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The Start-Up Company | When to Distrust Your Employers

On Behalf of | Mar 1, 2021 | When to Distrust Your Employer

Sirens also like start-up companies. Because the owners of start-up companies often don’t have the ability to compensate their employees fairly, they give promises instead. In new businesses, owners frequently tell almost every employee, that they are “key” and that they will be able to share in future profits when the company is successful. These promises are made to ensure that the employees will continue working in a dedicated fashion without much compensation.

Based on promises from the owner/founders, employees who are part of the original team are often willing to work long hours with minimum compensation, expecting that there will be future rewards including significant equity ownership when the company is successfully launched. More often than not, the employees of start-up companies have unrealistic expectations, fueled by even more unrealistic promises from the owners/founders. When and if the company does become successful, employees may bitterly discover that they are not, in fact, needed any longer and that they will not see any share of the corporate profits.

If you are involved in a brand new business, beware of promises from the controlling owners. Common promises include:

  • You will own a share (or greater share) of the company;
  • (If you are in sales), you will receive commissions in future years for repeat business from the customers you develop now;
  • When the company is sold or goes public, you will have valuable stock options;
  • You will be a partner in the business;
  • You will receive much greater compensation in the future;
  • You are essential to the success of the company and you will be assured of a job here as long as the company is successful.

More often than not with new companies, these promises are empty. Although the owner is usually sincere when the promise is made, circumstances, greed and venture capitalists usually conspire to render it very unlikely that these promises will be honored. If you find yourself employed or considering employment with a start-up business, you should NEVER believe a verbal promise such as the one above. Here is a situation where the promise should always be reduced to a written contract drafted by an employment attorney. If the owner won’t do that, beware. AT THE VERY LEAST, confirm these promises in writing.

In writing these promises up as a contract or in a confirming letter, you really need help from an attorney. Many of these kinds of promises will not be enforceable even in writing if they are not done in a legally correct way. For example, promises of stock grants or stock options are meaningless without appropriate stock agreements in effect. Promises of job security may be nullified if there is not a term in the employment agreement or if there is “at will” language in the agreement or in other corporate documents (See Power Paper Section earlier). Some of these promises require a certain level of specificity and details to be enforceable.

Why Founder Promises Often Turn Out to be False (Even When Made by Your Best Friend):

  • Differences naturally arise between the owner and other founders as you work together. These differences make it less likely that the owner wants you to own part of his business.
  • You may be indispensable at the beginning of the operation of the company, but quite dispensable at a later date. In fact, the very same skills that make you invaluable originally (flexibility, creativity, willingness to forego salary in exchange for doing “meaningful” work) often mean that you will not fit in when the company becomes more established;
  • Vague promises of stock options or “equity ownership” mean little until actually awarded;
  • Even if you have a great relationship with the original owner, he or she may not be in control later on. As the business grows, the company usually needs more investment capital. The capital comes at a price. Angel investors give way to venture capitalists. Venture capitalists often make it easy for owners to commit to unrealistic short-term financial goals. When these goals cannot be met within the time frame specified and a further capital infusion is required, the outstanding shares are dramatically devalued. Bingo, the venture capitalists end up in control;
  • The owner doesn’t really want to give up his power, money and control to you if he doesn’t have to.

Start-Up Divisions of Existing Companies

This variant of a start-up involves a new division of an old company. Employees are often lulled into this situation by being led to believe they can rely on the financial stability of the old company when they make a career move into a new division. This is not always the case.

Often new divisions are, like other kinds of start-ups, under-capitalized. Moreover, recruiters often misrepresent the commitment of the parent company to the new division. Frequent misrepresentations include:

  • Glowing statements about financial strength or financing;
  • Statements that their parent company is committed to backing them until they get off the ground;
  • Statements that their product is fully developed (or that all the defects have been worked out) and ready for production when, in fact, additional development time is required);
  • Statements about future bonus plans, profit-sharing and stock options;

The motivation for these misrepresentations is often strong. Like the start up companies, the young companies need talented strong employees in place to achieve their goals (and sometimes to secure additional financing from investors), yet are not usually in a position to compensate them adequately for the risk involved.

It is wise to proceed very carefully before accepting an offer to work with a company or division without an established track record. The following are some things you may want to explore first:

  • Do not accept representation that the financing is actually in place. Check the documents for yourself. Question different people;
  • Travel to your new work site and inspect it carefully. Try to talk to employees who do not have a financial interest in the company and who are not promoters or recruiters. Judge for yourself how ready the company is to commence production;
  • Remember, a new company backed by a large successful corporation may not mean much. If earnings are down for the parent corporation or if the parent requires capital for some other priority, the parent may suddenly terminate all funding for the new company, despite prior verbal assurances to the contrary;
  • Check out the history of the key principals in the new company;
  • Get your promises in writing or if that is not possible, confirm them in writing;
  • Try not to overly rely on the future success of the company for the first few years. Keep other career options open. Remember production schedules and marketing plans for start-up companies are often unrealistic.