6 ms·

> Most founders' instincts seem to be to give too much equity to investors and not enough to employees. Is this wrong? Investors don't receive anything for the

by pdog 10y ago

> Most founders' instincts seem to be to give too much equity to investors and not enough to employees. Is this wrong? Investors don't receive anything for their capital but equity. Employees receive income, benefits, etc. that have to be factored into the equation.

anandkulkarni 10y ago
In the final calculation, employees are the ones who are toiling day-in and day-out for the company's well being – in a real way, the company's future depends on them more than the investors. It can be more valuable to have them invested long-term in the company's success, point for point, than an investor. Another way to think about it is like this: if an investor told you tomorrow they'd no longer contribute to the company, versus your first engineer, which would be more damaging? The investor's money is already in the bank, whereas the engineer will cost time and money to replace, as well as disrupting the ongoing development.
- jimmykennedy 10y ago
  "It's more valuable to have them invested long-term in the company's success." Why? A cash bonus of "If we meet this deadline you will receive $X" is going to increase my productivity much more than "you own 0.01% of an illiquid, unprofitable company". Startup equity is way too abstract for employees to affect their motivation. Peer pressure, mission, pride in work, cash bonuses / raises / promotions are infinitely more impactful.
  - firloop 10y ago
    Sure, the argument isn't that equity is the end-all to employee compensation. But early-stage startups often aren't able to to give (significant) cash bonuses, and more importantly, compensating an employee with equity means that 5 years down the line, you're more likely to have someone on the cap table that both contributed to past efforts that made the company successful and also cares about the company's future. I think in practice this preference makes more sense when you consider that most of the (non capital based) value that early-stage investors can provide applies mostly to early-stage companies.
  - Retric 10y ago
    It's not about having equity now. If you have a seed company that fails in two years then the equity equation is meaningless. However, if in two years things are going good, but it's not clear you are the next google then you really don't want to lose key employees and it's going to take more equity to keep them interested. On the other hand if in two years it looks like you will be the next google then getting more capital is easy and you really don't want to lose a key person.
- rqebmm 10y ago
  I'd argue the better analogy is "If you have a great idea, what's more important to get it to market: your first engineer or your first investor?" The next is always going to be "well, do I have enough money to pay my engineer?" This is why the investor holds all the cards and therefore gets the best deal up front. Without that up-front money there is no eventual business.
  - jacquesm 10y ago
    That's not true. You have the option to give that engineer a real slice of the cake instead of the misers share that's common. I've seen co-founders be labeled 'engineer #1' because they sat down 15 minutes after the first meeting where a company's founding was discussed. Non technical founders can - and do - use investors money to try to limit the number of co-founders so they get a larger share themselves. Technical founders are less likely to do this to non-technical co-founders. (But it does happen.)
    - softawre 10y ago
      > Technical founders are less likely to do this to non-technical co-founders. (But it does happen.) Technical people are so great, aren't they! No bias here.
      - jacquesm 10y ago
        It's not that they're 'so great' it's just that they are usually less business savvy and doing less 'jockeying for position'. They tend to not be in it for the money as much as they're in for the challenge which makes it relatively easy to take advantage of them. (Been there, done that, have several t-shirts to go with it and I promise it won't happen again but if I had known 20 years ago what I know now... never mind, hindsight is always perfect.)
tyre 10y ago
It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on its employees than its investors.
- idiot_stick 10y ago
  >Employees are the ones who put in the work to actually build the company. Company and work that, in most cases, wouldn't exist without a capital investment.
  - mianos 10y ago
    It may be the chicken or the egg, but, if you have some employee that can achieve something that others can't, he can go somewhere else and achieve the same. The money could be equally applied and it will not bring success. No money means failure but no employee means no chance of success, money or not.
  - nostrademons 10y ago
    I'd question that, actually. The vast majority of huge tech companies that you've heard of today - Microsoft, Apple, Google, Facebook, Amazon, EBay, AirBnB, Whatsapp, Snapchat, GitHub - managed to construct a working product without taking investment. Several others - DropBox, Stripe, Instagram, Slack - had only a relatively small seed or angel round before launching a product. Meanwhile the track record for companies that take a huge amount of investment before delivering a product - Theranos, Webvan, Go, Magic Leap, etc. - is pretty abysmal. YC and several other top-tier VCs recommend that you keep the startup as small as possible, oftentimes just the founding team, until you've built a product that's popular enough that you're swamped with demand. Then you can go and raise working capital to fund expansion and fuel growth, but not before. It's not true that the company wouldn't exist without the capital investment, though - it's actually pretty critical that the company does exist before raising capital.
  - 10y ago
nostrademons 10y ago
I think this is saying that founders often underestimate the variance that employees bring to their company's success, and overestimate the variance that an investment round brings. If you assume that employees are basically fungible and that $100K in salary will buy the same output regardless of who works for you and how motivated they are, then it makes sense to raise $10M rather than $2M, so you can hire 100 person-years of work rather than 20 person-years. VCs become the limiting factor. If you assume that there are wide varieties in employee output that stem from a.) hiring the right employees b.) into the right roles and c.) compensating them so that they're incentivized to do their best, then it becomes absolutely critical to attract those employees and motivate them. It is unlikely that you will attract these types of employees for a $100K/year salary. It is far more likely that you will attract them with a percent or two of equity that could be worth several million dollars. In my experience, the latter is a much closer description of reality than the former is. From the entrepreneur's perspective, what investors or employees "deserve" is irrelevant, what matters is how much of an effect they have on the ability to deliver a good product to a big market. Early employees are in the trenches with you every day; the difference between high effort and low effort from them can make or break the company. Investors give you money and often advice/introductions, but you are one of many investments in their portfolio; they are not going to give you high effort.
bbcbasic 10y ago
My understanding is that employees will be paid less than what they could earn elsewhere, so need to be compensated with some upside for that shortfall. If I were to cut your pay by $100k to join my company, would you say, ah OK but I am still receiving income & benefits, don't worry about it? If you have to leave your 9-5 to work for my 10-"late" for the same salary, would you want something extra for that, even if it is just a high-EV lotto ticket? Another argument, made in the article is that if you want to attract the best talent you need to make an attractive offer. Otherwise why wouldn't the people you want just go work for Google or another startup, or start their own?
CalChris 10y ago
Employees take a risk. First, they don't have to work for your startup. They could go to work for BigCo and have a secure paycheck. Second, they get options for common stock which vest over years. Generally that first year is at will.

by pdog 10y ago

anandkulkarni 10y ago

In the final calculation, employees are the ones who are toiling day-in and day-out for the company's well being – in a real way, the company's future depends on them more than the investors. It can be more valuable to have them invested long-term in the company's success, point for point, than an investor. Another way to think about it is like this: if an investor told you tomorrow they'd no longer contribute to the company, versus your first engineer, which would be more damaging? The investor's money is already in the bank, whereas the engineer will cost time and money to replace, as well as disrupting the ongoing development.

jimmykennedy 10y ago
"It's more valuable to have them invested long-term in the company's success." Why? A cash bonus of "If we meet this deadline you will receive $X" is going to increase my productivity much more than "you own 0.01% of an illiquid, unprofitable company". Startup equity is way too abstract for employees to affect their motivation. Peer pressure, mission, pride in work, cash bonuses / raises / promotions are infinitely more impactful.
- firloop 10y ago
  Sure, the argument isn't that equity is the end-all to employee compensation. But early-stage startups often aren't able to to give (significant) cash bonuses, and more importantly, compensating an employee with equity means that 5 years down the line, you're more likely to have someone on the cap table that both contributed to past efforts that made the company successful and also cares about the company's future. I think in practice this preference makes more sense when you consider that most of the (non capital based) value that early-stage investors can provide applies mostly to early-stage companies.
- Retric 10y ago
  It's not about having equity now. If you have a seed company that fails in two years then the equity equation is meaningless. However, if in two years things are going good, but it's not clear you are the next google then you really don't want to lose key employees and it's going to take more equity to keep them interested. On the other hand if in two years it looks like you will be the next google then getting more capital is easy and you really don't want to lose a key person.
rqebmm 10y ago
I'd argue the better analogy is "If you have a great idea, what's more important to get it to market: your first engineer or your first investor?" The next is always going to be "well, do I have enough money to pay my engineer?" This is why the investor holds all the cards and therefore gets the best deal up front. Without that up-front money there is no eventual business.
- jacquesm 10y ago
  That's not true. You have the option to give that engineer a real slice of the cake instead of the misers share that's common. I've seen co-founders be labeled 'engineer #1' because they sat down 15 minutes after the first meeting where a company's founding was discussed. Non technical founders can - and do - use investors money to try to limit the number of co-founders so they get a larger share themselves. Technical founders are less likely to do this to non-technical co-founders. (But it does happen.)
  - softawre 10y ago
    > Technical founders are less likely to do this to non-technical co-founders. (But it does happen.) Technical people are so great, aren't they! No bias here.
    - jacquesm 10y ago
      It's not that they're 'so great' it's just that they are usually less business savvy and doing less 'jockeying for position'. They tend to not be in it for the money as much as they're in for the challenge which makes it relatively easy to take advantage of them. (Been there, done that, have several t-shirts to go with it and I promise it won't happen again but if I had known 20 years ago what I know now... never mind, hindsight is always perfect.)

tyre 10y ago

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on its employees than its investors.

idiot_stick 10y ago
>Employees are the ones who put in the work to actually build the company. Company and work that, in most cases, wouldn't exist without a capital investment.
- mianos 10y ago
  It may be the chicken or the egg, but, if you have some employee that can achieve something that others can't, he can go somewhere else and achieve the same. The money could be equally applied and it will not bring success. No money means failure but no employee means no chance of success, money or not.
- nostrademons 10y ago
  I'd question that, actually. The vast majority of huge tech companies that you've heard of today - Microsoft, Apple, Google, Facebook, Amazon, EBay, AirBnB, Whatsapp, Snapchat, GitHub - managed to construct a working product without taking investment. Several others - DropBox, Stripe, Instagram, Slack - had only a relatively small seed or angel round before launching a product. Meanwhile the track record for companies that take a huge amount of investment before delivering a product - Theranos, Webvan, Go, Magic Leap, etc. - is pretty abysmal. YC and several other top-tier VCs recommend that you keep the startup as small as possible, oftentimes just the founding team, until you've built a product that's popular enough that you're swamped with demand. Then you can go and raise working capital to fund expansion and fuel growth, but not before. It's not true that the company wouldn't exist without the capital investment, though - it's actually pretty critical that the company does exist before raising capital.
- 10y ago

nostrademons 10y ago

I think this is saying that founders often underestimate the variance that employees bring to their company's success, and overestimate the variance that an investment round brings. If you assume that employees are basically fungible and that $100K in salary will buy the same output regardless of who works for you and how motivated they are, then it makes sense to raise $10M rather than $2M, so you can hire 100 person-years of work rather than 20 person-years. VCs become the limiting factor. If you assume that there are wide varieties in employee output that stem from a.) hiring the right employees b.) into the right roles and c.) compensating them so that they're incentivized to do their best, then it becomes absolutely critical to attract those employees and motivate them. It is unlikely that you will attract these types of employees for a $100K/year salary. It is far more likely that you will attract them with a percent or two of equity that could be worth several million dollars. In my experience, the latter is a much closer description of reality than the former is. From the entrepreneur's perspective, what investors or employees "deserve" is irrelevant, what matters is how much of an effect they have on the ability to deliver a good product to a big market. Early employees are in the trenches with you every day; the difference between high effort and low effort from them can make or break the company. Investors give you money and often advice/introductions, but you are one of many investments in their portfolio; they are not going to give you high effort.

bbcbasic 10y ago

My understanding is that employees will be paid less than what they could earn elsewhere, so need to be compensated with some upside for that shortfall. If I were to cut your pay by $100k to join my company, would you say, ah OK but I am still receiving income & benefits, don't worry about it? If you have to leave your 9-5 to work for my 10-"late" for the same salary, would you want something extra for that, even if it is just a high-EV lotto ticket? Another argument, made in the article is that if you want to attract the best talent you need to make an attractive offer. Otherwise why wouldn't the people you want just go work for Google or another startup, or start their own?

CalChris 10y ago

Employees take a risk. First, they don't have to work for your startup. They could go to work for BigCo and have a secure paycheck. Second, they get options for common stock which vest over years. Generally that first year is at will.