Not My Jam: Pandora Didn't Pay Employees for Two Years

By Mark Wilson, Esq. on April 28, 2015 | Last updated on March 21, 2019

In the frenzied environment of the Silicon Valley startup, employees join the company even though they're not sure when their paychecks will arrive, if ever. Many startups aren't even financially viable for a while (if ever).

But how do you explain not paying wages at the company's inception? If you're Pandora, you just don't pay them, and later claim you didn't know that was illegal.

We Just Plumb Forgot

According to Business Insider, Pandora co-founder Tim Westergren admitted at a San Francisco startup conference that, between 2002 and 2004, it didn't pay its 50 employees at all. This isn't your typical situation of management getting rich based on a clerical error, though. Westergren didn't get paid, either; in fact, he said, he "survived on maxed-out credit cards and sheer willpower."

That's all well and good, but Westergren claimed he didn't know he was breaking the law, which seems a little unlikely (you'd think a company in the music licensing business would have a lawyer or two at the ready). Once Pandora secured some of that sweet, sweet venture capital money in 2004, though, it was able to pay the bills -- including $2 million in back pay owed to those 50 people. All's well that ends well?

Of course, that was also after two lawsuits -- which is exactly what companies are staring into when they flat-out don't pay employees. Obviously, it's up to the finance department to make sure that there's enough operating cash to pay bills, including employees salaries. "We don't have enough money" isn't an excuse.

Of course, that probably won't stop some startups from desperately trying to reclassify employees as independent contractors, temps, or even interns. That might hold off the wolves for a while, but in the end, intentional employee misclassification will similarly end up in lawsuits and a visit from the state or federal employment commission and every GC worth her own salary knows it.

Decisions, Decisions

So what's a cash-strapped startup to do? It does take money to make money, and while Pandora was ultimately lucky enough to find success, the halls of posterity are littered with the names of startups that utterly failed, leaving unpaid employees to scrounge what they can from the shell of a dead company.

If you can, Mr. or Ms., consider alternative arrangements, like deferred compensation plans or compensation in the form of equity, like stock options. Sure, the "entrepreneur" has the ideas, but it's the employees who make those ideas into real things. Don't forget: Labor is also a factor of production.

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