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Investors sometimes say mean things about these “lifestyle businesses” but you don’t have to care what investors think. There's nothing wrong with a lifestyle

by chiph 13y ago

Investors sometimes say mean things about these “lifestyle businesses” but you don’t have to care what investors think. There's nothing wrong with a lifestyle business, as long as it's run like a business. There can be decent exits (purchases by competitors, private equity, etc). But the employees seldom see a big payoff. In return, you usually get a pretty comfortable work experience.

watwut 13y ago
Employees seldom see a big payoff. Period. Startups trade salary and benefits now for maybe huge payoff later. The maybe in previous sentence is important, most startups fail. Some business are build to stay there, grow and earn enough for founders to make them upper middle class/rich for the rest of their lives. It is different then Facebook like success, but most would count that as successful too.
- danieltillett 13y ago
  I have often thought that it would make sense for employees of different companies to pool any equity. You already take on enough risk being employed by a startup business without adding on your equity risk too.
  - vonnik 13y ago
    That's an amazing idea. What would it take?
    - troels 13y ago
      For one thing, you'd have to trust the people that you pool with by quite a stretch.
      - apercu 13y ago
        Great idea, in theory. But even if you simply shared equity across, say, a 20 or 30 person company. The agendas, the politics, the perceived golden handcuffs because of equity ownership. Hard to start a business with 20-30 people. Even if those are your 20 best friends. Now multiply this across dozens of companies. Plus, most startups give options, not equity unless you are a very early employee.
        danieltillett 13y ago
        I think you get most of the benefit of diversification with as few as 8 stocks [0], so if you kept each of the pools small you could avoid a lot of the scaling issues. [0] http://en.wikipedia.org/wiki/Diversification_(finance) http://en.wikipedia.org/wiki/Diversification_(finance)
    - danieltillett 13y ago
      A YC application - lets call it poolr :) More seriously there is a number of ways of doing this. I would imagine the simplest would be to create a trust and have everyone give their equity and options to the trust. The bigger issue is how to ensure that people don't game the system. The assets being put into the pool need to be accurately valued so people don't put in what they know are worthless assets. Of course there is there is the reverse situation where those already in the pool undervalue new assets. Most of the effort of this idea needs to go into setting up the rules so that everyone does the right things and everyones interests are aligned. While I think this might be hard, I don't see anything that can't be solved by some smart people.
      - bksenior 13y ago
        A simple voting mechanism would work where you announce the shares you own to the pool you want to join.
        danieltillett 13y ago
        Yes this might work - you could also have a bidding process where you put up your shares and the various pools can bid on them.
        aamar 13y ago
        Derisking makes economic sense, but incentive stock options are mostly nontransferable. You're describing a market for shares of a privately held company, which the SEC doesn't want (except through some very specific protocols like JOBS Act crowdfunding).
        danieltillett 13y ago
        The stock or stock options aren't really being sold as such, just given to the pool. I am wondering if the pool members could continue to hold the options, but enter into a secondary agreement to share any gain with their fellow pool members. This would be a derivative of some sort I guess.
- exelius 13y ago
  I feel it's a good lesson that people new to the industry often learn. And working for a startup is a lot of fun; you get to wear a lot of hats and a 23 year old software developer gets way more responsibility at a startup than they would working at Microsoft or Google. If you're fresh out of college, what do you have to lose? You either get underpaid for a few years and learn some valuable lessons (one of which being equity in a startup has a value close to zero) or you get lucky and can retire before you're 30.
- rhizome 13y ago
  Employees seldom see a big payoff. Period. You know what I've never heard of being tried? Creating a private business with big enough margins so that the office manager is paid $200K.
  - qq66 13y ago
    Not an office manager, but I know an executive assistant who was making $4-500K before she retired, working for a Fortune 100 CEO. She was incredibly effective but hated the stress of the job, so she kept quitting and the CEO kept raising her pay until she eventually couldn't take it anymore.
    - rhizome 13y ago
      Not a private company, either. Suffice it to say I was referring to something like a Basecamp-type company.
- at-fates-hands 13y ago
  >>>> Employees seldom see a big payoff. Period. Great point. The best example of this is when RIM was sued by Minformation. After several offers by RIM to settle for around 60-70 million, one of the RIM attorneys said, "I have no idea why they won't accept our offer. You could give every employee of the company $5 million with what we're offering." When they finally won (and then lost) that $147 million dollar settlement, how much you think the employees saw of it??
- georgemcbay 13y ago
  "Employees seldom see a big payoff. Period." Yeah this is an obvious but oft-overlooked fact. As a VC you can manage the high rate of failure of startups by investing in many of them simultaneously.. that's what the whole model is based on. As an employee, not so much, you're probably doing 2 fulltime jobs worth of work for one single company very likely to fail. This is why working for shitty pay in return for non-founder equity is a very -EV financial move (I'll allow that maybe it makes sense for some people as a learning experience or whatever). And this is without even getting into the fact that your company could have a very successful exit and your equity could still evaporate due to dilution or outright clawback of options (ala Zynga's pre-IPO moves), or any number of dick moves from the founders/investors.
- jroseattle 13y ago
  "Employees seldom see a big payoff. Period." I believe this, coupled with demand, is what is driving the cost of engineer salaries in the market today. Equity allocations mean almost nothing to candidates -- as they should. That doesn't mean you get a pass on offering equity; you just have to match it with a market salary.
danieltillett 13y ago
There is the issue of control. Not having external investors means you can do what you want with the business. The value of this freedom is worth a lot to the business owner.
- foxylad 13y ago
  This is the big reason for me. I've built my business on my values, and it is incredibly satisfying to see it succeed against competitors with different values.
inthewoods 13y ago
Another problem with raising money: if you raise early, you probably don't yet know if you have a VC-appropriate business or a lifestyle business. If you turn out to have a lifestyle business and you've raised VC, it is amazingly depressing - as in, "I'd love this business if I owned all of it and I'd be happy with a small exit".
- throwaway212 13y ago
  I don't know much about VC, but these sorts of claims are always surprising to me. Is it really moonshots or bust when you raise a VC round? Even with a 2x liquidity preference, don't you just need to double the invested amount in order to have personally broken even on the VC deal? Say you have a $10M business (pre-money), and you raise $5m at a 2x liquidity preference, giving up 50% of the company in the process. That would leave you with a $15M post-money valuation. So long as you can use that $5M to turn you from a $15M business into a $20M business, didn't you just break even on the deal? I'm know it's not an outcome that the VC is looking for, but it would seem to be a fine outcome from the founder's perspective.
  - wpietri 13y ago
    If you have sold 50% of your business to the VC, then you no longer have control of the business. (Seed-round investors may have stock; employees and/or cofounders certainly will.) You won't be able to close a deal that the investors don't like. My understanding is that even if you take less, so that investors don't have outright controll, VCs will have incentive and substantial power to push small wins toward becoming either big wins or big failures. And they begin that push early, so that it's easy for VC-funded startups to end up in a grow-or-die situation, even if they theoretically might have taken a different path. Note that there's some selection bias involved. If a VC thinks that the business is only going to be a $20m business, they won't invest. They also won't invest if the founders seem like the kind of people who will stop early. They're in the business of finding 10:1 odds on 100:1 money. As an aside, it's a little dangerous to do valuation math like that. The valuations at A-round levels are highly speculative. If you take your $10m company and add $5m in cash, in theory it's a $15m company. But it's mainly fantasy. It's very different than a $15m operating business whose valuation is based on revenues and profits.

by chiph 13y ago

watwut 13y ago

Employees seldom see a big payoff. Period. Startups trade salary and benefits now for maybe huge payoff later. The maybe in previous sentence is important, most startups fail. Some business are build to stay there, grow and earn enough for founders to make them upper middle class/rich for the rest of their lives. It is different then Facebook like success, but most would count that as successful too.

danieltillett 13y ago
I have often thought that it would make sense for employees of different companies to pool any equity. You already take on enough risk being employed by a startup business without adding on your equity risk too.
- vonnik 13y ago
  That's an amazing idea. What would it take?
  - troels 13y ago
    For one thing, you'd have to trust the people that you pool with by quite a stretch.
    - apercu 13y ago
      Great idea, in theory. But even if you simply shared equity across, say, a 20 or 30 person company. The agendas, the politics, the perceived golden handcuffs because of equity ownership. Hard to start a business with 20-30 people. Even if those are your 20 best friends. Now multiply this across dozens of companies. Plus, most startups give options, not equity unless you are a very early employee.
      - danieltillett 13y ago
        I think you get most of the benefit of diversification with as few as 8 stocks [0], so if you kept each of the pools small you could avoid a lot of the scaling issues. [0] http://en.wikipedia.org/wiki/Diversification_(finance) http://en.wikipedia.org/wiki/Diversification_(finance)
  - danieltillett 13y ago
    A YC application - lets call it poolr :) More seriously there is a number of ways of doing this. I would imagine the simplest would be to create a trust and have everyone give their equity and options to the trust. The bigger issue is how to ensure that people don't game the system. The assets being put into the pool need to be accurately valued so people don't put in what they know are worthless assets. Of course there is there is the reverse situation where those already in the pool undervalue new assets. Most of the effort of this idea needs to go into setting up the rules so that everyone does the right things and everyones interests are aligned. While I think this might be hard, I don't see anything that can't be solved by some smart people.
    - bksenior 13y ago
      A simple voting mechanism would work where you announce the shares you own to the pool you want to join.
      - danieltillett 13y ago
        Yes this might work - you could also have a bidding process where you put up your shares and the various pools can bid on them.
        aamar 13y ago
        Derisking makes economic sense, but incentive stock options are mostly nontransferable. You're describing a market for shares of a privately held company, which the SEC doesn't want (except through some very specific protocols like JOBS Act crowdfunding).
        danieltillett 13y ago
        The stock or stock options aren't really being sold as such, just given to the pool. I am wondering if the pool members could continue to hold the options, but enter into a secondary agreement to share any gain with their fellow pool members. This would be a derivative of some sort I guess.
exelius 13y ago
I feel it's a good lesson that people new to the industry often learn. And working for a startup is a lot of fun; you get to wear a lot of hats and a 23 year old software developer gets way more responsibility at a startup than they would working at Microsoft or Google. If you're fresh out of college, what do you have to lose? You either get underpaid for a few years and learn some valuable lessons (one of which being equity in a startup has a value close to zero) or you get lucky and can retire before you're 30.
rhizome 13y ago
Employees seldom see a big payoff. Period. You know what I've never heard of being tried? Creating a private business with big enough margins so that the office manager is paid $200K.
- qq66 13y ago
  Not an office manager, but I know an executive assistant who was making $4-500K before she retired, working for a Fortune 100 CEO. She was incredibly effective but hated the stress of the job, so she kept quitting and the CEO kept raising her pay until she eventually couldn't take it anymore.
  - rhizome 13y ago
    Not a private company, either. Suffice it to say I was referring to something like a Basecamp-type company.
at-fates-hands 13y ago
>>>> Employees seldom see a big payoff. Period. Great point. The best example of this is when RIM was sued by Minformation. After several offers by RIM to settle for around 60-70 million, one of the RIM attorneys said, "I have no idea why they won't accept our offer. You could give every employee of the company $5 million with what we're offering." When they finally won (and then lost) that $147 million dollar settlement, how much you think the employees saw of it??
georgemcbay 13y ago
"Employees seldom see a big payoff. Period." Yeah this is an obvious but oft-overlooked fact. As a VC you can manage the high rate of failure of startups by investing in many of them simultaneously.. that's what the whole model is based on. As an employee, not so much, you're probably doing 2 fulltime jobs worth of work for one single company very likely to fail. This is why working for shitty pay in return for non-founder equity is a very -EV financial move (I'll allow that maybe it makes sense for some people as a learning experience or whatever). And this is without even getting into the fact that your company could have a very successful exit and your equity could still evaporate due to dilution or outright clawback of options (ala Zynga's pre-IPO moves), or any number of dick moves from the founders/investors.
jroseattle 13y ago
"Employees seldom see a big payoff. Period." I believe this, coupled with demand, is what is driving the cost of engineer salaries in the market today. Equity allocations mean almost nothing to candidates -- as they should. That doesn't mean you get a pass on offering equity; you just have to match it with a market salary.

danieltillett 13y ago

There is the issue of control. Not having external investors means you can do what you want with the business. The value of this freedom is worth a lot to the business owner.

foxylad 13y ago
This is the big reason for me. I've built my business on my values, and it is incredibly satisfying to see it succeed against competitors with different values.

inthewoods 13y ago

Another problem with raising money: if you raise early, you probably don't yet know if you have a VC-appropriate business or a lifestyle business. If you turn out to have a lifestyle business and you've raised VC, it is amazingly depressing - as in, "I'd love this business if I owned all of it and I'd be happy with a small exit".

throwaway212 13y ago
I don't know much about VC, but these sorts of claims are always surprising to me. Is it really moonshots or bust when you raise a VC round? Even with a 2x liquidity preference, don't you just need to double the invested amount in order to have personally broken even on the VC deal? Say you have a $10M business (pre-money), and you raise $5m at a 2x liquidity preference, giving up 50% of the company in the process. That would leave you with a $15M post-money valuation. So long as you can use that $5M to turn you from a $15M business into a $20M business, didn't you just break even on the deal? I'm know it's not an outcome that the VC is looking for, but it would seem to be a fine outcome from the founder's perspective.
- wpietri 13y ago
  If you have sold 50% of your business to the VC, then you no longer have control of the business. (Seed-round investors may have stock; employees and/or cofounders certainly will.) You won't be able to close a deal that the investors don't like. My understanding is that even if you take less, so that investors don't have outright controll, VCs will have incentive and substantial power to push small wins toward becoming either big wins or big failures. And they begin that push early, so that it's easy for VC-funded startups to end up in a grow-or-die situation, even if they theoretically might have taken a different path. Note that there's some selection bias involved. If a VC thinks that the business is only going to be a $20m business, they won't invest. They also won't invest if the founders seem like the kind of people who will stop early. They're in the business of finding 10:1 odds on 100:1 money. As an aside, it's a little dangerous to do valuation math like that. The valuations at A-round levels are highly speculative. If you take your $10m company and add $5m in cash, in theory it's a $15m company. But it's mainly fantasy. It's very different than a $15m operating business whose valuation is based on revenues and profits.