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Startup Equity Pep Rally: We Need a "Rosa Parks Moment"

"Stocks are the only way engineers can get rich and retire. Remember that."

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Chris Zaharias paced the stage at a recent rally in Palo Alto, Calif., barely able to contain his rage, with a clear message for the audience of 200 frustrated workers.

He called for nothing less than a collective uprising, which he said would need a “Rosa Parks moment.”

The people, united!

“Stocks are the only way engineers can get rich and retire. Remember that,” Zaharias said. “To live here in Palo Alto, you need about $1 million dollars in equity gains. And given that only one in five startups are going to amount to something, you need to get that to happen.”

Held last weekend at Palo Alto High School, serial startup employee Zaharias whipped the crowd of tech workers at the first Startup Employee Equity rally into an indignant unity.

Aligning the plight of the elite Silicon Valley engineer with a seminal figure in the Civil Rights movement may strain credulity. But the rally’s message was a poignant one nonetheless in an industry where the mythology of unbridled riches to all ye who enter is mismatched by the reality experienced by a preponderance of its rank and file.

Employees at startups are being taken advantage of, said Zaharias, who was joined by rally partner and stock option counsel Mary Russell. Founders and venture capitalists make the negotiations around equity (or how much of the company employees own) intentionally confusing. When a company is acquired or goes public, leading to potentially life-changing paydays, many employees will be shocked by how little of it they owned. This Wild West startup economy needs rules, they said, and startup employees need a Bill of Rights.

On the invitation, Zaharias and Russell made it clear, founders and venture capitalists were not allowed into the building. “We’re trying to collectively build a set of inalienable rights that you have as employees at a startup. This is your event and it’s your future,” Zaharias said, as members of the audience clapped. “Startups matter because we’re making the economy more efficient, but this equity thing is leading more and more people to stay in monopolies, oligarchies.”

Russell presented a mock conversation between an employee and founder.

“‘What’s the most recent preferred stock price per share? Just give me the information,’” she said on the stage, playing the role of a worker taking a firm stance in a negotiation. “They don’t want to give it to you, but it is out there. It’s your right to know.”

Zaharias said he was shocked at how few questions applicants asked before taking a job at a startup.

“Two-thirds of people don’t know the number of shares outstanding — [the founder] will want you to think the denominator is the number said 12 months ago. It’s not.”

Careful equity negotiations matter even more for the non-technical staff, who are often the first ones fired during an acquisition, so they don’t receive the full amount of shares promised, Russell said.

“I hate to say it, but it’s mostly the technical staff that is retained after an acquisition,” she said. “You ask for accelerated vesting upon change of control if you’re fired, that protects your right to earn.”

From the audience, a man wearing a Google Glass face computer raised his hand and talked about how he was tricked out of 90 percent of the equity he’d been promised by a founder.

Zaharias and Russell started an online wiki to share such “war stories” and resources. They said they hope this will start a movement.

Afterward, a dozen or so decamped to The Patio in downtown Palo Alto for chips, guacamole and risotto balls.

One 30-year-old Mountain View engineer said she felt pressured by her company’s CEO to take a higher share of equity and lower pay, which has now tethered her dangerously close to a startup that may or may not succeed.

“The CEO was like, ‘Oh, it’s going to be worth so much money.’ And it’s part of the culture of everything’s up up up!” said the engineer, who asked to remain unnamed so as not to put her job at risk. “It’s like, ‘Well if you believe in the company, you should put your money where your mouth is.’”

As venture capital continues to pump into startups, it has become an increasingly common and potentially extremely lucrative option for mid-career professionals who come from traditional companies — and who may not be attracted to the all-nighters, a Ping-Pong table and big promises.

“For the traditional 24-year-old, their priorities are different — startups are fun, social, maybe there are girlfriends. They’re getting an experience,” said 60-year-old Stuart Soffer, an intellectual property strategist in Menlo Park. “As the audience gets broader, you start to hear these more practical conversations being talked about. But it’s like folklore, it’s people quietly in cafes.”

The hardest part for many employees is that there are just a lot of details to know, and there’s not usually institutional or family knowledge being passed down.

“It’s really hard to ask for advice,” said 28-year-old Raj Thiagaraji, who works for a finance startup in San Francisco. “Your parents didn’t work for a startup.”

Here’s the full “Startup Employee Equity Bill of Rights”:

The employees of startups have expressed a desire to set forth certain rights to best ensure the security of their ownership in the value they create. This is a draft proposal of such rights, which we hope will gather many collaborators and become the standards to which startup employee equity holders can hold any management or investment teams to account.

Right to Know.

Company information on capitalization and valuation, being necessary to the employee’s negotiation of a fair compensation package, shall be provided to the employee with his or her equity offer and after each dilution and valuation event.

Right to Value.

The right of the employee to earn the full value of his or her grant shall not be limited by unreasonable vesting terms.

Right to Keep Vested Shares.

The right of the employee to hold vested equity up to an acquisition or public offering shall not be violated, and no forfeiture, repurchase or other provisions shall allow the company to seize vested equity of current or former employees.

Right to Tax Benefits.

The employee shall enjoy the right to all tax benefits, and shall not be subjected to tax penalties due to company negligence, at grant, vesting, settlement, company acquisition or sale of stock.

Right to Enforce.

The right to enforce this Bill of Rights shall not be violated by company limits on access to information or legal counsel necessary for such enforcement.

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