15 ms·

First employee of startup? You are probably getting screwed

389 points by Murkin 15y ago

jacques_chester 15y ago
Alternative title: "Don't remember how to multiply, add, subtract and divide? You are probably getting screwed". There's so many things in life where party A gets away with soaking party B because B didn't perform some simple arithmetic.
- amirmc 15y ago
  ...and party A didn't encourage them to do so (or give them enough information to do so). That's the part I dislike about all the ads for early hires. 'Meaningful equity' is rarely put into context.
- davidw 15y ago
  It's only simple if you can plug in accurate numbers.
  - jacques_chester 15y ago
    This is such a case. But your offer of equity paid on a probabilistic basis intrigues me.
- GBond 15y ago
  "How much do you want your monthly payments to be?" -Car saleman
- itg 15y ago
  I find that it is often because of information asymmetry, not because person B can't do simple math, that they get screwed.
ayanb 15y ago
Without having a bias towards the investor community, I think this comparison is only done from a money standpoint. Its also important to note what other value investor money and involvement brings to the organisation. Investors bring contacts from their immediate and extended network, sometimes a strong brand (think SV Angel/ YC), mentorship, experts in the given field, and media attention.
- gaius 15y ago
  Equally a good programmer brings much more than just programming ability.
  - ayanb 15y ago
    Being a programmer myself, I totally agree. I wanted to point out its not a linear comparison based on a money:equity parameter.
nivertech 15y ago
This guy can work for a year and invest his money on the same terms as angel investors. The only technical problem how to do it tax free, b/c you obviously owe income tax and in some countries like Israel also VAT. There are some solutions, but they are not trivial. The employee actually buys a convertible debt in the company on the similar terms as angel investor and can cash out on later rounds.
- Murkin 15y ago
  Or he can be a freelancer with his own company, investing from company's funds (no tax) and after the exit pulling the money from the company as dividends and getting to have only one (low) tax event.
  - nivertech 15y ago
    You can invest company funds, but you will still need to pay Corporate tax on your profits. Not relevant for freelancers without company, b/c they will need to pay taxes+VAT on income.
nwatson 15y ago
One more factor to consider, though: angel or Series A preferred shares often cost much more per share than the employee's per-share Common strike price. The option-exercising employee has a lower outlay and thus less risk. Of course, in all but the most favorable exits the reward per share will also be smaller.
grimen 15y ago
Depends on if the startup got production material and deals. Letting people in more than a very small equity and salary is just plain stupid if you worked hard for a year to get anywhere. Hardest thing is not to compe up with an idea, hardest things are: start, execute, ship, and have models to get paid. When these are almost done, new founders are not needed - they should have joined earlier. I've lately met people tryng to get onto the boat as if all we worked for was air. If I take someone more in for more than a good salary he/she better be a unshaped diamond. Of course, the article mentions 50% of normal salary for 1% - that is just so stupid. The people who wants to signed up on that cannot be unshaped diamonds.
Stravob 15y ago
you got a mistake with your math 500K of 2 million is 25%
- billswift 15y ago
  Actually: They raised 500K at a high 2M (pre-money) valuation, giving away 20% The 2M is before the 500K was added, so it is 500K of 2.5M total for 20%.
blader 15y ago
A more accurate title for this would be: "Taking a pay cut that is more than the market value of your equity stake? You are probably getting screwed."
Joakal 15y ago
I didn't know the forgone loss of salary for equity could be compared with investment that easily. That's brilliant!
- praptak 15y ago
  Why not? The salary money is real, even if you discount for the fact that it is not available immediately. The employee could as well stay at their current job and actually invest half of their salary in whatever they please - including a startup which pays its employees half of market salary.
wheels 15y ago
Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say: • Employee given 1% • Two additional funding rounds at 30% dillution each bring that to 0.49% • In a $30 million exit the employee will get $147,000 • Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter) • So the adjusted value, including probability of failure, of those options is just $14,700 You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).
- notbitter 15y ago
  You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.
- jonnathanson 15y ago
  Something to further emphasize here: time to exit. Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.
- Murkin 15y ago
  The seed round _is_ the 'probable return' calculation. Seed numbers should tell you what other (professional) investors consider to be a 'good deal'. If you are willing to get in and worse conditions, you are either brilliant or..
  - wheels 15y ago
    That's partly true, but there are some subtleties not conveyed by such: If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life. And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset). Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.
roel_v 15y ago
But comparing to the opportunity of somebody else is irrelevant. If the employee has 500k to invest, they're free to get the same terms as the investor. It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy. Ergo, the investor gets paid more.
- gaius 15y ago
  Read the article. He is an investor, to all intents and purposes, and getting significantly worse terms than all other investors.
  - roel_v 15y ago
    Uhm, I did read the article, and no, 'putting in' 50k by getting a lower salary is not 'being an investor to all intents and purposes'. For one because the investor brings cash, the guy just work and time. Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.
    - earbitscom 15y ago
      The investors invests $500k NOW, usually with no ability to take their money back. The employee invests $136 each day with the option to leave and cut their losses anytime.
      - foobarbazoo 15y ago
        ^^ This. Plus, the employee is coming on AFTER a substantial fund raising round, and should not expect the same terms since the company is already validated (and capitalized); thus, the "investment" risk is reduced. I also agree with the other posters: "paycheck" employees are not good hires early on in a startup.
      - Silhouette 15y ago
        > The employee invests $136 each day with the option to leave and cut their losses anytime. (a) That depends on where you are. (b) You are ignoring the opportunity cost to the employee (though admittedly this is consistent with the original article). (c) You are ignoring the potential adverse consequences on the employee's future career of being associated with a failed start-up, leaving a job early to chase dreams, etc. (Please don't tell me that it's better to have a CV showing you worked at several failed start-ups than it is to have a solid track record of demonstrable good results at established companies. That is the kind of fiction that only people in the start-up community manage to believe.)
DodgyEggplant 15y ago
Then open your own startup, and get 99% of the shares for 0% of your previous salary
earbitscom 15y ago
No offense, but this is horseshit and the math is embarrassing. The number of people ready to invest $500k, for whom this is "a small part of his capital," is about 1/1000th of the number of people who will enjoy working and learning in a small, exciting company, and having more input into the product, regardless of total potential for financial gain. So, the value of $500k in cash from an accredited investor is already worth more than the time investment of the average employee, for whom there are replacements lining up. [Edit] This is to say nothing of the additional value that an investor adds. Even if that were not the case, and this were strictly a math exercise, the investor is putting in $500k NOW. You're putting in $50k spread out over the next 365 days, during which a solid company's valuation may go up by ten fold. Right now, your $50k is worth 1% of the company. But you're not putting in $50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136 the next day. Good luck making an early stage investment in an exciting startup for $136. I have never seen early stage stock available on lay away. Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.
- amirmc 15y ago
  > "... the average employee, for whom there are replacements lining up" The article is talking about the first employee. If a tech startup is happy to accept 'average' employees at that stage it's probably doing it wrong. Also, if there are really that many people lining up, then why offer equity at all?
  - earbitscom 15y ago
    $100k is not the salary of a super star team member. Based on that salary, I assume this person is a solid B+ team member.
    - darklajid 15y ago
      Unqualified like this your statement is wrong. Please, for the sake of the global nature of the internet, state something like "based on the assumption that we're talking about this specific country/region and based on my experience with..." $100.000 seems to be the current salary of the friend in question for that blog post. If you don't know where he's based and what his costs and standard of living are, how can you judge the person as being 'B' level? Also - what the hell is a 'super star team member'? Edit: Just for fun I put the author's name into Google. According to LinkedIn/Twitter he's from Israel. If we assume that the startup was local as well (why not? And why should it be in the most expensive areas of the States?) $100.000 is really good salary. High tech (i.e. programmers) employees are already overpayed here compared to the everyone else and 100.000 USD / 30.000 NIS per month is a good salary even in that field.
thisisfmu 15y ago
Someone making a normal salary at a normal job will probably keep making roughly this amount. An early employee making a low salary plus options at a startup will learn the skills to create a bigger piece of wealth on their own. Why do I believe this to be true? Several of the people who worked for my startups previously have. Also, the ride is rather fun especially for someone shielded from most of the downsides and this has value. Why the disparity between founders and early employees you ask? There is a huge (order of magnitude+) difference in risk and, frankly, a differential in skills which we don't talk about for reasons of politeness.
davidw 15y ago
It'd be very interesting to look at real data from real companies and see how early employees made out. And naturally you'd want to include a wide spectrum of companies, both successful and unsuccessful. You could look at what rates people were actually paid, how much stock/options they got, how much it turned out to be worth and so on.
- pgroves 15y ago
  I wonder if the Startup Genome guys would be interested in tackling that? They seem more focused on "what makes a startup successful," but they seem to work by doing surveys like what you're talking about.
- ayanb 15y ago
  Now that would be an interesting study that would be quite oft-quoted.
  - davidw 15y ago
    If only there were someone around here with access to a lot of data about startups... I guess they're a bit conflicted though: YC startups need employees, and if their results showed that the early employees were getting screwed, they might not want to release them.
- Silhouette 15y ago
  As one data point, following the recent sale to HP, Autonomy staff in Cambridge split £30m between 175 people[1]. I'm in Cambridge and know various people who work/worked there, so I'm fairly sure that those 175 include many of the remaining "early employee" group. They'll be getting a nice windfall, obviously, but it's not never-work-again money. For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or so for his share of the company. For those not familiar with the numbers, Autonomy was basically the most successful software company in the UK, and the sale valued its shares at around a 60% premium give or take market fluctuations at the time of the announcement. It was founded in 1996. HP is the currently the biggest IT company in the world. In other words, this exit is as big as anything in its generation is going to get in my country, and if you weren't founder/investor/board level, you weren't retiring from it. [1] http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambridge-staff-share-p30m-bonanza-after-multi-billion-sale-to-hp http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambr...
goldmab 15y ago
There's a mistake in the math: one year of a salary cut is given as the amount invested. Why one year?
- Tichy 15y ago
  He mentioned assuming the optimistic scenario that after one year they can pay him a full salary.
JoeAltmaier 15y ago
Works the same way for contractors. Take a lower rate, delay payment, accept warrants instead of grants...its all investment, and should be on the same terms as any other early investor.
OstiaAntica 15y ago
The comparison math forgot the impact of taxes. The employee's $50K "investment" is pretax money, whereas the investors are putting in after-tax dollars. The marginal combined state, federal, and payroll tax rate on that second $50,000 in earnings is probably over 40%, so maybe the actual take-home salary given up for the deal is $29,000. Plus the equity earned is taxed at much lower capital gains rates (15%).
- pbreit 15y ago
  Also don't forget that if the employee is not accredited, it's unlikely he could (legally) invest at all. So there's an opportunity that must be valued, as well.
dfragnito 15y ago
There is risk associated with hiring an employee. There is no risk associated with a cash investment, There is investment risk, the risk associated with making the wrong investment like hiring the wrong employee. The investor with 50k in hand now vs the 100K per year employee willing to work for 50k. The Investor wins. With the 50K the start up can hire the 100k per year employee for 50k. If thing do not work out you can fire them and hire another one. The money is less risky giving it a higher value, plus its all upfront which has already been discussed.
realschool 15y ago
At a start-up I'm making a good rate for my first job.
marcin 15y ago
Nice polarising title, but: 1. You're not getting screwed, you are making a choice, which is driven by market factors like your alternatives, expected utility from the job etc. 2. The numbers given are quite extreme - if the guy is really worth 100k I find it hard to believe that he would be offered 50k and only 1%. Also his option stake could raise with more responsibility given, this is just the initial negotiation point as I see it. 3. It only makes sense in the Valley or US.
par 15y ago
If you give employee #1 only 1% of your startup, then there is something wrong with you, or employee #1 is more of an intern and not a key hire.
rglover 15y ago
Honestly, going in as the first employee of a startup shouldn't be a decision made by someone just looking for compensation. Rather, a first employee should be someone who is so hooked on the idea of that startup, they focus on the ability to build a company from the ground up. It's a risk, but if all else fails, they can find a job working for an established business that can offer those numbers. Joining a startup early on should be based on beliefs and passion for the company, not a paycheck.
- andrewcooke 15y ago
  sure, but you can have belief and passion and still not want to be screwed over financially.
  - rglover 15y ago
    Yes, but is $50,000 all that bad? Sure, it may not be what your skill bracket is worth, but I think you can live quite well (given that your frugal) on that salary. What's more is that you'll be more motivated to do good work and insure that the business grows so that your salary does as well. There are benefits and setbacks but that's up to the individual to make the choice. If you're going to work at a startup, you should understand the risks.
- cgbystrom 15y ago
  If the startup isn't considering their first employee a crucial hire then they're doing it wrong. And if you, as a job seeker, are dependent to land a potentially low-paying job at a startup to get a "real" job, then you probably aren't that "crucial hire" the startup is looking for. This ain't no charity business.
sl_ 15y ago
This covers the equity issue pretty well: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
- sarcasmatron 15y ago
  Pretty well, indeed. Thanks for the link.
craigmc 15y ago
Leaving aside that 1% is, in reality, too small a % for employee #1 of most startups, there are two factors that might make it worth it: 1. Route from employee #1 to v. senior position (with commensurately higher salary) is shorter* irrespective of whether the employee stays with the startup or moves on. (*Shorter than if the employee was working as a small cog elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can be made. 2. Route from employee #1 to owning your own funded startup is again shorter. As employee #1, if you do a good job, then you'll be considered a de facto founder, and thus will have that to add to your pitch when it is your turn to try and raise $500k. A third factor is that money is not everything. Working for a startup can be awesome, and might give you a whole range of professional and life experiences that you would not get when sucking down at your $100k pa teat.
- AlexeyMK 15y ago
  Agreed. One of the biggest intangibles of being an early employee is the amount learned, which (I imagine) is better than the learning for an investor. The path of early employee => founder is pretty well trodden. Aaron Patzer of Mint and Drew Houston of Dropbox are two immediate examples that come to mind. Who else am I missing?
  - 2arrs2ells 15y ago
    Adam D'Angelo
robjohnson 15y ago
Not entirely an accurate depiction of equity calculations, but it is nice to see as many people as possible doing these back-of-the-napkin sketches to educate. Mark Suster has some great posts about equity math.
toblender 15y ago
At least he got offered equity. The first one I joined didn't even have that.
michaelochurch 15y ago
First, I disagree that early employees of startups are "probably" getting screwed, but it definitely can happen, and often does to people who don't know their real value. The part of this that resonates with me isn't the mathematics. The math isn't very relevant because there's a really large unknown: the eventual value of the company. One percent could be a lot of money, or it could be nothing. There's also the matter of dilution: is he protected against dilution from investor and employee stock grants over the next N years? I would guess not. His 1% could be 0.2% or less by the time an exit happens. What is obvious is the emotional undercurrent to this very common anti-pattern. It sounds like he's not a real co-founder, he's "just a coder". They seem to be trying to sell him on a rotten deal because they think it's just such a privilege to work on their golden idea that they don't need to compensate properly. He's going to bust his ass to make the code work, for a salary half of his market rate, and in return he gets a tiny sliver of the company that gives him no real control, on a 4-year vesting cycle. I'm sorry, but these two guys are not (after 4 years, after he's done some real work) worth 79 times what he is just because they had the connections to raise money. Prospective employees tend to view equity grants in a pre-employment context, when a 1% share seems extremely generous because the employee hasn't done anything yet. But that's what vesting's for! Vesting allows companies to compensate based on future contributions, with the knowledge that if the employee quits or is fired before the 4-year period is up, they won't have to pay for all 4 years of work. At the least, if still thinks it's an "exciting" opportunity worth pursuing, he should recognize that he probably can't value the company better than the market, that we are in frothy times, and that the equity is worth more to an investor than to him (different risk profiles). So the value of 1% (post-money) of a $2.5 million company is $25,000 at most. That's $6,250 per year, far less than what he's giving up. The first employee of a startup is not necessarily getting screwed. If that employee gets appropriate respect for his skill set, and reasonable compensation for the risks inherent in a startup, then it's a fair trade. A lot of people go into startups as early employees knowing the risks and upsides and that's fine. What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right. First action: he needs to ask for 20% and settle for no less than 12%. If they say, "but you haven't done anything yet", he should point out that the equity grant is subject to vesting and that he won't get anything if he doesn't do any work. Second action: he needs to demand the right to listen in on investor and client meetings. Otherwise, the other two founders will hold all the power in the organization because they, and they alone, hold that special knowledge of what investors want. If they think he's "just a coder", they'll show it by saying (in effect) that no, he's not "good enough" to be in the investor meetings. The most likely outcome of his making these two demands is that they'll tell him to get lost. If that's the outcome, it's also the best outcome because it means the startup's a tarpit.
localhost3000 15y ago
My first gig out of school was with a startup. First employee. They paid 20% below market wage and gave way less than 1% equity. I didnt know any better (young/naive). I got screwed, big time.
kabdib 15y ago
Happened to me. Years of effort . . . startup bought . . . eventually wound up with 17 shares of Oracle. I'm not bitter. It was a fun ride, I learned a lot, and after an initial pay cut (when I first joined, and funding was tight) I got paid a decent salary.
- rudiger 15y ago
  How much did the founders and investors get?
Hisoka 15y ago
I think it depends on how much work was actually done before you joined. If the 2 co-founders already completed the main app/product, and you joined, 1% actually sounds fair. If you're gonna be the one creating almost the entire product from scratch, 1% is pitiful.
brudgers 15y ago
If I were valuing the deal, I would give primary consideration to the likelihood that the business is underfunded based upon their inability to provide a competitive salary after receiving funding. I would also consider the crap nature of the equity offer as evidence that their source of funding does not bring a wealth of experience to the table...no smart tech investor is going to tolerate the risk associated with screwing over critical hires.
ailon 15y ago
The question is: would someone working on 100k salary invest real 50k into a startup? And the answer is 99.9% no. They'll just spend the 50k on fancier food and other crap.
patio11 15y ago
Imagine three twenty-something guys working on a startup that has more lines of code than dollars in the bank. They're working out of an apartment and spend most evenings eating ramen noodles from the same MSG-laden box. They work approximately equal hours (too many). They suffer approximately equal stress (more than they ever expected). They bear approximately equal responsibility for not tanking the company through poor performance. They each accept dramatic pay-cuts relative to easier, better jobs which they could sleepwalk their way into. Next door, there are another three guys, eating ramen, etc etc. Now, it seems to me like the three guys behind Door #1 are very similar to the three guys behind Door #2. However, in one case they're all co-founders, and in one case they are two co-founders and a first employee. Those are very, very different statuses for the third guy. The third co-founder gets mentioned in press hits about the company. The third co-founder can call himself a co-founder, a status of value in an industry (and society) which is sometimes obsessed with status. The third co-founder cannot get excised from the cap table without that being mentioned as a subplot in the eventual movie. The first employee will not usually get mentioned. The first employee gets no social status of particular esteem. The first employee will not have a seat at the table -- literally or figuratively -- when the eventual disposition of the first employee's equity is decided. The first employee's equity stake is approximately 1/6 to 1/40th (or less!) of what the third co-founder's was. Well, theoretically. 0.5% is 1/40th of 20% in engineering math, not in investor math, because investors can change the laws of mathematics retroactively. 0.5% of millions of dollars is sometimes nothing at all. (This is one of the least obvious and most important things I have learned from HN.) If you're good enough to be a first employee, you're probably epsilon away from being good enough to be a third co-founder. There may be good reasons to prefer being an employee... but think darn hard before you make that decision.
- amirmc 15y ago
  Herein lies the problem for early stage companies trying to hire. The people they really need/want are probably capable of starting their own companies.
  - amirhhz 15y ago
    <epiphany> A small non-technical founding team looking to hire the best technical person they can is effectively looking for a co-founder, not an employee. So you're right, the coder who would be willing to consider such early involvement in a project is probably fairly entrepreneurial and will lose out if he is taken on as anything other than an equal co-founder. </epiphany> This has been my feeling previously, but this post and the comments helped make it concrete.
amorphid 15y ago
Youre not getting screwed if you walk into the job with your eyes wide open.
rudiger 15y ago
This is just a special case of "Working on a startup? You are probably getting screwed." The first employee doesn't have it too much worse than the founders, the second employee, or the third.
pgroves 15y ago
The founders are playing a dangerous game in this story. If key engineers don't have much reason to stick around other than it being exciting, they are likely to leave as soon as they get bored or tired. And yes, you can get bored while working 80 hour weeks. I was once in this exact position. I was the first employee and over the next few years a bunch of senior managers came in and each got 5-10x the stock I'd gotten. When the whole thing got old, I looked around and saw that I didn't have much upside potential (especially since there had been dilution), my salary was below market, and I left. What was incredible looking back is that something similar happened with a truly key engineer... someone who was recruited out of a university because he had more or less built the text mining library the company was using by himself. A product line rested on his shoulders, so he had a ton of responsibility, but when things got rough he didn't have enough reason to stick around. Added: The point is, there are good times and bad times in startups. In the good times you should look around and decide who you really need to stick around in the bad times and give out stock accordingly.
ailon 15y ago
If you are going to work as an employee in a startup primarily for the money, you are doing it wrong already.
sarcasmatron 15y ago
Interesting responses: I've never worked with startups for the payout, but for the experience of working with startups. As to stock, I prefer shares to options from both sides of the transaction. Finally, FASB 123 doesn't cover contractors or other non-employees - worth keeping in mind.
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progolferyo 15y ago
Great post. I think one of the undervalued points to make is the value first employees get out of going through the experience of being a 'first employee', not just counting the salary and stock options. It sounds kind of cliche I guess, but I really think its true that you get to live and breathe the startup life better than any big company. The value of coming out the other side with the experience and esteem of being that first employee is really huge. I think the first employee hires of any startup with similar financial numbers as the article should be for employees who want to start a company of their own someday, because thats where you get the biggest value. Those are the kinds of people who will have the bravado to start a their own company (and hopefully have some extra cash to spare as well) after a successful exit.
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earlylinkedin 15y ago
Some people are talking about the "expected value" of being an early employee, which is a very valuable view. I'd like to focus more on the best case to give a sense of what you can hope for if everything goes right. I was fortunate enough to be an early engineer at LinkedIn after I graduated college. I was one of the first few engineers hired. I'm not an amazing company picker, and I barely knew what a startup was at the time -- I just got lucky because I knew one of the cofounders. I received a decent option grant (especially for a kid just out of college!) and stayed at the company for two years. My options got diluted approximately 50% during the various funding rounds. Right now, LinkedIn is a top 20 website in the world, and there's a consensus that its current stock price is "very optimistic". My net worth on paper ends up being a couple of million. Needless to say, I'm thrilled. However, I also want to point out that there are only twenty "top 20 websites", and most of them aren't going to change anytime soon. So if you're one of the first few engineers at one of the 10-20 companies that's going to go from nothing to huge in the next 5-10 years, then you can view a few million -- perhaps 10-20 million -- as being the best that you can expect. And there are literally a few dozen, or maybe 100 people that will get this kind of success every decade. There is little skill involved here. It's all about getting lucky. Furthermore, people forget that it takes time for value to build. It might take you 4 years to get most of your stock options and decide you want a more stable job or a change of scenery, but it might take another 10 years for your company to go public or get sold. You're giving up a big chunk of your 20s for the potential of a few million in your mid-late 30s -- but you could probably save close to that much anyway with good spending habits and better paying jobs. So if you want to be an early employee at a start-up, it's an awesome experience. But you should do it because you love it, because you're passionate about the product, or because you cherish the learning opportunity. You shouldn't do it because you think it will make you a gazillionaire. (just to be clear, I did love my time at LinkedIn -- I made some great friends, learned a ton, understood that startups are the kind of places that I like to work at, etc. I'm really happy I was there, and would be even if the company hadn't become a big success)
vineet 15y ago
Having been employee one and started 2 companies - I strongly disagree. It is hard to find employees/co-founders that (a) have the right skills, (b) the right interests, (c) the right industry knowledge/contacts, and (d) are in the same place in their life to make the same amount of commitments. And even when you do you find such people, it is hard to give them 10% equity in the beginning and then tell them that they are under-performing, and only deserves 2.5% equity. Now, I agree, that the definition of under-performing is very different for a startup compared to a more established company. I have also found people are willing to accept when they are under-performing, but contracts and equity that is given is harder to change. However, I would love to have the right cofounder, and even share the equivalent equity with him if he can take over half my burden. Perhaps the answer is to find people with a very good fit, start them with low equity (~1%), and tell them how they can get more equity. And then doubling equity multiple times as they are able to rise to a founder level responsibility.
- gamble 15y ago
  This is normally a problem solved by a four-year vesting schedule w/ a one-year cliff. IMO, companies offering minimal equity with a promise to increase it later is a huge red flag, since those promises rarely come to fruition. Equity is given to compensate for the risk and work involved in a startup. Once the company is further along, the risk and work required are lower and there's no market justification to increase someone's equity stake. The temptation to ignore those promises is usually too great.
  - vineet 15y ago
    I do agree that the cliff and vesting schedules help here. But those force you to fire someone even if they are good but not perfect. I have been in situations where an early employee definitely believes that he/she can perform better per plan. Yes, there is also temptation to ignore rewarding someone when the company has progressed. But, it is also a huge red flag when you have a company where major early employees have left. IMO, one of the biggest responsibilities of any startup CEO is in attracting and retaining good talent. I am not suggesting giving lesser equity upfront, but more towards making a serious decision based on where the person is. If he is a great coder give him the equity that a great coder deserves. But a great coder is different from a great early team member - and it is hard to impossible to make the distinction early on. As for the red flags that an employees might have when joining a company with such promises - I am hoping that the rest of the team will be able to vouch for it working with regards to them being in the company.
dlikhten 15y ago
Differences between Co-Founter, Investor, First Coder: Co-Founder: - Starts the compamy, has the idea/initial impl - Takes risk, may work for a while with zero salary, investing personal time for nothing. - May wind up getting ZERO (total) for the investment. - Company does not get paid, co-found does not get paid. - Big potential payout - Health benefits? Post funding, or from other job while building startup. Investor: - Puts money into company. - May lose everything, that money is just going to the founders for some food and servers or something of that nature. - Payout depends on investment size. However lets say compared to co-founder, small payout. - Minimal invested personal effort compared to co-founder. - Invested time assisting the company and connecting the company to personal contacts to help it grow. - Provides advice when needed (hopefully) First Coder: - Gets paid less than average coder - Gets potential payout less than investor - Gets paid or laid off. There is no in-between. May agree to not get paid this month and instead get paid later in hopes of assisting the business during a tough month. - Has to be pretty close to the business since it's so volatile, so will see the lay-off coming. - Probably coming in with benefits provided to employee. As you can see risks/benefits are quite different for everyone. So its not just "you are getting screwed". I think that getting a very small % is actually practical depending on how far along the company is. The question is about how much risk is being taken, and how much is being contributed. A smart co-founder will see the contribution of a very valuable employee and offer more % to that employee especially if they are so critical to the company. Its not about employee #1 its about the fact that during the early phases, each individual person has the ability to make big things for the company, and they should be rewarded for those big things. Keeping life static is quite boring and no incentive. Yet having incentives for employees transforming the business early on is quite good.
- bugsy 15y ago
  The term "coder" is a demeaning one that is solely used to denigrate the contributions of product developers. If you are the only product developer at a company, you are not a "coder". The correct title would be Director of Product Development, or VP of Software Engineering.
  - wpietri 15y ago
cHalgan 15y ago
I'm not sure, but if you want to build a world class team you need to pay more than market rate + excellent team/work environment + more responsibility + more impact on world + give equity. There is no free lunch. Really. Did Facebook become successfully because they went cheap with hiring VP of engineering early in their game? (answer not: they recruited the top) Yes, you can get lucky and build a successful company by hiring people which are fresh from college for less than market and dream about being rich. The point is the following: DONT HIRE BAD DEVELOPERS. Unfortunately, good developers are good in math and they were around so they will not go with salary cut + questionable equity stake. Yes you can get lucky but there are so many other unknowns when you run a business and you should limit unknowns to the minimum.
pg 15y ago
You can write an article claiming that anyone doing x is probably getting screwed, if you choose numbers that make it a bad deal. In my experience (which at this point is pretty extensive) the numbers he uses here are extreme outliers. I'd expect a startup that was only able to raise money at $2m pre to be giving the first employee way more than 1%. How much more depends on how good he is (a factor that's not even considered in this article). Someone as good as the founders could reasonably expect 15%.
- amirmc 15y ago
  Interesting that your figure seems to be similar to the number another commenter came up with (assuming this guy is as good as the founders). What do you think of his reasoning? [edit: from 7th para at http://news.ycombinator.com/item?id=2949795 http://news.ycombinator.com/item?id=2949795] "What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right."
- 3pt14159 15y ago
  It's been my experience that they get about 3% or 4% and if they are good they get more in subsequent bonuses. Usually totaling to around 5%. If they end up in an executive role they get about 7% to 10%. But maybe YC companies have different metrics than my local TO startup scene. I received 4 subsequent bonuses in about 20 months before leaving a successful startup tripling my stake, but I was employee 20.
HaloZero 15y ago
Just wanted to point out (read a bit) you get equity at big companies too? That's not a not negligible amount of cash. So the guy isn't just losing $50K in salary, but the equity that the other company (bigger company) would be giving him. Not sure what the equity grants at bigger companies end up being though.
rmorrison 15y ago
This post is missing the most valuable part of working at a startup: the experience. Sure, you can go work at ________ (big company paying fresh developers $120k+), but you're going to be pigeonholed into working on a small aspect of the product/company. If you join a promising small startup, you're going to learn about all aspects of business, startups, selling, marketing, fundraising, etc. These skills will be extremely helpful to you throughout the rest of your career, especially if you plan to start your own company someday.
- xyzzyz 15y ago
  Why pay for this experience, when you can get the same, with much better financial situation, by actually starting a company?
  - rmorrison 15y ago
    If you can start one then great, but it's difficult to get your own startup to the point where it is paying you and your cofounder's living expenses. Most likely, starting your own company consists of working a full time job and half-assing a startup on the side. A much better first step is to immerse yourself in an existing startup, plus you'll have the added bonus of a large financial upside. Besides the financial risks of starting a company, it's extremely helpful to learn from existing entrepreneurs, which you also get working at a startup.
    - xyzzyz 15y ago
      Why work full time for startup for $50k when you can work half time for established company for the same salary and more benefits, and have more time to build your startup at the same time? If you're able to live off $50k/year, why not work for established company full time for one year for $100k, spending $50k and still having $50k to cover full year of searching for customers and investors?
      - rmorrison 15y ago
        1) You need a cofounder, for all practical purposes. So that costs more. 2) It'll probably take you longer than 1 year to make $50k/year/cofounder, so in your scenario you run the risk of running out of money after the second year. 3) In your scenario you have to wait a year to start. Plus, you run the risk of getting trapped in the job. Life happens, who knows what your circumstances will be like in a year or two. And most importantly of all: 4) You'll be 100x better prepared after working at a real startup for a few years. All of the books and blogs are no replacement for real startup experience.
rmrm 15y ago
my history with startup options: 1st company: acquired 2nd: ipo 3rd: bankrupt 4th: acquired Net value of all option shares : 0 Meaning, in toto, my strike price x shares is almost exactly what they ended up being worth. The net present value of an option is the strike price. Even the private options market is pretty efficient. Whereas a lottery ticket might have a net present value of only 60%, so these are pretty good lottery tickets. But that is essentially all they are.
slowpoison 15y ago
He forgot to factor the risk into the equation here. Investors have risk. If the company goes down they lose $500K. How much do you lose $50K? 1% may or may not be less. We definitely need deeper analysis here.
spinlock 15y ago
Cash is king. You can demand more equity and priority in the debt stack ordering when you write checks. Life's not fair but whining over how you're getting screwed won't help you realize the opportunities that are available to you.
caffeine5150 15y ago
I was a co-founder of a startup (non-tech) that raised $60+ million over 10 years and in my experience, a dollar of sweat equity, particularly from a person without some extraordinary personal value-add, is rarely as valuable as a dollar of paid in capital, all things being equal.
kelnos 15y ago
Related question: when we're talking "equity" here for early employees, are we talking stock or options? At my last startup, all employees (even #1) were given options, not stock outright.
abalone 15y ago
It's a market. If you think you can get >1% for "saving the company" with your hax0r skilz, go right ahead and try to negotiate that.

389 points by Murkin 15y ago

Alternative title: "Don't remember how to multiply, add, subtract and divide? You are probably getting screwed". There's so many things in life where party A gets away with soaking party B because B didn't perform some simple arithmetic.

amirmc 15y ago
...and party A didn't encourage them to do so (or give them enough information to do so). That's the part I dislike about all the ads for early hires. 'Meaningful equity' is rarely put into context.
davidw 15y ago
It's only simple if you can plug in accurate numbers.
- jacques_chester 15y ago
  This is such a case. But your offer of equity paid on a probabilistic basis intrigues me.
GBond 15y ago
"How much do you want your monthly payments to be?" -Car saleman
itg 15y ago
I find that it is often because of information asymmetry, not because person B can't do simple math, that they get screwed.

ayanb 15y ago

Without having a bias towards the investor community, I think this comparison is only done from a money standpoint. Its also important to note what other value investor money and involvement brings to the organisation. Investors bring contacts from their immediate and extended network, sometimes a strong brand (think SV Angel/ YC), mentorship, experts in the given field, and media attention.

gaius 15y ago
Equally a good programmer brings much more than just programming ability.
- ayanb 15y ago
  Being a programmer myself, I totally agree. I wanted to point out its not a linear comparison based on a money:equity parameter.

nivertech 15y ago

This guy can work for a year and invest his money on the same terms as angel investors. The only technical problem how to do it tax free, b/c you obviously owe income tax and in some countries like Israel also VAT. There are some solutions, but they are not trivial. The employee actually buys a convertible debt in the company on the similar terms as angel investor and can cash out on later rounds.

Murkin 15y ago
Or he can be a freelancer with his own company, investing from company's funds (no tax) and after the exit pulling the money from the company as dividends and getting to have only one (low) tax event.
- nivertech 15y ago
  You can invest company funds, but you will still need to pay Corporate tax on your profits. Not relevant for freelancers without company, b/c they will need to pay taxes+VAT on income.

nwatson 15y ago

One more factor to consider, though: angel or Series A preferred shares often cost much more per share than the employee's per-share Common strike price. The option-exercising employee has a lower outlay and thus less risk. Of course, in all but the most favorable exits the reward per share will also be smaller.

grimen 15y ago

Depends on if the startup got production material and deals. Letting people in more than a very small equity and salary is just plain stupid if you worked hard for a year to get anywhere. Hardest thing is not to compe up with an idea, hardest things are: start, execute, ship, and have models to get paid. When these are almost done, new founders are not needed - they should have joined earlier. I've lately met people tryng to get onto the boat as if all we worked for was air. If I take someone more in for more than a good salary he/she better be a unshaped diamond. Of course, the article mentions 50% of normal salary for 1% - that is just so stupid. The people who wants to signed up on that cannot be unshaped diamonds.

Stravob 15y ago

you got a mistake with your math 500K of 2 million is 25%

billswift 15y ago
Actually: They raised 500K at a high 2M (pre-money) valuation, giving away 20% The 2M is before the 500K was added, so it is 500K of 2.5M total for 20%.

blader 15y ago

A more accurate title for this would be: "Taking a pay cut that is more than the market value of your equity stake? You are probably getting screwed."

Joakal 15y ago

I didn't know the forgone loss of salary for equity could be compared with investment that easily. That's brilliant!

praptak 15y ago
Why not? The salary money is real, even if you discount for the fact that it is not available immediately. The employee could as well stay at their current job and actually invest half of their salary in whatever they please - including a startup which pays its employees half of market salary.

wheels 15y ago

Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say: • Employee given 1% • Two additional funding rounds at 30% dillution each bring that to 0.49% • In a $30 million exit the employee will get $147,000 • Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter) • So the adjusted value, including probability of failure, of those options is just $14,700 You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).

notbitter 15y ago
You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.
jonnathanson 15y ago
Something to further emphasize here: time to exit. Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.
Murkin 15y ago
The seed round _is_ the 'probable return' calculation. Seed numbers should tell you what other (professional) investors consider to be a 'good deal'. If you are willing to get in and worse conditions, you are either brilliant or..
- wheels 15y ago
  That's partly true, but there are some subtleties not conveyed by such: If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life. And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset). Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.

roel_v 15y ago

But comparing to the opportunity of somebody else is irrelevant. If the employee has 500k to invest, they're free to get the same terms as the investor. It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy. Ergo, the investor gets paid more.

gaius 15y ago
Read the article. He is an investor, to all intents and purposes, and getting significantly worse terms than all other investors.
- roel_v 15y ago
  Uhm, I did read the article, and no, 'putting in' 50k by getting a lower salary is not 'being an investor to all intents and purposes'. For one because the investor brings cash, the guy just work and time. Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.
  - earbitscom 15y ago
    The investors invests $500k NOW, usually with no ability to take their money back. The employee invests $136 each day with the option to leave and cut their losses anytime.
    - foobarbazoo 15y ago
      ^^ This. Plus, the employee is coming on AFTER a substantial fund raising round, and should not expect the same terms since the company is already validated (and capitalized); thus, the "investment" risk is reduced. I also agree with the other posters: "paycheck" employees are not good hires early on in a startup.
    - Silhouette 15y ago
      > The employee invests $136 each day with the option to leave and cut their losses anytime. (a) That depends on where you are. (b) You are ignoring the opportunity cost to the employee (though admittedly this is consistent with the original article). (c) You are ignoring the potential adverse consequences on the employee's future career of being associated with a failed start-up, leaving a job early to chase dreams, etc. (Please don't tell me that it's better to have a CV showing you worked at several failed start-ups than it is to have a solid track record of demonstrable good results at established companies. That is the kind of fiction that only people in the start-up community manage to believe.)

DodgyEggplant 15y ago

Then open your own startup, and get 99% of the shares for 0% of your previous salary

earbitscom 15y ago

No offense, but this is horseshit and the math is embarrassing. The number of people ready to invest $500k, for whom this is "a small part of his capital," is about 1/1000th of the number of people who will enjoy working and learning in a small, exciting company, and having more input into the product, regardless of total potential for financial gain. So, the value of $500k in cash from an accredited investor is already worth more than the time investment of the average employee, for whom there are replacements lining up. [Edit] This is to say nothing of the additional value that an investor adds. Even if that were not the case, and this were strictly a math exercise, the investor is putting in $500k NOW. You're putting in $50k spread out over the next 365 days, during which a solid company's valuation may go up by ten fold. Right now, your $50k is worth 1% of the company. But you're not putting in $50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136 the next day. Good luck making an early stage investment in an exciting startup for $136. I have never seen early stage stock available on lay away. Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.

amirmc 15y ago
> "... the average employee, for whom there are replacements lining up" The article is talking about the first employee. If a tech startup is happy to accept 'average' employees at that stage it's probably doing it wrong. Also, if there are really that many people lining up, then why offer equity at all?
- earbitscom 15y ago
  $100k is not the salary of a super star team member. Based on that salary, I assume this person is a solid B+ team member.
  - darklajid 15y ago
    Unqualified like this your statement is wrong. Please, for the sake of the global nature of the internet, state something like "based on the assumption that we're talking about this specific country/region and based on my experience with..." $100.000 seems to be the current salary of the friend in question for that blog post. If you don't know where he's based and what his costs and standard of living are, how can you judge the person as being 'B' level? Also - what the hell is a 'super star team member'? Edit: Just for fun I put the author's name into Google. According to LinkedIn/Twitter he's from Israel. If we assume that the startup was local as well (why not? And why should it be in the most expensive areas of the States?) $100.000 is really good salary. High tech (i.e. programmers) employees are already overpayed here compared to the everyone else and 100.000 USD / 30.000 NIS per month is a good salary even in that field.

thisisfmu 15y ago

Someone making a normal salary at a normal job will probably keep making roughly this amount. An early employee making a low salary plus options at a startup will learn the skills to create a bigger piece of wealth on their own. Why do I believe this to be true? Several of the people who worked for my startups previously have. Also, the ride is rather fun especially for someone shielded from most of the downsides and this has value. Why the disparity between founders and early employees you ask? There is a huge (order of magnitude+) difference in risk and, frankly, a differential in skills which we don't talk about for reasons of politeness.

davidw 15y ago

It'd be very interesting to look at real data from real companies and see how early employees made out. And naturally you'd want to include a wide spectrum of companies, both successful and unsuccessful. You could look at what rates people were actually paid, how much stock/options they got, how much it turned out to be worth and so on.

pgroves 15y ago
I wonder if the Startup Genome guys would be interested in tackling that? They seem more focused on "what makes a startup successful," but they seem to work by doing surveys like what you're talking about.
ayanb 15y ago
Now that would be an interesting study that would be quite oft-quoted.
- davidw 15y ago
  If only there were someone around here with access to a lot of data about startups... I guess they're a bit conflicted though: YC startups need employees, and if their results showed that the early employees were getting screwed, they might not want to release them.
Silhouette 15y ago
As one data point, following the recent sale to HP, Autonomy staff in Cambridge split £30m between 175 people[1]. I'm in Cambridge and know various people who work/worked there, so I'm fairly sure that those 175 include many of the remaining "early employee" group. They'll be getting a nice windfall, obviously, but it's not never-work-again money. For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or so for his share of the company. For those not familiar with the numbers, Autonomy was basically the most successful software company in the UK, and the sale valued its shares at around a 60% premium give or take market fluctuations at the time of the announcement. It was founded in 1996. HP is the currently the biggest IT company in the world. In other words, this exit is as big as anything in its generation is going to get in my country, and if you weren't founder/investor/board level, you weren't retiring from it. [1] http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambridge-staff-share-p30m-bonanza-after-multi-billion-sale-to-hp http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambr...

goldmab 15y ago

There's a mistake in the math: one year of a salary cut is given as the amount invested. Why one year?

Tichy 15y ago
He mentioned assuming the optimistic scenario that after one year they can pay him a full salary.

JoeAltmaier 15y ago

Works the same way for contractors. Take a lower rate, delay payment, accept warrants instead of grants...its all investment, and should be on the same terms as any other early investor.

OstiaAntica 15y ago

The comparison math forgot the impact of taxes. The employee's $50K "investment" is pretax money, whereas the investors are putting in after-tax dollars. The marginal combined state, federal, and payroll tax rate on that second $50,000 in earnings is probably over 40%, so maybe the actual take-home salary given up for the deal is $29,000. Plus the equity earned is taxed at much lower capital gains rates (15%).

pbreit 15y ago
Also don't forget that if the employee is not accredited, it's unlikely he could (legally) invest at all. So there's an opportunity that must be valued, as well.

dfragnito 15y ago

There is risk associated with hiring an employee. There is no risk associated with a cash investment, There is investment risk, the risk associated with making the wrong investment like hiring the wrong employee. The investor with 50k in hand now vs the 100K per year employee willing to work for 50k. The Investor wins. With the 50K the start up can hire the 100k per year employee for 50k. If thing do not work out you can fire them and hire another one. The money is less risky giving it a higher value, plus its all upfront which has already been discussed.

realschool 15y ago

At a start-up I'm making a good rate for my first job.

marcin 15y ago

Nice polarising title, but: 1. You're not getting screwed, you are making a choice, which is driven by market factors like your alternatives, expected utility from the job etc. 2. The numbers given are quite extreme - if the guy is really worth 100k I find it hard to believe that he would be offered 50k and only 1%. Also his option stake could raise with more responsibility given, this is just the initial negotiation point as I see it. 3. It only makes sense in the Valley or US.

par 15y ago

If you give employee #1 only 1% of your startup, then there is something wrong with you, or employee #1 is more of an intern and not a key hire.

rglover 15y ago

Honestly, going in as the first employee of a startup shouldn't be a decision made by someone just looking for compensation. Rather, a first employee should be someone who is so hooked on the idea of that startup, they focus on the ability to build a company from the ground up. It's a risk, but if all else fails, they can find a job working for an established business that can offer those numbers. Joining a startup early on should be based on beliefs and passion for the company, not a paycheck.

andrewcooke 15y ago
sure, but you can have belief and passion and still not want to be screwed over financially.
- rglover 15y ago
  Yes, but is $50,000 all that bad? Sure, it may not be what your skill bracket is worth, but I think you can live quite well (given that your frugal) on that salary. What's more is that you'll be more motivated to do good work and insure that the business grows so that your salary does as well. There are benefits and setbacks but that's up to the individual to make the choice. If you're going to work at a startup, you should understand the risks.
cgbystrom 15y ago
If the startup isn't considering their first employee a crucial hire then they're doing it wrong. And if you, as a job seeker, are dependent to land a potentially low-paying job at a startup to get a "real" job, then you probably aren't that "crucial hire" the startup is looking for. This ain't no charity business.

sl_ 15y ago

This covers the equity issue pretty well: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

sarcasmatron 15y ago
Pretty well, indeed. Thanks for the link.

craigmc 15y ago

Leaving aside that 1% is, in reality, too small a % for employee #1 of most startups, there are two factors that might make it worth it: 1. Route from employee #1 to v. senior position (with commensurately higher salary) is shorter* irrespective of whether the employee stays with the startup or moves on. (*Shorter than if the employee was working as a small cog elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can be made. 2. Route from employee #1 to owning your own funded startup is again shorter. As employee #1, if you do a good job, then you'll be considered a de facto founder, and thus will have that to add to your pitch when it is your turn to try and raise $500k. A third factor is that money is not everything. Working for a startup can be awesome, and might give you a whole range of professional and life experiences that you would not get when sucking down at your $100k pa teat.

AlexeyMK 15y ago
Agreed. One of the biggest intangibles of being an early employee is the amount learned, which (I imagine) is better than the learning for an investor. The path of early employee => founder is pretty well trodden. Aaron Patzer of Mint and Drew Houston of Dropbox are two immediate examples that come to mind. Who else am I missing?
- 2arrs2ells 15y ago
  Adam D'Angelo

robjohnson 15y ago

Not entirely an accurate depiction of equity calculations, but it is nice to see as many people as possible doing these back-of-the-napkin sketches to educate. Mark Suster has some great posts about equity math.

toblender 15y ago

At least he got offered equity. The first one I joined didn't even have that.

michaelochurch 15y ago

First, I disagree that early employees of startups are "probably" getting screwed, but it definitely can happen, and often does to people who don't know their real value. The part of this that resonates with me isn't the mathematics. The math isn't very relevant because there's a really large unknown: the eventual value of the company. One percent could be a lot of money, or it could be nothing. There's also the matter of dilution: is he protected against dilution from investor and employee stock grants over the next N years? I would guess not. His 1% could be 0.2% or less by the time an exit happens. What is obvious is the emotional undercurrent to this very common anti-pattern. It sounds like he's not a real co-founder, he's "just a coder". They seem to be trying to sell him on a rotten deal because they think it's just such a privilege to work on their golden idea that they don't need to compensate properly. He's going to bust his ass to make the code work, for a salary half of his market rate, and in return he gets a tiny sliver of the company that gives him no real control, on a 4-year vesting cycle. I'm sorry, but these two guys are not (after 4 years, after he's done some real work) worth 79 times what he is just because they had the connections to raise money. Prospective employees tend to view equity grants in a pre-employment context, when a 1% share seems extremely generous because the employee hasn't done anything yet. But that's what vesting's for! Vesting allows companies to compensate based on future contributions, with the knowledge that if the employee quits or is fired before the 4-year period is up, they won't have to pay for all 4 years of work. At the least, if still thinks it's an "exciting" opportunity worth pursuing, he should recognize that he probably can't value the company better than the market, that we are in frothy times, and that the equity is worth more to an investor than to him (different risk profiles). So the value of 1% (post-money) of a $2.5 million company is $25,000 at most. That's $6,250 per year, far less than what he's giving up. The first employee of a startup is not necessarily getting screwed. If that employee gets appropriate respect for his skill set, and reasonable compensation for the risks inherent in a startup, then it's a fair trade. A lot of people go into startups as early employees knowing the risks and upsides and that's fine. What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right. First action: he needs to ask for 20% and settle for no less than 12%. If they say, "but you haven't done anything yet", he should point out that the equity grant is subject to vesting and that he won't get anything if he doesn't do any work. Second action: he needs to demand the right to listen in on investor and client meetings. Otherwise, the other two founders will hold all the power in the organization because they, and they alone, hold that special knowledge of what investors want. If they think he's "just a coder", they'll show it by saying (in effect) that no, he's not "good enough" to be in the investor meetings. The most likely outcome of his making these two demands is that they'll tell him to get lost. If that's the outcome, it's also the best outcome because it means the startup's a tarpit.

localhost3000 15y ago

My first gig out of school was with a startup. First employee. They paid 20% below market wage and gave way less than 1% equity. I didnt know any better (young/naive). I got screwed, big time.

kabdib 15y ago

Happened to me. Years of effort . . . startup bought . . . eventually wound up with 17 shares of Oracle. I'm not bitter. It was a fun ride, I learned a lot, and after an initial pay cut (when I first joined, and funding was tight) I got paid a decent salary.

rudiger 15y ago
How much did the founders and investors get?

Hisoka 15y ago

I think it depends on how much work was actually done before you joined. If the 2 co-founders already completed the main app/product, and you joined, 1% actually sounds fair. If you're gonna be the one creating almost the entire product from scratch, 1% is pitiful.

brudgers 15y ago

If I were valuing the deal, I would give primary consideration to the likelihood that the business is underfunded based upon their inability to provide a competitive salary after receiving funding. I would also consider the crap nature of the equity offer as evidence that their source of funding does not bring a wealth of experience to the table...no smart tech investor is going to tolerate the risk associated with screwing over critical hires.

ailon 15y ago

The question is: would someone working on 100k salary invest real 50k into a startup? And the answer is 99.9% no. They'll just spend the 50k on fancier food and other crap.

patio11 15y ago

Imagine three twenty-something guys working on a startup that has more lines of code than dollars in the bank. They're working out of an apartment and spend most evenings eating ramen noodles from the same MSG-laden box. They work approximately equal hours (too many). They suffer approximately equal stress (more than they ever expected). They bear approximately equal responsibility for not tanking the company through poor performance. They each accept dramatic pay-cuts relative to easier, better jobs which they could sleepwalk their way into. Next door, there are another three guys, eating ramen, etc etc. Now, it seems to me like the three guys behind Door #1 are very similar to the three guys behind Door #2. However, in one case they're all co-founders, and in one case they are two co-founders and a first employee. Those are very, very different statuses for the third guy. The third co-founder gets mentioned in press hits about the company. The third co-founder can call himself a co-founder, a status of value in an industry (and society) which is sometimes obsessed with status. The third co-founder cannot get excised from the cap table without that being mentioned as a subplot in the eventual movie. The first employee will not usually get mentioned. The first employee gets no social status of particular esteem. The first employee will not have a seat at the table -- literally or figuratively -- when the eventual disposition of the first employee's equity is decided. The first employee's equity stake is approximately 1/6 to 1/40th (or less!) of what the third co-founder's was. Well, theoretically. 0.5% is 1/40th of 20% in engineering math, not in investor math, because investors can change the laws of mathematics retroactively. 0.5% of millions of dollars is sometimes nothing at all. (This is one of the least obvious and most important things I have learned from HN.) If you're good enough to be a first employee, you're probably epsilon away from being good enough to be a third co-founder. There may be good reasons to prefer being an employee... but think darn hard before you make that decision.

amirmc 15y ago
Herein lies the problem for early stage companies trying to hire. The people they really need/want are probably capable of starting their own companies.
- amirhhz 15y ago
  <epiphany> A small non-technical founding team looking to hire the best technical person they can is effectively looking for a co-founder, not an employee. So you're right, the coder who would be willing to consider such early involvement in a project is probably fairly entrepreneurial and will lose out if he is taken on as anything other than an equal co-founder. </epiphany> This has been my feeling previously, but this post and the comments helped make it concrete.

amorphid 15y ago

Youre not getting screwed if you walk into the job with your eyes wide open.

rudiger 15y ago

This is just a special case of "Working on a startup? You are probably getting screwed." The first employee doesn't have it too much worse than the founders, the second employee, or the third.

pgroves 15y ago

The founders are playing a dangerous game in this story. If key engineers don't have much reason to stick around other than it being exciting, they are likely to leave as soon as they get bored or tired. And yes, you can get bored while working 80 hour weeks. I was once in this exact position. I was the first employee and over the next few years a bunch of senior managers came in and each got 5-10x the stock I'd gotten. When the whole thing got old, I looked around and saw that I didn't have much upside potential (especially since there had been dilution), my salary was below market, and I left. What was incredible looking back is that something similar happened with a truly key engineer... someone who was recruited out of a university because he had more or less built the text mining library the company was using by himself. A product line rested on his shoulders, so he had a ton of responsibility, but when things got rough he didn't have enough reason to stick around. Added: The point is, there are good times and bad times in startups. In the good times you should look around and decide who you really need to stick around in the bad times and give out stock accordingly.

ailon 15y ago

If you are going to work as an employee in a startup primarily for the money, you are doing it wrong already.

sarcasmatron 15y ago

Interesting responses: I've never worked with startups for the payout, but for the experience of working with startups. As to stock, I prefer shares to options from both sides of the transaction. Finally, FASB 123 doesn't cover contractors or other non-employees - worth keeping in mind.

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progolferyo 15y ago

Great post. I think one of the undervalued points to make is the value first employees get out of going through the experience of being a 'first employee', not just counting the salary and stock options. It sounds kind of cliche I guess, but I really think its true that you get to live and breathe the startup life better than any big company. The value of coming out the other side with the experience and esteem of being that first employee is really huge. I think the first employee hires of any startup with similar financial numbers as the article should be for employees who want to start a company of their own someday, because thats where you get the biggest value. Those are the kinds of people who will have the bravado to start a their own company (and hopefully have some extra cash to spare as well) after a successful exit.

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earlylinkedin 15y ago

Some people are talking about the "expected value" of being an early employee, which is a very valuable view. I'd like to focus more on the best case to give a sense of what you can hope for if everything goes right. I was fortunate enough to be an early engineer at LinkedIn after I graduated college. I was one of the first few engineers hired. I'm not an amazing company picker, and I barely knew what a startup was at the time -- I just got lucky because I knew one of the cofounders. I received a decent option grant (especially for a kid just out of college!) and stayed at the company for two years. My options got diluted approximately 50% during the various funding rounds. Right now, LinkedIn is a top 20 website in the world, and there's a consensus that its current stock price is "very optimistic". My net worth on paper ends up being a couple of million. Needless to say, I'm thrilled. However, I also want to point out that there are only twenty "top 20 websites", and most of them aren't going to change anytime soon. So if you're one of the first few engineers at one of the 10-20 companies that's going to go from nothing to huge in the next 5-10 years, then you can view a few million -- perhaps 10-20 million -- as being the best that you can expect. And there are literally a few dozen, or maybe 100 people that will get this kind of success every decade. There is little skill involved here. It's all about getting lucky. Furthermore, people forget that it takes time for value to build. It might take you 4 years to get most of your stock options and decide you want a more stable job or a change of scenery, but it might take another 10 years for your company to go public or get sold. You're giving up a big chunk of your 20s for the potential of a few million in your mid-late 30s -- but you could probably save close to that much anyway with good spending habits and better paying jobs. So if you want to be an early employee at a start-up, it's an awesome experience. But you should do it because you love it, because you're passionate about the product, or because you cherish the learning opportunity. You shouldn't do it because you think it will make you a gazillionaire. (just to be clear, I did love my time at LinkedIn -- I made some great friends, learned a ton, understood that startups are the kind of places that I like to work at, etc. I'm really happy I was there, and would be even if the company hadn't become a big success)

vineet 15y ago

Having been employee one and started 2 companies - I strongly disagree. It is hard to find employees/co-founders that (a) have the right skills, (b) the right interests, (c) the right industry knowledge/contacts, and (d) are in the same place in their life to make the same amount of commitments. And even when you do you find such people, it is hard to give them 10% equity in the beginning and then tell them that they are under-performing, and only deserves 2.5% equity. Now, I agree, that the definition of under-performing is very different for a startup compared to a more established company. I have also found people are willing to accept when they are under-performing, but contracts and equity that is given is harder to change. However, I would love to have the right cofounder, and even share the equivalent equity with him if he can take over half my burden. Perhaps the answer is to find people with a very good fit, start them with low equity (~1%), and tell them how they can get more equity. And then doubling equity multiple times as they are able to rise to a founder level responsibility.

gamble 15y ago
This is normally a problem solved by a four-year vesting schedule w/ a one-year cliff. IMO, companies offering minimal equity with a promise to increase it later is a huge red flag, since those promises rarely come to fruition. Equity is given to compensate for the risk and work involved in a startup. Once the company is further along, the risk and work required are lower and there's no market justification to increase someone's equity stake. The temptation to ignore those promises is usually too great.
- vineet 15y ago
  I do agree that the cliff and vesting schedules help here. But those force you to fire someone even if they are good but not perfect. I have been in situations where an early employee definitely believes that he/she can perform better per plan. Yes, there is also temptation to ignore rewarding someone when the company has progressed. But, it is also a huge red flag when you have a company where major early employees have left. IMO, one of the biggest responsibilities of any startup CEO is in attracting and retaining good talent. I am not suggesting giving lesser equity upfront, but more towards making a serious decision based on where the person is. If he is a great coder give him the equity that a great coder deserves. But a great coder is different from a great early team member - and it is hard to impossible to make the distinction early on. As for the red flags that an employees might have when joining a company with such promises - I am hoping that the rest of the team will be able to vouch for it working with regards to them being in the company.

dlikhten 15y ago

Differences between Co-Founter, Investor, First Coder: Co-Founder: - Starts the compamy, has the idea/initial impl - Takes risk, may work for a while with zero salary, investing personal time for nothing. - May wind up getting ZERO (total) for the investment. - Company does not get paid, co-found does not get paid. - Big potential payout - Health benefits? Post funding, or from other job while building startup. Investor: - Puts money into company. - May lose everything, that money is just going to the founders for some food and servers or something of that nature. - Payout depends on investment size. However lets say compared to co-founder, small payout. - Minimal invested personal effort compared to co-founder. - Invested time assisting the company and connecting the company to personal contacts to help it grow. - Provides advice when needed (hopefully) First Coder: - Gets paid less than average coder - Gets potential payout less than investor - Gets paid or laid off. There is no in-between. May agree to not get paid this month and instead get paid later in hopes of assisting the business during a tough month. - Has to be pretty close to the business since it's so volatile, so will see the lay-off coming. - Probably coming in with benefits provided to employee. As you can see risks/benefits are quite different for everyone. So its not just "you are getting screwed". I think that getting a very small % is actually practical depending on how far along the company is. The question is about how much risk is being taken, and how much is being contributed. A smart co-founder will see the contribution of a very valuable employee and offer more % to that employee especially if they are so critical to the company. Its not about employee #1 its about the fact that during the early phases, each individual person has the ability to make big things for the company, and they should be rewarded for those big things. Keeping life static is quite boring and no incentive. Yet having incentives for employees transforming the business early on is quite good.

bugsy 15y ago
The term "coder" is a demeaning one that is solely used to denigrate the contributions of product developers. If you are the only product developer at a company, you are not a "coder". The correct title would be Director of Product Development, or VP of Software Engineering.
- wpietri 15y ago

cHalgan 15y ago

I'm not sure, but if you want to build a world class team you need to pay more than market rate + excellent team/work environment + more responsibility + more impact on world + give equity. There is no free lunch. Really. Did Facebook become successfully because they went cheap with hiring VP of engineering early in their game? (answer not: they recruited the top) Yes, you can get lucky and build a successful company by hiring people which are fresh from college for less than market and dream about being rich. The point is the following: DONT HIRE BAD DEVELOPERS. Unfortunately, good developers are good in math and they were around so they will not go with salary cut + questionable equity stake. Yes you can get lucky but there are so many other unknowns when you run a business and you should limit unknowns to the minimum.

pg 15y ago

You can write an article claiming that anyone doing x is probably getting screwed, if you choose numbers that make it a bad deal. In my experience (which at this point is pretty extensive) the numbers he uses here are extreme outliers. I'd expect a startup that was only able to raise money at $2m pre to be giving the first employee way more than 1%. How much more depends on how good he is (a factor that's not even considered in this article). Someone as good as the founders could reasonably expect 15%.

amirmc 15y ago
Interesting that your figure seems to be similar to the number another commenter came up with (assuming this guy is as good as the founders). What do you think of his reasoning? [edit: from 7th para at http://news.ycombinator.com/item?id=2949795 http://news.ycombinator.com/item?id=2949795] "What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right."
3pt14159 15y ago
It's been my experience that they get about 3% or 4% and if they are good they get more in subsequent bonuses. Usually totaling to around 5%. If they end up in an executive role they get about 7% to 10%. But maybe YC companies have different metrics than my local TO startup scene. I received 4 subsequent bonuses in about 20 months before leaving a successful startup tripling my stake, but I was employee 20.

HaloZero 15y ago

Just wanted to point out (read a bit) you get equity at big companies too? That's not a not negligible amount of cash. So the guy isn't just losing $50K in salary, but the equity that the other company (bigger company) would be giving him. Not sure what the equity grants at bigger companies end up being though.

rmorrison 15y ago

This post is missing the most valuable part of working at a startup: the experience. Sure, you can go work at ________ (big company paying fresh developers $120k+), but you're going to be pigeonholed into working on a small aspect of the product/company. If you join a promising small startup, you're going to learn about all aspects of business, startups, selling, marketing, fundraising, etc. These skills will be extremely helpful to you throughout the rest of your career, especially if you plan to start your own company someday.

xyzzyz 15y ago
Why pay for this experience, when you can get the same, with much better financial situation, by actually starting a company?
- rmorrison 15y ago
  If you can start one then great, but it's difficult to get your own startup to the point where it is paying you and your cofounder's living expenses. Most likely, starting your own company consists of working a full time job and half-assing a startup on the side. A much better first step is to immerse yourself in an existing startup, plus you'll have the added bonus of a large financial upside. Besides the financial risks of starting a company, it's extremely helpful to learn from existing entrepreneurs, which you also get working at a startup.
  - xyzzyz 15y ago
    Why work full time for startup for $50k when you can work half time for established company for the same salary and more benefits, and have more time to build your startup at the same time? If you're able to live off $50k/year, why not work for established company full time for one year for $100k, spending $50k and still having $50k to cover full year of searching for customers and investors?
    - rmorrison 15y ago
      1) You need a cofounder, for all practical purposes. So that costs more. 2) It'll probably take you longer than 1 year to make $50k/year/cofounder, so in your scenario you run the risk of running out of money after the second year. 3) In your scenario you have to wait a year to start. Plus, you run the risk of getting trapped in the job. Life happens, who knows what your circumstances will be like in a year or two. And most importantly of all: 4) You'll be 100x better prepared after working at a real startup for a few years. All of the books and blogs are no replacement for real startup experience.

rmrm 15y ago

my history with startup options: 1st company: acquired 2nd: ipo 3rd: bankrupt 4th: acquired Net value of all option shares : 0 Meaning, in toto, my strike price x shares is almost exactly what they ended up being worth. The net present value of an option is the strike price. Even the private options market is pretty efficient. Whereas a lottery ticket might have a net present value of only 60%, so these are pretty good lottery tickets. But that is essentially all they are.

slowpoison 15y ago

He forgot to factor the risk into the equation here. Investors have risk. If the company goes down they lose $500K. How much do you lose $50K? 1% may or may not be less. We definitely need deeper analysis here.

spinlock 15y ago

Cash is king. You can demand more equity and priority in the debt stack ordering when you write checks. Life's not fair but whining over how you're getting screwed won't help you realize the opportunities that are available to you.

caffeine5150 15y ago

I was a co-founder of a startup (non-tech) that raised $60+ million over 10 years and in my experience, a dollar of sweat equity, particularly from a person without some extraordinary personal value-add, is rarely as valuable as a dollar of paid in capital, all things being equal.

kelnos 15y ago

Related question: when we're talking "equity" here for early employees, are we talking stock or options? At my last startup, all employees (even #1) were given options, not stock outright.

abalone 15y ago

It's a market. If you think you can get >1% for "saving the company" with your hax0r skilz, go right ahead and try to negotiate that.