7 ms·

I just started working at my first startup. Given that the employees are so crucial in building the product that is sold, why is it so uncommon for significant

by Osiris 12y ago

I just started working at my first startup. Given that the employees are so crucial in building the product that is sold, why is it so uncommon for significant proceeds from M&As to go to employees rather than founders? I realize that VCs like to take the lion's share, but even with what remains most of the stories I hear are of founders taking large payouts while employees get relatively little. I applaud Perfect Audience for recognizing the value of employees and allowing them to participate in the windfall.

ig1 12y ago
Founders hold the majority of the stock because they shoulder the majority of the risk in the early days, employees are largely reward through their salary rather than their stock option. That said most employees make out reasonably through a combination of options & golden handcuffs.
- maaku 12y ago
  No, founders hold the majority of the stock because the standard unequal terms of silicon valley favor founders over employees (and investors over everyone). Founders got the ball rolling, but it is the employees that took the company from rough product to something acceptable for M&A. Employees can and should be getting a fair shake, but only if we take steps to change the norm together.
  - deleted 12y ago
    [deleted]
  - il 12y ago
    Founders owning the majority of the business is not a uniquely Silicon Valley phenomenon.
    - maaku 12y ago
      Many of the mechanisms which aggravate the situation (e.g. aggressive company-favored retention clauses in options) where pioneered here.
      - swombat 12y ago
        I'm not in SV. My cofounder and I own 100% of the business. And that's the way it works in most of the world. The SV approach of giving early employees shares as an incentive is actually fairly tech-centric. Whoever heard of a restaurant's first waiter getting shares in the business?
        maaku 12y ago
        I could give cooperatives as a counter-example. However what I'm talking about is something different -- e.g. language in options contracts that cause you lose your shares if you leave the company unless you immediately exercise them, which most people are not in a financial position to do. This has caused many early employees to lose out on windfalls that would have been theirs if they had the same terms as founders (actual vested equity).
        larrys 12y ago
        I'd actually love to see examples of companies in SV giving equity to people who are not even clued in and recognize that they need to or should be given equity. And would gladly work for a normal pay check. Anecdotal there are stories of the early janitor getting stock (or something like that) as if they wouldn't work for just a salary. The line that I've heard is that it's a way to get people to work for less money than they would get paid if they didn't get equity. [1] But is this really true and how often in actual practice? (Comments?). I mean in a way if it is true you are taking advantage of the naivete of "the janitor" or "admin assistant" who may not even have a clue at all the probability of that equity even being worth anything at all. Because all they know about is what they read of the big wins that everyone talks about and they think they might actually stand a good chance of hitting the jackpot. Why is this right? To me it isn't (even if you believe it yourself as a founder). Separately with domain name deals there is always a push on the part of sellers that I have noticed to try to get some upside equity when selling what they consider to be a valuable name. In general since the seller isn't taking that much of a haircut on the price anyway it's is usually a bad idea. It's almost pure upside with nominal downside. [1] Along the lines of your comment "Whoever heard of a restaurant's first waiter" that would be the almost equivalent of the admin assistant or maybe customer service rep. Otoh anyone can easily see a new restaurant offering equity to people who work in the kitchen. Especially the the person in the kitchen (or several) need to be lured away from another job they are at.
  - ig1 12y ago
    Yes and they get a salary for this like they would at any other company. If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that. Obviously you can argue that employees are in a weak negotiating position; but largely the tech sector in major hubs is skewed in favour of employees with a significant range of employers (run from tech giants to new startups). If a particular company isn't willing to offer a compensation package that satisfies you then there are countless other potential employers. (and you can obviously start your own company as well)
    - maaku 12y ago
      > Yes and they get a salary for this like they would at any other company. You've obviously never worked as an early employee at a startup. Pay is never equal or even close to what you'd get at typical big company. Typically that's explained to be because you get equity -- often a pitifully small set of options which if you do the math you'd realize probably wouldn't equal the difference in salary over 4-5 years in anything but the most wildly optimistic scenarios. (The OP's employees' windfall is probably break-even with their opportunity costs.)
      - matnewton85 12y ago
        Wanna quote the second line of his post? >Yes and they get a salary for this like they would at any other company. > If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that.
  - mrkurt 12y ago
    I don't think it's either of the above, honestly. "The majority of risk" take is more of a rationalization about why it's ok for founders to get the bulk of the proceeds. "The unequal terms of silicon valley" is the flip side to that. Neither actually explains why this happens, because it's relatively mundane. Founders hold the majority of the stock because they "created" the corporation. When it's time to hire employees, presumably they have some money as well. If a company wants to hire someone, they offer some combination of benefits, equity, and salary that the new employee finds reasonably compelling. Early employees at startups are typically (1) engineers and (2) relatively inexperienced, thus they don't negotiate very large compensation packages. Employees are making the implicit decision to favor salary and a more certain (not very much more certain) over a disproportionate amount of equity. For every startup that actually hires multiple employees, there are probably 10 more where the equity is worthless.
    - maaku 12y ago
      The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodian, or public face, is because of the non-perishable, non-inflationary nature of equity. It is the nature of equity, and the legal system surrounding it, which is the problem. That's not to say that you can't design more equitable arrangement within the current system. For example, you can allocate an order of magnitude fewer shares than are issued, and each quarter do equity "bonuses" of an amount totaling 1% of the allocated shares so far. In other words, ownership percentage of the company for founders + employees would decay with a half-life of about 17 years. (You'd need protections of investor shares against this dilution to make it acceptable of course.) You can play with the numbers of course, but the idea is to have long-term ownership reflect an employees honest contribution (determined by relative bonus size vs. the size of the company), and eventually over time even out disproportionate allocations from early on. Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?
      - tptacek 12y ago
        Why haven't you started a company organized on some alternative set of terms?
  - rgbrgb 12y ago
    > got the ball rolling That's quite an understatement of what it takes to quit a job with a salary, build an MVP, structure a company, convince people to work with you, and (if you're hiring pre-revenue) convince investors you'll make them money.
    - maaku 12y ago
      I am a founder of a company; I know what is involved. I've also been there on the employee side -- I know how much they contribute. And with that context, I can say with certainty that terms are almost universally biased in favor of founders and investors at the expense of employees. You can count the exceptions.
- bluthru 12y ago
  >Founders hold the majority of the stock because they shoulder the majority of the risk in the early days The investors shoulder the majority of the risk.
  - jt2190 12y ago
    Founders are investors also, they're just using their time and effort [1] to buy shares, not cash. [1] Be very wary of working for founders who haven't put themselves on a vesting schedule, as it will be very tempting for them to put in as little effort as possible since they'll still reap the rewards if things go well.
- borplk 12y ago
  Pardon my ignorance but what is golden handcuffs?
  - ryanburk 12y ago
    usually it is an option or stock award grant that is valuable enough when fully vested over a long term (usually 4-5 years) that it is very hard to walk away from it. it "handcuffs" you to the company. http://en.wikipedia.org/wiki/Golden_handcuffs http://en.wikipedia.org/wiki/Golden_handcuffs
  - winslow 12y ago
    Golden handcuffs are a way to keep a key person at a company through massive payouts. For example the tumblr deal netted the CEO a massive golden handcuff of ~81 million to stay til 2017. [1] [1] - http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-golden-handcuff http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-...
- rhizome 12y ago
  We can quibble about the degree of risk at issue, but I don't think there's a question that employees create the majority of the value.
- melvinmt 12y ago
  It's not like founders don't get any salary.
  - bigchewy 12y ago
    do you have a reference for this claim?
deleted 12y ago
[deleted]
jasode 12y ago
>Given that the employees are so crucial in building the product that is sold, why is it so uncommon for significant proceeds from M&As to go to employees rather than founders? It's based on the concept of "ownership." The founders literally own the company. The windfall from selling the company by definition, goes to the owners. That's how it works. I "own" a car. The mechanic at the shop is the one doing all the grease work of changing the oil and spark plugs etc. But when I sell the car, I (the owner) get the money and not the mechanic. Even though one can argue that the mechanic is the one most responsible for keeping my car running in good enough condition to sell later, I'm still the one who owns the car. The mechanic gets his payment via service fees he charges me. The mechanic getting sweaty and dirty does not grant any ownership of my car. Ownership grants ownership. Substitute car with company. (Presumably, more mechanics happen to own their own cars which makes "ownership" of cars and its ownership benefits much more obvious to the layperson than ownership of companies.) So, to translate your question in the most direct way, you're asking "why do owners get rewards of M&A but non-owners (such as employees) do not?" If you think of it that way, the question answers itself. It's tautology. But your question-behind-the-question could then be, "well, why don't the employees get part ownership?" ... and the answer is, they sometimes do! One way is for the "employee" to start their own company. (S Wozniak leaves HP, and S. Jobs doesn't stay with Atari.) The other way is for other owners to grant partial ownership through stock shares (equity). This financial arrangement is almost always a tradeoff because the founder can't afford to pay market rate of full salary. Partial ownership for employees is the dangling carrot compensating for uncompetitive wages. Since established companies like Google Inc and Apple Inc offer competitive wages, they don't need to give new employees partial-ownership of any significant amount.
- ForHackernews 12y ago
  Owners and stock grants aren't the only possible model, and your righteous insistence that it's self-evident that economic gains should obviously accrue to "owners" is disingenuous. There are many cooperatives where employees all share ownership of the enterprise, http://www.sfgate.com/business/article/Cooperatives-give-new-meaning-to-sharing-economy-5502879.php http://www.sfgate.com/business/article/Cooperatives-give-new... and this model arguably makes even more sense for knowledge-economy companies that require little in the way of physical capital, and derive the majority of their value from the talents of skilled employees.
at-fates-hands 12y ago
I've worked at two startups who sole purpose was to get acquired. Towards the end of the life cycle of the product, when the founders were actively seeking investors, it became clear what was going on. Some employees held on, hoping to get a piece of the action, but there was little hope of that. You just have to be clear on what the goals of the company are so you know whether you're going to get a cut or not. You also have to decide if its worth it to stick around if there's no incentive to stick around when you're essentially sealing your own fate so to speak.
jt2190 12y ago
> Given that the employees are so crucial in building the > product... If the product can not be created without your effort alone, you should seriously consider asking for a significant equity stake in the company and becoming a cofounder. If you don't want to take an ownership stake you should ask for a very large salary. Most likely the product can be created not just by you but also by someone with your skill set. In that case you should definitely expect fair market salary for your effort. If the founders can't afford to pay, they need to raise more cash from investors, not beg professionals for charity. If the founders are asking you to take a reduced salary, they're really asking you to become an investor, and you should expect that for every dollar reduction in your salary you get that much equity in return.
curun1r 12y ago
Employees are free to negotiate employment contracts with a startup so that their compensation is structured as primarily equity. If and when an acquisition/IPO happens, those employees will make a considerable sum. But most employees aren't willing to take on that risk and don't have the savings necessary to live off that kind of arrangement. Money is a very limited commodity in a startup and every dollar you're getting paid is equivalent to a dollar you're not investing in the company. Acquisitions reward investors, whether the investment is time or money.
- dragonwriter 12y ago
  > If and when an acquisition/IPO happens, those employees will make a considerable sum. Or not, depending on the terms of the acquisition or the market price at the point they sell after the IPO.

by Osiris 12y ago

ig1 12y ago

Founders hold the majority of the stock because they shoulder the majority of the risk in the early days, employees are largely reward through their salary rather than their stock option. That said most employees make out reasonably through a combination of options & golden handcuffs.

maaku 12y ago
No, founders hold the majority of the stock because the standard unequal terms of silicon valley favor founders over employees (and investors over everyone). Founders got the ball rolling, but it is the employees that took the company from rough product to something acceptable for M&A. Employees can and should be getting a fair shake, but only if we take steps to change the norm together.
- deleted 12y ago
  [deleted]
- il 12y ago
  Founders owning the majority of the business is not a uniquely Silicon Valley phenomenon.
  - maaku 12y ago
    Many of the mechanisms which aggravate the situation (e.g. aggressive company-favored retention clauses in options) where pioneered here.
    - swombat 12y ago
      I'm not in SV. My cofounder and I own 100% of the business. And that's the way it works in most of the world. The SV approach of giving early employees shares as an incentive is actually fairly tech-centric. Whoever heard of a restaurant's first waiter getting shares in the business?
      - maaku 12y ago
        I could give cooperatives as a counter-example. However what I'm talking about is something different -- e.g. language in options contracts that cause you lose your shares if you leave the company unless you immediately exercise them, which most people are not in a financial position to do. This has caused many early employees to lose out on windfalls that would have been theirs if they had the same terms as founders (actual vested equity).
      - larrys 12y ago
        I'd actually love to see examples of companies in SV giving equity to people who are not even clued in and recognize that they need to or should be given equity. And would gladly work for a normal pay check. Anecdotal there are stories of the early janitor getting stock (or something like that) as if they wouldn't work for just a salary. The line that I've heard is that it's a way to get people to work for less money than they would get paid if they didn't get equity. [1] But is this really true and how often in actual practice? (Comments?). I mean in a way if it is true you are taking advantage of the naivete of "the janitor" or "admin assistant" who may not even have a clue at all the probability of that equity even being worth anything at all. Because all they know about is what they read of the big wins that everyone talks about and they think they might actually stand a good chance of hitting the jackpot. Why is this right? To me it isn't (even if you believe it yourself as a founder). Separately with domain name deals there is always a push on the part of sellers that I have noticed to try to get some upside equity when selling what they consider to be a valuable name. In general since the seller isn't taking that much of a haircut on the price anyway it's is usually a bad idea. It's almost pure upside with nominal downside. [1] Along the lines of your comment "Whoever heard of a restaurant's first waiter" that would be the almost equivalent of the admin assistant or maybe customer service rep. Otoh anyone can easily see a new restaurant offering equity to people who work in the kitchen. Especially the the person in the kitchen (or several) need to be lured away from another job they are at.
- ig1 12y ago
  Yes and they get a salary for this like they would at any other company. If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that. Obviously you can argue that employees are in a weak negotiating position; but largely the tech sector in major hubs is skewed in favour of employees with a significant range of employers (run from tech giants to new startups). If a particular company isn't willing to offer a compensation package that satisfies you then there are countless other potential employers. (and you can obviously start your own company as well)
  - maaku 12y ago
    > Yes and they get a salary for this like they would at any other company. You've obviously never worked as an early employee at a startup. Pay is never equal or even close to what you'd get at typical big company. Typically that's explained to be because you get equity -- often a pitifully small set of options which if you do the math you'd realize probably wouldn't equal the difference in salary over 4-5 years in anything but the most wildly optimistic scenarios. (The OP's employees' windfall is probably break-even with their opportunity costs.)
    - matnewton85 12y ago
      Wanna quote the second line of his post? >Yes and they get a salary for this like they would at any other company. > If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that.
- mrkurt 12y ago
  I don't think it's either of the above, honestly. "The majority of risk" take is more of a rationalization about why it's ok for founders to get the bulk of the proceeds. "The unequal terms of silicon valley" is the flip side to that. Neither actually explains why this happens, because it's relatively mundane. Founders hold the majority of the stock because they "created" the corporation. When it's time to hire employees, presumably they have some money as well. If a company wants to hire someone, they offer some combination of benefits, equity, and salary that the new employee finds reasonably compelling. Early employees at startups are typically (1) engineers and (2) relatively inexperienced, thus they don't negotiate very large compensation packages. Employees are making the implicit decision to favor salary and a more certain (not very much more certain) over a disproportionate amount of equity. For every startup that actually hires multiple employees, there are probably 10 more where the equity is worthless.
  - maaku 12y ago
    The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodian, or public face, is because of the non-perishable, non-inflationary nature of equity. It is the nature of equity, and the legal system surrounding it, which is the problem. That's not to say that you can't design more equitable arrangement within the current system. For example, you can allocate an order of magnitude fewer shares than are issued, and each quarter do equity "bonuses" of an amount totaling 1% of the allocated shares so far. In other words, ownership percentage of the company for founders + employees would decay with a half-life of about 17 years. (You'd need protections of investor shares against this dilution to make it acceptable of course.) You can play with the numbers of course, but the idea is to have long-term ownership reflect an employees honest contribution (determined by relative bonus size vs. the size of the company), and eventually over time even out disproportionate allocations from early on. Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?
    - tptacek 12y ago
      Why haven't you started a company organized on some alternative set of terms?
- rgbrgb 12y ago
  > got the ball rolling That's quite an understatement of what it takes to quit a job with a salary, build an MVP, structure a company, convince people to work with you, and (if you're hiring pre-revenue) convince investors you'll make them money.
  - maaku 12y ago
    I am a founder of a company; I know what is involved. I've also been there on the employee side -- I know how much they contribute. And with that context, I can say with certainty that terms are almost universally biased in favor of founders and investors at the expense of employees. You can count the exceptions.
bluthru 12y ago
>Founders hold the majority of the stock because they shoulder the majority of the risk in the early days The investors shoulder the majority of the risk.
- jt2190 12y ago
  Founders are investors also, they're just using their time and effort [1] to buy shares, not cash. [1] Be very wary of working for founders who haven't put themselves on a vesting schedule, as it will be very tempting for them to put in as little effort as possible since they'll still reap the rewards if things go well.
borplk 12y ago
Pardon my ignorance but what is golden handcuffs?
- ryanburk 12y ago
  usually it is an option or stock award grant that is valuable enough when fully vested over a long term (usually 4-5 years) that it is very hard to walk away from it. it "handcuffs" you to the company. http://en.wikipedia.org/wiki/Golden_handcuffs http://en.wikipedia.org/wiki/Golden_handcuffs
- winslow 12y ago
  Golden handcuffs are a way to keep a key person at a company through massive payouts. For example the tumblr deal netted the CEO a massive golden handcuff of ~81 million to stay til 2017. [1] [1] - http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-golden-handcuff http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-...
rhizome 12y ago
We can quibble about the degree of risk at issue, but I don't think there's a question that employees create the majority of the value.
melvinmt 12y ago
It's not like founders don't get any salary.
- bigchewy 12y ago
  do you have a reference for this claim?

deleted 12y ago

[deleted]

jasode 12y ago

>Given that the employees are so crucial in building the product that is sold, why is it so uncommon for significant proceeds from M&As to go to employees rather than founders? It's based on the concept of "ownership." The founders literally own the company. The windfall from selling the company by definition, goes to the owners. That's how it works. I "own" a car. The mechanic at the shop is the one doing all the grease work of changing the oil and spark plugs etc. But when I sell the car, I (the owner) get the money and not the mechanic. Even though one can argue that the mechanic is the one most responsible for keeping my car running in good enough condition to sell later, I'm still the one who owns the car. The mechanic gets his payment via service fees he charges me. The mechanic getting sweaty and dirty does not grant any ownership of my car. Ownership grants ownership. Substitute car with company. (Presumably, more mechanics happen to own their own cars which makes "ownership" of cars and its ownership benefits much more obvious to the layperson than ownership of companies.) So, to translate your question in the most direct way, you're asking "why do owners get rewards of M&A but non-owners (such as employees) do not?" If you think of it that way, the question answers itself. It's tautology. But your question-behind-the-question could then be, "well, why don't the employees get part ownership?" ... and the answer is, they sometimes do! One way is for the "employee" to start their own company. (S Wozniak leaves HP, and S. Jobs doesn't stay with Atari.) The other way is for other owners to grant partial ownership through stock shares (equity). This financial arrangement is almost always a tradeoff because the founder can't afford to pay market rate of full salary. Partial ownership for employees is the dangling carrot compensating for uncompetitive wages. Since established companies like Google Inc and Apple Inc offer competitive wages, they don't need to give new employees partial-ownership of any significant amount.

ForHackernews 12y ago
Owners and stock grants aren't the only possible model, and your righteous insistence that it's self-evident that economic gains should obviously accrue to "owners" is disingenuous. There are many cooperatives where employees all share ownership of the enterprise, http://www.sfgate.com/business/article/Cooperatives-give-new-meaning-to-sharing-economy-5502879.php http://www.sfgate.com/business/article/Cooperatives-give-new... and this model arguably makes even more sense for knowledge-economy companies that require little in the way of physical capital, and derive the majority of their value from the talents of skilled employees.

at-fates-hands 12y ago

I've worked at two startups who sole purpose was to get acquired. Towards the end of the life cycle of the product, when the founders were actively seeking investors, it became clear what was going on. Some employees held on, hoping to get a piece of the action, but there was little hope of that. You just have to be clear on what the goals of the company are so you know whether you're going to get a cut or not. You also have to decide if its worth it to stick around if there's no incentive to stick around when you're essentially sealing your own fate so to speak.

jt2190 12y ago

> Given that the employees are so crucial in building the > product... If the product can not be created without your effort alone, you should seriously consider asking for a significant equity stake in the company and becoming a cofounder. If you don't want to take an ownership stake you should ask for a very large salary. Most likely the product can be created not just by you but also by someone with your skill set. In that case you should definitely expect fair market salary for your effort. If the founders can't afford to pay, they need to raise more cash from investors, not beg professionals for charity. If the founders are asking you to take a reduced salary, they're really asking you to become an investor, and you should expect that for every dollar reduction in your salary you get that much equity in return.

curun1r 12y ago

Employees are free to negotiate employment contracts with a startup so that their compensation is structured as primarily equity. If and when an acquisition/IPO happens, those employees will make a considerable sum. But most employees aren't willing to take on that risk and don't have the savings necessary to live off that kind of arrangement. Money is a very limited commodity in a startup and every dollar you're getting paid is equivalent to a dollar you're not investing in the company. Acquisitions reward investors, whether the investment is time or money.

dragonwriter 12y ago
> If and when an acquisition/IPO happens, those employees will make a considerable sum. Or not, depending on the terms of the acquisition or the market price at the point they sell after the IPO.