Even the receptionist is getting rich while the Internet startup’s stock price soars, and every employee, compensated largely with options, is genuinely excited and working as a team. Life is beautiful.

Then the bottom drops out. Options are suddenly worthless, with little hope of value resurfacing any time soon. Life is less grand, and fantasies of early retirement fade into anxiety about getting the bills paid. Some employees jump ship, fleeing back to the safety of established institutional employers. And sometimes they don’t have a choice but to go elsewhere if the startup shuts down altogether, as Digital Entertainment Network did last week.

That’s the scenario that has gripped a number of local dot-coms over the past few weeks, coming as something of a shock to those who weren’t prepared for it.

“These businesses do shift directions, and if you’re not going in with your eyes wide open about the fact it’s a fickle space, it’s going to be tough when your stock options go underwater,” said Jennifer Happillon, director of the Internet, e-commerce and digital commerce practice at recruiting firm C4 Partners ITP Worldwide in Santa Monica.

While ship-jumping at L.A. startups has become more frequent in recent weeks, it is far from an epidemic, according to several industry observers.

“People are joining these companies because they believe they represent real business opportunities and not just a market-swing exercise,” said Happillon.

Actually, even when the gravy is flowing, the ups and downs are not for everyone.

Case study

Fledgling TrafficStation Inc. represents a textbook example of the kind of technology startup that has lured employees in an ultra-tight labor market by offering stock options. Last year at this time, the company roster boasted all of six employees. Now the figure stands at 160 and growing. Yet even TrafficStation, a downtown L.A.-based provider of personalized traffic and traveler digital information, has had a few defections.

“You’re always going to lose some people,” said President and CEO Geoff Halstead. “We have a pretty good success where retention is concerned, but there is always a process of self-selection going on. Employees are assessing the element of risk in their life against being a part of something with potential for growth.”

Or as Happillon puts its, “Entrepreneurs are always going to do it, and fence-sitters will think twice.”

But as the financial seas have gotten choppier, more and more “entrepreneurs” are deciding they’d rather go back to fence-sitting, at least for awhile.

“What we’re seeing is a loosening of supply as individuals are realizing that perhaps (working largely for stock-option compensation) isn’t the best place to be in terms of long-term gain,” said Timothy P. Smith, managing director of recruiting firm Stanton Chase Venture Resources in Los Angeles. “The top executives in companies that have seen market values decline significantly have seen their net worth decline accordingly, and therefore have become more receptive to entertaining alternative career choices.”

That may be fine for top executives, whose skills are in high demand, but what about that startup from which they’re bolting? How does it keep the ship afloat? “It all boils down to leadership,” said Smith. “That component is critical, especially in times of trouble.”

Happillon concurred. “In terms of maintaining morale, communications need to stay open and senior management needs to be candid regarding future plans to keep employees excited about what they’re still building.”

Maintaining morale

Amid such turmoil, a focused, upbeat business environment can suddenly become more important to employees than any equity stake they’ve been promised. “You can’t solicit someone’s interest if they see there’s no business there,” Happillon said.

And the same goes for attracting new top-level talent to the startup.

“You have to know how to pitch it to a savvy executive who knows how to ask the right questions,” she said.

And what are those questions? Jane F. Lee, an executive vice president at TrafficStation, proffers a few: “What’s the financial mode? When are you going to be profitable? Can the technology do what you say it’s going to do?”

And recruiters who are placing employees at these high-risk startups should engage in some due diligence of their own.

“The recruiter needs to be more perceptive in its evaluation of an executive vis-a-vis their personal performance, the stock market and the company’s overall business plan,” said Smith.

Talented employees with New Economy skills will, of course, have plenty of employment options. They can roll the dice on a startup and get paid largely in options, and then if the startup hits the skids or starts heading for the rocks they can jump over to a more established company that compensates employees with cash.

The challenge for employers is to stay abreast of what employees are looking for, in terms of compensation, and be prepared to offer it.

“Companies and recruiters will need to design compensation packages to draw and retain that talent,” Smith said.

While some employees have recently begun turning their noses up at options-offering startups, a steady stream of Angelenos continues to flow into high-risk fledglings. The dream of quick riches and early retirement remains strong in L.A., even though many of those dreams will never materialize.