5 ms·

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

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
  If you were the inventor of Facebook, then you would have invented Facebook.
- tptacek 16y ago
  It's a weird little backwater we're in if the only perceived risk in starting a company is reputational. Most companies fail. The risk is financial. The people you see founding companies "again and again and again" generally fall into two categories: (1) people who have never founded anything successful and have nothing obvious to lose, and (2) people who have already succeeded (like Calacanis) for whom the risk is any the myriad of other things they could have been doing to make money during that time period.
- verysimple 16y ago
  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. I used to work for a web design shop. My fellow programmers and I hated the fact that our bosses were making money on our backs. They would bill clients these huge fees for our hours and pay us 10% of that amount. What did we do about it? We complained to each other during lunch hours. Until one day when I threw in the idea, "lets start our own company". Then the truth came out, all those brave soldiers started backpedaling. I was in awe. I quit my job soon after, became a freelancer and 3 years later partnered up with another programmer to start a development company. We went through ups and downs at the beginning, not garnering much support, even from our own social circles. It's been a year and only now are some of our clients finally realizing the appeal of our offer. We have more work than we can handle and have had to moved into a larger office in a downtown area. I'm literally starting to hire next week. The same people we tried to get help from at the beginning, who were instead doing nothing but discourage us, are now more than willing volunteers. I've had many similar experiences all throughout my life. I have once tried to organize a class action lawsuit against a company orchestrating an organized scam. I knew many of the clients personally. So I tried to gather them and the same thing happened, there was fud and people chose to wait and see what would happen as they left me to handle the initial steps on my own. I eventually reached an agreement with the company and got somewhat compensated. Later on when people heard, they tried to join in on the action, but by then it was too late, I had moved on with my life. Another example, about 2 years ago, I had dealings with an agency that wanted to build this really ambitious website for one of their clients. I was hired as a developer along with other professionals from various fields (design, ux, marketing, etc). The agency ended up not paying any of us and while everybody were emailing each other trying to figure out what to do? I threw in a couple of bold ideas, such as bypassing the agency and dealing directly with the client, suing the agency. As expected the brave mouths didn't feel so tough anymore. I ended up hiring my own lawyer and a few months ago, I obtained a court decision. When people heard, I started receiving emails about "maybe ganging up to get our money". All 3 stories have the same pattern. There is a problem, a risky proposal gets thrown in, people react to the idea, someone does something about it. I've come to the conclusion that being an entrepreneur is a character trait. You either have it or you don't. Soon after I quit my job 4 years ago, I read or heard something somewhere, I don't remember the source, but it basically said, you get paid what you deserve. It's only now that I have a small and growing enterprise and that I have to explore the compensation question that I understand this. My coworkers from 4 years ago still work for the same boss. Maybe they got salary bumps, maybe they didn't, maybe they're still complaining during lunch, but one thing is sure we all got what we deserved.
gamble 16y ago
I really question this idea that (YC-style) startup founders are taking on more risk than employees. Few founders have a significant amount of personal capital invested in the business. If the startup fails, they're not out of much more than a job. In fact, early employees are in a far more precarious situation, since they're much more likely to lose their job than the founders. And if the company does go down, the founders have a much better entry on their resume than someone who took a job at a small company that no one has ever heard of. At least in America, there is so little stigma associated with a failed startup that I don't see the reputation aspect of your argument. Short of flat-out malfeasance, a failed entrepreneur is far more fundable than someone who has never started a company.
- wdewind 16y ago
  We like to say there is no stigma associated with a failed startup. Quite frankly I think that's bullshit. It may not hurt your chances of getting hired again as an engineer because you will likely have great experience from it. But you will have just spent months/years promising people you were going to improve an aspect of their life (through your business solving their problems, or maybe through getting more financial independence for your family etc.), and you were unable to do so. In many cases you've been trusted with extremely important things. You will have been trusted with a leadership role (in society, not just a company), and you will have failed, regardless of the value of the experience. Startups don't really get traction (outside of social) without serious contributions: being involved in solving hair on fire problems. So, let's say you're starting a banking/commerce related startup like PayPal, and some fraud happens on your network which ultimately leads to it failing to gain trust (though it is relatively secure) and thus failing to gain traction and failing. Sure, you may handle the breach well, and go on to have a high paying job as a security analyst or something based on your specific experience. But good luck trying to raise capital again. Good luck getting your friends and family to support you and take you seriously when you're going down your second "I'm quitting my job to give everything I have to a startup." Good luck recruiting engineers who know you as the ex-CEO of failed startup XYZ, etc.
  - mechanical_fish 16y ago
code_duck 16y ago
That reflects on their future prospects of being a startup founder, though. I think the founder of a company like Friendster could still get a job working at Twitter or Zynga or whatever as an engineer, and the notoriety in their past would actually be a benefit.
- ojbyrne 16y ago
  Engineer? Jonathan Abrams, since Friendster, has been a CEO, owns a bar, is an angel investor and an advisor to other companies (http://www.crunchbase.com/person/jonathan-abrams http://www.crunchbase.com/person/jonathan-abrams) . He probably was able to "take money off the table."
  - code_duck 16y ago
    Right, so in this case it wasn't some failed attempt that harmed his prospects. I think the real risk is that you'll fail and end up bankrupt, not that you'll sell the company for millions but carry the ignominy of not becoming Facebook.
natch 16y ago
I call bullshit. For financial risk, this doesn't apply if the founder doesn't have much to lose, or has a stable family they can rely on, or is just starting their career, or doesn't care about money. For reputation risk, that's hardly an issue, because making mistakes in considered a legitimate (even honorable) form of learning in startup culture; it certainly does not ruin someone's reputation. The real answer is way more simple: the founders hold most of the cards, and the engineers don't. Edit: and if the engineers don't like this, they are free to try to start their own startups.
- tptacek 16y ago
  This is head-explodey. If the engineers don't like the deal they're getting, they can go work for other companies. If they should be getting a better deal, they will. There simply isn't a glut of dev talent right now. There is the opposite of that.
  - deleted 16y ago
    [deleted]
  - mkramlich 16y ago
    exactly. and founder vs employee isn't a species difference. it's a role difference, and only at a moment in time, and only with respect to one particular company. any employee could also (before|instead|after) be a founder for another business. Don't like the perks/negs of being a mere employee? Fine, be a founder. And vice versa.
deleted 16y ago
[deleted]
bryanlarsen 16y ago
I argue that those first employees are taking more risk. If the company runs into trouble in 3-6 months time, it's going to be the employees who get turfed, not the founders. And I'm sure the founder of Friendster has no trouble finding a job. Starting a company and failing has enourmous cachet in the States. And Friendster did quite well, relatively speaking, compared to most failed startups.
OpieCunningham 16y ago
The founder of Friendster is very likely to be capable of being hired for a job, so the risk he took to his reputation was the risk of lower probability of becoming something other than an employee. Therefore, in comparison to an employee, the founder of Friendster remains on equivalent ground. He lost little if anything compared to an employee (a group of which he now belongs), so the risk was little and of low value in regards to personal reputation. In regards to money, that depends on the process. Did the startup function using the founders cash for a period of time that required a significant financial investment? If so, then there's significant risk on the part of the founder. If the startup functioned for a limited period of time on the founder's cash before receiving an investment that paid the founder as well as employees, then clearly there is little risk. Granted, the former scenario is the more likely.
swombat 16y ago
Many founders invest their savings into the business at inception. They certainly invest a massive cut in salary (usually all the way down to $0). The opportunity cost for founders is much more than a "25% haircut". Imho, for most, the financial risk and opportunity cost is why they deserve those shares, if you're going to do calculations. But, even more fundamentally, the founders deserve the shares because if they didn't start the business the business wouldn't exist. Without the founders, the discussion is moot.
- cellis 16y ago
  HN is seriously degraded if this is being downvoted. If this doesn't ring true, then you haven't been a startup founder.
  - georgieporgie 16y ago
    But HN is so VC-obsessed, it seems like independent, $0-income startups are the edge cases here.
  - deleted 16y ago
    [deleted]
  - stonemetal 16y ago
    How so? OP said employees at a startup get 25% lower salary than they would at someplace more mainstream. He didn't mention founders making 25% less than they would at a day job.
    - NickPollard 16y ago
      Who do you think puts up the money that pays the employees?
joe_the_user 16y ago
Reputation? I have no idea who founded Webvan and I don't think I'd care if I did know. In modern America, there's little if any shame attached to having your business fail - less shame, really, than being fired or simply having a low prestige job. I agree that the difference is that the founders risk something. What they risked was just money and time. And risking time can be risking more than you'd think because there's an opportunity cost to not creating a career. It boils down to risk-amortized market for money and time; capital and human-capital. This is just the market. There is no fairness guarantee mechanism. If I have a billion dollars to put at a very, very slight risk, it is still worth much more than your willingness to risk your time, your "reputation", your health and your $100K.
dasil003 16y ago
Since when do you care about reputation ;) Seriously though, I agree that founders are taking the risk, but actually I think that is irrelevant as well. The bottom line is that the founder started the damn company; the company would not exist without the founder. If you go and negotiate a contract with a company, you get what's in the contract. In a profitable business we can argue all day about who's creating the value, but it's subjective and irrelevant; the only thing that matters is that the founder went and started a company and offered you a job and you took it. If you weren't able to negotiate a deal for what you're "worth" then man up and start your own damn company, otherwise you're just whining.
anon330 16y ago
This article is very timely. I've been employee #1 at a small company for about ten months, and I'm not only making just 50-60% of my pay potential, the recently proposed employee options plan grants me just 0.8% vesting over the next four years. "This isn't about who is more valuable, this about who took the risk." Risk? I joined less than a year after incorporation. I feel like I'm shouldering substantial risk by taking 50% of my overall compensation as options in a venture which I have no direct control over—I'm not on the board, I'm not a director. The options are worthless until 4-5 years down the road, and even then, I have no control or say into when we sell, to whom, and for how much. Myself and the other employee are probably going to leave, because we feel that more like 2-3% minimum is appropriate for our position, and we doubt that the founders will see it that way.

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
If you were the inventor of Facebook, then you would have invented Facebook.
tptacek 16y ago
It's a weird little backwater we're in if the only perceived risk in starting a company is reputational. Most companies fail. The risk is financial. The people you see founding companies "again and again and again" generally fall into two categories: (1) people who have never founded anything successful and have nothing obvious to lose, and (2) people who have already succeeded (like Calacanis) for whom the risk is any the myriad of other things they could have been doing to make money during that time period.
verysimple 16y ago
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. I used to work for a web design shop. My fellow programmers and I hated the fact that our bosses were making money on our backs. They would bill clients these huge fees for our hours and pay us 10% of that amount. What did we do about it? We complained to each other during lunch hours. Until one day when I threw in the idea, "lets start our own company". Then the truth came out, all those brave soldiers started backpedaling. I was in awe. I quit my job soon after, became a freelancer and 3 years later partnered up with another programmer to start a development company. We went through ups and downs at the beginning, not garnering much support, even from our own social circles. It's been a year and only now are some of our clients finally realizing the appeal of our offer. We have more work than we can handle and have had to moved into a larger office in a downtown area. I'm literally starting to hire next week. The same people we tried to get help from at the beginning, who were instead doing nothing but discourage us, are now more than willing volunteers. I've had many similar experiences all throughout my life. I have once tried to organize a class action lawsuit against a company orchestrating an organized scam. I knew many of the clients personally. So I tried to gather them and the same thing happened, there was fud and people chose to wait and see what would happen as they left me to handle the initial steps on my own. I eventually reached an agreement with the company and got somewhat compensated. Later on when people heard, they tried to join in on the action, but by then it was too late, I had moved on with my life. Another example, about 2 years ago, I had dealings with an agency that wanted to build this really ambitious website for one of their clients. I was hired as a developer along with other professionals from various fields (design, ux, marketing, etc). The agency ended up not paying any of us and while everybody were emailing each other trying to figure out what to do? I threw in a couple of bold ideas, such as bypassing the agency and dealing directly with the client, suing the agency. As expected the brave mouths didn't feel so tough anymore. I ended up hiring my own lawyer and a few months ago, I obtained a court decision. When people heard, I started receiving emails about "maybe ganging up to get our money". All 3 stories have the same pattern. There is a problem, a risky proposal gets thrown in, people react to the idea, someone does something about it. I've come to the conclusion that being an entrepreneur is a character trait. You either have it or you don't. Soon after I quit my job 4 years ago, I read or heard something somewhere, I don't remember the source, but it basically said, you get paid what you deserve. It's only now that I have a small and growing enterprise and that I have to explore the compensation question that I understand this. My coworkers from 4 years ago still work for the same boss. Maybe they got salary bumps, maybe they didn't, maybe they're still complaining during lunch, but one thing is sure we all got what we deserved.

gamble 16y ago

I really question this idea that (YC-style) startup founders are taking on more risk than employees. Few founders have a significant amount of personal capital invested in the business. If the startup fails, they're not out of much more than a job. In fact, early employees are in a far more precarious situation, since they're much more likely to lose their job than the founders. And if the company does go down, the founders have a much better entry on their resume than someone who took a job at a small company that no one has ever heard of. At least in America, there is so little stigma associated with a failed startup that I don't see the reputation aspect of your argument. Short of flat-out malfeasance, a failed entrepreneur is far more fundable than someone who has never started a company.

wdewind 16y ago
We like to say there is no stigma associated with a failed startup. Quite frankly I think that's bullshit. It may not hurt your chances of getting hired again as an engineer because you will likely have great experience from it. But you will have just spent months/years promising people you were going to improve an aspect of their life (through your business solving their problems, or maybe through getting more financial independence for your family etc.), and you were unable to do so. In many cases you've been trusted with extremely important things. You will have been trusted with a leadership role (in society, not just a company), and you will have failed, regardless of the value of the experience. Startups don't really get traction (outside of social) without serious contributions: being involved in solving hair on fire problems. So, let's say you're starting a banking/commerce related startup like PayPal, and some fraud happens on your network which ultimately leads to it failing to gain trust (though it is relatively secure) and thus failing to gain traction and failing. Sure, you may handle the breach well, and go on to have a high paying job as a security analyst or something based on your specific experience. But good luck trying to raise capital again. Good luck getting your friends and family to support you and take you seriously when you're going down your second "I'm quitting my job to give everything I have to a startup." Good luck recruiting engineers who know you as the ex-CEO of failed startup XYZ, etc.
- mechanical_fish 16y ago

code_duck 16y ago

That reflects on their future prospects of being a startup founder, though. I think the founder of a company like Friendster could still get a job working at Twitter or Zynga or whatever as an engineer, and the notoriety in their past would actually be a benefit.

ojbyrne 16y ago
Engineer? Jonathan Abrams, since Friendster, has been a CEO, owns a bar, is an angel investor and an advisor to other companies (http://www.crunchbase.com/person/jonathan-abrams http://www.crunchbase.com/person/jonathan-abrams) . He probably was able to "take money off the table."
- code_duck 16y ago
  Right, so in this case it wasn't some failed attempt that harmed his prospects. I think the real risk is that you'll fail and end up bankrupt, not that you'll sell the company for millions but carry the ignominy of not becoming Facebook.

natch 16y ago

I call bullshit. For financial risk, this doesn't apply if the founder doesn't have much to lose, or has a stable family they can rely on, or is just starting their career, or doesn't care about money. For reputation risk, that's hardly an issue, because making mistakes in considered a legitimate (even honorable) form of learning in startup culture; it certainly does not ruin someone's reputation. The real answer is way more simple: the founders hold most of the cards, and the engineers don't. Edit: and if the engineers don't like this, they are free to try to start their own startups.

tptacek 16y ago
This is head-explodey. If the engineers don't like the deal they're getting, they can go work for other companies. If they should be getting a better deal, they will. There simply isn't a glut of dev talent right now. There is the opposite of that.
- deleted 16y ago
  [deleted]
- mkramlich 16y ago
  exactly. and founder vs employee isn't a species difference. it's a role difference, and only at a moment in time, and only with respect to one particular company. any employee could also (before|instead|after) be a founder for another business. Don't like the perks/negs of being a mere employee? Fine, be a founder. And vice versa.

deleted 16y ago

[deleted]

bryanlarsen 16y ago

I argue that those first employees are taking more risk. If the company runs into trouble in 3-6 months time, it's going to be the employees who get turfed, not the founders. And I'm sure the founder of Friendster has no trouble finding a job. Starting a company and failing has enourmous cachet in the States. And Friendster did quite well, relatively speaking, compared to most failed startups.

OpieCunningham 16y ago

The founder of Friendster is very likely to be capable of being hired for a job, so the risk he took to his reputation was the risk of lower probability of becoming something other than an employee. Therefore, in comparison to an employee, the founder of Friendster remains on equivalent ground. He lost little if anything compared to an employee (a group of which he now belongs), so the risk was little and of low value in regards to personal reputation. In regards to money, that depends on the process. Did the startup function using the founders cash for a period of time that required a significant financial investment? If so, then there's significant risk on the part of the founder. If the startup functioned for a limited period of time on the founder's cash before receiving an investment that paid the founder as well as employees, then clearly there is little risk. Granted, the former scenario is the more likely.

swombat 16y ago

Many founders invest their savings into the business at inception. They certainly invest a massive cut in salary (usually all the way down to $0). The opportunity cost for founders is much more than a "25% haircut". Imho, for most, the financial risk and opportunity cost is why they deserve those shares, if you're going to do calculations. But, even more fundamentally, the founders deserve the shares because if they didn't start the business the business wouldn't exist. Without the founders, the discussion is moot.

cellis 16y ago
HN is seriously degraded if this is being downvoted. If this doesn't ring true, then you haven't been a startup founder.
- georgieporgie 16y ago
  But HN is so VC-obsessed, it seems like independent, $0-income startups are the edge cases here.
- deleted 16y ago
  [deleted]
- stonemetal 16y ago
  How so? OP said employees at a startup get 25% lower salary than they would at someplace more mainstream. He didn't mention founders making 25% less than they would at a day job.
  - NickPollard 16y ago
    Who do you think puts up the money that pays the employees?

joe_the_user 16y ago

Reputation? I have no idea who founded Webvan and I don't think I'd care if I did know. In modern America, there's little if any shame attached to having your business fail - less shame, really, than being fired or simply having a low prestige job. I agree that the difference is that the founders risk something. What they risked was just money and time. And risking time can be risking more than you'd think because there's an opportunity cost to not creating a career. It boils down to risk-amortized market for money and time; capital and human-capital. This is just the market. There is no fairness guarantee mechanism. If I have a billion dollars to put at a very, very slight risk, it is still worth much more than your willingness to risk your time, your "reputation", your health and your $100K.

dasil003 16y ago

Since when do you care about reputation ;) Seriously though, I agree that founders are taking the risk, but actually I think that is irrelevant as well. The bottom line is that the founder started the damn company; the company would not exist without the founder. If you go and negotiate a contract with a company, you get what's in the contract. In a profitable business we can argue all day about who's creating the value, but it's subjective and irrelevant; the only thing that matters is that the founder went and started a company and offered you a job and you took it. If you weren't able to negotiate a deal for what you're "worth" then man up and start your own damn company, otherwise you're just whining.

anon330 16y ago

This article is very timely. I've been employee #1 at a small company for about ten months, and I'm not only making just 50-60% of my pay potential, the recently proposed employee options plan grants me just 0.8% vesting over the next four years. "This isn't about who is more valuable, this about who took the risk." Risk? I joined less than a year after incorporation. I feel like I'm shouldering substantial risk by taking 50% of my overall compensation as options in a venture which I have no direct control over—I'm not on the board, I'm not a director. The options are worthless until 4-5 years down the road, and even then, I have no control or say into when we sell, to whom, and for how much. Myself and the other employee are probably going to leave, because we feel that more like 2-3% minimum is appropriate for our position, and we doubt that the founders will see it that way.