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As a former startup founder, I tend to agree that most startups are low-balling early employees. These employees over-value their stock by imagining what it wou

As a former startup founder, I tend to agree that most startups are low-balling early employees. These employees over-value their stock by imagining what it would be worth if the company reaches $1B valuation. It really is a lottery ticket. But in my opinion, the answer is more pay, not more equity. Employees should get market comp, period. Doesn't matter how early-stage the startup is. If a founder can't afford employees at market rate, they shouldn't be hiring yet. They could perhaps offer to take people on as co-founders -- with an appropriately equal share. People looking to join early-stage startups as employees should be extremely skeptical of equity. Obviously, you want to take some. But if a small chance of getting super-rich is your goal, you should start your own startup. If you are going to make bets, bet on yourself, not on someone else, because you know yourself much better than you know anyone else, and wise bets are all about having information no one else has. Yes, non-founding early-stage employees can have a big impact on a company, but they are still beholden to the founders -- if something goes wrong, they can fire you but you can't fire them. Making a big bet while letting someone else hold the cards is just too risky. Instead, demand market comp. Do not join a startup that won't offer you market comp. It's not worth it.

rgossiaux 8y ago
I don't quite understand. On the one hand you're saying that early employees should "demand market comp" and on the other you're saying that equity basically doesn't matter (and if you feel this way, it doesn't really make any sense to be joining a startup anyway). Are you conflating "compensation" with "salary"? "Market comp" for a good engineer with several years of experience in the Bay Area is something like 250k - 350k at a Google or Facebook (with some variation in both directions here). It's not realistic, nor consistent with the market, for an early-stage startup to pay people this much in cash. Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. If their expected earnings are less than this, then more equity is absolutely a good solution.
- tim_sw 8y ago
  250-350k is low for Google and FB. It's more like 400-500k if you are senior, 500-700k if you are staff. This is including RSUs
  - dunpeal 8y ago
    Indeed, and even well-funded startups can't afford to burn $400k on a single engineer. They basically have to give out generous equity to compete, but they and the VCs would rather be greedy and dole out fractions of percents under the cynical misleading pitch that these scraps will be worth millions when the startup exits for billions. To their credit, This scam did work for a while, shortly after a whole lot of early employees really did make millions on generous equity grants at early startups like Google. Being an "early employee" means nothing now. You get the token 0.01% bottom-preference shares that will net you 0 in almost every imaginable scenario, and somehow this is supposed to cover the 200-300k/yr difference you'd get at a profitable established company.
  - gregcrv 8y ago
    How do you explain these numbers? http://www.h1bdata.info/index.php?em=&job=Senior+Software+Engineer&city=&year=2018 http://www.h1bdata.info/index.php?em=&job=Senior+Software+En...
    - kentonv 8y ago
      Those are not Google and not Silicon Valley. Try: http://www.h1bdata.info/index.php?em=Google&job=Staff+Software+Engineer&city=MOUNTAIN+VIEW&year=2018 http://www.h1bdata.info/index.php?em=Google&job=Staff+Softwa... And keep in mind that base salary (what's reported on that page) is usually about half of total compensation. (Bonus and stock being the other half.) Also this appears to be the H1B database. I'm not sure how H1B salaries compare to the overall average.
      - dunpeal 8y ago
        > I'm not sure how H1B salaries compare to the overall average. H1B salaries are typically lower than average. Why do you think companies spend millions lobbying for more H1Bs? To pay them more than average? :-) Also, keep in mind Google only has to disclose base salaries for these H1Bs. For a staff engineer, most of the total comp would be in bonus pay and especially RSUs. They can easily be making $400k or more through those means.
- kentonv 8y ago
  > Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. That's the joke! Nobody comes remotely close to offering enough equity that their total comp is equivalent! Imagine a company that just raised a $1M seed round on convertibles at a $6M valuation cap. Now say they offer an "extremely generous" 2% equity package to their first employee. What is that 2% worth? Well, the investors think that preferred shares in that quantity would be worth $120k. Of course, equity vests over four years. So your equity comp is... $30k/year. If it were preferred shares. But it's not, it's common shares. So it's worth even less. You'd need to offer more like 10% to claim you are matching the RSUs people are getting at Google or Facebook. But at that point, you might as well call the person a co-founder. And maybe that's in fact the answer: add co-founders, not employees. But this isn't what people are doing today. Instead they're convincing employees to take sub-market pay and sub-market equity to take a stressful job with almost no benefits.
  - rgossiaux 8y ago
    Yes, I mostly agree. There's one nuance that I've been thinking about lately that I haven't seen anyone ever point out before, which is that high volatility will make options worth more than they are on paper. Here's a thought experiment: imagine that there are two employers on the market. One will always pay 200k/yr guaranteed and you can choose to work for them at any time for this wage. The other pays 100k/yr plus one Coconut per year, and Coconuts are currently worth 100k each. So far these are equivalent monetarily. But now let's add the stipulation that after one year, the price of coconuts has a 50% chance of going to 0 and a 50% chance of going to 200k each. Which would you choose? The expected value of each of these job offers is still equivalent (after 4 years of working at each, you'll have 800k in expectation). But you should definitely take the second one. Why? Because after one year, if coconuts drop to 0, you can just quit and join the first company. Then you have a 50% chance of 100 + 200 + 200 + 200 (coconuts to 0) and a 50% chance of 300 + 300 + 300 + 300 (coconuts to 200) which comes out to 950k, which is better than sticking with either company alone. This thought experiment fascinates me because it clearly shows the extra value that up-front stock grants have. The point is that you have some protection from downsides in the form of switching jobs, but no similar cap on the upsides, and the higher the volatility of the stock the more value this provides. I'm not sure what the numbers look like when you view them through this lens, but it does mean that an equity grant of 2% of a 6M company should trade off for more than 30k/yr.
- Eridrus 8y ago
  > Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. This would still be underpaying people for a few reasons: expectations are not risk-adjusted, it also doesn't take into account the timeline you get paid on, i.e. the ROI you would get investing your Google salary in an index fund and taxes make getting paid a regular amount over time more valuable than getting a large startup check. Maybe you were taking these factors into account, but most startup equity offers are massive low balls.
- s2g 8y ago
  > in expectation earn at least the same as they would at a public company No, it should be multiples. Otherwise why is the employee taking on that risk?
  - rgossiaux 8y ago
    I don't see why this follows. I said "in expectation". So some % of the time it's going to be 0 or thereabouts and some % of the time will be much higher. The best case scenario needs to be multiples in order to make the average work out, but I don't see any reason the average case needs to be.
dunpeal 8y ago
> If a founder can't afford employees at market rate, they shouldn't be hiring yet. That's a little bit too strict, and as such is not a position founders are likely to accept. Sometimes they need employees before they can pay market rate, and market rate is pretty steep for a senior engineer in the Bay, for example, and most other areas startups are heavily recruiting. It's reasonable to offer generous equity for early employees willing to take the risk. What does need to stop is the toxic culture of giving out 0.01% even to earliest employees (engineer number less than 10, often less the 5) with the cynical fake-stardust pitch that "this will be worth tens of millions since we're definitely exiting at $1bn+". As you mentioned, this culture of deceit has become commonplace and it's poisoning the well of future employees. You can witness its corrosive effect throughout this comment thread. Give out substantial equity to those early engineers who take risk. Give them a realistic estimate of the risk they're taking, and the value they can get. If they take it, it's their prerogative.
- kentonv 8y ago
  > Sometimes they need employees before they can pay market rate, But you don't get to have something just because you need it. That's not how it works. You need to raise more money, so that you can afford to pay the employees. It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept. > giving out 0.01% even to earliest employees I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?) But if you go based on the valuation paid by the investors, then even 1% is a laughably low offer during the seed stage.
  - dunpeal 8y ago
    > It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept. Which is why I'm saying they should be offered a deal that investors would accept. Demanding everyone pay market rate is just unrealistic. Never going to happen. I'm proposing a realistic, possible change. > I hope that's an exaggeration and no one actually goes that low. First ad I clicked on from Angel List front page: https://angel.co/everlane/jobs https://angel.co/everlane/jobs $130k salary and 0.01% equity. But that's OK, I'm sure their CEO will be happy to tell you about their surefire $Xbn exit. Last I checked Angel List, 0.01% equity was quite common, even for early engineers at very early stage startups. It almost always goes hand in hand with blatant lies about the certain $Xbn exit.
kinganurag 8y ago
> If a founder can't afford employees at market rate, they shouldn't be hiring yet. They could perhaps offer to take people on as co-founders -- with an appropriately equal share. Brother, I have worked with both startup & MNC's and i can understand what you are trying to say but it is a bit harsh to say that if a founder can't afford employees at market rate, they shouldn't be hiring. Some part of me says you are right but other part says that some employee should have some faith. If I look from employees perspective its safer/more rewarding/less riskier to join as co-founder then getting market rate. I believe somewhere faith also counts :)
- hanniabu 8y ago
  Not sure how you're viewing getting paid less as safer and less risky. Also, the parent is saying the issue is when an early employee is not considered a founder and isn't getting paid market rate. That's the downside of each of those points - no/little equity and no/little pay
- raz32dust 8y ago
  Faith is cool. But it needs to flow both ways. If you have faith in the person, make them a co-founder and give correspondingly respectable equity.
- jonbarker 8y ago
  I would say the 'market rate' for the big tech cos cannot be applied to the financial analysis of hiring in startups because most startups have cash burn, and big tech is profitable. If you somehow negotiate a startup to pay you a google like salary you probably won't have much fun because you will be viewed as an even riskier hire than you were to begin with. There will be even more pressure to perform than there already was.
angersock 8y ago
Frankly, the early employees often build more of the company and its success than the founders do. They should be rewarded proportionate to the growth they create and catalyze.

rgossiaux 8y ago

I don't quite understand. On the one hand you're saying that early employees should "demand market comp" and on the other you're saying that equity basically doesn't matter (and if you feel this way, it doesn't really make any sense to be joining a startup anyway). Are you conflating "compensation" with "salary"? "Market comp" for a good engineer with several years of experience in the Bay Area is something like 250k - 350k at a Google or Facebook (with some variation in both directions here). It's not realistic, nor consistent with the market, for an early-stage startup to pay people this much in cash. Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. If their expected earnings are less than this, then more equity is absolutely a good solution.

tim_sw 8y ago
250-350k is low for Google and FB. It's more like 400-500k if you are senior, 500-700k if you are staff. This is including RSUs
- dunpeal 8y ago
  Indeed, and even well-funded startups can't afford to burn $400k on a single engineer. They basically have to give out generous equity to compete, but they and the VCs would rather be greedy and dole out fractions of percents under the cynical misleading pitch that these scraps will be worth millions when the startup exits for billions. To their credit, This scam did work for a while, shortly after a whole lot of early employees really did make millions on generous equity grants at early startups like Google. Being an "early employee" means nothing now. You get the token 0.01% bottom-preference shares that will net you 0 in almost every imaginable scenario, and somehow this is supposed to cover the 200-300k/yr difference you'd get at a profitable established company.
- gregcrv 8y ago
  How do you explain these numbers? http://www.h1bdata.info/index.php?em=&job=Senior+Software+Engineer&city=&year=2018 http://www.h1bdata.info/index.php?em=&job=Senior+Software+En...
  - kentonv 8y ago
    Those are not Google and not Silicon Valley. Try: http://www.h1bdata.info/index.php?em=Google&job=Staff+Software+Engineer&city=MOUNTAIN+VIEW&year=2018 http://www.h1bdata.info/index.php?em=Google&job=Staff+Softwa... And keep in mind that base salary (what's reported on that page) is usually about half of total compensation. (Bonus and stock being the other half.) Also this appears to be the H1B database. I'm not sure how H1B salaries compare to the overall average.
    - dunpeal 8y ago
      > I'm not sure how H1B salaries compare to the overall average. H1B salaries are typically lower than average. Why do you think companies spend millions lobbying for more H1Bs? To pay them more than average? :-) Also, keep in mind Google only has to disclose base salaries for these H1Bs. For a staff engineer, most of the total comp would be in bonus pay and especially RSUs. They can easily be making $400k or more through those means.
kentonv 8y ago
> Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. That's the joke! Nobody comes remotely close to offering enough equity that their total comp is equivalent! Imagine a company that just raised a $1M seed round on convertibles at a $6M valuation cap. Now say they offer an "extremely generous" 2% equity package to their first employee. What is that 2% worth? Well, the investors think that preferred shares in that quantity would be worth $120k. Of course, equity vests over four years. So your equity comp is... $30k/year. If it were preferred shares. But it's not, it's common shares. So it's worth even less. You'd need to offer more like 10% to claim you are matching the RSUs people are getting at Google or Facebook. But at that point, you might as well call the person a co-founder. And maybe that's in fact the answer: add co-founders, not employees. But this isn't what people are doing today. Instead they're convincing employees to take sub-market pay and sub-market equity to take a stressful job with almost no benefits.
- rgossiaux 8y ago
  Yes, I mostly agree. There's one nuance that I've been thinking about lately that I haven't seen anyone ever point out before, which is that high volatility will make options worth more than they are on paper. Here's a thought experiment: imagine that there are two employers on the market. One will always pay 200k/yr guaranteed and you can choose to work for them at any time for this wage. The other pays 100k/yr plus one Coconut per year, and Coconuts are currently worth 100k each. So far these are equivalent monetarily. But now let's add the stipulation that after one year, the price of coconuts has a 50% chance of going to 0 and a 50% chance of going to 200k each. Which would you choose? The expected value of each of these job offers is still equivalent (after 4 years of working at each, you'll have 800k in expectation). But you should definitely take the second one. Why? Because after one year, if coconuts drop to 0, you can just quit and join the first company. Then you have a 50% chance of 100 + 200 + 200 + 200 (coconuts to 0) and a 50% chance of 300 + 300 + 300 + 300 (coconuts to 200) which comes out to 950k, which is better than sticking with either company alone. This thought experiment fascinates me because it clearly shows the extra value that up-front stock grants have. The point is that you have some protection from downsides in the form of switching jobs, but no similar cap on the upsides, and the higher the volatility of the stock the more value this provides. I'm not sure what the numbers look like when you view them through this lens, but it does mean that an equity grant of 2% of a 6M company should trade off for more than 30k/yr.
Eridrus 8y ago
> Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. This would still be underpaying people for a few reasons: expectations are not risk-adjusted, it also doesn't take into account the timeline you get paid on, i.e. the ROI you would get investing your Google salary in an index fund and taxes make getting paid a regular amount over time more valuable than getting a large startup check. Maybe you were taking these factors into account, but most startup equity offers are massive low balls.
s2g 8y ago
> in expectation earn at least the same as they would at a public company No, it should be multiples. Otherwise why is the employee taking on that risk?
- rgossiaux 8y ago
  I don't see why this follows. I said "in expectation". So some % of the time it's going to be 0 or thereabouts and some % of the time will be much higher. The best case scenario needs to be multiples in order to make the average work out, but I don't see any reason the average case needs to be.

dunpeal 8y ago

> If a founder can't afford employees at market rate, they shouldn't be hiring yet. That's a little bit too strict, and as such is not a position founders are likely to accept. Sometimes they need employees before they can pay market rate, and market rate is pretty steep for a senior engineer in the Bay, for example, and most other areas startups are heavily recruiting. It's reasonable to offer generous equity for early employees willing to take the risk. What does need to stop is the toxic culture of giving out 0.01% even to earliest employees (engineer number less than 10, often less the 5) with the cynical fake-stardust pitch that "this will be worth tens of millions since we're definitely exiting at $1bn+". As you mentioned, this culture of deceit has become commonplace and it's poisoning the well of future employees. You can witness its corrosive effect throughout this comment thread. Give out substantial equity to those early engineers who take risk. Give them a realistic estimate of the risk they're taking, and the value they can get. If they take it, it's their prerogative.

kentonv 8y ago
> Sometimes they need employees before they can pay market rate, But you don't get to have something just because you need it. That's not how it works. You need to raise more money, so that you can afford to pay the employees. It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept. > giving out 0.01% even to earliest employees I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?) But if you go based on the valuation paid by the investors, then even 1% is a laughably low offer during the seed stage.
- dunpeal 8y ago
  > It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept. Which is why I'm saying they should be offered a deal that investors would accept. Demanding everyone pay market rate is just unrealistic. Never going to happen. I'm proposing a realistic, possible change. > I hope that's an exaggeration and no one actually goes that low. First ad I clicked on from Angel List front page: https://angel.co/everlane/jobs https://angel.co/everlane/jobs $130k salary and 0.01% equity. But that's OK, I'm sure their CEO will be happy to tell you about their surefire $Xbn exit. Last I checked Angel List, 0.01% equity was quite common, even for early engineers at very early stage startups. It almost always goes hand in hand with blatant lies about the certain $Xbn exit.

kinganurag 8y ago

> If a founder can't afford employees at market rate, they shouldn't be hiring yet. They could perhaps offer to take people on as co-founders -- with an appropriately equal share. Brother, I have worked with both startup & MNC's and i can understand what you are trying to say but it is a bit harsh to say that if a founder can't afford employees at market rate, they shouldn't be hiring. Some part of me says you are right but other part says that some employee should have some faith. If I look from employees perspective its safer/more rewarding/less riskier to join as co-founder then getting market rate. I believe somewhere faith also counts :)

hanniabu 8y ago
Not sure how you're viewing getting paid less as safer and less risky. Also, the parent is saying the issue is when an early employee is not considered a founder and isn't getting paid market rate. That's the downside of each of those points - no/little equity and no/little pay
raz32dust 8y ago
Faith is cool. But it needs to flow both ways. If you have faith in the person, make them a co-founder and give correspondingly respectable equity.
jonbarker 8y ago
I would say the 'market rate' for the big tech cos cannot be applied to the financial analysis of hiring in startups because most startups have cash burn, and big tech is profitable. If you somehow negotiate a startup to pay you a google like salary you probably won't have much fun because you will be viewed as an even riskier hire than you were to begin with. There will be even more pressure to perform than there already was.

angersock 8y ago

Frankly, the early employees often build more of the company and its success than the founders do. They should be rewarded proportionate to the growth they create and catalyze.