Author Topic: Need some Jedi-level advice... big $$ decision with a start-up  (Read 7130 times)

tammyLav

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Need some Jedi-level advice... big $$ decision with a start-up
« on: December 10, 2013, 09:37:24 PM »
Thank you for taking a minute to answer my question. I appreciate the knowledge on this board so much, and as soon as my husband presented this puzzle, I knew I needed your help!

So, he is involved with a start-up that has been going for about a year how. It was founded by an experienced Palo Altoid who has had several exits by this point. I'm pretty certain she has plans to make at least some money from this venture--my guess is to ultimately sell the engine they've built it to a larger company, but who knows. I do know that she will be taking care of herself, because she plays this game well... but unfortunately it's a game I am unfamiliar with, one that seems to have such confusing rules!

So the boss lady is most pleased with hubby's hard work, and she has presented us with some options this holiday season. So we have in front of us 4 doors:

door #1: A raise--the least attractive option to me because we live well within our means already and it doesn't seem like enough to work with all at once.

door #2: A bonus-- attractive to me because we are working to get rid of our credit card debt, and this would cut it out all at once. I don't want to get tied up in small potatoes though.. I want this money to work as hard as possible and I'm not sure this the best choice for that reason, as much as I want the credit card gone!

door #3: Tripling his current stock options (he has 50,000 right now)

door #4: Access to some restricted stock-- now this option she did not seem to like as much. According to her, the stock options would be as valuable, and restricted stock would cost money up front, of course. I was thinking the bonus money could be used for this if it was something worthwhile.

door #5: some combination of the above or an entirely different request I hadn't thought to ask for

** Additionally, she has said she wants to make him a cofounder of the company. I'm not sure what the legal implications of this would be, though I'm guessing nothing is set in  stone. We need to figure out what to ask for. This is why I was thinking of the restricted stock, because if he is made a cofounder, I would want him to get access to some of the better perks should the company have a successful exit. But then, if our stock options will be as good, which is what his boss is telling him, then should we just ask for more of those?

Basically, if the company get sold, or this game product gets spun into some sale, I don't want to depend on a rich benefactor to generously offer us crumbs out of the kindness of her heart, lol. My husband and I want a piece of the pie he's baking, dammit ;) I want to find a way to make sure we get a share of the profits, because this could potentially represent a path to FI for us. She has left the options wide open, but now we are tasked with sorting out what they all really mean. What would you do in his shoes?


iamlindoro

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #1 on: December 10, 2013, 09:45:20 PM »
I'd take the raise or the bonus.  Pay off debt, increase your savings rate, and take the slow and steady sure thing that will get you an incremental but "free" step closer to FI/RE.

I've worked in startups nearly my whole career-  statistically less than one in 10 has a successful exit, and that's including the many I've worked for with founders with serious cred, successful prior companies, etc.  Having founders with great connections and money of their own is nice, but it isn't an indicator of success.

Or, ask for the bonus/raise and more options.  But the bonus/raise for sure.

Argyle

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #2 on: December 10, 2013, 10:02:38 PM »
I agree.  The bonus is sure-fire.  And I'm guessing your credit cards have a higher interest rate than you're likely to get on the market right now.  So paying them off saves you that much.  And with the raise, you can buy more stock (index funds!).  You say you don't need more money just now, but you do -- to pay off the credit cards.  And if you really didn't need or want any more money, you wouldn't be bothering about the other options -- you'd just say, "It doesn't matter, give us whatever."  But money = freedom and you might as well maximize your freedom.  Plus the start-up world is a wild uncertain ride, and you might as well have some assets locked down.

My guess about the other things is that you're thinking, "But what if this thing takes off like crazy, and if we turn down stock options etc. it ends up that we've turned down a fortune?"  That's a risk, though who knows how big a one.  Statistically probably  not that big, though the specifics matter a lot here and we're not in a position to know about those.  Equally the company could go bust and the raise and the stock options are worth nothing.  That's why I'd start with the bonus, then add on a couple of other things just in case the company does fabulously.

msilenus

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #3 on: December 10, 2013, 11:31:31 PM »
This is a ridiculously difficult question, and probably can't be answered based on any information you'd be at liberty to disclose.  The founder's cred is important, but it isn't the business.  The business is key.  You're a year in.  Is it executing well?  Is the market real?  How far out is launch, how much money does it have, how solid are the prospects for the next round?  Does it have the team in place to execute well enough to grow and still get to the round after that?

There's another dimension: I've never been a founder, but as I understand things, the answer she wants to hear is "equity."  It's not about the company's balance sheet --it's about his commitment.  You have enough to live, and you aren't even eating ramen, so any answer other than "equity" says he's hedging to some extent.  That could be cause for concern on her end.  So you need to consider how likely that is, and how important the relationship is.  It might not be.  Ie: if he plans to join IBM if his current gig fails.  However, if he expects to found another company if the current one fails -especially, but not exclusively, if he plans on starting it with her- the equity might not really be worthless.

The number of stock options isn't really meaningful.  The only way to measure equity is in percentages.

I recommend reading these lecture notes.  Peter Thiel is a VC and former founder at Paypal.  He did a series of lectures on startups at Stanford.  In this one, he talks a lot about equity:
http://blakemasters.com/post/21742864570/peter-thiels-cs183-startup-class-6-notes-essay

(The whole series is excellent.)

- -

Strictly by the numbers: I'd definitely prefer the bonus if his equity is already greater than or equal to about 2%.  That much equity is enough to start hitting diminishing returns from a FI perspective if there's an 8-figure exit.  However, the cultural dimension might be more important than the financial dimension.

Self-employed-swami

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #4 on: December 10, 2013, 11:37:44 PM »
Do you have a lawyer?  I would recommend getting some legal advice, on the liabilities, and responsibilities with becoming a co-founder/restricted share holder at a high percentage of the shares. 

These issues aren't things you will likely be able to get solid advice on, through the forum, because all of the business' books, plans, financial statements, and bylaws will need examining, to determine what the risks are.

I, for one, will not ever take a majority share, or executive share in a company, where I don't have at least 50%, if not more, say in how things are run.  Hence, I work for myself.

I am also a Canadian, so some of the terminology I know, might not be the same as in the US.

So, I'd recommend some sort of combination of bonus/raise/non-executive shares.

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #5 on: December 11, 2013, 09:18:20 AM »
Wow, you guys definitely didn't disappoint! I knew I'd get some good answers here.  I'm trying to help my exhausted husband out, so I am currently the R&D department of our marriage, lol. Thank you for your thorough responses.

Naturally, I can't disclose anything about it, but there is already a big player involved here who is interested in the goings on. They are a small team, several are close friends, and the team is very dedicated to the product they are working to create. The general concept has shown itself to be very profitable within its niche, as well as having room to expand, since there aren't a lot of other players in competition at the moment (actually, no other players yet), though other competitors are currently in development as well.

I see what you are saying about the risk of the unknown. We have been doing well on the MMM plan and getting rid of the two credit cards is priority #1, 1 card is almost gone... the smaller one... but the bigger one would be nice to kill, and this would do it. (I feel like I should defend myself here by saying we've never been spendy, but had a business that went bust...but it doesn't really matter I guess, lol. what's past is past... we need to do what's best now) We don't have access to the inner workings of the business, so I can't answer some of those questions, but the idea that becoming a founder might come with liability attached, though obvious now that I'm thinking of it, hadn't crossed my mind before. So is that a reason not be made a cofounder, or should he be asking if/what liability is involved with a role change?

Also, and please forgive me if this is a really stupid question...  (maybe msilenus' link, which I'll check out in a bit, answers it already) but what happens to stock options if the company is sold to this other player? Is that always negotiable per the exit agreement?

--A little aside, but my husband was once involved as an employee in an established company that did not grant stock options (so we weren't expecting any payoffs) and was part of a 2 man team that created a product that went onto make 100 mil in profits for the company (and is still a top money maker for them), and he just ended up getting laid off immediately after its release. Though we knew there would be no stake of the profits, that was a bitter pill at the time, and a wake up call as well. We are trying to make sure this time, we've at least got a shot. Thanks again for helping guide us to a smart decision

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #6 on: December 11, 2013, 09:28:29 AM »
So, I'd recommend some sort of combination of bonus/raise/non-executive shares.

Swami, good points. We can't afford a lawyer, unfortunately. Things are a bit tight as we work to clear out debt. I wish I had irl people to ask, but we both come from families of either working class or middle class pensioners, so no investors to learn from. I'm glad I found this community though, which has been extremely helpful.

« Last Edit: December 11, 2013, 09:50:35 AM by tammyLav »

Rebecca Stapler

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #7 on: December 11, 2013, 10:01:15 AM »

Also, and please forgive me if this is a really stupid question...  (maybe msilenus' link, which I'll check out in a bit, answers it already) but what happens to stock options if the company is sold to this other player? Is that always negotiable per the exit agreement?


I think that what happens to the stock options depends on (1) what is contracted for in the stock options plus (2) what is negotiated in the exit agreement. If you can get a good deal on the stock options' contract now, it will restrict what they can do with the options at the exit point. So, now is the time to be asking that question and resolving it.

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #8 on: December 11, 2013, 10:32:54 AM »

I recommend reading these lecture notes.  Peter Thiel is a VC and former founder at Paypal.  He did a series of lectures on startups at Stanford.  In this one, he talks a lot about equity:
http://blakemasters.com/post/21742864570/peter-thiels-cs183-startup-class-6-notes-essay

(The whole series is excellent.)


Outstanding advice!! Thanks, that was helpful. Same for you Rebecca. Generally, I'm reading all of these, nodding my head and feeling extremely grateful for the help... just don't want to be a pain and respond to every single stellar response!

KingCoin

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #9 on: December 11, 2013, 02:30:06 PM »
Ultimately, this is very hard to answer without hard numbers.

Choosing between a $10k raise and a $15k bonus is very different from choosing between a $10k raise and a $50k bonus. $10k cash vs $15k restricted equity or $10k cash vs $50k is restricted equity? Are the marginal stock options likely to be worth $20k on a successful exit or $2 million?

This decision is all about dollars and probabilities (even if finger-in-the-air), so without either, all we can give you is some vague advice about how to think about the problem. 

I'd add that if the firm is likely to either be sold or fail in the next couple years, the raise looks like the least appealing option.

dragoncar

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #10 on: December 11, 2013, 02:59:57 PM »
All things being equal, I'd go with some kind of equity -- but that can be complicated and can have wildly different terms. 

Maybe read this article:  http://www.complianceweek.com/companies-favor-restricted-stock-over-options/article/310434/

But this is made worse by the fact that you "can't afford a lawyer."  Which means that while you might be "living within your means" at this very second, you have no room for error.  It sounds like a large unexpected bill might push you back into "living beyond your means" territory if you have to rack up more credit card debt. 

Thus, I really want to say take the bonus.  It's real money, now.

Depending on the numbers, maybe the best compromise is a small bonus enough to establish a good emergency fund, plus some kind of employee stock purchase plan so you can build equity over time?  I don't know how flexible the CEO is.

KingCoin

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #11 on: December 11, 2013, 03:12:29 PM »
Depending on the numbers, maybe the best compromise is a small bonus enough to establish a good emergency fund, plus some kind of employee stock purchase plan so you can build equity over time?  I don't know how flexible the CEO is.

I kind of like a barbell approach here. A combination of bonus and options. That gives you a bird in hand, but also gives you upside if this things work.  The worst would be to accept a raise and then get laid off if things go poorly or get laid off if things go well (the company is sold and restructured).

As usual with this type of negotiation, it's better to ask for a lot and negotiate from there than to sell yourself short.

ShavinItForLater

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #12 on: December 11, 2013, 04:38:34 PM »
I'd say the answer really depends on your appetite for risk, and what you're really after working at the start-up.  If this is job and your primary aim is income, then I think the raise or bonus would be preferable.  Personally I prefer raises over bonuses, since they compound over time, but of course the relative sizes matter.  I got a pretty good bonus at my job recently, although it was smaller overall than I had hoped for, and almost no raise at all, despite very good performance reviews.  I made my case and successfully negotiated a raise.  If you're expecting the job to last many years, I think a raise is generally the better way to go, but to each his own.

If on the other hand, you are in this for the "big win" of the start-up exit, your ultimate aim is to strike it rich if it succeeds, and you're OK with the significant risk that it may not pan out, then of course the options and/or restricted stock are the way to go.  I'm not an expert on options, although I did help found a start-up which did have a successful exit.  I had restricted stock granted to me as part of my original employment agreement.  When at the start-up, I never received a raise or bonus of any kind, although my salary was comparable to what I was making before that, so I was OK with that.  We even chose to invest some of our own money in the company in the very first round of fundraising, which I was allowed to do since I was a founding executive, even though I would not have been a "qualified investor" otherwise.  Other than that investment, we never really had any decision like yours to make beyond the original decision to join the start-up.

For us, it turned out very well, and in fact may have made us FI (certainly did by Mustachian standards, but we have some work to do on the spendypants front).  It could easily have gone south and the stock could have been worth nothing.  It took a very long time for them to exit--I worked there 2 years, and it took another 7 years for them to exit.  The company has never made a profit, and there were probably at least 5 very large funding rounds in between, and I never invested a dime in any of those, because we felt it would have been too much risk.  The funding rounds all succeeded, but they certainly could have failed, and they had hard times--they had to scale back and lay off a bunch of people in 2008, for example.  The investment we made was money we could afford to lose, and with two small kids at home we were not willing to roll those dice any more than we did.

I'm not sure if that helps, but in my opinion I think you need to decide if you're in it for the gamble of a successful exit, or for the job and compensation along the way.  I don't doubt that my successful exit story is rare, and for every one of those there are 10 that failed and ended up worthless.  I don't think there is a wrong answer, it's more how you value the choices you've been offered, and how it maps to your personal circumstances.

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #13 on: December 11, 2013, 09:18:36 PM »
In reading over all the great responses so far, I'm definitely getting a clear picture of what needs to happen. I talked to my husband, and he agreed with me that the raise wasn't so necessary right now. We care about 1) equity/a possible exit 2) cash right now to get rid of that credit card and 3) an even stronger relationship with his boss, which could lead to many opportunities down the road and keep him happily working his own schedule from home. This clearly points to a combination of bonus and equity.

So here's my punch list:

-Find out if she would increase equity in the company as his "raise" for becoming a cofounder... and ask what percentage that would represent (if he started with 1%, then the question is, where is he now, and where would he stand after tripling his options, as she suggested) If she won't do it that way, then split bonus and equity to get a little for now and (hopefully) a little more later.

-On the bonus: Request on the generous end of things to allow room for negotiation.

-Make sure changing roles to cofounder will not bring greater risk onto the table (though that fabulous article posted by msilenus really keyed me into the fact that maybe she actually needs him to take on a stronger role, as he is better at getting the team of cats, ...er, colleagues into alignment with the set goals. definitely something to think about)

-Check out his contract to make sure all is well. Will consider consulting with a lawyer, especially if there is a new contract related to a change in his role in the company

« Last Edit: December 11, 2013, 09:40:43 PM by tammyLav »

iamlindoro

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #14 on: December 11, 2013, 09:45:52 PM »
Is the company public?  If not, then RSUs aren't going to be a very compelling incentive versus the options.  RSUs are good when the company is public because they have a definite value (as they are compensation in the form of stock, versus options which are a voucher to purchase shares at a given price) and can be easily exchanged for cash.  In a pre-IPO company, I can't see why you'd prefer the RSUs to options-- they can't be sold or exchanged for money.
« Last Edit: December 11, 2013, 09:57:19 PM by iamlindoro »

Nords

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #15 on: December 11, 2013, 10:26:10 PM »
-Find out if she would increase equity in the company as his "raise" for becoming a cofounder... and ask what percentage that would represent (if he started with 1%, then the question is, where is he now, and where would he stand after tripling his options, as she suggested) If she won't do it that way, then split bonus and equity to get a little for now and (hopefully) a little more later.
Keep in mind that cofounder status may require more of a commitment to the company, and for a longer time, than your "exhausted" spouse would like to give.  Any shares he gains as a cofounder may only vest over a 2-5-year period, and there may be clawbacks if he leaves before the end of the period.  If the company is acquired in the middle of this time, he'd want accelerated vesting as well.  It never hurts to ask for that even if it's just in order to negotiate it away.

Are these cofounder shares preferred or common?  Restricted?  Extra voting rights?  Does he have a seat on the board or "visitor privileges" at board meetings?  Is he expected to travel, to deliver pitches, to meet with VCs?  How many co-founders are there already?  If he's #2 or #3 then that's great, but if he's a higher number then this will turn into a high-school cafeteria clique.

I don't understand why she's being so nice.  What does she stand to gain for this?  Is she able to somehow transfer liability or responsibility for something bad that's about to happen?  Is he going to give up more than he gets?  She may genuinely be nice, but I'd want to have coffee with at least three employees (or ex-employees) of her previous startups to figure out what's behind this altruism.  Maybe it's an innovative and generous "Boss of the Year" tactic, or maybe it's something so devious it makes Steve Ballmer look like Pope Francis.

The questions need to keep coming back to how these things are aligning the boss' interests with your spouse's interests, and how they'll stay aligned.

-On the bonus: Request on the generous end of things to allow room for negotiation.
Tell her that you want an extra 28% on top to pay income taxes (and any other additional expenses incurred as a result of this honkin' big hunk of windfall).  Or can this bonus be transferred directly to your 401(k), if applicable?

-Check out his contract to make sure all is well. Will consider consulting with a lawyer, especially if there is a new contract related to a change in his role in the company
Your comment that you "can't afford a lawyer" is dangerously shortsighted.  You cannot afford to not consult a lawyer, and a CPA as well.  $5000 in legal fees now is chickenfeed next to a $100K payout.  Put the boss on the spot-- ask her to recommend a lawyer and a CPA who will honor a fiduciary duty to you, not her.

Find a good one of each through personal references, summarize your options on a single sheet of paper, bring along the employment contract, and consult with them for their free hour.  Tell them that you don't necessarily need anything but their shared wisdom or their advice on where to learn more.  Be willing to pay for an hour or two of reassurance and education.
« Last Edit: December 11, 2013, 10:27:45 PM by Nords »

Argyle

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #16 on: December 11, 2013, 10:32:11 PM »
I don't understand why "closeness" to the boss seems to be on the table -- as if your husband has to please her by choosing a particular option?  If he's an excellent worker and has the kind of skills she values, and he's dependable and trustworthy, then he's in an excellent position to be chosen for future endeavors no matter which of these options he picks, the way I see it.  He can turn down the various options that get him entangled in the company, if they don't seem like promising deals to him, while still expressing great enthusiasm for the enterprise.  (Though if he's "exhausted," sounds as if he wouldn't want to be locked into any particular future -- another reason to keep his options open.)  My vote is for picking the options that are best for the two of you, not what you guess the boss wants you to pick.

Self-employed-swami

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #17 on: December 11, 2013, 11:26:24 PM »
*snip*

-Check out his contract to make sure all is well. Will consider consulting with a lawyer, especially if there is a new contract related to a change in his role in the company

Your comment that you "can't afford a lawyer" is dangerously shortsighted.  You cannot afford to not consult a lawyer, and a CPA as well.  $5000 in legal fees now is chickenfeed next to a $100K payout.  Put the boss on the spot-- ask her to recommend a lawyer and a CPA who will honor a fiduciary duty to you, not her.

Find a good one of each through personal references, summarize your options on a single sheet of paper, bring along the employment contract, and consult with them for their free hour.  Tell them that you don't necessarily need anything but their shared wisdom or their advice on where to learn more.  Be willing to pay for an hour or two of reassurance and education.

Thank you Nords, for more clearly stating what I was trying to get at.

I would also make sure to ask them about the legal liabilities of the corporation, and what he might be opening himself up to, by becoming an executive share holder/co-founder.  Depending on the industry you are in, there might be a whole shwack of professional/public safety/employee safety and liability issues as well.


I'm going to tell a terrible, scary, sad story here, so please be forwarded (I doubt this is particularly applicable to this situation exactly, but I think it might be a good warning of the sorts of unexpected things that could happen):





A company that exists in the city I live in (same industry, not ever my employer), used to host large parties for their clients during our large summer fair.  They would have western themed rodeo rides, and serve liquor and beer for free.  Everyone in the service side of the industry had similar parties (think people get stumbling drunk sometimes, and make bad decisions, with the company trying to mitigate by paying for cabs, and having people sign waivers).  One of the rodeo rides killed an employee in a rather gruesome manor, while a hundred  people looked on.  It was a freak mechanical failure, and the company held "Party Alcohol Liability insurance" for the event, that covered a payout of some sort to the family member of the employee, but then the company owners were left to deal with the fallout of such an unfortunate incident, with their names attached to it (occupational health and safety took them to court, and fined them to the tune of almost a half a million dollars, for which the company is liable for, as insurance doesn't cover OH&S fines.  The incident happened in 2007, but the final court case and it's appeal are still not finalized as of 2 months ago).

If you can say it, it was 'lucky' that they had purchased that insurance.  But then they became unable to economically purchase it for future events, and now doesn't host any sort of parties any more, because of the inability to get the PAL insurance (and because of the terrible memory of that incident). 
It was truly a freak accident, which could only have been prevented by not running rides at all, but it is a possible example of liability issues that could go sideways, if the proper insurance isn't in place. 


Another potential liability issue that could come back to the executives (depending on how the company is set up, if the co-founders are personally liable for the company's operations, or are shielded), is if someone gets hurt at work (or a product hurts a customer somehow), and permanently disables someone.  If the insurance held by the company isn't enough to cover the disability pay-out, is the company next on the list to cover the settlement?  What if the company doesn't have enough $$, or is found to be grossly negligent, do the co-founders become personally liable next? 

And then there is the whole trend of employees at company events, drinking alcohol provided by the company, then driving themselves home drunk, getting into an accident, and then turning around to sue their employer for providing the alcohol, while 'allowing' them to drive after (ie, the person blaming the company, instead of taking personal responsibility for their decisions)

I am not trying to scare anyone, so I'm sorry if that's how I am coming off, but I just wanted to clarify the type of liability issues that I was vaguely referring to earlier.
« Last Edit: December 11, 2013, 11:50:42 PM by Self-employed-swami »

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #18 on: December 12, 2013, 12:16:41 AM »
A lot to digest here. Great insights and helpful points, thanks! It's hard to explain, mostly because I really just can't begin to. I'm new to startups, and so is he, so I apologize for not being clear as to what our options are. I'm still trying to figure things out. And yes, the husband is exhausted (I'm typing at 2 in the morning, lol, so we're both working hard I guess), but still in an exhilarated kind of way, so it's really all still good, again, sorry if that wasn't clear. I usually end up doing this type of research work though, because it's something I enjoy.

He's very happy with the team and dedicated to what they are working on. This isn't a stressful decision for us... I just want to make sure he and I are thinking things through, and I'm trying to ask everything I can think of. I also don't think the boss is looking to transfer liability. I genuinely think she just really loves creating, and she likes being around creative people. She has the financial freedom to just have a little fun with this venture, and has assembled a talented team. He just happens to have naturally fallen into a leadership role with them. It's not all sunshine and roses, of course, but so far, she seems to be good to people who do well for the company, and her actions to date have been pretty good to us. It's been a fun year, and if it doesn't work out, it's no biggie to us, especially if she pulls him onto another project. We have assumed no risk to this point (if the company folds, it's just another layoff), and there is no legal agreement about becoming a founder yet. If that happens, we will definitely consult legal advice though. Thanks for pointing that out. Right now, I'm trying to figure out what we should ask for in the first place. I will definitely keep the concerns mentioned in mind. All of your questions & comments are very good, and as that process moves further along, I will refer back to them. And no, the company is not public, and I am quite happy with the options option, after reading more into it. Thanks again for the advice!

fiveoclockshadow

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #19 on: December 12, 2013, 12:22:13 AM »
Second the cant afford a lawyer comments.  If you can't afford to do that the just take the bonus, the other options are probably less useful if you have credit card debt and don't have money for a lawyer.

Any options or shares you have or get do not necessarily have any value at an exit. If the exit is a big slam dunk sure they will. If the company folds of course they don't.  But those aren't the only or even likely outcomes. Most startups have a messy exit in the form of either desperation financing along the way or a messy acquisition. In those cases different share classes get handled different ways or massive amounts of dilution occur along they way. There can be an exit that is good for some and a pittance for you.

The net present value of any shares in such a venture is close to zero. Extremely risky. These are what are called "lottery like returns". Most of the time you lose everything but very ocasionally you make a mint. People are suckers for such things, it is in our psychology and is why Vegas and penny stocks are so popular. In reality these are the very worst kinds of "investments", huge skew and kurtosis, illiquid and difficult to value. People get into this kind of thing because of fear of missing out, not sound finance. Never trade based on fear and don't confuse fear for hope.

You say the choices roughly are bonus or shares.  Fine, then the correct way to view this is if someone handed you the bonus money would you use all of it to buy impossible to fairly value shares in a tiny startup that also is your source of salary or would you use it to invest in something diversified?

Lastly, heed the warning about work hours and commitment. Stepping up to the plate means staying there, it always goes on much longer than you think to the general detriment of quality of life for individual and family.

msilenus

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #20 on: December 12, 2013, 01:51:33 AM »
I'm not going to recommend against a lawyer, but it doesn't make a lot of sense for a your husband's employer to be out to screw you.

I was close enough to a buyout a while ago to see how one goes.  My wife's company --she was an early employee, a key engineer.  She had misgivings on some contractual terms being offered by the new company.  She was talking with a respected manager -one of the founders- about those concerns.  At some point he leveled with her: "if you want the acquisition to go through, you should sign the contract."

This is right around the time everyone's seeking professional advice because they need to know if it would be better for them to exercise their options before close or not.  Could you imagine if word was spreading around the water cooler that Bob's lawyer told him his options were worthless, right when management is trying to get everyone to sign on the dotted line so the deal can execute?

That's the closest I've ever been to an exit, but I've been working in Silicon Valley for a reasonably long time now.  I don't know anyone who's been screwed in the sorts of ways I think people are concerned about.*  I don't think that's an accident.  The whole Silicon Valley ecosystem relies on the idea that little guys get rich.  That's why they work like demons for fewer dollars when posh outfits are offering more money and benefits out the wazoo.  Most founders know that.  All VCs know that.  You could say that Silicon Valley is built on an alignment of interests around equity.

* I do know a co-founder who got ousted very, very early and certainly felt screwed.  The others told him that he was out, and that they wanted most of his equity back.  They said that if they went to VCs with a big chunk of equity owned by a founder wasn't with the company any more, they would be unlikely to get funded, and his equity would be worthless anyway.  So he ceded most of his equity.  That was a bad situation, but it wasn't some loophole in the contract.

dragoncar

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #21 on: December 12, 2013, 02:47:42 AM »
I'm not going to recommend against a lawyer, but it doesn't make a lot of sense for a your husband's employer to be out to screw you.

I was close enough to a buyout a while ago to see how one goes.  My wife's company --she was an early employee, a key engineer.  She had misgivings on some contractual terms being offered by the new company.  She was talking with a respected manager -one of the founders- about those concerns.  At some point he leveled with her: "if you want the acquisition to go through, you should sign the contract."

This is right around the time everyone's seeking professional advice because they need to know if it would be better for them to exercise their options before close or not.  Could you imagine if word was spreading around the water cooler that Bob's lawyer told him his options were worthless, right when management is trying to get everyone to sign on the dotted line so the deal can execute?

That's the closest I've ever been to an exit, but I've been working in Silicon Valley for a reasonably long time now.  I don't know anyone who's been screwed in the sorts of ways I think people are concerned about.*  I don't think that's an accident.  The whole Silicon Valley ecosystem relies on the idea that little guys get rich.  That's why they work like demons for fewer dollars when posh outfits are offering more money and benefits out the wazoo.  Most founders know that.  All VCs know that.  You could say that Silicon Valley is built on an alignment of interests around equity.

* I do know a co-founder who got ousted very, very early and certainly felt screwed.  The others told him that he was out, and that they wanted most of his equity back.  They said that if they went to VCs with a big chunk of equity owned by a founder wasn't with the company any more, they would be unlikely to get funded, and his equity would be worthless anyway.  So he ceded most of his equity.  That was a bad situation, but it wasn't some loophole in the contract.

It doesn't make sense for the employer to screw him on purpose.  But an oversight now can screw him down the road. 

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #22 on: December 12, 2013, 08:51:11 AM »
I think where we are fortunate here is that he genuinely loves what he's working on. Nobody is telling him to put in those hours. He really loves the product, which I think is pretty cool myself... especially for a small team. He's put in a lot of hours, but that is also because we have two small children, and he fits his hours around family needs as much as possible, which makes the day feel like a 24 hour work day sometimes! I'm doing my best to make sure we choose our path wisely, but if we are left with nothing at the end but a cool doodad and some fun memories, I think we could both live with it. We're a little crazy like that.

It is so nice to hear the fist hand experiences though. We are on the east coast, and with no other personal experience with it, the whole start-up culture feels a little like visiting Mars. I guess the trick is to not get too caught up in it and just enjoy the ride for what it is.

Five o'clock shadow, you put this into perspective nicely. I think we will be asking for a combo of bonus and upping his options. We have immediate needs that need to be addressed. The options may end up worthless, but then again, maybe not. Since I'm ok with it either way (though I'd obviously prefer the latter) We might as well play the game fully (we just won't bank on it).

tammyLav

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #23 on: December 12, 2013, 08:52:49 AM »
It doesn't make sense for the employer to screw him on purpose.  But an oversight now can screw him down the road.

This I definitely agree with! We will proceed with caution.

nawhite

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #24 on: December 13, 2013, 11:15:45 AM »
Just so you know, how many options he has is a worthless number because we don't know how many outstanding shares there are. 50,000 in options of a company with 1 million shares outstanding (0.5%) is very different than 50,000 in options of a company with 10 million shares outstanding (0.05%). Find out exactly how many shares are outstanding. If management wont tell you, then they have a problem and you need to take the cash now. If they do tell you, you need to take that info to a CPA because there are TONS of things you can do with those numbers to reduce your tax burden in the event of an exit. If you can't pay for a CPA or a lawyer, you need to TAKE THE CASH!!!

Also, executing options requires some amounts of cash on hand to actually purchase them. They work by saying "you can purchase X number of shares at the price way back in the day." Then you can purchase them. If you don't have the cash to purchase them in the first place, then you can't get the upside. You'll also need cash on hand to cover taxes if an exit or funding round requires you to exercise your options without a liquidity event (IPO). In this case, you might be a paper millionare (and paying taxes on your paper million) but you wont be able to exit with your cash at least until a liquidity event and even then there may be restrictions. If you are living close to paycheck to paycheck, you may not be able to exercise your stock options. TAKE THE CASH!!!

Rebecca Stapler

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #25 on: December 13, 2013, 08:24:39 PM »
You mentioned being on the East Coast ... I work with an attorney who specializes in entrepreneurship issues. I'm happy to give you his contact info if you'd like to speak with him. I'm sure he'd be happy to advise you and your husband.

I know what you mean about feeling like you're on Mars. My spouse and I are starting up a venture and I am very quickly trying to absorb the different lingo and culture of it all but I'm only cracking the surface!

Siamond

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Re: Need some Jedi-level advice... big $$ decision with a start-up
« Reply #26 on: December 15, 2013, 12:07:56 PM »
You don't get an opportunity like that very often... Bonus or salary seem like a terribly 'prudent' approach... I took my chances with an (East coast) start-up, and this made up for my kids (very expensive) college schools and some of my retirement... I would *never* have made it just based on salary... And your husband would be much better placed than I was as employee #200 or so.

Don't know, it all depends on the specific circumstances of course, but I would SERIOUSLY consider the stock-option path (RSUs are great post IPO, but pre-IPO, I don't see the point). This would also demonstrate to the boss lady that you guys go with her risk taking, with her own bet, and there will be rewards for such attitude. While asking for salary/bonus would actually be a message in the reverse direction...

Yes, making such a bet may end up with nothing, but your husband seems like a well qualified individual, so his 'human capital' is high, and he'll find a new job elsewhere if things go south with this start-up. It will actually be a very valuable experience even if it's a failure.

Again... You don't get an opportunity like that very often... Maybe just ask for a small bonus to erase your credit card debt and make the rest stock-options..
« Last Edit: December 15, 2013, 12:10:05 PM by Siamond »