Startup Exploitation Is Real, But Not Where You Think
In startups, the phrase “exploitation of passion” comes up often. Even when a business offers plenty of fulfillment, a cash-strapped startup often can’t pay wages to match, so it may impose low pay and excessive hours, or get many people involved without compensation at all. I don’t take a particularly negative stance toward that.
Motivation
The motivations of people who come to startups vary from person to person, but many share, to some degree, a disillusionment with existing companies, sometimes large corporations, that they’re hoping a startup will make up for. Beyond the fulfillment mentioned above, they carry frustrations, whether it’s doubts about the growth prospects of the company they work for, or doubts about their own career growth within that company. In most cases, though, a startup only has the “possibility” of filling in for their dissatisfaction, and the reality rarely lives up to it.
So even without any intention behind it, all the ingredients are inevitably in place for something that looks like exploitation of passion to occur. From the standpoint of an individual working at a startup, I think the important point is not to depend on the startup for too long a stretch of time.
Startups aim for dramatic growth.
Put another way, a startup that shows no growth at all over the long term has already stopped being a startup. At that point you should shift your mindset to recognizing that you’re simply working at a small or midsize company, seriously consider whether staying there can actually fill the hunger and dissatisfaction described above, and it’s fine to choose to leave depending on the answer.
Manage the challenge and its closing properly this way, and you won’t end up having been exploited by the startup. If anything, you’ll gain experience that money alone can’t buy in many cases.
Shifting now to the founder’s perspective, there is another kind of exploitation in startups, from a different angle, that deserves real caution.
That is exploitation through equity.
My wife is a former nurse, so she doesn’t know anything about technology or startups, but as the saying goes about a novice picking up things by exposure, she sometimes actually grasps the key point of a matter. Once, while I was watching an online video titled “Startup XX Contest! The winner gets X hundred million yen!”, she muttered from behind me, “Is that prize money? Or investment?” I was quite impressed. Having read the fine print of the terms myself, I knew the answer. It wasn’t prize money.
It was investment.
And it stated that at least 30% of the equity would be taken.
I’ve never seen a textbook that says what percentage of equity is appropriate for a given kind of involvement. Still, anyone involved in startups tends to carry some rough sense of it, and that sense doesn’t usually vary all that much from person to person. Standing outside that “market sense” are young people who have just started a startup. They are, in a word, easy marks. If they’ve already received investment from a savvy angel investor, or have an experienced advisor or counselor involved, the situation is different, but take, say, “an AI venture just founded by three graduate students” — for a malicious adult, that’s an open invitation to deceive them however they like.
You might think that sounds like something out of a scam story, but in reality there are sickeningly many cases like this. Startup investment decisions are basically made behind closed doors, though, so outsiders have no way of knowing what’s happening. Then, once the company grows smoothly and finally reaches an IPO, a prospectus full of questionable details comes to light.
The Solution
The way to avoid this kind of exploitation is simple. Talk to the people around you. Beyond the angel investors and advisors mentioned earlier, there are startup founders who recently received investment, speakers from seminars you attended before, regional startup support centers, and so on. Whether or not you actually take their advice to heart is another matter, but there aren’t that many people out there scheming to profit by skimming off the top of people who are working hard while taking on risk. Most of them will offer you advice out of genuine concern for you.
The content of this post is an excerpt (original text) from the following book. If you’re interested, please consider purchasing it.
The Shape of a Happy IoT Startup
The Shape of a Happy IoT Startup
Originally published in Japanese at https://clazytech.com/2022/08/1072/. Translated with LLM assistance and reviewed before publication.