Founders getting screwed: China’s startup industry grapples with trust issues

Photo credit: imtmphoto / 123RF Stock Photo

The following is an adapted translation of an article written by Xiangxiang Shenfeng and published by Sina Tech, and an anonymous story on Qiangwailou. It’s also worth noting that both of these stories are disputed by the relevant companies, and the truth is unclear. What’s presented here is based solely on information from the posts linked above, for the purpose of discussing a broader issue: the early splitting of startup equity.

Should you slice up a cake before you’re done making it? That’s the strange metaphorical question that China’s startup community is pondering after a blog post from a frustrated wife sparked a similar response from an equally frustrated wife on one of China’s top startup news portals.

Hard work unrewarded

The first post, which was written last year but has been making the rounds again, is a lengthy, earnest essay written by a woman about her husband. It tells the story of a man who took a big career risk, becoming the second employee (and the chief technology lead) at a gaming startup in 2010.

At first, it’s a by-the-numbers startup story: long hours, working weekends, low pay, sacrifice. All of that offset by the belief that the company was building something big. The wife watched as the hard work paid off in impressive company growth.

But in 2014, a friend approached the wife about starting a business together, and insisted that they allocate the new startup’s equity up front. Having no experience with equity, the wife asked her husband for advice.

“He said his CEO said that it’s not good for a company’s equity to be split up in the beginning because it will affect strategic decision-making. So it’s best for the equity not to be split up at first. I asked whether he’d signed any kind of agreement with his boss, and he said no, the plan was to wait until the company got bigger: ‘You don’t cut a cake until you’re finished baking it.’”

“At the time, I thought that made a lot of sense, and ultimately didn’t go into business with my friend, who was insisting that equity split be clearly defined from the outset,” she wrote.

The following year, facing the growing expenses caused by a newborn child and the increasingly costly Beijing housing market, the wife began to wonder about equity. And when she poked around on the web, she discovered that after a company retooling, her husband had been removed. He’s listed as a director on the old site but was nowhere to be found on the new one. “When I told my husband about the situation,” she recalled, “he was a bit surprised, but seemed willing to continue to trust in his friendship with the CEO.”

Eventually, though, she persuaded him to have a talk with the CEO about equity. It didn’t go well. Her husband is a programmer, not a negotiator, and the CEO seemed to have a well-prepared answer for every argument that the husband made. In the end, the husband – who played a huge part in the development of the company’s first game, which generated millions in profits – came home empty-handed. Feeling like he had wasted seven years of his youth working steadfastly for a company that had no loyalty to him, he sadly began updating his resume.

A familiar story

Unfortunately, that’s not as unusual a tale as one might hope. When the post circulated again earlier this month, another frustrated woman penned a response piece for Sina’s tech startup portal, telling a very similar tale. Her husband, a startup co-founder, was strung along for years, working long hours for a below-average pay with no equity agreement in place.

A startup workspace in Shanghai. Photo credit: Tech in Asia

“Trust your brothers” was the refrain at that company among early employees – and there was also a feeling that making those sorts of decisions wasn’t necessary. When the wife, a top-notch headhunter skeptical about the situation from the beginning, pressed her husband about equity, he told her that there was no need to bother with it when the company was still small. But years in, with the company far bigger and growing fast, he was still being promised by the CEO that equity would be dealt with “down the road” and that he wouldn’t go unrewarded.

The power of trust?