for it. Kudos to him and his motley crew. He has extensively blogged about it and been public about Gumroad's finances. Maybe one day Gumroad will be worth $1B but it is a long road ahead and I wish the new investors the best. Back to Sahil's actions, unless you have actual instances of wrongdoing by him, I feel you are just flinging innuendo. [1] https://sahillavingia.com/reflecting https://sahillavingia.com/reflecting

duxup 6y ago

I like the idea that a startup that fails to be a unicorn can still be something. The alternative are these companies vanish because they're not worth an enormous amount in a short time.. I'd argue the first issue is not being more direct / everyone understanding what it means to be an employee at a start up as it is equity wise. I'm not sure some token Grumroad tidbits thrown old employees way really would change much / I'd argue obligations like that would complicate any such resurrections.

PragmaticPulp 6y ago
> I like the idea that a startup that fails to be a unicorn can still be something. The problem isn’t that the company failed to be a unicorn. The problem is that the company was declared to be worthless and was given away to the founder (but not employees who built it), but it obviously wasn’t worthless as it’s currently valued at $100 million. Early employee equity was wiped out in the process. The point is that you can work for a $100mm company, build the foundation of a $100mm company, yet walk away with nothing because the investors and founders can play games with your equity. Unlikely to happen again given how this played out. However it must hurt to be an early Gumroad employee doing the math on what their equity would have been worth today after being told the company was worthless.
- ROARosen 6y ago
  The alternative was to close down the company completely, I'm not sure how that would help the employees equity. Besides, options are by nature expiratory unless certain milestones are reached, which obviously wasn't the case. And if the employees did have real equity there is no way the founder could have gotten that without their consent.
  - PragmaticPulp 6y ago
    > The alternative was to close down the company completely No, the alternative was to give the IP and equity ownership proportionally to the employees, not 100% to the founder. Instead, they gave it all to the founder and none to the employees who built the IP (as far as I can tell from public documents). Employees were told they received nothing because their work was useless. Apparently it wasn’t so useless.
    - duxup 6y ago
      I'm a little confused about how this works in a sort of mechanical function. At the time it was deemed worthless or whatever term we want to call it, the owners were the initial investors. They sold it (well some of them) back to the initial founder. It's their ownership to sell.... I go back to my point that we need to be honest about what the equity and rights of individual contributors really IS more than some ephemeral expectation that someone should get equity ... after most everyone has given up... or after others work to resurrect it.
      - itronitron 6y ago
        Dropping the price to exercise the options to zero dollars seems like it would be an equitable solution. If the company is really worth nothing then why should an option to buy a share of the company cost more than that?
        duxup 6y ago
        >If the company is really worth nothing I'm not sure I understand why that would be or why that would even come up if you were investing in 'worth nothing'.

jasode 6y ago

>, he continued running the company with new part-time employees, I think he continued with part-time contractors instead of employees if I read his blog post correctly: https://sahillavingia.com/work https://sahillavingia.com/work > Instead, I found an Indian firm called BigBinary and hired a few engineers as contractors. >These contractors saved the company. They fixed bugs and maintained the site while I answered support tickets, designed features, and wrote about new initatives. [I'll delete this post if it's inaccurate]

elnygren 6y ago

This is why you want stock/equity instead. Everything else is just toilet paper until it becomes stock/equity. Usually countries have lots of laws and regulations protecting small shareholders, but not really anything to protect people who might become shareholders one day. I wish companies had easy ways to give out real stock instead of options... it's up to regulators to make this smoother, easier, cheaper.

jelling 6y ago
The problem is that the employee would have to pay taxes on the value of the stack at the time it was issued. Given how high valuations can be and still never pan out, giving employees stock directly would cost them significant amounts of money in most cases.
- kirubakaran 6y ago
  RSUs + double trigger gets around this

whack 6y ago

> However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it's now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed. Let me start off by saying that I think most startup compensation is downright bad for employees, compared to FANG alternatives. I would like to be a startup founder one day, but I realistically can't see myself as a startup employee. That said, I don't think Gumroad did anything morally wrong here. The layoffs were absolutely necessary, because the company would have gone bankrupt without them. But it's false to say that this caused employees to have no equity. Even if you get laid off as a startup employee, you can still choose to exercise your options and hold on to the company's equity, if you think that they will eventually be worth $100M. No one misled the employees about the company's future. They saw that the investors were pulling out. They saw that the engineering team was getting shredded. And they made the very reasonable assessment that the company's equity isn't worth the cost of exercising their options. Blaming Gumroad for employees not having equity, is like blaming AMD for their previous employees selling off their stock during their near-bankruptcy days. Any company can and will go through dramatic reversals of fortune. And whenever there's such a turnaround, there is bound to be people who missed out on the upside, because they didn't continue holding through the dark times.

adamhp 6y ago
I've seen similar sentiment being repeated about Sahil, even by other successful founders like Nathan Berry. It is a bit unfair to look at everything in hindsight and assume Sahil acted maliciously. He did what he could to scrap together the resources to save a failing company. It's not like he ran some sort of shell game to rob the original contributors of their equity. People always view the past in this way and it is incredibly biased. You have to go back and step forward in time with each piece of information as it was available, and at the time it appeared the company was surely going to fail. In any case, I'd be curious to hear from some of the original contributors as to how they felt they were treated or how Sahil behaved.
- 6y ago

vmception 6y ago

The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. Yeah I guess cautionary tale is the good word here. > watching the early employees lose out on their equity because they were told the company was a failure is not cool eh, they had the choice, this isn't a story of the share class changing or the entity being changed, and you had to write presumably because you don't know and are relying on the financial unsophistication of many tech employees can be a tough choice to both earn below market salary and then be expected to use that income to buy your shares. sadly this is due to various tax law changes over the last few decades. but yeah this isn't "egregious enough" for me to garner anything from it. its a case study about how much you can do with contractors and that you don't need venture capital or the employee structure if you know what you actually want to build

PragmaticPulp 6y ago
> The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. That’s a side effect of the problem, not the cause of the problem. Why did the employee options expire worthless? Because they were issued at one valuation, then the investors changed the valuation to $0. Yet the company and technology didn’t change. In fact, it kept operating with the same brand, same customers, and website. The investors and founder both dipped the valuation to zero because it was in their best personal interests, dropping employees with options in the process. That’s why I framed this as a cautionary tale for employees looking to help startups. This wouldn’t have been a big deal if the company simply went through the normal failure process where the IP was sold on the open market in the normal process. Even if the founder had bought the company IP back for $1 if no one else wanted it, that would have at least persevered some appearance of fairness.
- vmception 6y ago
  I see, thats strange, do we know who the investors were? I didn't look at Crunchbase or anything yet Just an odd thing to agree to, if the IP had value and there were no creditors but the prospects were bad then this was improper. If there were creditors, what happened to them?

haltingproblem 6y ago

Disclosure - I don't know Sahil and have never had any interaction with him or Gumroad except as an ocassional Gumroad customer. I find this take to be disingenuous at best and outright misinformed at worst. Sahil has been very public with what happened [1]. Gumroad turned out to be a lifestyle business and not a VC funded boom or bust rocket. He could have easily shut down Gumroad and gone on to bigger and better things. He persevered and today Gumroad has risen from the ashes and creators are better off for it. Kudos to him and his motley crew. He has extensively blogged about it and been public about Gumroad's finances. Maybe one day Gumroad will be worth $1B but it is a long road ahead and I wish the new investors the best. Back to Sahil's actions, unless you have actual instances of wrongdoing by him, I feel you are just flinging innuendo. [1] https://sahillavingia.com/reflecting https://sahillavingia.com/reflecting