This 22-Year Veteran Of Startups Says Employees Are Getting Screwed By VCs And CEOs

Chris ZahariasChris Zaharias is a 22-year veteran of startups. He's worked at Netscape, Efficient Frontier, Omniture, Yahoo, and Triggit. Now he's the CEO of his own company, SearchQuant.

Zaharias says that if you're a startup employee, you're probably getting screwed.

"95%+ of non-founding employees don't know s---- about equity," Zaharias says.

"Investors, founders and the law firms they work with systematically & ruthlessly exploit startup equity information asymmetry to their gain and employees' pain."

In an email to Business Insider, he lists the three most common ways startups screw over their employees:

• "One way startup employees get screwed is when the nature of Preferred shareholders' (i.e. founders & VCs) preference multiple is withheld from them. Because they are not told (during the hiring/negotiation process) of he Preference structure (Standard vs Participating) and nor do they typically know to ask, it's only after years of work and post-acquisition that they find out they made, say, 40% less per Common share than they thought they would. This has happened to at least 20 people I know, and is one of the systematic ways non-founding startup employees get screwed by founders & VCs. Put simply, 95%+ startup employees naturally & naively assume Common & Preferred shareholders get paid the same amount, but that's only true in ~10-20% of startup exits."
• Another example is that of prospective startup hires not being told the number of shares outstanding when they get their offer letter. As my survey proved, this is the case with most startup employees, and it happens because a) founders & VCs knowingly keep this information to themselves as much as possible so they can make employees think 10,000 shares, for example, is big number; and b) non-founding startup employees know so little that they succumb to the feeling that they'll be seen as pushy if they push too hard to get info on # of shares outstanding; I have seen this happen hundreds of times, and twice in the past 2-3 weeks with Sr Dir & VP-level people.
• Last, because two thirds of employees know squat about acquisition-based vesting acceleration triggers, they often sign offer letters that give them no protection against being demoted or fired before or after (but in connection with) an acquisition. The result? Situations like Skype where the PE firm acquirer conspires with Andreessen & Horowitz to fire employees ahead of and after the acquisition to free up more shares/$$ for them.

In an effort to end employee ignorance, Zaharias is putting on an event in downtown Palo Alto next Friday. The topic: "Startup Employee Equity Bill of Rights." It's free. If you don't live anywhere near Silicon Valley, check out his blog.