How Startups Pay Employees With Limited Capital and No Profit [e264]

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist to that business news.
My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: Why are you laughing? Is it too formal or what?

MATT: No, it wasn’t too formal. It was just, uh, interesting breaks and peaks in your…

NASIR: Oh, because, well, the reason is because I was starting to think about what the name of our podcast is because, you know, since I never say it in our intro anymore, I almost forgot what it was.

MATT: There’s somebody else that does the intro, says the name, says our names, and then we immediately just repeat it.

NASIR: Well, we don’t say the name of the podcast which, for the life of me, I can’t remember what the name is, but that’s okay.

MATT: I say it at the end, I guess – in a way, I do.

NASIR: Uh, keep it sound and keep it smart?

MATT: Yeah, close enough. I hope you went to that game on…

NASIR: I did watch it. The final?

MATT: Great game, yeah.

NASIR: You know me. It’s surprising that I sat through a game that I have no idea who the teams are or players are but, yeah, it was a great game. I think I just watched the last half.

MATT: Yeah, the whole game was good but the last half was good. Yeah, my wife did the same thing. If she’s able to watch a whole half of basketball, you know it was a good game.

NASIR: Yeah, exactly, and we’re talking about the… uh, what are we talking about exactly? I just want to make sure we’re talking about the same thing.

MATT: College basketball.

NASIR: Oh, yeah, yeah, college.

MATT: Because it was in Houston, that’s why I bring it up.

NASIR: Yeah, we’re talking about the same thing.
Anyway, what have we got today?

MATT: You know, this is a topic that – I’m assuming you do as well – I seem to talk about it all the time with people – mostly with startup companies. We’re going to go through an actual company and kind of the tribulations that they’ve had. So, you have a startup company. Oftentimes, you have multiple people that are involved. Unless you get some sort of investment right away or unless one of the founders has some money from some other source or some money to pump through, they’re pretty handcuffed in terms of money they can pay out to people that are performing services for them which – you know, this is just a complete estimate I should say – over 90 percent of startups – and I use “startups” loosely – probably have this issue.

NASIR: The so-called “tech startups” or kind of dotcom startup.

MATT: Well, I think tech is a classic example because all businesses can probably use some sort of programming or tech person, but the tech ones in particular obviously have this huge need. And so, oftentimes, what happens for these startups, it’ll have the means to pay people. You know, we’re just talking minimum wage. We didn’t even talk about that yet but, in California, it was going to be quite the increase here in the next few years.

NASIR: $15.00 – and New York.

MATT: New York as well, that’s right, but we’ll talk about that at a later time.

NASIR: I think we have a story about it.

MATT: Yeah.

NASIR: Yeah.

MATT: So, in lieu of paying these people at least minimum wage, they pay them nothing but they pay them in equity meaning that – well, only if you stock in this company or membership interest if it’s an LLC – in exchange for your services, the one thing that they often do though is they tie it into some sort of vesting schedule. So, in order for this person to receive this, you know, think about it this way – we’re going to give you five percent of the company which is probably pretty high but we’re going to give you five percent for doing the work you’re going to do as a programmer. But the catch is you have to work with us for two years. Essentially, this person is not getting paid for their work for two years and that’s assuming they see out the whole thing. And then, even if they do see it out, you know, it’s very possible that that stock is even worse than anything at that point.

NASIR: In fact, it’s likely that it won’t.

MATT: Yeah.

NASIR: And, here’s the thing, that happens all the time and the problem is that there are a ton of popularized success stories of startups that have just went through that same process. And so, it’s like, “Okay. Well, everyone else does it,” and that’s partly true – this whole startup world definitely has been romanticized. I mean, there’s no doubt about that, right? When we talk to these clients, they kind of have a preconceived notion on how things should go. Even, frankly, startup attorneys or so-called startup attorneys or attorneys in Silicon Valley that are living and breathing in this world, they have this kind of style and approach to things that aren’t necessarily how things go in regular business world. Again, maybe it’s that culture or not, but there is definitely some drawbacks to that, and that’s what’s interesting about this guy.

MATT: Dan Lyons?

NASIR: Yeah, Dan Lyons. He’s a former employee of HubSpot and he wrote this book about his so-called misadventure in this startup bubble and it’s called Disrupted. He’s pretty critical of HubSpot and their kind of so-called culture which is very fitting to the romanticized culture of many startups and he’s one of the writers of that show, Silicon Valley, on HBO, right?

MATT: Well, I think he started this fake Twitter profile. Was that for Steve Jobs?

NASIR: Yeah.

MATT: I can’t remember.

NASIR: Fake Steve Jobs, basically – Fake Steve, I think it was called.

MATT: Yeah, the Fake Steve Jobs, but now he’s a writer for Silicon Valley. We’ve talked about the show a couple of times and I think we’ve even both mentioned that they have to have somebody. They have to have at least one writer – possibly a couple – that have some knowledge of the startup – not only the legal aspect but kind of the actual practical side of startups and what the reality side of it, what really happens.

NASIR: That’s right.

MATT: Because a lot of the plots and subplots are based off of things that we see all the time and are very common to startups. I think one of the last episodes – maybe the finale – was all centered around this employment agreement that became voided or was ruled invalid because it had a non-compete in it which is illegal in California and all this stuff which, for people that aren’t familiar with the law…

NASIR: I don’t think it works that way.

MATT: No.

NASIR: Just because it’s a non-compete doesn’t mean that the whole agreement’s invalid which I don’t know what the details of the episode was.

MATT: Yeah. You know, they needed a way to get out of it but it was pretty funny.
We’ll post this guy’s account of the situation of – was it HubSpot?

NASIR: Yeah, have you heard of HubSpot? It’s this marketing company. They focus on marketing software. I think that’s their bread and butter. I’ve actually looked into them a while ago and what I had trouble with was it was very hard to ascertain what they did. Like, basically, to actually get prices and to figure out what services they provide, you’ve got to basically talk to sales people. It wasn’t very transparent. I was like, “Forget that. I don’t want to go through that. I’m not that interested in it.” But I understand that everything from social media to email marketing to analytics. I’m sure they do much more now than they used to but they are a publicly traded company now.

MATT: Yeah, and I think that’s one of the things that this Dan guy says. They built this whole culture around all these different things and it’s all kind of inflated and the underlying part when he was there is they weren’t even turning a profit. It was just really pumping in all this enthusiasm throughout everybody to really get people working hard. On the flip side of it, too, they were giving basically they turned it into – from the way he describes it – like, a playground. You know, give all these people all these fun things to do. Make it a really fun culture and maybe that way they’ll forget about the fact that they’re not really getting paid at all.

NASIR: Or paid much.

MATT: Yeah.

NASIR: I’m sure they’re getting paid now but in the beginning at least.

MATT: I thought I saw there was a mention at some point of an amount they got paid in addition to the stock.

NASIR: That’s the thing. The stock options, first of all, they’re publicly traded and I’m looking at – for those that actually trade – their operating margin and net profit margin is -25 percent in 2015 and they have yet to run a profit. Yet, somehow, they have 1,000-plus employees and doing what? God knows what they’re actually selling or doing but they’ve been publicly traded since October 2014. The stock is trading just about – I don’t know – about 10 points above their original – I’m sorry – about 30 points more than their original IPO.

MATT: Looking at their IPO in 2014, they had a valuation of 1.5 billion – again, this got emphasized – they haven’t made any profit yet.

NASIR: Yeah, and their market cap is about 1.5 billion.
To give you an idea of their corporate culture, there’s this blog post from January 6, 2010 and this Lyons guy references their vacation policy. It’s basically I think Brian Halligan – which may be the CEO or not – he writes this post, an announcement on January 6, 2010 basically saying Mad Men inspires HubSpot’s new vacation policy. And so, you get an idea of where this is going already. He basically starts out, “I’ve been watching Mad Men recently and it’s remarkable how much corporate culture has changed in the last fifty years.” And then, it goes on to that end. “We announced our new vacation policy this week. Our new vacation policy is that there is a no-vacation policy. No paid time-off. No vacation rollover. Nothing. If people want to take off, then they take off.”
Okay. That’s interesting. I read through it; it’s still not clear what exactly that means. But, based upon what Lyons is saying, it seems like it’s just unpaid vacation and you just leave and you don’t get paid for it and it’s ambiguous if you’re on salary whether you get paid or not. I’m not following it but, based upon what Lyons is saying, basically, when they terminate the employee, they don’t have any saved up vacation time so they don’t have to pay for that. Most likely, it seems like it’s unpaid vacation, right?

MATT: Yeah, I would guess, and it really is a double-edged sword here. “Yeah, okay, here’s the thing. We’re giving you unlimited vacation but it’s (1) most likely unpaid so you’re taking time off and you’re not making anything; and then, (2) it’s unlimited but, if you overuse it – and probably their definition of overusing it is a lower amount – guess what – they’re probably going to terminate you.” And so, I think that would make people very reluctant to use a lot of this vacation time. I mean, unlimited vacation time just doesn’t really ever seem to work in my opinion. I like companies that do the mandatory vacation time because people do get burnt out. But, unlimited, you just never know what the right answer is on how much time you’re supposed to take off.

NASIR: What’s weird is, I mean, Lyons, he tears them apart. I mean, the New York Post did kind of a summary of some of the things that he talks about. I didn’t actually read the book but he tears them apart – everything from how they’re getting paid to how basically the CEO and the officers are basically marketing people that are salesmen to just tell people how great their company is and they get their customers by spamming and they send a bunch of spam every day and that’s how they get their customers, supposedly, and how it has this very cult-like atmosphere. This New York Post article continues to compare the culture of HubSpot to Scientology and they talk about the employees go through these tests in the beginning, so-called pseudo-personality tests and get asked questions like, “How weird are you from one to ten?” This is really about the romantic nature of people – what they think of startup culture. They think of the Apples and the Googles of the world and how they started in a garage. The reality is that how that translates to real life is kind of a pipedream in many ways and we see this personally with how clients want to structure their companies – not even business owners but a lot of people that come to us that are joining a startup. They have a lot of intellectual capital with them. They’re smart, intelligent, and they’re being asked to work for free in exchange for equity. Again, a pipedream.

MATT: Yeah, that’s kind of the warning to the individuals here that are getting into these situations. You’ve really got to know the situation before jumping into it – you know, before investing too much time. I think it’s fine if you see the idea and you invest a little time into it and, if it doesn’t work out, you kind of go your separate ways. But, if you’re like one of these situations where you’re putting in essentially full-time – more than full-time probably – and you’re really not getting much in return. Yeah, they might give you all these cool perks that are at the place that you’re working at but you’ve got to look at things from a macro view and see that it’s really not worth it and you’re getting treated pretty poorly and it’s probably not going to work out for you long-term. Like we said at the beginning, the odds of any sort of stock option turning into something are fairly slim.

NASIR: Especially a company that’s not making money because, in that scenario, and there’s plenty of companies that don’t make money that’s publicly traded. That may not be the issue but, in those scenarios, the people that win are the founders and the VCs before IPO, right? But, after that, it’s like those stock options are, until it turns a profit, right? There’s always exceptions, of course, and we’ve seen it with Twitter and I can’t remember. Facebook was profitable when IPO, too. But there’s been others that weren’t profitable right away.

MATT: Like I said, we’ll post his account – Dan Lyon’s account – of working there. The one I thought was particularly interesting was the employees have to wear rubber bracelets containing transponders which are needed to lock and unlock doors moving around headquarters which, of course, means they can track you at all times if you’re wearing it – something I assume that these people would figure out at some point.

NASIR: And we forgot to talk about the whole FBI scandal with this because, when he was releasing his book or something – I don’t know all the details but this is my understanding – the FBI did this investigation which apparently they ended up clearing them but there was some allegations that somehow they were trying to shut down this book by lines that it was being made and there were some allegations of hacking into email because they were trying to get a draft. Because of that investigation – or as a result of or afterwards – some people resigned and even the CEO of HubSpot was reprimanded to some extent regarding this whole activity. You have to accept that there must be some truth to what this guy is saying. I think it’s a credible source.

MATT: Yeah. So, what’s our…?

NASIR: How weird are you? From one to ten?

MATT: I don’t know how to answer that.

NASIR: I know, it’s such a silly question. I would say six for you.

MATT: Yeah. Okay, I’ll take that. For you, probably eight, eight and a half.

NASIR: Wow. That’s weird. What were you going to say?

MATT: I was going to say I don’t even know. For the takeaway in this case, well, I get it’s more for the individual perspective but I guess, from the business perspective or business owner perspective, treat the people that you bring on as part of your team, treat them appropriately and just because you offer them nice perks at the place of your office doesn’t mean that they’re enjoying their time. If you treat them well and you give them something good out of it, they’re going to stick around for the most part.

NASIR: I would also take what you read on the internet or from these so-called young CEOs and young and fast-growing companies and what they do, take it with a grain of salt because what made them successful is not necessarily because they had this great so-called “company culture.” Sometimes, there’s luck involved. Sometimes, there’s an actual product that they happen to do well. But, I’ll tell you this, I don’t think a company is successful because they have a no-vacation policy or little weird things like that. Some things don’t have to be reinvented, you know? Where it comes from, the no-vacation policy is because they feel like work and life has no separation – that life is your work. That’s where that no-vacation policy kind of bugs me a little. It’s not practical. It doesn’t fit realities of people’s lives. People want some kind of structure.

MATT: Right, exactly.
I think we offered some good takes on this one.

NASIR: Yeah, I think so, too.
All right, thanks for joining us.

MATT: Yeah, keep it sound and keep it smart.