Author Topic: Startup experience? I need a little advice!  (Read 5308 times)

tammyLav

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Startup experience? I need a little advice!
« on: September 15, 2012, 05:52:00 PM »
I posted on here before, and am happy to report that the advice I got has helped us immensely. Both my husband and I feel like we are breathing easier this month as better money habits are building up to get rid of our debt and give us a cushion.

This is not a post about cutting back though, because that is one of two ways to get to FI... the other is making more money and we are trying to do that too. An opportunity has come up for him to join (as employee 2, the art half of a game development team) a start-up out in CA. The company behind this has an impressive Silicon Valley resume (essentially, 4 well-known billionares and one of the biggest VC investors out there) I say that not to impress, but more to put my dilemma in context. These folks know what they are doing and I know they fully intend to get their money back on the investment. The concept is a really innovative sandbox game that might just have a shot, I think. My husband is the only game artist involved, and will be charged with making the true awesomeness of the game look, well...awesome :-) The problem is, the contract they are offering seems like they fully intend to keep the spoils to themselves, and I need to help my hubby counter offer in a way that puts things in our favor. As you might recall in my last post, my husband works in game developent, and the last company he worked for had he and another developer team up to create a game that ended up being a smash hit that made 10 mil+, of which he got like a 10k bonus, since he was just an employee then. We'd like things to go a wee bit differently this time around, obviously. They are treating this like a work-for-hire situation, but we want to get at least a small piece of the pie if the project is a success. So the details (sort of... I can't be completely detailed but will give as much info as I can)

They are offering a salary that is a 30% paycut from dh's current. He currently grosses 110k plus my 24k, so our income would drop from 134 gross to 104 gross (+ possible freelance work in there).

They say they are making up for it with 50k in common stock options. Now it is my understanding that we need to treat these options as worthless (or maybe more like an unlikely bonus) We make absolutely no money on them unless the company sells or goes public, right? Vesting is standard 4 years 1yr cliff, etc.

We are worried that the stock will dilute, and it is super important to us that there is some sort of clause about receiving % of profits... even a small %... so if they do well, we do well. How could we ask for this?

Dh is excited about the project and likes the team he would be working with. That paycut is a little painful though, since we can't count on the stock options doing anything for us. Thoughts??

tammyLav

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Re: Startup experience? I need a little advice!
« Reply #1 on: September 15, 2012, 08:15:15 PM »
By the way, I know you are probably wondering why I'm not asking this on a board devoted to start-ups :-) I just got such great financial advice, and there are so many knowledgeable folks hanging out here that I was hoping maybe someone would have been through a situation like this before, or a least has advice on what to really fight for in negotiation. Dh is coming from a position of strength in that he is making way more than they can offer him and doesn't feel like he needs to leave his job...  the offer has to be right before he moves.

deciduous

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Re: Startup experience? I need a little advice!
« Reply #2 on: September 15, 2012, 08:20:29 PM »
I'm a co-founder of a little company that got our start making games for young kids in a particular niche. It's been a very hard five years, and we've gotten to the point where we're essentially shutting down and switching over to maintenance only. I've also done a recent tour of duty at a west coast game company that you've certainly heard of--so there's a lot that I have in common with [you and?] your husband.

Unfortunately, I have developed a fairly acidic view of the industry, and additionally it sounds like you are already pretty familiar with lots of the things I would warn you about, things like: the assumption that your husband will simply be working 60+ hours a week, every week, indefinitely; the high cost of living in the valley; the high risk of startups; etc., etc.

One of the things that makes me most disgusted with the industry is pretty much what's happening to you, and what happened to me: you take someone who is happy and stable where they're at, ship them across the country to join a company with immense hype and deep buckets of money, who has set a great and glorious course for... another facebook / iPad game for people to waste time on at work. It just seems so massively pointless to me--and yet, the creative act of making this stuff is so enjoyable that we almost can't help ourselves. I'm working on another one as a hobby right now!

It sounds like you're really excited about the new gig, and it's entirely reasonable. California's beautiful, the money's good, the work is challenging and more enjoyable than not, and it sounds like you're a perfect fit. Most people out there wouldn't trade careers with hardly anyone. I wish you all the best.

I agree with your sentiment that the stock options should only be considered as so many lottery tickets. A company with founders with such deep pockets, hiring your husband as artist #1 should definitely be offering more than 100k. If he were just a member of an art team, say, artist #5 or #10, the offered salary could maybe make sense; there is a lot of art talent out there, and unfortunately you know artists are often treated as fairly interchangeable.

I don't know how to advise you on how to conduct negotiations, I'd just ask for more. All they can say is no, and founders like that should know what a competitive salary looks like. I don't think the offer you're describing is it.

Feel free to send me a PM if you'd like me to fill in some more details about my own background and/or talk some more. I don't like plastering a bunch of personally identifiable information in public places.

deciduous

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Re: Startup experience? I need a little advice!
« Reply #3 on: September 15, 2012, 08:26:21 PM »
The other thing to remember is that stock options are generally going to be a one-time hit. Getting your base salary higher is much more powerful except in a few particular cases.

MooreBonds

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Re: Startup experience? I need a little advice!
« Reply #4 on: September 15, 2012, 08:26:40 PM »
There are a few people that have experience in start-ups on the early-retirement.org/forums  area.

One thing I would caution is your insistence on a 'share of the profits'. There are completely legitimate ways, using GAAP methods, to show losses for a considerable length of time, depending on the goals of the people making the accounting decisions and assumptions. So if they wanted to, they could show losses for the company for certain periods of time, which could render your husband's potential share not worth very much (if anything!).

If you're going to counter their offer wit a share of profits, why not ask for a small percentage of the revenue instead? That way, it's not as much subject to accounting methods that could wipe away any gain for your husband.

deciduous

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Re: Startup experience? I need a little advice!
« Reply #5 on: September 15, 2012, 08:41:06 PM »
If you're going to counter their offer wit a share of profits, why not ask for a small percentage of the revenue instead? That way, it's not as much subject to accounting methods that could wipe away any gain for your husband.

Most of the time, Silicon Valley companies seem to give the same things: signing bonuses, stock options, or stock "units." What you're describing seems more like asking for equity directly, essentially to be a co-founder with them. I would be very surprised if moneyed/experienced founders agreed to that unless they really, really like the artist, which could be the case here.

Generally, equity goes to investors, and all this stock stuff with vesting schedules goes to employees. Obviously, some startup has already done every compensation imaginable... but generally they seem to have settled on fairly standard types of offers.

Fetlock

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Re: Startup experience? I need a little advice!
« Reply #6 on: September 15, 2012, 09:25:53 PM »
I've started my own company in California (which failed), and I'm currently working as the first employee of a game company, so I know a little bit about this stuff. I'll try to tell you what I know, but you should really take it with a grain of salt, because I don't really know all that much about it when it comes down to it.

They are offering a salary that is a 30% paycut from dh's current. He currently grosses 110k plus my 24k, so our income would drop from 134 gross to 104 gross (+ possible freelance work in there).

They say they are making up for it with 50k in common stock options. Now it is my understanding that we need to treat these options as worthless (or maybe more like an unlikely bonus) We make absolutely no money on them unless the company sells or goes public, right? Vesting is standard 4 years 1yr cliff, etc.

These are some things you might want to take into account:


1) How much investment has the company already taken?

The more investment the company has taken, the less 50k in stock options is worth in terms of the percentage of the company that you own (see 2).

More investment means a higher valuation for the company (valuation being the expected worth of the company), but a high valuation isn't necessarily good. As a rule of thumb, investors are typically looking for returns in the range of about 10 times what they invested (but this can vary based on a lot of factors). There will be resistance to selling the company for less than that amount, because the investors aren't looking for small returns. This means its possible for a company to become trapped, unable to sell, because it took too much investment. This would be the worst case for you, since it means those stock options will never amount to anything. You have to gauge how likely it is that you think the company will be able to sell for that amount.

Also, keep in mind that you're getting common stock, not preferred stock. All those big, billionaire investors got preferred stock. That means that in the case of a liquid event (such as selling the company), they get paid first BEFORE you get your percentage of the remainder. To be honest, I'm not exactly clear on the exact mechanics here, so you'll probably want to do your own research. But I'm pretty sure if the company has taken millions in investment and sells for the same, you won't get anything.


2) What percentage ownership does 50k equate to?

Since the company has already taken investment, this will probably be low, like about 1% for a good technical, software engineer type. Maybe an experienced, non-founder CEO might be worth as much as 5%. I don't really know what's expected for an artist, probably less than the engineer. It's really hard to say for sure in any case. The higher the investment taken, the lower this number is likely to be, but that might be justified if the company is expected to sell for a lot.

This is where you have to calculate your expected return. You know you're giving up about 30k per year in income. Expect that you may have to work as many as 5 years before the company sells. It could be a lot less, or it could be a lot more, but I think 5 years is a solid number. The numbers only get better if you sell earlier. So let's say we're looking at giving up about about 150k. Now, take the percentage of the company that you own and multiply that by whatever you expect the company will sell for.

So, for example, let's say you own 1% of the company, and it has 10 million in investment. You can expect that it probably has to sell for at least 50~100 million, or not at all. So let's say that it sells for 50 million. For simplicity, I'm going to assume that's what's left after preferred stock has been paid out. So, if all goes well, you get 1% of 50 million. That's a cool 500k, so its nothing to sneeze at. But keep in mind that you aren't guaranteed to get this, either, if the company never goes anywhere. (Also, don't forget that you'll have to pay taxes on it, so you'll lose, what, a good third of it? But it's the same with the 150k you would have made.)

Obviously, you'll have to figure out your own numbers and figure out for yourself what you think the company might sell for, and so on.


3) It's normal that common stock will dilute if the company takes further investment.

But, while it's certainly possible to get screwed, you typically expect that the company is taking further investment because it thinks it will end up making enough more money in the long run with the investment than without to make up for it. So even though the percentage goes down, it's balanced by the fact that the company is expected to be worth more when it sells.


4) Don't assume that the VCs know what they're doing.

They can't. It's a risk for them every single time.

You'd think that they must be really confident to put millions of dollars into the project, but that's not really how it works. VCs expect that most of their deals will go bad, but the ones that work out will more than pay for all the failures. That's why they expect such high returns (e.g. 10x+). It's kind of sad, but the VC world isn't about picking the best deals. In a lot of ways, its actually far more about appearance. That is, appearing to do something that's at least reasonable and not obviously stupid. Sometimes they invest in things that are more trendy than common sense. That need for social validation is why it's often the hardest to attract the first investor, but once you have a term sheet from one, others will suddenly be a lot more willing to invest, too. At least if it fails, they feel that it wasn't a bad decision because their peers thought it had a chance, too.

Also keep in mind that there are more people out there wanting to invest than there are truly good ideas to invest in.


5) You still have to pay the 50k to get that stock.

These are stock options, meaning that when they vest, you still have to exercise that option to purchase them before you get the actual stock. In practice, while you work at the company, you won't have to exercise, but if you leave the company or if it sells, you'll need the cash on hand if you want the stock.

IMPORTANT: One of the big tax gotchas is not filing a section 83b election form within 30 days of exercising your stock options. Please research this before exercising your options. I don't know the full details, but I think the gist of it is that you only have to pay the tax one time up-front if you file the form, but if you don't, you'll be stuck paying tax every time the stock increases in value, or some such. This can be the difference in 10's of thousands of dollars in tax, depending on your situation.


6) If you're not already living in California, keep in mind that the cost of living is probably higher there, equating a further paycut.


We are worried that the stock will dilute, and it is super important to us that there is some sort of clause about receiving % of profits... even a small %... so if they do well, we do well. How could we ask for this?

I don't really know anything about making this sort of deal. If I were the owner of the company, I might be worried about a deal like this hurting my chances of selling the company when it comes up during due diligence. I have a feeling its unlikely you'll get this.



---

All in all, please don't rely on my advice. I'm not THAT confident in what I've said. Please just use it as a starting place for doing your own research and making your own conclusions.
« Last Edit: September 15, 2012, 09:35:00 PM by Fetlock »

tammyLav

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Re: Startup experience? I need a little advice!
« Reply #7 on: September 15, 2012, 10:12:12 PM »
Oh wow! I knew you guys would come through :) Thank you for the fantastic responses with personal experiences. I read every one of them aloud to my husband. He's the one doing this, but we tend to work as a team, so I am the R&D person at the moment. He started his own game company that failed as well, and as worked for a big game company that made tons of money off of his games and then laid him off... so we are a little cynical about the process and understandably wary. We keep trying because we can't help it... this stuff is just what we enjoy doing (either that or we are just a little crazy). Some really interesting points about how the revenue sharing model could be a problem. By the way, he will be talking to a lawyer on Monday, so we are trying hard to go back to this place with a good counter that works for us. I really wish there was some way we would see some $ if the game takes off. How disgusting would it be to pour your heart and soul into something and watch it start making millions for other people (like what happened to him at big game company) with nothing to show for it. I just wish this didn't make me feel like we are being suckers :-)

We are not currently planning a move to CA. They are comfortable with him working from home.
More of a breakdown of our thoughts

Pros:
work from home (spend time with our 2 and 5 year olds--at least getting to see them... currently works in NYC, commutes and gets home at bedtime)
great, worthwhile project
good team
satisfying end product (even if it doesn't make money)
possibility of a good bonus at the end of the year

Cons
work for 30k less per year

health benefits are planned, but still an unknown

10 fewer vacation days (currently 23. they allow 15, and those have to be earned 1.25 days per 1 month)

current clause in the contract restricts freelancing and contract work well beyond your typical noncompete clause

The are not giving dh a contract and can lay him off at will without severance (he currently has severance)

seems like there are many scenarios where we end up with nothing at the end of this--even if a profitable product is created-- and very few ways that will find us even a tiny bit richer

His friend (who knew him at the big game company), who refused to work with anyone else until they talked to Matt. This friend is programmer #1. He was brought in as a founder. I guess that is too much to ask for a company this small to do that for artist/game designer #1, even though his work is vital to what they are trying to accomplish.


P.S. will cross-post over on the investment board, which is probably a better fit. I was just fond of this board because of how helpful I found it last time, lol

« Last Edit: September 15, 2012, 10:16:02 PM by tammyLav »

gooki

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Re: Startup experience? I need a little advice!
« Reply #8 on: September 16, 2012, 04:10:25 AM »
If your husband is well connected to other artists/developers I'd feel the road to riches would more likely occur from creating ones own product, and utilizing crowd sourced funding (www.kickstarter.com) to get it off the ground without giving up ownership to external investors.

tomsang

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Re: Startup experience? I need a little advice!
« Reply #9 on: September 16, 2012, 09:42:02 AM »
It sounds like your husband has a job, doesn't need this job so he should be the one in control. All of the items that you have brought up are negotiable. Days off, stock comp, salary, bonuses, etc. The more that he can come back with his package for them to accept the more likely they will hire him. The more he allows them to dictate his package the more he will get screwed or pass on the opportunity. As one of the first employees he is in a completely different camp then those coming after him. Also the more professional he is about how the game is played the more desirable he is. Goodluck. What a great position to be in. Don't jump at the first offer.

bananabread

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Re: Startup experience? I need a little advice!
« Reply #10 on: September 18, 2012, 10:04:35 AM »
My perspective: I'm a game developer who's worked at 2 start ups here in the Bay Area, and most of my friends work at game industry startups around here, too.

My advice would be, don't count on anything other than the salary and whatever benefits are agreed to in the contract. Don't count on raises. Don't count on stock options. No one starts a business believing it will fail, but most do. The game industry is incredibly volatile. Even the folks over at Zynga lost all their promised " big gains" after the IPO.

Working at a start up is an incredible amount of fun. It's a phenomenal experience and I wouldn't trade it for a job at a big box developer for anything - I'd go indie and get a side job waiting tables first. But don't delude yourself. You'll work harder, for less money, and the possibility that your game (and team) (and possibly even the company) will get cut is just as high, if not higher, than the rest of the industry.

Startups have to be lean - if a project gets cut, they can't keep people around for 2 weeks while the next contract gets figured out - the whole team has to be fired immediately. Hence, no severance, no warning. It happens, and it's brutal, so you need to prepare for the worst.

View anything "extra" as an unexpected bonus. Don't even factor it into your plans. Expect the worst and be planned for it. And then, if he still wants the job, then go for it! It'll be a blast, and you won't be stressed because you're mentally and financially prepared for the worst. But you make your own safety net, 'cause the company can't catch you if you fall.

Good luck!

Edit: Fight that non-compete clause! Don't let it go unchallenged! There's nothing worse than being creatively stifled and controlled by your own company.
« Last Edit: September 18, 2012, 10:08:18 AM by bananabread »

igthebold

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Re: Startup experience? I need a little advice!
« Reply #11 on: September 18, 2012, 11:47:09 AM »
Edit: Fight that non-compete clause! Don't let it go unchallenged! There's nothing worse than being creatively stifled and controlled by your own company.

Yes, yes, a thousand times yes, to this. They will either capture your passion or not. This is just a legal weasel clause.

deciduous

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Re: Startup experience? I need a little advice!
« Reply #12 on: September 18, 2012, 12:30:17 PM »
The nerds found this today, it relates to the discussion:

https://blog.wealthfront.com/startup-employee-equity-compensation/

tammyLav

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Re: Startup experience? I need a little advice!
« Reply #13 on: September 18, 2012, 10:56:13 PM »
Thanks for the advice everyone! It helped us SO much as we started this process feeling in over our heads, but I think, with your help,  I was able to help my  husband, Matt, negotiate a fair deal. Right now his shares are 1%, with no current plans for additional funding rounds (though stuff happens, so dilution is still possible of course) He's thinking he'll definitely take the offer. In talking with the CEO, it seems like she's got a solid plan in place, and the product, I already know, is phenomenal (even without art, and that says a lot coming from someone who judges most things aesthetically). Will it be a success? Who knows, but it's a fun project and they brought the salary up, so now there is almost no financial risk and a chance at a nice reward at the end.