Author Topic: Start-up help... am I getting screwed over?  (Read 4072 times)

tammyLav

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Start-up help... am I getting screwed over?
« on: September 15, 2012, 10:34:44 PM »
This is a cross post at the suggestion of the helpful folks over on the "ask a mustachian" board. Here is the link to my original thread:

http://www.mrmoneymustache.com/forum/ask-a-mustachian/startup-experience-i-need-a-little-advice!/msg25594/#msg25594

Basic gist of the story. I am working as R&D (aka... spously slave labor) for my husband. He currently works a comfortable job in pharma advertising, but his heart is into more creative endeavors. He started his own company a while back that failed, and before that worked at a big casual game company that made millions off of one of his games, which has been a perennial best seller for 4 years. All he had to show for it was a pink slip at the end... Sooo we are a little wary of this whole process at this point (long story short)

Enter the start-up. Good programmer friend from big game company has been brought in as a founder at a Silcon Valley startup with very very deep pockets and connections to some pretty big hitters in the industry. He only wants to work with my husband as the creative side of the team, so they are offering him a position as artist/game experience designer #1.

pros
work from home/see the kids more
good team
great product
satisfying work

cons
30% less pay
50,000 in stock options can easily be worthless (we only make money on these if the company gets bought or goes public, right?)
many ways to lose out on this--even if they succeed in selling the game for tons--but it seems like not many ways to win
10 fewer vacation days (15 vs currently 23)
health benefits sketchy (haven't been nailed down yet)
very strict clause against doing other freelance projects to make up for the 30k loss our family will be feeling from the salary difference


so my question boils down to this. Is there ANY way we end up NOT being chumps in this deal? Do you think a 30k pay cut with the questionable value of stock options is worth it for the contacts? We are established professionals with little kids.. well beyond just "getting experience"

Is asking to be brought in as a founder a pointless quest? He is artist #1, employee #2... he will be building this thing from nothing along with the programmer. Should we ask for more stock? (they are offering 50k) I think they've been through series A funding but not sure how many rounds to go. 4 big investors are backing this, so I don't know how much preference there is.

luna

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Re: Start-up help... am I getting screwed over?
« Reply #1 on: September 15, 2012, 11:52:02 PM »
I hope someone else can answer some of your questions.

I just have a comment about the stock options.

Getting 50k options says nothing.  Is it 50k out of 10 billion, or 50k out of 100k?  Huge difference.

There are basically two numbers which you really care about.  What percentage of the company does he get?  And what is the expected total value of the company?

That calculated value should be around 20 times the pay cut he is taking.  10 times because of how most startups end up in value (10% make it, 30% break even, the rest are a total loss), and then double that 10 to pay for the risk of getting nothing.

So if he is losing 30k over 3 years, his stock options should have an "expected" payout of $30k*3*20 = $1.8M.

So if he gets 1% of the company over three years and you expect the company to be worth $20M at the end of that time, his compensation needs to be increased.  If he gets 10% of a $1B company then he could afford to take a larger pay cut. Etc.

focusaurus

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Re: Start-up help... am I getting screwed over?
« Reply #2 on: September 16, 2012, 12:21:19 AM »
This book had a lot of good detailed information.

http://books.piaw.net/guide/index.html


My personal opinion (and most startups are trending this way), is that non-founding early employees should get market rate salaries, or at least very close to. 30% pay cut is nuts, especially if you are not getting founder level shares and position.

I considered joining a promising startup with similar terms: significantly below my market rate salary plus early-employee percentage of the stock (I think it was 0.5%-1% range). Even if they had a great exit 4 years later, I would only be slightly ahead of where I would be keeping my job at a fortune 500 company, which is pretty much as sure a thing as you can get. I turned them down and in hindsight I still think it was the right choice. These days (only about 1 year later), I'm still getting startup offers, but now they are paying market rate salaries plus stock.

There are legitimate non-financial reasons that can make joining a startup the right choice, but if your primary motivation is FIRE, I would try to earn ahead-of-schedule raises and bonuses at an established company that pays on the high end of the pay scale.

igthebold

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Re: Start-up help... am I getting screwed over?
« Reply #3 on: September 17, 2012, 07:54:12 AM »
Good answers on the logistics front. So here's my contribution to the emotional side of it.

Here are a couple things I've learned by playing the startup game as a partner, first employee, etc.:
  • Most startups fail, and they fail for preventable reasons. Just because you're in a startup-rich area, and just because a company has funding, the company won't necessarily succeed.
  • Startup founders believe in their startups. Now.. do the math and combine it with the datum above. The founders will do an *excellent* job selling their "opportunity" because they have an unshakeable belief in its future success. Most option plans only really work for the founders, because even in a successful exit (sale of company, usually), after all the dilution, only the founders have much left to sell. Everyone else might break even with what they would've made had they gone with a decently paying job at an established company.
  • Startups can be loads of fun and you often end up working with really fun people. The energy is intoxicating. Or, you can end up in a startup where the founders think they're IBM, move like they're IBM, and have an IBM level of pride in something that hasn't been proven yet.
  • Working in a startup can be an excellent way to network. You end up in front of a number of different kinds of people that you wouldn't normally, and that can lead to opportunities in the future.
  • Asking to be brought in as a founder and receiving a decent salary doesn't work. Most founders are giving up a lot of opportunity, and if your husband requires a salary, that makes him an employee, not a founder. This one factor has kept me out of several startups. I wanted to be a founder, not an employee, but I didn't have the financial will to do it.

In summary, if your husband likes the work, likes the people, and is OK with the compensation, I'd say ignore the options like you ignore Social Security, dive in, have a good time, work hard. It'll turn out as well as you make it turn out.

On the other hand, if he keeps his current job, saves like the dickens, and ends up financially better off even than he would with a successful exit, he will have a lot more leeway in creative pursuit. This is where I am. I'm tired of the startup game. :)

tammyLav

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Re: Start-up help... am I getting screwed over?
« Reply #4 on: September 17, 2012, 03:20:50 PM »
Great points! The CEO has expressed that she is not interested in selling. Doesn't mean they won't... just that it apparently isn't the exit plan. My husband, Matt, will be asking her about IPO plans, but we are treating the options as a potential bonus, and nothing more. I'm a little concerned about this becoming a lifestyle business with no plans for an exit, so Matt will definitely be asking specifically about that. I do think the contacts could be good. The last venture this CEO was involved in sold for 500 mil. Now we won't be seeing that kind of money, naturally, but if we never get rich off of this kind of stuff, maybe can start a new circle of contacts which might lead to more business opportunities. It seems like that's what this group does... they fund startups. That, to me, seems like the most potentially valuable part of this. New contacts. Matt has specific salary requirments or he plans to turn this down, I think. He's well past the point in his career of needing to settle, and another option will hopefully be along if this one wasn't the golden goose. He and I have worked too hard to just take a random 30% paycut with no hope for payoff

tammyLav

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Re: Start-up help... am I getting screwed over?
« Reply #5 on: September 18, 2012, 10:57:11 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.