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Are founders really 1000x more valuable than their employees?

131 points by abreckle 16y ago

itsnotvalid 16y ago
Because they get to keep that money and the 0.001 less people are also okay with the agreement. Life isn't fair.
deleted 16y ago
[deleted]
- MarkPNeyer 16y ago
  How exactly does someone who takes on very little risk being rewarded with 100k translate into them getting 'fucked?'
  - cal5k 16y ago
    It doesn't; rather, it's the weird result of people transposing value judgments on purely economic phenomena.
sbov 16y ago
It may not be normal, but the startup I was involved in never had to raise money. Were we all founders? Is anyone they continue to hire a founder?
- staunch 16y ago
  At some point your startup put a fair market value on its stock. That means equity for new hires had a dollar value when they joined.
  - trobertson 16y ago
    > At some point your startup put a fair market value on its stock. Assuming that his company went public, or took outside money. If it is, and will remain, a private company (with no outside investors), why worry about stock at all? Stock is unnecessary overhead, perceived value is unnecessary overhead.
- blacksmythe 16y ago
  In many cases the founders have a different type of stock (preferred vs common). In those situations there is no ambiguity about who is a founder. In other cases, the best definition of the founder is if you joined when there was no company.
  - jessedhillon 16y ago
    Founders aren't usually given preferred stock. Preferred stock is for investors, and it gives them preference in liquidation events. It's to protect their investments, especially in the case of a bankruptcy where all assets are liquidated: the investors can pull out their money first.
njharman 16y ago
no, but the founders founded something. The emploees just got a job. btw A job that didnt exist before the founders did their thing.
- frederickcook 16y ago
  This is the key. For founders who are not intrinsically fundable, an incredible amount of risk is removed between the time of initial founding and when a third-party assigns a value to the company. 1000x seems reasonable.
- georgieporgie 16y ago
  > The emploees just got a job. Which is generally funded by VC money. In the formula of money -> jobs -> more money, the founder doesn't necessarily play such a meaningful role. If he hadn't taken VC money to create the company that contains the jobs, someone else would have.
protomyth 16y ago
Well, if the choice is nothing versus something, then there is a lot of value in the person who took nothing and turned it into something. Employees wouldn't have made anything from the venture without the founders.
- dadkins 16y ago
  The question isn't, "are founders more valuable than employees?". As you've pointed out, that's trivially true. The question is -- as it is with beachfront property -- "how much more valuable are they?"
jshen 16y ago
When I was a kid my mom would complain about how the world was out to get her. She didn't frame it that way, but that's essentially what she was saying. One time she was complaining about lawyers because she was charged $300/hr or something like that. I asked her, "why don't you become a lawyer?" It made sense to me as a 12 year old and still does.
- deleted 16y ago
  [deleted]
- timr 16y ago
  I don't know your mom, and I don't know what she is or isn't capable of doing. I also don't think it's helpful to believe that the word is out to get you, regardless of personal situation. But that said, you're absolutely delusional if you think that everyone in this country who wants to become a lawyer or a doctor or a better-paid whatever is capable of doing it. There are a million different reasons why most people will never become lawyers or doctors...or computer programmers. The reasons are all quite real, even if you've never had the misfortune of experiencing them: some people are born into grinding poverty. Others are never educated while young. Many people just aren't intellectually gifted. It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got. Right now, there are thousands of people accumulating debt in third-tier law schools trying to do what you suggested to your mother -- but most will never get anywhere, no matter how hard they work. There are culinary schools full of aspiring chefs, vocational schools full of people trying to learn their way into a trade, and literally millions of other people who have been told that their lost factory job can be replaced with something better, if only they spend enough time in community college. Just because you had the disproportionate good luck to be born into a situation where you can become whatever you desire, does not mean that everyone else in our society has been granted equivalent opportunity by the big genetic lottery. Said another way: empathy is a useful skill, but you don't have much of it when you're 12.
  - jshen 16y ago
    I was born to a single drug addict, into a family in which no one had finished high school, and spent part of my childhood on food stampes. I understand empathy and that I lucked out in some ways, but I had anything but disproportionate good luck. I enlisted in the army at 17 and spent a year deployed. That's how I paid for college. "It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got." While I agree with your general sentiment, most people are not doing the best they can. You know what I do 3 nights a week? I have a study regimen, right now I'm working my way through a probability book. A lot of people that could be doing the same thing are playing WoW or watching Big Brother. I have a 1 year old and a 3 year old, and I still make time to study on top of my job as an engineer, which pretty much means that I don't watch t.v., play video games, etc. Most people don't make that sacrifice.
jasonmcalacanis 16y ago
This isn't about who is more valuable, this about who took the risk. Employees take little or no risk in 99% of cases. You are not taking a risk making 75% of your max pay at Google/Facebook/Zynga/Twitter by going to a startup. You are taking a 25% haircut to be part of something new/small/etc. However, starting something from scratch, incorporating and putting your reputation on the line is a major risk. If you are the creator you carry the lifetime risk/reward of your startup. The founder(s) of Friendster, PointCast and Webvan will always be remembered a certain way. As will the founders of Twitter, Groupon, Yahoo and Google. The employees that come after them do not carry this personal risk/reward issue. They can always say "I joined Freindster and it was a great learning experience." The founder of Friendster will have to explain for all time why they were first and failed so horribly. How they missed the opportunity to be MySpace, LinkedIn or Facebook. That's the real difference in my mind: personal reputation risk.
- noahlt 16y ago
  And to make it more concrete: those who take the risk are rewarded because investors need people who take risks, otherwise they'd have nothing to invest in.
- mattmanser 16y ago
  This seems a weak argument, it's only applicable once you've actually got a reputation to protect. The vast majority of founders aren't celebrities. Given that many entrepreneurs just keep failing and then trying again and again and again it doesn't make much sense to me at all. There is no risk. Maybe it will be embarrassing if Malhalo fails, but I'm sure that won't stop you trying again. Personally I think there's no good reason, founders aren't actually worth much more than the employees, it's just the way capitalism works. To the victor goes the spoils. Hence the occasional Marx being thrown into the mix to try and keep the worst excesses in check (overall I think capitalism's been a greater good for humanity). I think we're due a Marx soon if the earnings divide keeps growing as it is. Don't try and rationalize it, it's just natural greed. But it has benefits too, all those jobs that wouldn't have existed.
  - brandnewlow 16y ago
sahillavingia 16y ago
Of course it's fair: it was determined by the market, no?
- ecaradec 16y ago
  If you implicitly consider the market to be fair, yes. It's a kind of fair though...
hyko 16y ago
The article only deals with equity, which isn't the only way to compensate people. In equity terms, the founders are worth whatever they choose because they created the company: 100% of the equity is theirs to give away on the terms they decide.
brudgers 16y ago
"Valuable" isn't the right word - because the article is being used for current compensation and equity comparisons but the justification is past events. In the present, it is quite possible that a founder could be detrimental to a company (negative value) while an employee could be nearly irreplaceable (I've even read rumors of such situations here on HN). The question is one of compensation - which is a fool's game, e.g. are founders really 2000x more valuable than 3rd grade teachers?
Skroob 16y ago
I'm not a "founder" in the startup sense, but I did start my own indie development and consulting shop, and I think the startup founders can relate to my experience. For example, 16, 18, even 20 hour days are common. Keeping the business going becomes the major focus in your life. You think about it all day and dream about it if you manage to get some sleep at night. You hope and you dream and scratch and claw and fight and work your butt off every single day with no end in sight. It's your idea, your vision, your baby. For an employee, it's a job. They do the work, they get paid. They may care, and they may care a lot, but they'll never have the kind of commitment you have as a founder. Someone recently asked me if when I hire my first employee, if I'll be able to double my productivity. I wish it were true, but I would never ask an employee to work the kind of hours I do. So are founders always worth 1000x more than the employees? Maybe not always, but I can sure see the argument being made.
- tastybites 16y ago
  You're a founder in the startup sense - just because you started a service business doesn't make it any less of a business. You have customers, employees, revenues, profits, losses, capital equipment purchases, travel expenses, etc. You probably make more money than most 'product' startups. IBM, KPMG, PwC, etc. are all service businesses that are massive and successful. There's a thousand other firms with middling market caps you've never heard of that also make billions.
- bryanlarsen 16y ago
  I was employee #1 at a company. I once clocked 210 hours in a 2 week period, and become super emotionally invested in the company. I spent time on the assembly line when we had orders that needed to go out. If it's just a job for your first employees, you hired the wrong employees. Because it's super hard not to become that involved -- you're working so closely with the founders who are that involved. It's pretty hard to 9-5 it when nobody else is.
chegra 16y ago
I see the 1000x as a reflection of the risk they undertake. Employees, for 100% probability of receiving a specific amount of money exchange their time and effort while founders for a 10% probability of receiving a unspecified amount of money exchange their time and effort. Essentially, for a lower chance of success they make it possible to receive unlimited rewards or go broke(losing years of work and to be despised by all and suitably fit for ridicule and to be made into a parable.). Life is indeed fair, hence you can't have your cake and eat it. You can't have security and unbounded success, something has to give. Fortune favors the bold - Virgil
charlesju 16y ago
I think this is just a free market equilibrium. If employees were unwilling to work for anything less than 10% of the company than employees would have more stock. If founders were able to get away with keeping 100% of the company, then they deserve to have it. There is no fairness here. It's just the free market. If employees want founder economics, then start a company. It's that simple. Welcome to America.
DevX101 16y ago
Value that can be extracted will be. As a founder, you have a large, if not the final say on compensation. Founders therefore pay themselves as much as they can while keeping the business healthy. I think this is a greater factor in the relatively high compensation than "value added" or "risk taken".
- tptacek 16y ago
  Founders don't have the final say on compensation! The market does! If you think you're worth 5% of a company you're applying for, demand it. If you're worth it, you will get 5% --- maybe not from any specific company, but from some comparable company. If you think you're worth 10-20% of a company, stop applying for jobs and go start your company. It is absolutely a seller's market for talent right now. If you aren't getting what you think you're worth, you have nobody to blame but yourself. Your current company may not give it to you --- for the role you fill, they may believe you're replaceable for less cost --- but that doesn't mean you can't get it on the market somewhere. But you have to make the effort. People absolutely cannot in the real world whine that things "aren't fair" and expect improvement.
rwaliany 16y ago
There is a huge risk in opportunity cost to join a startup. Some founders such as serial entrepreneurs who have proven their value, I could see 100-1000x. However, first-time and inexperienced founders should not get more than 10x their employees given that they providing a lower expectation. Also priced into it should be the difficulty for you to do it yourself. If the company truly does amplify your value by 1000x, then by all means it is a fantastic deal.
mdink 16y ago
For me it has been - who picks up the hat when something painful needs to get done? (getting tax info together, sales cold calling, doing a complex data migration, etc.) It is usually the founder, in order to shield employees from potentially morale destroying work. For this (and other reasons mentioned here) their value is more then that of their employees.. Obviously this is not the case all the time.. just my experience...
kalvin 16y ago
I think the real issue isn't whether or not founders are "worth" 10x or 100x or 1000x the 10th employee (arguable, no real answer) but whether the extreme variance that exists in early startup employee equity is fair. I once surveyed several friends who joined tech startups (at similar funding rounds, # of employees) out of school as very similar software engineers. They received between 0.05% and 0.3% of those startups. That's a 6x range. That certainly wasn't a result of a transparent and perfectly fair market; equity compensation numbers are opaque to many startup employees, plus the comparative data just isn't widely available. (Ackwire is the best I've seen, and it's new and rudimentary.) And it's not really in the startup's interest to make them more aware-- who wants their employees to have the thought "my boss will make 100x more than me when we exit" in their head? (Not everyone is as hyperrational or founder-aspirational as the HN crowd...)
rokhayakebe 16y ago
Yes.
tzm 16y ago
This question is more about positioning, less about risk per se. Founders are usually in a position of strength to negotiate higher valuations than subsequent employees. Likewise, future needs (funding rounds, key hires, etc) may also devalue their position of strength. Although unlikely, it is possible that founders have little risk.
joe_the_user 16y ago
Why employees are priceless - that's why we can't pay them very much. Founder are less important, so figure we can compensate with money. Groucho: If I paid you wages, you'd be wage-slave, you wouldn't want to be a wage-slave, would you? Bellhop: I quit
vannevar 16y ago
A better question might be, is a startup founder who achieves a lucrative exit 1000x more valuable than a founder who fails? Because the reality is that most founders don't get 1000x the compensation of their employees; in fact, such cases are exceedingly rare. There is a lot of risk in starting a company if you're not independently wealthy. But I would question whether a 1000x payoff that is as rare as a lottery win is a more effective incentive than say a 10x payoff that happens more often. Maybe it would be healthier to invest smaller amounts in more companies, rather than investing enormous amounts in just a few as part of what Mark Cuban correctly identifies as a glorified Ponzi scheme (http://news.ycombinator.com/item?id=2231082 http://news.ycombinator.com/item?id=2231082).
luca-giovanni 16y ago
When you build a skyscraper, tell me what is the most important floor? The foundations. The founder is the foundation of the company. Above this foundation is often build billions of dollars of value.
hammock 16y ago
Seems like the premise of this argument is busted. How much stock you own is not the measure of how valuable you are to the company. That's ridiculous. Is Micky Arison, owner of the Heat, more valuable to the team than Lebron James or Dwayne Wade or Chris Bosh? How does this kind of garbage logic make it to the front page of Hacker News?
gamble 16y ago
People are over-moralizing this. Why do CEOs get paid so much? Why are salesmen often better paid than engineers? Does a ditch-digger deserve less money than a lawyer? The market is basically amoral. People get what they can get, not what they 'deserve'. Founders get more money because they have ownership, and in a capitalistic system profits accrue to capital. There's no point in constructing an elaborate moral architecture to justify how a social structure developed to maximize financial gain also somehow optimizes for socially-desirable outcomes.
- rue 16y ago
  There's no problem moralising it while keeping in mind that the current system indeed is amoral. I think the point is whether it should be. Personally, I'm of the opinion that no job worth doing is worth less than any other job, but I recognise there's “some” ways to go before that thought becomes in any way mainstream again…
  - thebigredjay 16y ago
    I don't think it's amoral. There are "world-shakers" in this life who aren't satisfied with how the world looks and they strive to change it. They develop an idea that provides value to others and they build a beast from nothing. With out people like this there would be no change, no progress. Founders create the world as we know it. And, a slight adjustment to the original phrase will correct it. Founders, in general, are not 1,000 more valuable than their employees. Successful founders are 1,000,000 more valuable than their employees.
    - rue 16y ago
      No, they really aren't. They can extract 1000 or 1000000 times the money, sure.
  - nitrogen 16y ago
    I'm of the opinion that no job worth doing is worth less than any other job... Following this reason would end up with a world in which no job is worth doing. The value of a job is in how much value it provides to others. If one person's 8 hours produces 100 times as much value for others than another person's 8 hours (e.g. 100x time saved, 100x food produced, etc.) then the first person's job is worth 100x more than the second, and by your logic the second person's job isn't worth doing. But if there's nobody or no machine to replace the second person, then that job doesn't get done. If the second person's job was originally worth doing until the 100x person came along, why would it no longer be worth doing if it's now worth relatively less to others?
icandoitbetter 16y ago
Does anyone else find the assumption that wage is somehow linearly proportional to 'value' completely ridiculous?
sreitshamer 16y ago
What does ownership have to do with relative value of people? If you go create something (a business) from nothing, it's yours. If you agree to do work for a business in return for cash, that's your decision.
johngalt 16y ago
"Deserve has got nothing to do with it" Stop seeing compensation as a judgement of value and instead see it as a measure of scarcity. Most people prefer to be employees rather than founders, compensation reflects this.
bradgessler 16y ago
This article completely glosses over the class of bootstrapped startups where the founders leave their day jobs, invests their time and money in the startup, and then start hiring people. That's a lot of risk, so yes, for that class of startups founders should have higher ownership in the company and thus are worth more if the company is worth something. On top of that, these boot strapped startups often pay their employees more than themselves, so on the income front, employees are worth more. This article really underscores the weirdness of incentives that can crop up at venture backed companies. It almost makes no sense.
FernandoEscher 16y ago
A founder is just twice as valuable than a employee, and this just at the beginning. If you measure value by the actual profit a founder or an employee generates at a project, enterprise or whatever, you'll surely find that in long term is the employee that generates most of your earnings. That's a plain truth, if you have employees is because your business is growing and you can't deal with it just by yourself, so you need someone to work by your side at this point. Every earning from then now should be almost equally split on you and your employees. And I say almost, because your employees do owe you something, a place to work with less risk. And that last part is the why I think a founder is 2x more valuable than employees. I love to see enterprises where they left a percentage of their actions to split that amount of earnings over their employees.
fleitz 16y ago
The reason founders get more is because they are less willing to accept a bad deal, and more able to turn a bad deal into a good one. An employee who brings strategic assets to a company will make a lot of money, neither Eric Schmidt or Tim Cook are founders of their respective companies but they do VERY well for themselves. The best explanation is found on Ribbon Farm in The Gervais Principle. http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-or-the-office-according-to-the-office/ http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-o... And yes, Founders are 1000x more valuable to the market than their employees. They may not be more valuable according to any other logic but the market is the person who cuts the cheques.
petervandijck 16y ago
The real reason is simple: employees are (by definition) replacable, when they get hired, founders (by definition) not, when they found the company.
stretchwithme 16y ago
In business, as in biology, those who discover and exploit niches get the rewards.
palewery 16y ago
You don't know the value of employee X until after he has agreed to compensation and joined the company. If he joins and never completes a single task he is assigned, then yes the founders were 1000x more valuable. If he joints and is able to find 10x more customers than you had before than no he is not 1000x less valuable.
known 16y ago
Economic mobility != Social mobility http://goo.gl/K8Pg http://goo.gl/K8Pg
tsotha 16y ago
>Are founders really 1000x more valuable than their employees? Yes. There's a big gap between working somewhere with the option to bail whenever you want and having your own financial resources at risk.
stretchwithme 16y ago
In a way, their employees have already decided the matter. They looked at the founder risk/effort/reward and decided being an employee is a better deal. Of course, founders also looked at it and decided being a founder is a better deal. So, everybody's happy and all's right with the world.
laf2019 16y ago
I think it is true in certain cases. A successful founder has that 100% commitment to the idea / company. He or she will do anything it takes for it to succeed and will hustle it until it does. Sure, employees can write the code that makes the company run but they don't have that extra drive to have made it a success on their own. On the flip side, some founders are just super-well connected people that just get oodles of money and hire a team to make their idea come to life and have no real ability beyond that.

131 points by abreckle 16y ago

itsnotvalid 16y ago

Because they get to keep that money and the 0.001 less people are also okay with the agreement. Life isn't fair.

deleted 16y ago

[deleted]

MarkPNeyer 16y ago
How exactly does someone who takes on very little risk being rewarded with 100k translate into them getting 'fucked?'
- cal5k 16y ago
  It doesn't; rather, it's the weird result of people transposing value judgments on purely economic phenomena.

sbov 16y ago

It may not be normal, but the startup I was involved in never had to raise money. Were we all founders? Is anyone they continue to hire a founder?

staunch 16y ago
At some point your startup put a fair market value on its stock. That means equity for new hires had a dollar value when they joined.
- trobertson 16y ago
  > At some point your startup put a fair market value on its stock. Assuming that his company went public, or took outside money. If it is, and will remain, a private company (with no outside investors), why worry about stock at all? Stock is unnecessary overhead, perceived value is unnecessary overhead.
blacksmythe 16y ago
In many cases the founders have a different type of stock (preferred vs common). In those situations there is no ambiguity about who is a founder. In other cases, the best definition of the founder is if you joined when there was no company.
- jessedhillon 16y ago
  Founders aren't usually given preferred stock. Preferred stock is for investors, and it gives them preference in liquidation events. It's to protect their investments, especially in the case of a bankruptcy where all assets are liquidated: the investors can pull out their money first.

njharman 16y ago

no, but the founders founded something. The emploees just got a job. btw A job that didnt exist before the founders did their thing.

frederickcook 16y ago
This is the key. For founders who are not intrinsically fundable, an incredible amount of risk is removed between the time of initial founding and when a third-party assigns a value to the company. 1000x seems reasonable.
georgieporgie 16y ago
> The emploees just got a job. Which is generally funded by VC money. In the formula of money -> jobs -> more money, the founder doesn't necessarily play such a meaningful role. If he hadn't taken VC money to create the company that contains the jobs, someone else would have.

protomyth 16y ago

Well, if the choice is nothing versus something, then there is a lot of value in the person who took nothing and turned it into something. Employees wouldn't have made anything from the venture without the founders.

dadkins 16y ago
The question isn't, "are founders more valuable than employees?". As you've pointed out, that's trivially true. The question is -- as it is with beachfront property -- "how much more valuable are they?"

jshen 16y ago

When I was a kid my mom would complain about how the world was out to get her. She didn't frame it that way, but that's essentially what she was saying. One time she was complaining about lawyers because she was charged $300/hr or something like that. I asked her, "why don't you become a lawyer?" It made sense to me as a 12 year old and still does.

deleted 16y ago
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timr 16y ago
I don't know your mom, and I don't know what she is or isn't capable of doing. I also don't think it's helpful to believe that the word is out to get you, regardless of personal situation. But that said, you're absolutely delusional if you think that everyone in this country who wants to become a lawyer or a doctor or a better-paid whatever is capable of doing it. There are a million different reasons why most people will never become lawyers or doctors...or computer programmers. The reasons are all quite real, even if you've never had the misfortune of experiencing them: some people are born into grinding poverty. Others are never educated while young. Many people just aren't intellectually gifted. It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got. Right now, there are thousands of people accumulating debt in third-tier law schools trying to do what you suggested to your mother -- but most will never get anywhere, no matter how hard they work. There are culinary schools full of aspiring chefs, vocational schools full of people trying to learn their way into a trade, and literally millions of other people who have been told that their lost factory job can be replaced with something better, if only they spend enough time in community college. Just because you had the disproportionate good luck to be born into a situation where you can become whatever you desire, does not mean that everyone else in our society has been granted equivalent opportunity by the big genetic lottery. Said another way: empathy is a useful skill, but you don't have much of it when you're 12.
- jshen 16y ago
  I was born to a single drug addict, into a family in which no one had finished high school, and spent part of my childhood on food stampes. I understand empathy and that I lucked out in some ways, but I had anything but disproportionate good luck. I enlisted in the army at 17 and spent a year deployed. That's how I paid for college. "It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got." While I agree with your general sentiment, most people are not doing the best they can. You know what I do 3 nights a week? I have a study regimen, right now I'm working my way through a probability book. A lot of people that could be doing the same thing are playing WoW or watching Big Brother. I have a 1 year old and a 3 year old, and I still make time to study on top of my job as an engineer, which pretty much means that I don't watch t.v., play video games, etc. Most people don't make that sacrifice.

jasonmcalacanis 16y ago

This isn't about who is more valuable, this about who took the risk. Employees take little or no risk in 99% of cases. You are not taking a risk making 75% of your max pay at Google/Facebook/Zynga/Twitter by going to a startup. You are taking a 25% haircut to be part of something new/small/etc. However, starting something from scratch, incorporating and putting your reputation on the line is a major risk. If you are the creator you carry the lifetime risk/reward of your startup. The founder(s) of Friendster, PointCast and Webvan will always be remembered a certain way. As will the founders of Twitter, Groupon, Yahoo and Google. The employees that come after them do not carry this personal risk/reward issue. They can always say "I joined Freindster and it was a great learning experience." The founder of Friendster will have to explain for all time why they were first and failed so horribly. How they missed the opportunity to be MySpace, LinkedIn or Facebook. That's the real difference in my mind: personal reputation risk.

noahlt 16y ago
And to make it more concrete: those who take the risk are rewarded because investors need people who take risks, otherwise they'd have nothing to invest in.
mattmanser 16y ago
This seems a weak argument, it's only applicable once you've actually got a reputation to protect. The vast majority of founders aren't celebrities. Given that many entrepreneurs just keep failing and then trying again and again and again it doesn't make much sense to me at all. There is no risk. Maybe it will be embarrassing if Malhalo fails, but I'm sure that won't stop you trying again. Personally I think there's no good reason, founders aren't actually worth much more than the employees, it's just the way capitalism works. To the victor goes the spoils. Hence the occasional Marx being thrown into the mix to try and keep the worst excesses in check (overall I think capitalism's been a greater good for humanity). I think we're due a Marx soon if the earnings divide keeps growing as it is. Don't try and rationalize it, it's just natural greed. But it has benefits too, all those jobs that wouldn't have existed.
- brandnewlow 16y ago

sahillavingia 16y ago

Of course it's fair: it was determined by the market, no?

ecaradec 16y ago
If you implicitly consider the market to be fair, yes. It's a kind of fair though...

hyko 16y ago

The article only deals with equity, which isn't the only way to compensate people. In equity terms, the founders are worth whatever they choose because they created the company: 100% of the equity is theirs to give away on the terms they decide.

brudgers 16y ago

"Valuable" isn't the right word - because the article is being used for current compensation and equity comparisons but the justification is past events. In the present, it is quite possible that a founder could be detrimental to a company (negative value) while an employee could be nearly irreplaceable (I've even read rumors of such situations here on HN). The question is one of compensation - which is a fool's game, e.g. are founders really 2000x more valuable than 3rd grade teachers?

Skroob 16y ago

I'm not a "founder" in the startup sense, but I did start my own indie development and consulting shop, and I think the startup founders can relate to my experience. For example, 16, 18, even 20 hour days are common. Keeping the business going becomes the major focus in your life. You think about it all day and dream about it if you manage to get some sleep at night. You hope and you dream and scratch and claw and fight and work your butt off every single day with no end in sight. It's your idea, your vision, your baby. For an employee, it's a job. They do the work, they get paid. They may care, and they may care a lot, but they'll never have the kind of commitment you have as a founder. Someone recently asked me if when I hire my first employee, if I'll be able to double my productivity. I wish it were true, but I would never ask an employee to work the kind of hours I do. So are founders always worth 1000x more than the employees? Maybe not always, but I can sure see the argument being made.

tastybites 16y ago
You're a founder in the startup sense - just because you started a service business doesn't make it any less of a business. You have customers, employees, revenues, profits, losses, capital equipment purchases, travel expenses, etc. You probably make more money than most 'product' startups. IBM, KPMG, PwC, etc. are all service businesses that are massive and successful. There's a thousand other firms with middling market caps you've never heard of that also make billions.
bryanlarsen 16y ago
I was employee #1 at a company. I once clocked 210 hours in a 2 week period, and become super emotionally invested in the company. I spent time on the assembly line when we had orders that needed to go out. If it's just a job for your first employees, you hired the wrong employees. Because it's super hard not to become that involved -- you're working so closely with the founders who are that involved. It's pretty hard to 9-5 it when nobody else is.

chegra 16y ago

I see the 1000x as a reflection of the risk they undertake. Employees, for 100% probability of receiving a specific amount of money exchange their time and effort while founders for a 10% probability of receiving a unspecified amount of money exchange their time and effort. Essentially, for a lower chance of success they make it possible to receive unlimited rewards or go broke(losing years of work and to be despised by all and suitably fit for ridicule and to be made into a parable.). Life is indeed fair, hence you can't have your cake and eat it. You can't have security and unbounded success, something has to give. Fortune favors the bold - Virgil

charlesju 16y ago

I think this is just a free market equilibrium. If employees were unwilling to work for anything less than 10% of the company than employees would have more stock. If founders were able to get away with keeping 100% of the company, then they deserve to have it. There is no fairness here. It's just the free market. If employees want founder economics, then start a company. It's that simple. Welcome to America.

DevX101 16y ago

Value that can be extracted will be. As a founder, you have a large, if not the final say on compensation. Founders therefore pay themselves as much as they can while keeping the business healthy. I think this is a greater factor in the relatively high compensation than "value added" or "risk taken".

tptacek 16y ago
Founders don't have the final say on compensation! The market does! If you think you're worth 5% of a company you're applying for, demand it. If you're worth it, you will get 5% --- maybe not from any specific company, but from some comparable company. If you think you're worth 10-20% of a company, stop applying for jobs and go start your company. It is absolutely a seller's market for talent right now. If you aren't getting what you think you're worth, you have nobody to blame but yourself. Your current company may not give it to you --- for the role you fill, they may believe you're replaceable for less cost --- but that doesn't mean you can't get it on the market somewhere. But you have to make the effort. People absolutely cannot in the real world whine that things "aren't fair" and expect improvement.

rwaliany 16y ago

There is a huge risk in opportunity cost to join a startup. Some founders such as serial entrepreneurs who have proven their value, I could see 100-1000x. However, first-time and inexperienced founders should not get more than 10x their employees given that they providing a lower expectation. Also priced into it should be the difficulty for you to do it yourself. If the company truly does amplify your value by 1000x, then by all means it is a fantastic deal.

mdink 16y ago

For me it has been - who picks up the hat when something painful needs to get done? (getting tax info together, sales cold calling, doing a complex data migration, etc.) It is usually the founder, in order to shield employees from potentially morale destroying work. For this (and other reasons mentioned here) their value is more then that of their employees.. Obviously this is not the case all the time.. just my experience...

kalvin 16y ago

I think the real issue isn't whether or not founders are "worth" 10x or 100x or 1000x the 10th employee (arguable, no real answer) but whether the extreme variance that exists in early startup employee equity is fair. I once surveyed several friends who joined tech startups (at similar funding rounds, # of employees) out of school as very similar software engineers. They received between 0.05% and 0.3% of those startups. That's a 6x range. That certainly wasn't a result of a transparent and perfectly fair market; equity compensation numbers are opaque to many startup employees, plus the comparative data just isn't widely available. (Ackwire is the best I've seen, and it's new and rudimentary.) And it's not really in the startup's interest to make them more aware-- who wants their employees to have the thought "my boss will make 100x more than me when we exit" in their head? (Not everyone is as hyperrational or founder-aspirational as the HN crowd...)

rokhayakebe 16y ago

Yes.

tzm 16y ago

This question is more about positioning, less about risk per se. Founders are usually in a position of strength to negotiate higher valuations than subsequent employees. Likewise, future needs (funding rounds, key hires, etc) may also devalue their position of strength. Although unlikely, it is possible that founders have little risk.

joe_the_user 16y ago

Why employees are priceless - that's why we can't pay them very much. Founder are less important, so figure we can compensate with money. Groucho: If I paid you wages, you'd be wage-slave, you wouldn't want to be a wage-slave, would you? Bellhop: I quit

vannevar 16y ago

A better question might be, is a startup founder who achieves a lucrative exit 1000x more valuable than a founder who fails? Because the reality is that most founders don't get 1000x the compensation of their employees; in fact, such cases are exceedingly rare. There is a lot of risk in starting a company if you're not independently wealthy. But I would question whether a 1000x payoff that is as rare as a lottery win is a more effective incentive than say a 10x payoff that happens more often. Maybe it would be healthier to invest smaller amounts in more companies, rather than investing enormous amounts in just a few as part of what Mark Cuban correctly identifies as a glorified Ponzi scheme (http://news.ycombinator.com/item?id=2231082 http://news.ycombinator.com/item?id=2231082).

luca-giovanni 16y ago

When you build a skyscraper, tell me what is the most important floor? The foundations. The founder is the foundation of the company. Above this foundation is often build billions of dollars of value.

hammock 16y ago

Seems like the premise of this argument is busted. How much stock you own is not the measure of how valuable you are to the company. That's ridiculous. Is Micky Arison, owner of the Heat, more valuable to the team than Lebron James or Dwayne Wade or Chris Bosh? How does this kind of garbage logic make it to the front page of Hacker News?

gamble 16y ago

People are over-moralizing this. Why do CEOs get paid so much? Why are salesmen often better paid than engineers? Does a ditch-digger deserve less money than a lawyer? The market is basically amoral. People get what they can get, not what they 'deserve'. Founders get more money because they have ownership, and in a capitalistic system profits accrue to capital. There's no point in constructing an elaborate moral architecture to justify how a social structure developed to maximize financial gain also somehow optimizes for socially-desirable outcomes.

rue 16y ago
There's no problem moralising it while keeping in mind that the current system indeed is amoral. I think the point is whether it should be. Personally, I'm of the opinion that no job worth doing is worth less than any other job, but I recognise there's “some” ways to go before that thought becomes in any way mainstream again…
- thebigredjay 16y ago
  I don't think it's amoral. There are "world-shakers" in this life who aren't satisfied with how the world looks and they strive to change it. They develop an idea that provides value to others and they build a beast from nothing. With out people like this there would be no change, no progress. Founders create the world as we know it. And, a slight adjustment to the original phrase will correct it. Founders, in general, are not 1,000 more valuable than their employees. Successful founders are 1,000,000 more valuable than their employees.
  - rue 16y ago
    No, they really aren't. They can extract 1000 or 1000000 times the money, sure.
- nitrogen 16y ago
  I'm of the opinion that no job worth doing is worth less than any other job... Following this reason would end up with a world in which no job is worth doing. The value of a job is in how much value it provides to others. If one person's 8 hours produces 100 times as much value for others than another person's 8 hours (e.g. 100x time saved, 100x food produced, etc.) then the first person's job is worth 100x more than the second, and by your logic the second person's job isn't worth doing. But if there's nobody or no machine to replace the second person, then that job doesn't get done. If the second person's job was originally worth doing until the 100x person came along, why would it no longer be worth doing if it's now worth relatively less to others?

icandoitbetter 16y ago

Does anyone else find the assumption that wage is somehow linearly proportional to 'value' completely ridiculous?

sreitshamer 16y ago

What does ownership have to do with relative value of people? If you go create something (a business) from nothing, it's yours. If you agree to do work for a business in return for cash, that's your decision.

johngalt 16y ago

"Deserve has got nothing to do with it" Stop seeing compensation as a judgement of value and instead see it as a measure of scarcity. Most people prefer to be employees rather than founders, compensation reflects this.

bradgessler 16y ago

This article completely glosses over the class of bootstrapped startups where the founders leave their day jobs, invests their time and money in the startup, and then start hiring people. That's a lot of risk, so yes, for that class of startups founders should have higher ownership in the company and thus are worth more if the company is worth something. On top of that, these boot strapped startups often pay their employees more than themselves, so on the income front, employees are worth more. This article really underscores the weirdness of incentives that can crop up at venture backed companies. It almost makes no sense.

FernandoEscher 16y ago

A founder is just twice as valuable than a employee, and this just at the beginning. If you measure value by the actual profit a founder or an employee generates at a project, enterprise or whatever, you'll surely find that in long term is the employee that generates most of your earnings. That's a plain truth, if you have employees is because your business is growing and you can't deal with it just by yourself, so you need someone to work by your side at this point. Every earning from then now should be almost equally split on you and your employees. And I say almost, because your employees do owe you something, a place to work with less risk. And that last part is the why I think a founder is 2x more valuable than employees. I love to see enterprises where they left a percentage of their actions to split that amount of earnings over their employees.

fleitz 16y ago

The reason founders get more is because they are less willing to accept a bad deal, and more able to turn a bad deal into a good one. An employee who brings strategic assets to a company will make a lot of money, neither Eric Schmidt or Tim Cook are founders of their respective companies but they do VERY well for themselves. The best explanation is found on Ribbon Farm in The Gervais Principle. http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-or-the-office-according-to-the-office/ http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-o... And yes, Founders are 1000x more valuable to the market than their employees. They may not be more valuable according to any other logic but the market is the person who cuts the cheques.

petervandijck 16y ago

The real reason is simple: employees are (by definition) replacable, when they get hired, founders (by definition) not, when they found the company.

stretchwithme 16y ago

In business, as in biology, those who discover and exploit niches get the rewards.

palewery 16y ago

You don't know the value of employee X until after he has agreed to compensation and joined the company. If he joins and never completes a single task he is assigned, then yes the founders were 1000x more valuable. If he joints and is able to find 10x more customers than you had before than no he is not 1000x less valuable.

known 16y ago

Economic mobility != Social mobility http://goo.gl/K8Pg http://goo.gl/K8Pg

tsotha 16y ago

>Are founders really 1000x more valuable than their employees? Yes. There's a big gap between working somewhere with the option to bail whenever you want and having your own financial resources at risk.

stretchwithme 16y ago

In a way, their employees have already decided the matter. They looked at the founder risk/effort/reward and decided being an employee is a better deal. Of course, founders also looked at it and decided being a founder is a better deal. So, everybody's happy and all's right with the world.

laf2019 16y ago

I think it is true in certain cases. A successful founder has that 100% commitment to the idea / company. He or she will do anything it takes for it to succeed and will hustle it until it does. Sure, employees can write the code that makes the company run but they don't have that extra drive to have made it a success on their own. On the flip side, some founders are just super-well connected people that just get oodles of money and hire a team to make their idea come to life and have no real ability beyond that.