Lately, there’s been a steady drumbeat of accusations that on-demand startups are unfairly wringing profits out of independent contractors. The concern: no one is withholding their taxable wages for them, they aren’t being given health care, and they have almost none of the same protections as full-time employees. In fact, one of the only protections independent contractors are provided under federal law is from race discrimination. In 2008, California’s Fair Housing and Employment Act was amended to give independent contractors protection against sexual discrimination, but many states don’t even go that far.
Maybe it’s no wonder that, to deflect such criticisms, a growing number of on-demand management teams and investors have begun suggesting that a third classification of worker – one poised to enjoy both flexibility and greater worker protections – is around the corner.
During a panel that StrictlyVC moderated in May, Simon Rothman of Greylock Partners, whose bets include the food-delivery startup Sprig, told attendees, “I personally think the 1099 [tax classification] framework is broken. It existed in a world of monolithic, centralized corporations, not in a world of distributed companies, so I think there needs to be a third class of worker [and that we’ll eventually have one], though it will take a while.”
Longtime employment attorneys say not to count on it.
For more of this story, read on.
The “Fuzzy” Logic of Venture Partnerships
The gender discrimination and retaliation case of Ellen Pao versus Kleiner Perkins Caufield & Byers has enthralled Silicon Valley in recent weeks, with everyone now focusing on what a jury that’s set to begin deliberations will decide.
But one of the many, bigger questions the trial has raised is whether it will impact how venture capitalists nurture talent and groom junior people to become partners.
If it isn’t top of mind for many partnerships, it should be.
On the stand last week, Kleiner Perkins general partner Matt Murphy described the promotional path at the storied firm as “fuzzy,” explaining to jurors that when he’d come aboard in 1999, you “just weren’t going to become a partner. You stayed two years, then you went to an operating company.”
As Murphy and then-colleague Aileen Lee were promoted to more senior roles, a “fuzzy process” of promotion began to develop that led to less collegiality and more self-interested maneuvering at the firm, Murphy testified.
That murky process also played a starring role in Pao’s lawsuit, which is why Joseph Sellers, the head of the civil rights and employment practice group at Cohen Milstein in Washington, D.C., suggests partnerships adopt a more structured promotional path than many feature today.
Explains Sellers: “There are certain types of workplaces where the path to advancement isn’t as well defined as others, and in some people’s minds, that might look to provide some protection; with a poorly defined path, it’s harder to hold people accountable for decisions.” The reality, adds Sellers, is that “what might be legitimate grounds on which to deny somebody advancement could be perceived as being influenced by something impermissible.”
Asking venture firms to be more transparent about how they choose general partners is easier said than done, of course. When it comes to the promotional paths of most firms, it’s “part fraternity, part sorority rush,” notes Cliff Palefsky, a top employment and civil rights lawyer in San Francisco. “It’s always a question of: Who do you want to hang out with?”
Murphy told jurors last week that promotions at Kleiner depend on a “critical mass of partners within the firm who are saying, ‘We want this person to be promoted . . . There have to be enough people around the table who want this person to be a partner and to work with them for a long time.”
Given that partnerships typically last at least 10 years and involve shared economics, it’s understandable to a point, too. “There’s very much an are-you-like-me orientation that comes into play in a small partnership,” says Palefsky. “Who do you trust? Who do you go to battle with? Those are the kinds of things that sunk Ellen. No one trusted her.”
The irony is that Pao – as well as Trae Vassallo, another female partner who is no longer actively investing on behalf of the firm – have been revealed as big money makers for Kleiner, even if they didn’t quite fit in longer term.
If Pao had gotten her way, Kleiner would have backed Twitter years earlier than it did and made a far richer return. She also lobbied to invest in RPX, a company that later enjoyed a successful offering, and Climate Corp., a company that was acquired seven years after its founding for roughly 10 times what investors poured into it. (Kleiner invested in RPX; it passed on Climate Corp.)
Vassallo, meanwhile, played a key role in Kleiner’s investment in Nest Labs, which sold to Google for $3 billion last year. She also led the firm’s investment in Dropcam, the camera company that sold to Nest Labs for $550 million last year. (According to two sources, Dropcam liked Vassallo so much that Kleiner’s investment in the company was contingent on securing her as a board member.)
Says Palefsky: “One thing this trial highlighted is how men and women can be held to a different standard without people realizing it, and how you can be a successful venture capitalist without being an identical twin to the person who came before you.”
Helping startups with strategic decisions and recruiting is great, but “you can be great on the board of a company that’s failing,” he says. Ultimately, he says, “What matters is whether the fund goes up or down because of how well you can analyze a business. And there’s zero reason a man would be better than a woman in doing that.”