Employee Rewards

Reflections on a startup journey (Chapter 4)

I founded AppSheet in Seattle in early 2012. The company was acquired by Google at the start of 2020 just before the pandemic took over our lives. This is #4 in a series of articles to capture some of my experiences. Here was article #3. Every startup journey is different, and my perspective is probably over-fitted to my unique situation. So please read with skepticism and treat these articles as opinions at best.

Every employee in a startup expects and deserves tangible and intangible rewards. Intangible rewards matter the most during the startup journey, while the tangible rewards matter if there is a successful exit for the startup.

Intangible rewards

There is this mistaken notion that startups are a high stress environment whereas established companies are not. At least for AppSheet, I don’t think this was true, although my perspective is obviously skewed.

How is a job at a startup lower stress when by definition it is always on the verge of failure? The stress in a large corporate job comes from frustration with the corporate structures and processes. Those processes are in place to ensure stability of the organization at scale. Intentionally, they do not optimize for the unique needs, skills, and goals of the individual. Some people get stressed and frustrated by “politics” or “process” or “their manager” or “their review” or any of the other reinforcing mechanisms that whisper “you are powerless here”. For the people affected, this sense of powerlessness is very stressful and monetary compensation can balance it out for a while but not forever (the Great Resignation happening at Amazon is a perfect demonstration of what happens when compensation becomes a bit less compelling one year).

These are exactly the people who are potentially a good fit for an early stage startup. For them, the most important intangible reward in a startup is a sense of shared purpose and sense of individual empowerment. I can guarantee that nobody worked at AppSheet because of the (low) pay and the (limited) perks. Most of them worked in the team because they had a sense of shared mission, they did not worry about politics, and they could make progress every day without being blocked by someone. So, they had less stress.

In general, one of the biggest sources of employee angst is “I don’t like my manager”. That is equally a problem at a startup or anywhere else. All my instincts and experience told me that most people are either poor at people management or at project execution. In most organizations, a manager is expected to do both, and it is a recipe for failure of some form or the other. At AppSheet, I tried to keep the organization as flat as I could for as long as I could. And I tried to set things up so that individuals could deliver on projects without requiring team coordination. The moment you need a team to coordinate something together, you need a manager/owner for that team or project, and all the manager problems return. I explicitly tried to ensure we never had two devs work together on the same feature (we absolutely expected devs to help each other with advice, reviews, etc, but only one owned the feature). I discouraged having a manager and a reporting employee jointly own the same deliverable (the manager would tend to cover for the employee, or sometimes the manager wouldn’t guide the employee right, or they’d be in conflict with each other). I know this is not how the rest of the world works, but it worked well for us. And in fact, almost every time we violated this rule, we got inefficient and had conflicts and stress.

Also, as CEO, it was my job to make sure I did not replace one stress with another — for example, fear of company failure, or fear of running out money. It would have been irresponsible to share those concerns with people on the team who could do nothing about it. Of course, it goes without saying that you need to avoid the “un-rewards” like neverending-meeting-itis, exec entitlement (special parking spot, exec who puts his feet up on the conf table, etc), and hyper-aggressive work culture. One other startup I heard about would routinely fire one low performer every Friday. Just think about working at such a place — every Friday, one of your colleagues would go into a meeting, come out, and pack up his or her desk. Ugh.

There’s also other stresses a CEO can create like pushing for impossible timelines or yelling at people or punching holes in the wall. You cannot run a startup company without reality distortion and intensity. But there is a fine line between positive intensity and negative intensity. You’re going to come close to that line often, and you’re going to cross it occasionally. You just cannot be on the negative intensity side the majority of the time. That’s when a startup is too stressful.

Tangible rewards: Salary & Benefits

My principle at AppSheet was that employees would get the lowest salary that was viable to make things sustainable for them at home with their families. My life was sustainable without a salary so I didn’t take one for five years. When Brian joined, he’d already been doing another startup for a few years without a salary but that had just failed. But he felt a salary of $6K/month would make things sustainable. So for the first few years, we set everyone’s salary at $6K/month ($72K/year), whatever their level or title or role. Beyond that, people got restricted stock awards and different numbers of stock for different people.

At each funding round, we increased this salary baseline. After a while, we introduce two salary levels differentiated by about 10%. It was only after we did our Series A in 2019 that we did a formal compensation plan, but even then, there was relatively little differentiation in salary compensation.

In terms of benefits, initially we had none. I was worried that some of the young people on the team were purchasing horrible health plans or going without one. So we added a 100% paid good health plan (100% for employee and family) when we got to the stage we could afford it. Then we added a 100% paid health club membership. We were going to do a 401K (100% matched) just before we got acquired. In general, my philosophy was that any benefit provided should be high quality with 100% matching/covered. I don’t know why a 90% health plan is wrong in any way, but 100% felt right.

Stock

Stock is the only valuable mechanism for tangible rewards at a startup. By taking a pay cut, employees monetarily invest in the company, and it is their effort that creates the true value of the company.

As CEO, you have to ensure that the stock grant for each person is aligned with their contribution to the value of the company. Yet, stock grants are forward looking projections of value. It is difficult to hand out the “right” amount of stock to new employees when you don’t know their level of commitment or how long they will stay or how much value they will contribute. In practice, we almost always undervalued people at the start. So we ended up issuing fresh stock awards almost once a year — some folks who were at AppSheet for years had four different stock awards. I know most startups don’t do this. If you are an early-stage employee joining a startup, don’t expect it — your initial stock award might be all you’ll get. Just know that if you are a high performer, it probably undervalues the contributions you will make.

At every stage, the company gets set up in a way that most of the stock is allocated (to the founders usually at the start) and there is an unallocated “stock pool” set up for the future employees who will be hired. If you set up this stock pool to be too small (10% is a favorite low number), then you’re going to give people tiny stock grants and/or you’re going to run out. Very very early on, I had made a big mistake. An excellent talented person I’d worked with before was interested in joining. He was somewhat early in his career but I thought the world of him. I took guidance from a couple of other enterpreneurs who gave me the guidelines they had used. I offered him 2% stock and he wanted 4%. I decided it was too much and he moved on (to Facebook and then started his own company where he did very well). It took me a while to realize how stupid I had been. Over time, I learnt that it was much more important to attract great people, that “junior” and “senior” were part of big company culture that I need to shed. I made this mistake repeatedly especially early on, but luckily AppSheet ran so long that I had the opportunity to compensate for many of those mistakes with extra grants.

If you are stingy with stock, you will not attract or retain the right talent. If you are suitably generous with stock though, you will run out of your small initial stock pool. Then the question is, how do you create a new stock pool? The default answer, of course, is that you dilute everyone including the existing employees who just got a small fraction of what you have in the company. But that is actually only the convenient answer. A better answer at this stage is — you dilute only the founders or only yourself because you probably held on to too much for yourself at the start. Founders can surrender some of their stock. It is a way to balance things and make them more equitably reflect the needs of the company. Later, when you have VC investors, you won’t have this option, but early on, you do. As a founder, your job is to set up the company for success, and if that means shrinking your share of ownership to provide greater incentives for great colleagues, then of course you should do it.

The standard stock compensation system is structurally exploitative in favor of founders and investors, at the expense of employees. It is something I did not realize at the start. Here are some of the ways:

• Number of shares: most CEOs describe stock grants in terms of %ages (“you’ll own 0.5% of the company”) but does the employee actually know what that means? The final offer letter and the grant will only have an actual number of shares (eg: 50,000). So is that actually the original 0.5% of the company? I guarantee you almost no employee knows. If you join a company that has already raised money on a convertible note, then it is already diluted and you just don’t know exactly how much. If the company had ten million outstanding shares and you were granted 50,000, most certainly you did not get 0.5% of the company. And there’s all kinds of other dilution potentially going on after you join too but nobody tells you.
• Vesting: stock grants and options are typically granted with a 4 year vesting period, but nothing vests for the first 12 months. Why is that? Because if someone works in the company for 6 months and then leaves, the founders/company don’t want her to own any stock. Now, that is obviously good for the company but is it fair? Very early on before Brian even joined, one of my ex-Microsoft colleagues spent a few months working with me exploring some ideas together. He decided to leave, move to the bay area, and try out other stuff. We parted on excellent terms. He didn’t retain any vested stock. Maybe this is fair. We went through three pivots after that. Or maybe not. I could make the case either way. But there are startups where someone works hard for 11 months and then is terminated. And they get no stock in the company. That is not fair.
• Option exercise: when a company provides stock options that vest over time (four years), it gives the employee the right to purchase company shares at the original strike price. So let’s say the employee has the option to purchase 1000 shares at $1/share. Five years later, the company is doing well, has gone through a couple of priced funding rounds, and now is valued at $50/share. The employee is ready to move on to a different job and leaves on good terms. But there’s a nasty surprise waiting in the fine print on the option purchase agreement. After she quits, she gets 90 days (or maybe less) to exercise or forfeit her options. The company would love her to forfeit them of course. To exercise them, she’d need to shell out $5000 to the company, and also pay Uncle Sam income tax on 1000 * (50 -1). Unlike a public company though, the shares aren’t liquid, so she has to shell out this money and then hold onto illiquid shares. You’d think after working for five years in the company with fully vested options, she’d have the right to retain the options until the company exits via IPO or acquisition. Nope! When I learned that this was the default approach, it seemed unfair to me. Fortunately, our board directors agreed and we amended it to a 10 year window within which to exercise the options.
• Vested stock clawbacks: I have seen company stock plans with “clawback” clauses even for vested stock grants. So if someone worked in the company for N years and had fully vested stock, the fine print in the stock plan agreement gives the company the right to repurchase the vested stock at the original purchase price if the person leaves the company. Ugh. Beyond unethical.
• Bad terms in funding rounds: no employee ever gets to see the contract details of funding rounds. Yet, these may have all kinds of liquidation preferences and other such clauses that unreasonably disadvantage (and therefore lower the value of ) the employee’s common stock

Most employees lack the legal acumen to understand the nuances of stock plan agreements. Employees tend to trust the employer and sign whatever is put in front of them. The general principle for the company on the other hand is far less trusting. Current employees are perhaps worth respecting but any ex-employee is viewed as potentially a problem if they continue as a shareholder. In my experience, this is an overly transactional approach to a much more complex and nuanced relationship. There are many valid reasons for employees to leave a company. For example, one of our colleagues worked with us for a couple of years, then received a good offer to work at UIPath before they went IPO. A marketing role there was a better fit for her so we wished her well. It didn’t in any way diminish her contribution to AppSheet. There are also unfortunate but valid reasons when you may have terminate an employee. But even then, their vested stock was something they earned by working at the company, and nobody should have the right to take it away from them.

Takeaway

It’s pretty simple. When it comes to rewards at a startup, employees are entirely at the mercy of the CEO and board. Fairness cannot be assumed and transparency usually doesn’t exist. As an employee, you can read the fine print as much as you want, but really your only moment of leverage is when making the decision to join.

As the CEO, if you are lucky to have diligent board members, they can both guide you and provide guardrails. Quite often though, you get to decide by yourself what is ok and what isn’t. If you can earn trust that the eventual tangible rewards will be fair, and the work environment delivers the low-stress intangible rewards every day, then a startup team can focus on customer and product and do its best to succeed together.

Rewards however are only part of the contract at work. More about this in the next article.

“… But if you treat me right baby
I’ll stay home everyday.…”

— — Billie Holliday. Fine and Mellow.