Why are you making moral judgements on a business decision? The investors didn't HAVE to take a write down, they chose to. The early employees didn't HAVE to join this company, they chose to.
Why do you deem it immoral for a founder to do what is best for himself within the bounds of the agreements he has made?
This kind of calling-out is common in HN and quite distasteful. Comments like this all amount to saying "X is immoral because they refused to give a charitable donation to Y". Charity is not a moral requirement and arguably it's not even a moral good.
We all make moral judgements like this all the time, and it’s totally normal to do so. Morality isn’t defined by what is legally permissible; it’s possible to be simultaneously entirely compliant with your legal obligations, and an absolute raging arsehole who has acted in an immoral manner.
It's not that it's legally permissible, it's that it's within bounds of what all parties agreed to.
If I agree to sell you my car for $5,000 then you show up with the money and give it to me and take the car, I don't get to change my mind later and get mad that you didn't give me more and call you immoral.
For startup employees it's more like they agree to help fix a car you intend to sell in return for payment and a take in the profits of the sale.
A lot of startup exits seem to take the form of you then selling the car to someone for a break even amount, who just happens to also pay you individually an extra $5,000 on the side.
Is it a good deal for you? Yes. Is it a scummy move? Yes.
The reality is that many startup employees may have stacked Stanford STEM degrees yadda yadda yadda, but they can’t do basic math, don’t have a good intuitive grasp of probability, have outlandish expectations, and/or don’t ask clarifying questions about the cap table.
One of my startups sold for about $25-40MM depending on whether you count pre- or post-earnout. The typical engineer got maybe a quarter of a percent of options on common stock. You’d think that would net out to $62.5K but we had a messy cap table. Various investments’ preferred status ate deeply into what remained for common stockholders.
Even if there were no cap table issues, the engineers wouldn’t have been happy, because they hung their hopes and dreams on a multi-hundred-million dollar exit. We experienced 90%+ engineer turnover over the next six months. (We got by just fine.)
Rule of thumb: do not join a startup for the money.
Agreed on not joining a startup for the money. Although it seems like a lot of damage has been done in setting a cultural expectation that joining a startup early will see you become a multi-millionaire, to the benefit of startups everywhere I suppose.
Correct me if I'm wrong here, but isn't another major issue faced by early employees that the math might look good when they join the company, but further rounds dilute their stake so much that it becomes meaningless?
Yes, though the expression “an up round is an up round” has a lot of truth to it. Dilution is important if you care about control, but as long as the stock is worth more on a per-share basis, you’re doing better.
The problem is when people anchor their calculations about their future lottery winnings to the current float.
I try to tamp down expectations when I’m hiring by trying to sketch out a wide range of plausible scenarios (basically the Drake Equation for startups) but I’m going to go out on a limb and guess that a lot of hiring managers and HR departments set new hires up for disappointment by not throwing cold water on their very optimistic math.
Savvy investors include non-dilutive clauses when they know money needs to be raised, but good luck trying to negotiate this as an employee. It’s also not too bad if the dilution occurs at increasingly higher share valuations and help compound growth (see TSLA).
And startups should really be upfront about those cap table details with those employees, especially if there's >1x preference on some of the investment, or other unusual issues.
I don't get to change my mind later and get mad that you didn't give me more and call you immoral.
But on the other hand, if you’d agreed to sell me your car at a price under what you might be able to get elsewhere—maybe because I was financially struggling and you were doing me a friendly favour—you’d probably be pretty miffed if I won the lottery and still demanded you stick to your offer…
If I were miffed, I could rescind the offer or ask for more. Just like the investors could have demanded their money back if they wanted too.
They chose not to, which would seem to indicate they weren't miffed. Nobody forced them to do anything. It's not immoral to ask someone for an accommodation and accept it.
The investors didn't give him the money as a friendly favor to help him it out. It was an investment. Presumably they make a lot of them and understand the risks involved in doing so. If you're going to get hurt feelings whenever one of your investments doesn't pay off, you're not cut out to be an investor.
The founder couldn’t have done anything without his employees. And yet he takes $3.7M, leaving almost nothing for his employees. It certainly sounds like the employees got royally fucked and he got the lion’s share of the payout.
> "This kind of calling-out is common in HN and quite distasteful."
Frankly there's nothing distateful about recognising that in a hierarchical system such as a corporation those higher up the tree have a duty of responsibility to protect the interests of those below them.
Quite how modern capitalists have managed to convince people that this shouldn't be the case I'm not quite sure, but the results are hostile to a functioning society.
In this case, charity would distort incentives by softening the outcome of bad decision-making.
Each of those employees signed up for a salary and equity.
That equity turned out to be of very little value to them in the end, probably less than they were hoping for.
If they all got paid out anyway, they would not have learned that small equity stakes can turn out meaningless, and that exits are way less profitable for employees then founders.
Some of these employees might now go on to be founders because they learned the dangers of working hard on something in which there is no equity. In the end they might create something of massive value, which the world never would have had if they simply benefited from charity.
I think the lesson of this exit is also more valuable for all HN readers than it would've been if he had just paid out the employees, for the same reasons.
A counterexample I'd offer is that upon being treated charitably those employees could then be incentivised to use that windfall to pursue their own ideas, seeing the success of their founder benefactor and being empowered with a financial cushion they would not have otherwise had.
They might then go on to create something of massive value which the world never would have had if they simply did not have the financial means to do so.
Remembering the "charity" they received in helping build the business that enabled them to succeed as founders they then pass that same "charity" on to their own employees upon a successful exit, kickstarting a cycle of innovation that spreads much farther.
There's an argument that "that's not the way the world is" but the world is as compassionate or dispassionate as we make it. Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
> Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
It's not clear to me what you're actually suggesting.
You think that when someone takes more than they need, they deserve to be shamed? How do you determine how much one can take?
We all want the world to be more loving and compassionate, but rules and financial incentives drive productivity in our economy. If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
Imo, the goal should be creating a system where the rules are fair and clearly outlined. The rules and incentives for employment were very clearly outlined in the employment contract these people signed. And, the founder does not seem to be the type of person who over-promises. So, I see nothing wrong here.
> You think that when someone takes more than they need, they deserve to be shamed? How do you determine how much one can take?
Shame is a pretty good motivator for encouraging people to behave in a manner deemed appropriate by society. I don't think there's an easy or definite answer for how much is appropriate. I guess the question I'd ask in return is: in the case of the woman caught on security footage dumping a whole bucket of Halloween candy into her plastic bag. Why is it that we find it appropriate to shame her and not a founder/ceo who does effectively the same thing? Why can we not apply these same rules of decency to business?
> If the financial incentive to start a company is reduced, there will necessarily be a cost to innovation.
I don't think this is necessarily true. By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further.
I'd argue that model where innovation centers around founders aiming to hit unicorn status and then retire with 'fuck you' money limits it in the sense that those once you've earned your 'fuck you' money you aren't really incentivised to innovate any further.
> The rules and incentives for employment were very clearly outlined in the employment contract these people signed.
I'm questioning whether they were fair, not in this specific case, but I'm asking more generally is our approach to employment as a society reasonable and fair.
> Why is it that we find it appropriate to shame her and not a founder/ceo who does effectively the same thing?
In the case of Halloween candy, the owner of the candy is offering each person up to a few pieces of candy for free. If you take more than a few pieces, you are stealing from the candy owner. Stealing is bad because we believe in the right to private property. Stealing is, in fact, illegal. Of course, our legal system isn't set up to enforce punishment for small actions, so shame is a useful alternative form of punishment.
> Why can we not apply these same rules of decency to business?
In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
> By spreading the fruits of successful innovation more broadly you put the people who enabled that innovation in a position to use that experience to innovate further
I actually agree with this specific point for an isolated case. That is, in isolation, spreading the purchase price for a huge acquisition evenly across the employee base would probably lead to greater innovation.
However, this only makes sense in isolation. If you make it common practice to share acquisition price more evenly among employees, you destroy the financial incentive that drives much of entrepreneurship.
Startups are very risky, and without a huge payout for success at the end, the expected values just don't work out anymore. Smart engineers will be much better off applying for a traditional FANG job. In fact, this is already the case! What you're proposing would just make the math even worse. Remember, for every success case like this, there are 4 or more founders who failed. There better be a sweet reward at the end of the tunnel to keep them motivated to keep trying!
Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
I'm not suggesting that acquisitions should necessarily be shared precisely evenly. I don't even think Josh necessarily earned an outsized return in this case. I do think that the current disparity in compensation that we're seeing is potentially dangerous to a healthy society. We're already seeing a move towards a rentier approach to the economy, where individuals can't afford to own property or other essentials. A major force driving this is inequality, those with the means have so much capital under their control that they can afford to outbid those that have a need for those resources.
> In the case of employment, each employee is offering the business owner his/her time in exchange for a salary and equity. The expectations are crystal clear to both parties. When the business owner sells the company, taking his fair share of the purchase price (as determined by his equity stake) is NOT stealing. Nor, is it breaking any norms or expectations.
I don't think it necessarily is crystal clear. A big part of the sales pitch to employees for many startups is that your.5% will be worth X when they reach Y valuation. This isn't too bad in itself, but when it turns out that the founders can issue new/preferred stock the incentives from an employees point of view become severely misaligned.
> Furthermore, for small acquisitions like this, even if you were to split his 3.7M payday across his 20 employees, each person gets $18.5K. Hardly an amount that would spur innovation.
I agree it that it doesn't look great for smaller acquisitions. Although there are some interesting (in my opinion) alternatives to selling to private equity. In my city for example, the founders of a print shop sold the company to the existing workers. The money was paid out over a few years from the company's revenue and they sat on the board to offer some advice on the transition. It seems like a more ethical alternative in that the workers are rewarded for their part in building the company, and the new owners are less likely to asset strip and gouge existing customers to recoup their investment. It has the added bonus of not adding to the concentration of capital in a small number of holders.
We're broaching many new ideas now, many of which I agree with. I agree that employers have an obligation to communicate in crystal clear terms what equity in the company means. I also agree wealth inequality endangers the stability of our society, and some form of wealth re-distribution makes sense. I also agree that worker cooperatives can make sense in some situations, though rarely.
I don't agree that employees deserve to be rewarded for their part in building the company above and beyond their cash and equity compensation.
> Personally I'd like to see it move towards a point where taking everything just because you can isn't viewed as acceptable.
I still am unsure what you're actually proposing we do.
I initially thought you were proposing we shame Josh for taking more than he needs. I strongly disagree with this principle for aforementioned reasons. To put it another way, Josh isn't taking "everything just because he can". He's taking what he owns, rightfully deserves, and worked
and risked 7 long, hard years for.
This comment should be seen as unrelated to the Baremetrics case (because I don't know the employees' POV).
I think I understand your reasoning but I don't agree with it. It implies that workers don't already know they're in a much worse position compared to founders/business owners when it comes to acquisitions. Generally it suggests that workers "learn" through pain until they become founders. Which might apply to some people but certainly isn't the case for everyone, let alone a good reason to treat your workers badly. I much more agree with the sibling comment by Jochim.
Why do you deem it immoral for a founder to do what is best for himself within the bounds of the agreements he has made?
This kind of calling-out is common in HN and quite distasteful. Comments like this all amount to saying "X is immoral because they refused to give a charitable donation to Y". Charity is not a moral requirement and arguably it's not even a moral good.
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