Many of these founders have only "made it" in a paper sense. It's at best ungracious to be living large while your employees and investors are still sweating it out and/or losing money.
Also, I find the "years of struggle" trope irritating. Many of people live on beans while working 70-hour weeks and don't end up rich. Plenty of those people work at companies whose executives do get rich.
Is it only in a paper sense until what? The IPO? Many companies are staying private much longer, because it's better for them. Can you really say that a company that has a valuation in the billions, that, let's be clear, has been paying thousands of employees, suppliers, etc. for years, and that is choosing to stay private because it's the smarter move for all its shareholders, is not considered a success warranting of the founders taking some money off the table?
Not to mention the fact that lots of companies simply remain private always, that's a perfectly legit option although not as often used in the startup world for various reasons. Nor to mention the fact that the founders who are "taking money off the table" are quite literally doing it by investors buying shares from them, meaning the investors themselves necessarily have to agree to this arrangement. (Although admittedly, those are later stage investors, and this could be against the interests of earlier shareholders, but then they made a business deal with a company, it's on them to do it in a smart way).
I don't get why suddenly when it comes to tech startups and founders, the normal rules of business are suspect. People start companies and sell off parts of them to outsiders all the time, and it's mostly up to the parties involved to agree on the details that seem right to their situation. If they are willing to do a deal with a company that isn't currently making a profit, fine! That's their business.
> Can you really say that a company that has a valuation in the billions [...] is not considered a success warranting of the founders taking some money off the table?
I can definitely say that. Are the employees and investors getting rich at the same time? If not, then there may be pragmatic arguments for paying off founders (e.g., they will have an incentive for selling the company too soon), but I don't think there's much of a moral one. And if it happens, I think there is still zero excuse for the founders living large while the people actually doing the work and providing the capital have not received the same rewards.
> Not to mention the fact that lots of companies simply remain private always
This is just muddying the waters. This article is clearly about VC-backed companies, which are all about the exit. For truly private companies, founders get their dough when the company is in the black long enough that they start paying dividends or partner draws.
> I don't get why suddenly when it comes to tech startups and founders, the normal rules of business are suspect.
They aren't. Money-losing companies giving their founders tens or hundreds of millions of real cash dollars is not within the normal rules of business.
Equity is a type of compensation designed to help lower costs, mitigate risk and improve motivation for both sides, but it is neither necessary nor required and there are plenty of businesses that have grown without it. There is absolutely no "get rich together" scheme in place outside of some unfortunate silicon valley cult/culture attitudes.
Founders are the business owners so they get the proceeds commensurate to their ownership. There's nothing wrong with that and employees are free to start their own business if they want more control (and work and risk). This is how corporations have worked since the beginning.
I'm not sure why you think startups are different, what they worked like "before" and most worryingly why you think founders are "getting away with" creating wealth for themselves by building a business.
How do you know what my personal take is? Was that meant to be an ad hominem slight? I'm stating that "get rich together" isn't some formal or even commonly accepted concept of any business (for anyone not a founder). Equity is a common way to share wealth and motivation but that has nothing to do with the founders being owners and owners gaining wealth through their ownership - but that makes me greedy because you think that owners shouldn't spend their money because someone somewhere (in the same company) doesn't have as much?
You can have exactly what you want by starting a company and giving everyone (including employees and investors) equal shares so why not do that?
You're also basically wrong about the history of business. Your theory of "I get to take it all" is relatively new in the scheme of things, an artifact of high financial liquidity, rising inequality, and a shift in political power from labor to capital.
Again, feel free to do something different than the Silicon Valley model. But please stop pretending like it's just a weird coincidence that it has been enormously successful and is different than how business is done elsewhere.
What I'm actually saying is that SV is NOT different than anywhere else. Corporations and ownership are universally practiced, and China for example is just as big. Business wealth (outside of wages) is proportional to ownership, founders are the biggest owners so they gain the most wealth from an exit. They've earned their money and can spend it freely. This is the fundamental way corporations work.
However giving away equity more often actually is a relatively new thing. I have no issue with this but am merely asking you what this has to do with a majority owner not being able to spend proceeds because there exists a minority owner? I'm asking you to backup the statements you made regarding the "startup/SV/get rich together" model which seems to be your theory - I see 0 examples of this pact outside of the founders circle. If you feel that everyone in a company should share equal ownership then that's certainly not the case in SV, which you seem to be praising.
And I'm saying you're wrong. SV is different in the extent to which people pursue joint success rewarded by equity. (Go look at the AngelList job listings versus job listings anywhere else if you don't believe me.) It is also different in the extent of its economic success. This is not coincidental, and neither is the SV bias against ostentatious displays of wealth.
> what this has to do with a majority owner not being able to spend proceeds because there exists a minority owner
Because in the cases mentioned a founder (who is often not the majority owner by the time you get to later rounds) is cashing out ahead of everybody else. It's not like the employees and investors are getting buckets of cash. Just high-living founders.
Especially when the company is not even profitable, this sends a terrible signal. If someone has built a profitable company and rewarded investors and employees proportionally to how they've helped the founder, that's one thing. But when the founder is just pocketing cash that could be instead used to help the company succeed, that's different. It makes it very clear that the founder is looking out for himself first.
Your logic is flawed. When I start a company I will be leaving my cushy job that pays damn well and living low in hopes of making it big one day. A founder making a deliberate choice here is very different from unskilled/unlucky/not-qualified (in whatever sense) people living on the beans. They don't have a choice. They are not part of the game.
Tall poppy syndrome would be more applicable if it was peers being upset at the success of one of their own, not between subordinates and leaders
> every dollar the boss keeps _is_ a dollar that the employees don't get and the boss is the one deciding how much both sides get.
I've thought a lot about this over the past few years. There's definitely a difference between being an owner and an employee. An owner lives with a whole different level of stress and risk. An employee has a choice to work for an owner, or go work somewhere else, or become an owner by starting a company.
I'm not sure where the balance of power between business owner and employee is determined...it's fairly complex.
Owners become employees when they accept too much outside investment. They become employees of investors...and investors buy ownership.
I think the balance of power is primarily affected by two things: 1) Barrier of entry into starting a business, such as laws that inhibit/regulate small businesses, or independent workers (owners) 2) Regulation that gives bigger businesses an inherent advantage over smaller businesses, such as limited liability, indemnification, bnakruptcy, mandated group health insurance plans, etc.
Sure, an owner can make 1MM per year and only pay the employee 100K.
But I think the question we really need to understand is, what's stopping the employee from quitting and starting his own company? I don't know the answer.
There is also a lot of pro-management literature that defines a work culture where employees should be loyal to their company, boss, etc., give two weeks notice when quitting, among other things that psychologically disenfranchise employees.
In reality though, at least right now in the tech industry, if you don't like your salary, job or work environment, it isn't hard to re-tool and find a new job...
In blue-collar/unionized industries, it might be totally different. I don't totally understand the work cultures of other industries, especially lower paying ones.
Obviously you might leave after a few years of really unfair bonuses. But truly, they seem a little disconnected from regular market forces.
Everyone knows that if you go work for e.g. Google, you're getting a certain base salary, plus a bonus package (plus options/RSUs, plus free food, plus a lot of things). People consciously subconsciously price these in as much as they can. Of course if bonuses are variable it's harder to price them, but the same can be said of stock grants in companies. And no one can afford to ignore those - they can in practice make up a huge part of your pay package.
Well, you're correct. If the bonus is unacceptable, the employee can just quit. But a year of work (or more if it's event based instead of annual) is a big opportunity cost to find out that info.
In other words, employees never take an unexpectedly huge bonus to the chagrin of the employer. So there is a power imbalance there.
It at least partially is. The employer needs to meet reasonable expectations and any commitments they made.
The boss/employee relationship is an interesting one as well. If the boss is a self made entrepreneur that built his/her company from scratch and lived by the skin of their pants for years, then I believe it should be their decision as to how much of every dollar coming into the company goes into their pockets.
I would also assume that being successful from those beginnings would indicate that they are shrewd business people, and that they can figure out a ratio of boss/employee allotment that would be fair and also be beneficial for future company growth and reinvestment.
Why would the boss give anything to the employees then? I think you’ll find that the employees decide how much they want.
Employee signed the contract out of his own free will? Then no, the boss is not the only one who's deciding that.
I think they'd prefer that you take the perspective that you've only really made it once you've made a profit for your investors. Or even, gasp, until you've built a self-sustaining, actually-profitable company. Otherwise investors will worry that their investment is in your lifestyle rather than a company that will eventually earn them a return on their investment.
Once a founder has built a company that's exited or doesn't need any more funding and is turning a profit, I doubt anyone particularly cares how they spend their money.
I remember there was a great deal made in the press a few years back about a famous Indian movie star spending several million dollars on his wedding in a poor city that he grew up in. He was criticised for his 'wastefulness'. However, a follow up report on the event a few months later pointed out that his one wedding actually was massively beneficial for the entire city's economy. Catering and hire companies made several year's profits in one day, and were able to hire more people and take them off the streets.
Similarly, we may criticise the extravagant marble entrance stairway in a startup founder's mansion, but that stairway may have probably put the stonemason's kids through college or helped to extend that dying artform for another generation.
If they have an empty house, they still contribute to the local government's activities via land tax or rates bills, and they probably also employe local cleaners, garden maintainers etc. Far better than just snorting it all away in cocaine and other heavy drugs.
But when they buy cocaine they still contribute to the income of local dealers and the activities of gangs. Their money may well put a gang leader's kids through college. And drug lords can have huge weddings as well.
It seems to me like you as well fail to see the downstream consequences of that spending.
I do agree that building a house and letting it sit empty is usually slightly better than spending the money on drugs, but that can easily reverse itself depending on the specific building materials and drugs in question.
More importantly, there are not just two alternatives. Why spend money on a house you don't need and pat yourself on the back for helping the people you paid, when you could have used the money much more efficiently to directly improve people's lives?
The fact is - no matter how it happens, that money sloshing around is good for the economy. I guess the worst thing they could do is to convert it to bank notes or gold bars and bury it somewhere.
P.S.: I'd love to have a big house, and don't jusge people who can afford it that do. Luxury is fun, but in this case its wasteful non the less.
I guess some of the worst investment advice ever was repeated to us as kids - viz Scrooge McDuck swimming in his vault full of money, or pirates constantly burying their loot... :)
I think the problem is that they are still working for the investors, having sold them the dream. Because they are also acting as CEO, they are still on duty to the investors to create an exit.
They haven’t “made it” yet, unless you consider raising investment as the goal. But it isn’t. Until you’ve made your investors a great return, the point of the article is to show some modesty.
Most don't though.
Most come from upper middle class families.
They live 'Grad School Life' until they are successful.
Meaning: ok, nothing phat or fancy, but they don't have any real trouble or risk.
Of course - many do struggle for a long while.
I think they should buy what they want ... but they shouldn't be showy about it.
Don't drive your Ferrari into work when there's a layoff :). Or ever maybe.
EDIT: there's quite a lot of data to validate that richer kids are more likely to be successful founders [1]. I'm not indicating that this is always the case of course, but it's pretty common.
I worked for a while at a Fortune 50 and the kids we saw coming in as interns were really well prepared - I also noticed a pattern - their parents were Doctors, CEOs, high level government officials. I'm not saying they didn't earn the positions, but there's no doubt that their status helped, moreover, they already knew how to behave properly in a corporate/professional setting. I had no idea, that's not something my parents could teach me.
Two of my 'rich kid' interns went on to found major companies, one of which there's 100% chance you've heard of and probably 80% chance you've used - the other just raised $50M.
Coming from a remote Wyoming ranching childhood, I will claim that signalling can be learned, and that most if not all customers, VCs and bankers I might talk to are shocked to learn that I was not brought up just like them.
It's no different than lawyers or doctors, though. Every group has tribal signaling to help them identify if a person is in or out of their group. Learn to speak the language. Heck, even poor people (like me!) can do that.
You can have a large house or mansion, somewhere isolated (if that's what you want), but unless you have a family with 4 kids running, it can get lonely pretty fast.
Also as the article points out, people aren’t using their stock to buy these places (Evan Spiegel being the exception). They are almost certainly using money they got when they (and often the rest of their employees) were offered the chance to take some money off the table in a later round of funding. Investors do this for a few reasons — they want a larger percentage that would cause more dilution than existing shareholders want to take, they want the founder focused on the home run IPO instead of potentially taking a buyout offer that would net the founder life-changing wealth but only be a single or a double for their fund, and probably more I’m not aware of. Point being, investors are fully involved participants in this — no one is being taken advantage of. (Again WeWork may be an exception — the external optics there are very bad.)
Finally, using something like Dropbox as an example, Drew has built a multi-billion dollar company and his investors (with the possible exception of the last round which was basically an IPO without the listing) are very happy. Is a $9M condo really a sign that he’s not working hard? Anyone who knows him knows nothing could be further from the truth.
Just pointing out that, just because a house is massive, it won't make you happy. It's often seen as a status symbol, though it doesn't make much sense anymore in this day and age in my eyes, unless you constantly have people around and you have a large family.
Yes, a big house won’t make you happy by itself. Neither will money, a girlfriend, kids (especially kids!), a bar where everyone knows your name, etc. You can be happy sharing a bedroom with two other people you don’t particularly like and you can be unhappy despite everything in your life going exactly how you hoped it would (speaking from experience here). But that’s human psychology, and I don’t think it’s useful to try and paychoanalyze why people are choosing to buy what they buy. Honestly, we all have better things to do with our time.
You shouldn’t hire people with whom this is a legitimate concern.
These companies were "best places to work"
I recall a chapter that struck me from Bob Taylor's book (of Taylor Guitars). The first half of the book was all about him building guitars in a shed, then loading them in a car and visiting guitar shops one by one, trying to convince them to buy his guitars and display them next to the Martins and Gibsons etc. that had a lion's share of the market.
Many years later, when he became one of the most successful guitar companies in the US, he built himself a nice house, and he used to invite his staff around for an annual BBQ to show his appreciation of them.
Then one day, at the BBQ, he overheard some senior management pointing at his new pool rockery and saying "So THAT's where my bonus went this year...". He stopped inviting staff to his house after that incident.
"Tall poppy syndrome" exists in all industries and cultures. Personally, I don't see why people who have sacrificed a lot in order to make money in the early days cannot enjoy it later when they _do_ make it. As long as they maintained a high standard of ethics and principles doing so, of course.