4 ms·

Ask YC: Should I work for a startup?

14 points by bobp 19y ago

Here's my dilemma: there's a relatively young startup in the Valley that I think would be a great place to work. I really like the people, the technology, the product and the market. I'm sure I'd have a great time working there and that I would make lasting bonds with my colleagues. Here's the problem: equity. The offer is just too low: a fraction of a percent. For me to make decent money from this startup (by decent I don't even mean enough to retire, certainly not in the Valley, which would require a few millions) it would have to have an exit of hundreds of millions if not over a billion dollars. These days, very few companies achieve this. I doubt this startup will. It seems like although the attitudes towards funding and operating startups have changed significantly since the .com bust, the attitude towards equity distribution to employees is still rooted in the delusional .com days. It's just not worth it for a good hacker to join someone else's startup for such little ownership stake. As much as I would like to join them, it just makes much more sense for me to start my own company so I'll have a better chance at cashing out with a reasonable amount of money. This brings me to the startup risk paradox: working at a startup is riskier for employees than for founders. A founder will do well for himself even if the startup has a modest exit. An employee will only do well at the much less likely event of a fantastic (hunderds of millions) exit. If you're a talented hacker, it's less risky to found a startup than to join one. Sure, you may fail, but if that happens you can always get a job and then try again. Your thoughts are appreciated.

cperciva 19y ago
I think there are two points you haven't considered. First, for startups which take VC, a "modest exit" can mean that the founders get nothing. The range of outcomes where founders become fabulously wealthy but early employees do not is fairly narrow. Second, most founders start off by not taking a salary. Deciding to be an employee instead of founding your own startup means implicitly deciding to take more salary up-front and less of a chance of holding valuable stock at the end -- put another way, reducing your risk. That all said, whether "a fraction of a percent" equity is reasonable is an open question -- it depends on how large the company already is, how large your salary is, et cetera. You can always negotiate.
- johnrob 19y ago
  (this is slightly off topic) I'm not crazy about how equity gets distribution in start-ups. Long story short, founders are compensated for work without salary. The problem is that stock should go to whoever contributes most to the company. Just because the founders work for free, doesn't mean they contribute the most critical work. Here is an extreme example to prove a point: I write a business plan and successfully raise money from investors. Then I hire people to do all the work, pay them salary, and give them much less stock than I take. I have the largest employee stake, but haven't done any of the 'real' work (unless you consider fund raising to be the real work). This example is absurd, but it's useful to my argument: the founders get their stock by working for free, not necessarily for creating the critical foundation of the business. For some reason, this has been bothering me lately. It seems more reasonable to have a system where ownership is determined by contribution... otherwise there will always be the risk of the opposite: contribution being determined by ownership.
  - anamax 19y ago
    > Here is an extreme example to prove a point: I write a business plan and successfully raise money from investors. Then I hire people to do all the work, pay them salary, and give them much less stock than I take. I have the largest employee stake, but haven't done any of the 'real' work (unless you consider fund raising to be the real work). Since I've actually done both "founding engineering" and "fundraising", I think that I'm qualified to claim that fundraising is real work. Note that the fundraising created a structure for the engineering to take place. If the engineers feel that the structure is of no value, why did they show up? Besides, the most likely outcome for fundraising is 0. Founding engineering is almost always compensated. The extra payoff is, in part, compensation for the extra risk. Don't confuse effort or time with value. Or rather, if you do, make sure that the janitor makes more than you do.
  - dhouston 19y ago
    if in that 'extreme example' you're putting the wheels in motion to create that value (i.e. creating a business out of nothing that otherwise wouldn't have existed), you arguably deserve the equity. turns out it's usually not that simple in practice, and most successful founders have to work their asses off and take significant risk. that said, no one's stopping you from starting something and dishing out equity however you want :)
dkokelley 19y ago
We need to know the answers to a few questions: Do you know how the equity is currently divided? Is it 40-40 for the two founders (assuming only 2) and 20% left over? Have they taken any equity funding yet? Is it just starting out, or would you be employee number 13? Knowing what they have available to offer, where they are along the start-exit line, and their current equity position will give you a good idea of how to negotiate. Another angle, will you be taking a salary? If you're making a modest salary then it is perfectly acceptable to be offered only a small fraction of equity. You may very well be making more than the founders are. If you want more equity in the company, offer to forgo a salary or take only what the founders are taking. working at a startup is riskier for employees than for founders. I disagree. The founders take the most risk, and get the most reward because of this. Founders typically make millions or $0. Employees don't typically make millions, but it's against the law for them to make 0. They earn a regular salary, which is less than the millions the founders might make, but they earn it consistently. There's a trade off.
- bobp 19y ago
  I'm not sure how the equity is currently divided, but these are very good questions, thanks. The company had an A round and it has about 10-15 employees. I should have said that founders are exposed to greater risk in the very early days of the company, but afterwards the chance of meaningful financial payoff for employees becomes much smaller. Most startups won't be the next Google or Ebay, and I think they should take that into consideration when incenting their employees with stock options.
  - dkokelley 19y ago
    If the company already has about 10-15 employees, you're not looking at much equity left, assuming that the other employees get the same you do. If 2 founders and 10 employees got equal amounts, you would be looking at 8.3% per person, and if there were 17 people total (15 + 2 founders, not including you) that puts the company at 5.9% per person. This is just a starting point, You have to assume that the founders have the lion's share of the equity, and that the amount of equity per additional employee trends downward the later the employee joined. It could be that the company only has 5% equity left for future employees, and so they have to offer only a small percentage of the equity. In any case, try to see what they have available, and again, offer to take only a token salary if anything in return for a greater equity share. Good luck!
csmajorfive 19y ago
Well if you're getting paid a salary, it's not the case that it's riskier for you. You get to enjoy some of the benefits of a startup (culture, equity, etc) without having to go through the period where you're living on credit card debt and ramen.
- bobp 19y ago
  It's risky in the sense that the chance of a meaningful payoff is much smaller. I don't mind living on ramen for a while if it made the "dream" tangible. If the difference between a founder and an employee were, say, 5x to 10x the equity, being an employee may make sense, but if it's 100x-400x range it just makes the employee stock options look pathetic.
- marketer 19y ago
  That's true, but culture, equity, are not tangible. The hours and the effort are very tangible. Startup employees put in a lot of effort, in some cases as much as the founders, depending on the culture. There are few circimstances where you'd want to put in such an effort for a negligible expected reward.
bprater 19y ago
If you are hunting the big exit, go forth and co-found a company. (And enjoy the pork-and-beans while the engineers are getting cut nice fat checks.) Equity is rarely going to pay off for you unless you are fortunate enough to hit the Microsoft or Google jackpot. You might be able to buy a nice car, but don't expect a place in the Bahamas. Work there if you really love the people or the idea. Enjoy your monthly paycheck. But if you are in the game for the big payoff, you'll have to strike out on your own.
jojoleflaire 19y ago
What percentage does it take to get 2x your base salary in 4 years max (accounting for multiple rounds and the subsequent dilution)? Adjust base salary until it fits your goals. Remember: early employees never get rich, except for the really exceptional cases in which even the dock workers get a huge windfall.
marketer 19y ago
If you're not a co-founder, it's difficult to rich off of stock options in. It happens once in a while (ebay, paypal, etc.), but not very often. How many employees does it have, and what's a recent valuation? If it has something like more than 10 employees, a valuation in the 10+ millions, and it's in a great market, it could be reasonable. Another thing to consider is the overall experience. Would you be learning technologies that are unique, and valuable in the future? Who is involved in this startup, and how valuable are the connections you could make? For instance, if the startup makes ROR apps, you could probably spend your time moonlighting and become competent in the technology yourself.
staunch 19y ago
I'd say you're just too late to that particular party. Go start your own or find one that's really early (so you can be a 2nd tier founder). Those are the only two options I consider personally.
comatose_kid 19y ago
Working at a startup is not more risky for employees than for founders. Consider that the startup you are applying to already has funding (I'm assuming it does, since it sounds like there is already a team). The founders started with nothing but an idea, probably invested their free time to implement v0 and then sold it well enough to attract funding. They could have failed at any time, and would have had nothing except experience and pissed off investors to show for it, not to mention the loss of any personal investment in the firm. You on the other hand will draw a salary from day 1, and you already have a better idea of the company's trajectory than the founders did when they conceived of the idea. Even if the company goes under, you will have earned $X in addition to the experience gained. And you have the luxury of not having to worry about how to get funding, sign deals, etc. If you don't like the risk/reward, the best way to change the equation is to become a founder, or build/lead something so amazing that your rep alone compels startups to offer you a significant percentage.
webwright 19y ago
"working at a startup is riskier for employees than for founders." That (honestly) is ridiculous. If the founder is taking the standard path, they are going months or years without salaries, oftentimes accumulating debt to do so. When they get a little slice of angel funding, they usually pay themselves pennies so their early hires can get non-insulting salaries. You seem to assume that a "cash-out" is a foregone conclusion. 99% of startups go belly up. No payout for the founders, "modest" or otherwise. A fraction of a percent for an engineer is not uncommon. I'd need to know the company size, how far along they are, what sort of salary they are offering, and how senior YOU are to know if it's unreasonable. But for a funded startup offering a non-insulting salary to a relatively junior person, it's common. And (honestly) plenty fair. What, exactly, are YOU risking as an employee? The 10 minutes it'll take you to go find a new job if the startup flops? Do you know what the founders have on the table? If not, you could probably ask them. If you want more equity, offer to work for free or ridiculously cheap. Many smart founders will happily trade a little more equity to avoid a monster salary.
- bobp 19y ago
  I guess it depends on your definition of risk. The definition I was going by is the chance of getting a decent payout after spending 4 years of your life working somewhere. If you work for someone else's startup, especially for a tiny amount of equity, you risk forgoing the opportunity to enjoy the financial benefits of a successful exit after 4 years of hard work. A founder can also get a job in 10 minutes if the startup flops. The additional sacrifice (not necessarily risk) the founders take is living a few months without salary. This sacrifice obviously merits a higher portion of the equity than an employee -- maybe even much higher -- but as an employee you have to wonder whether the tiny equity you'll get is worth it.
  - alaskamiller 19y ago
    So I'm confused; are you looking to be a partner in the company or an employee? An employee is paid however much he is willing to take off the table.
  - nostrademons 19y ago
secorp 19y ago
Startup pros: * great people, unique culture * influence a wide range of issues from tech to office location * great experience for founding a company later Note that I didn't include "huge potential financial gain" in that list. A non-founder at a startup really has to value the experience because most likely there won't be a huge financial win. That doesn't mean that you shouldn't try to negotiate a fair compensation package, but really you are using the opportunity to gain skills and experience to use when founding your own company where you will have more ownership and potential financial gain. If you don't believe that the founders take more risk than the employees now, you will once you found your own company :) If financial gain is your main goal, you may want to take a serious look at getting into the financing side. This will take a different approach, but good analytical skills plus good networking skills are in high demand. Alternatively, you could go down a more corporate path and aim for senior management at a good firm. I'm not necessarily recommending these paths, but it's worth exploring the alternatives so that you can really appreciate the (in my opinion) extraordinary benefits and privileges of working at a startup.
Spyckie 19y ago
For your situation - you are, ultimately, selling yourself not just as an employee but as a package of value contributed to the company. Now, if you are valuable - that means, if you can provide experience, work or code to the company that will drive it forward that not many other people can provide, then yes, you should consider asking for more equity. Really, its all about selling. You have some goods or services. They want/need it. Is the current deal fair in both parties' eyes? Founders will say all sorts of things like "I bear all the risk", "I've been here since the beginning", and "I've contributed the most work", and many of these things will be true. However, you have cards to play like, "employees need compensation for their efforts", "good hackers are rare" and "I can add value to your company" (we assume you can). There's an argument to be had here about how much employee should get, but really, its all about how you negotiate. You have to show them why you think the deal is unfair to you, and offer up one that you think is more fair to both parties. If you like the deal, just take it. If you don't like the deal enough to take it, offer up your own, and if they reject it, you weren't going to take the original deal anyways. But I will admit that like everyone else here has said, the negotiation here is skewed heavily towards the founders favor - still try to get what you can.
alaskamiller 19y ago
I'm not sure why you think working at one startup is going to be the ultimate path to salvation. Some people jump in and out of multiple startups.
geebee 19y ago
This depends on the situation. There are times when an "employee" is really a founder, but the founders don't want to admit this. Even if there is a salary, the financial situation may be very unstable (ie., making payroll may be an issue). This is often the case for very early employees, and seems to happen most when non-technical founders are hiring their first progammer. In this case, I think the founders should really be either bringing on a technical person as a founder or paying a contractor. It's a sign of a pretty clueless bunch of managers, either way. The other situation (which I am in right now) is when you have a fully functioning "startup". The business may not be cash flow positive, but it's been around for a while, has a stable funding base, a product, and probably some customers. In this case, a very small bit of equity is reasonable, because the employee is really working for a salary, plus a chance at a nice payout (maybe up to a mil, but no more than that). My advice is that you evaluate the company - they need to be in category 2 for this offer to make sense. By the way, I agree with you that the risk can be "greater" in some situations for the employee than for the founders. The founders have more control over the exit than the employees do, and they'll see trouble coming from much further out.
brentg 19y ago
Bob, I understand your conundrum. I was in the very same position. I would suggest doing your own startup. Also, on the same topic, I would like to discuss with you the potential for a possible partnership between you and I on a venture. brent.griffith AT gmail [.] com if you're interested. Let's see if our skills are complementary.

I think the chance of a "decent payout after spending 4 years of your life" is smaller than you expect, for both founders and employees. I thought/think much the same as you, which is why I'm founding my own startup after working for 3 years at 2 other ones. I had similar equity offers as you - 0.1% at one startup, none at the second (and an offer of 0.02% at a third that I turned down). I used to think that employees were insane for taking a straight salary instead of a shot at a big payout. After 5 months working full-time on my own startup with no salary, I'm not entirely sure. Obviously I think that on-balance the startup bargain is more appealing, else I'd go get a job, but I also think the scales are much more even than I'd initial thought. If you do take a job at the startup, take it to learn, not to get rich. You won't get rich. 80-90% of startups fail outright and nobody gets anything, other than whatever venture money was paid out in salaries. If it does succeed, you won't get rich with an employee's option grant, unless the startup really hits it big (like, Google or Microsoft-sized). One of my coworkers worked at a startup that was bought for $42M - he ended up with $3000. I do know someone else that ended up with a multi-million-$ payout as employee #35, but she was a VP and the company in question was Stratus, which momentarily had a billion-$ market cap. She ended up losing much of it when Stratus stock crashed anyway. If you do go the founder route, do it for meaning and not for money. It has to be something you'd want to do anyways, regardless of whether there's a huge payout attached. Because from 5 months in, that huge payout looks pretty remote. (I wish I'd paid more attention to webwright's advice on tractability, in another comment thread.) On a side note, I always wondered why some startups are so stingy with equity. If you give out big-company equity awards, you get big-company effort. And if the people who are actually doing the work are putting in big-company effort levels, how do you expect to catch the big companies? The conclusion I reached is that the startup should have product-market fit before hiring people, so that success is just a matter of crossing Ts and dotting Is, but neither of the startups I've worked at were at that point. (And sure enough, one failed outright and the other is sorta walking-dead: profitable but not growing, with a pretty narrow customer base.)