Wheel of Fortune
Shawn Spaulding took a secretarial job at a start-up software firm nine years ago in hopes of working her way up the ladder as the business blossomed. The move wound up paying off more than she ever had imagined, and her eventual promotion to a senior product analyst position was only part of the reason: Today, by virtue of the stock incentives she received in the early years of the enterprise, Spaulding is a millionaire.
Mary Springer, on the other hand, was hoping to hit the jackpot when she left an advertising sales job to handle marketing for a start-up restaurant referral service. She was so enthusiastic, in fact, that she took a one-third cut in pay and gave up a company car and employer-paid health insurance. The firm never took off, though, and Springer’s financial dreams, at least for the time being, were dashed.
Welcome to the financial gambles and potential payoffs of working for start-up companies. For a few, it’s a path to riches. But for many others, who put in the same long hours and make the same salary and employee-benefits sacrifices, the bonanza will never arrive.
When you go to work for a start-up, “you’re betting on the performance of the company, and you’re betting on the performance of the stock market,” said Cathy Shepard, a compensation specialist with the employee-benefits consulting firm William M. Mercer Inc. “It means that more of your pay is at risk.”
The main financial enticement that start-ups, particularly in high-tech industries, offer to new employees are stock options. These financial incentives enable employees to buy company stock at a set price within a specified number of years.
When things work out well, what typically happens is that a company goes public with its shares at prices far higher than the cost of the stock options, providing a fat profit to the options holders.
For employees at start-ups, often even those in the lowest-level jobs, “if the company does well, they do well,” said Theresa M. Welbourne, a Cornell University expert on personnel practices at young companies.
Stock options and similar incentives, such as the right to buy low-cost “founders’ stock” before the company goes public, are an essential recruiting tool for some young firms. Dwight Matheny, general manager of Business Software Advantage, a start-up in Bellevue, Wash., said he recently hired a software developer who left his previous firm because he didn’t receive stock incentives there.
“It’s really competitive for developers, and if you don’t offer an equity position, you’re not going to get the quality of people you want,” Matheny said.
Figures on how widespread the use of options is among start-up technology companies are hard to come by. But Fred W. Whittelsey, a Newport Beach-based consultant specializing in compensation and business performance issues, said it is rare to find such a company “that doesn’t give at least a few options to everyone in the company.” Fortune 1,000 companies also are increasingly providing stock-related compensation for ordinary employees, he said, but nothing coming close to the potential payoff of options at start-up firms.
The pluses and minuses of working for a start-up, to be sure, involve more than just pure financial considerations. For many workers, a big part of the appeal is the spirit of camaraderie, the high energy level, the lack of a corporate bureaucracy and the chance to make a substantial contribution to the business while learning new skills.
While benefits packages are likely to be skimpy aside from the stock options, start-ups also are apt to let employees telecommute or work flexible schedules. Also, start-ups may provide openings for people who ordinarily would run into barriers at a big company. A start-up, for instance, might take a chance on someone with no college degree for a job ordinarily requiring one.
Yet on top of the economic risks, working at a start-up often means putting in long hours, enduring chaotic conditions and having few of the perks of corporate life.
“You do everything. You don’t just call facilities and say you need a desk. You go out and get the desk,” Matheny said.
For workers drawn to start-ups by the potential financial payoffs, experts advise keeping some key issues in mind. For starters, find out how many years of service it takes to qualify for--in other words, to become vested in--the company’s stock options.
Robin A. Ferracone, president of Los Angeles-based compensation consulting firm SCA Consulting, said it commonly takes three to seven years for the stock options to vest at a start-up. So, if you don’t stay with the company that long, you might never get the options.
Ferracone said new hires can try to negotiate shorter vesting periods, but employers often have standardized policies that rule out such changes.
A related problem involves employees who have vested options but who leave the company before it goes public, making it difficult or impossible to cash out immediately. Ferracone recommends that, when possible, new hires should negotiate buyout terms with management before accepting the job as a hedge against that kind of bind.
In addition, Ferracone suggests that employees try to negotiate performance bonuses. While salaries may be lower at start-ups, many young firms are willing to provide bonuses linked to the company’s success in developing products or reaching agreements with distributors, she said.
For the start-up companies themselves, stock options also carry risks. Handing out too many options could someday dilute the value of the company’s stock, Ferracone said.
Or, if the company thrives and eventually makes many of its employees rich, “what’s the likelihood they’ll be able to retain these people?” Shepard said.
Even though her stint with a start-up didn’t work out financially, Springer said she would be happy to try again someday. Springer, 38, now an assistant to the executive director of a nonprofit organization in New York, enjoyed the enthusiasm that pervaded the office.
“You put everything into it,” she said.
What’s more, Springer noted that jobs at big, established companies no longer offer the security they once did and can be as almost as demanding.
“I feel that if you’re going to kill yourself working, you might as well work for yourself,” she said, referring to the chance of becoming financially independent.
But when Spaulding joined her employer, a San Francisco business software company named Indus Group, in 1988, the firm was only months old and wasn’t even issuing stock options.
Instead, Spaulding, now 32, said she was attracted by the high-energy work environment.
“Everybody was so excited about what they were doing,” she said.
The following year, when Indus allowed employees to buy founders’ stock, the staff was excited but, “we had work to do. No one was counting on it.”
Although she had a bachelor’s degree in business when she moved from her native Iowa to San Francisco in the late 1980s, Spaulding had little luck finding anything beyond clerical jobs. So she started at Indus as a secretary, doing everything from answering the telephone to handling the accounts payable.
Eventually, Spaulding moved on to such tasks as quality assurance and training, gaining the experience that led to her current product analyst’s job.
“There were so many things that needed to be done that you could always pick what you wanted to do. . . . They were a close-knit group, and they wanted to help you learn,” she recalls.
The financial bonanza came when the company went public in February 1996. Spaulding’s stake in the company, coming from her founders’ stock and stock options, translated into a market value of $1.3 million.
Still, Spaulding’s advice for others considering working for start-ups is to avoid getting carried away by the longshot chance for striking it rich.
“You can’t tell what will happen. More companies fail than succeed,” Spaulding explained. In the years while you’re waiting to see how the company will do, she added, “you have to like what you’re doing.”
