6 ms·

Here's the thing about each layer after the founders owning 10%. In his example, layer 2 (first employees) consists of 5 people, each of whom own 2%. Those empl

by autarch 15y ago

Here's the thing about each layer after the founders owning 10%. In his example, layer 2 (first employees) consists of 5 people, each of whom own 2%. Those employees probably took a pretty significant pay cut to work at this startup. Let's say a programmer who could make $120,000 a year joins the startup at a $70,000 salary. The next year it gets bumped up to $85,000, and then the year after $95,000. After three years that programmer has now forgone $110,000 in income. If the company sells the programmer has to earn at least that much back (and we're ignoring lost opportunities from not having the money). So the company has to sell for $5.5 million dollars. And of course, the programmer may have worked way more hours than she would have at that $120,000 hour job. Let's assume she average 50 hours a week. In any sane world she would earn 25% more for that amount of work. So if we value her time based on her possible $120k salary, the sale needs to deliver $200,000 to her to be worthwhile. Now we're looking at a $10 million dollar sale. Oh, and that's assuming that the company doesn't have investors with preferred shares who will take a 3x return. So maybe the sale really needs to be $15 million just to get that $200,000 back. And of course many sales are not all in cash, so maybe she just gets stock in some other company, and that stock may not even be liquid. All of this assumes that there is an exit as opposed to a bankruptcy. She's gambling on an amazing exit (not necessarily Google, but something like VMWare buying Zimbra for $100 million. That happens, but it's pretty damn rare. All of this is compounded by the fact that for the founders, a smallish ($5-20 million exit) is entirely worthwhile. They walk away with a few million dollars each. Early startup employees get completely and utterly screwed. I'd never consider being one of these employees again unless I was offered a lot more than 2%. I think a fairer number might %10. But really, if you're willing to take that much risk, you might as well just be a founder. That's where the real rewards are.

ChuckMcM 15y ago
"Early startup employees get completely and utterly screwed." Except that early Google employees all had stock worth over a million dollars. Same with all early Sun employees, all early eBay employees, all early Amazon employees, all early Yahoo employees (basically anyone with an employee # < 100 was in darn good shape at all of these companies. The generalization that all employees get screwed, is based on your experience. and I understand that pain, my first startup I was employee #9 and my stock at the time it was acquired [1] was worthless. But it is just that, a generalization. And it is perfectly reasonable to say "My threshold for risk is lower than the risk of working at a startup." And by telling a startup you won't work for less than 10% equity or even going in with that thought is one way of saying that. I interviewed a guy for the second startup I did, FreeGate, who told me basically he had 'done his homework' and he needed 4 million (about 5% of the outstanding at the time) shares and a competitive salary (which during the boom was insane) and while I loved his skills I wasn't comfortable risking that much equity on this guy who might or might not work out. So we passed. He eventually went to work for Oracle because no startup he talked to would (or perhaps even could) hire him based on his risk tolerance. In that case I think the market did the right thing, he didn't work at a startup. Now had he come to work for me at the 'standard' offer during that period, he would have done OK, better than 4 years of Oracle salary + their option, but not the multiple millions he was dreaming about. I always recommend that people who absolutely have to be employed for the next 'n' years, avoid start-ups. Too much existence stress. That being said, I like Joel's approach. The only wrench I see in it is that there often comes a time when you need 'that guy' (or 'that gal') who will take the company to the next level. Could be a VP of sales, or a Manufacturing, or some other part of the company that it needs to do, but nobody in the company is experienced or ready to take the company to the scale it needs. That is a person who comes late but you end up doling out lots of equity to. The return is that everyone's equity value will go way up. Sometimes this person is the difference between continued climb and spiraling death. So in that regard their 'impact' is as much as a founder who got the company to this point. When that situation comes up, it's always got its own wrinkles to deal with, but generally it comes up because you are doing well, not you're shopping yourself around to try to exit with a positive spin. [1] http://www.linksv.com/compSummary/2172/GolfWeb http://www.linksv.com/compSummary/2172/GolfWeb
- deleted 15y ago
  [deleted]
biobot 15y ago
Interesting! But I think $70k salary for early employees is not realistic. They will probably take $10k-$20k less than market price for significant shares.
- rokhayakebe 15y ago
  If you can pay someone 100K + equity, you should just pay them 120K and not have to worry about that.
- autarch 15y ago
  My experience has been that startups demand a larger pay cut of early employees.
- vidarh 15y ago
  If even that. As I've pointed out elsehwere, when I've joined startups as a regular employee, I've demanded raises and gotten them. If those tiny differences would make and break the company, it's underfunded and I won't have anything to do with it, or it's too early for them to start hiring and they should offer substantially more equity and involve me as a co-founder.
jarrett 15y ago
Given the numbers you've presented, then yes, it seems like a bad deal for an early employee. But here's how I think the market may correct for that: 1. If I'm a startup founder, I want to recruit smart employees. Smart employees will do the math you describe above, and they'll know if I'm offering a raw deal. So, in order to attract smart employees, I'll have to offer a fair balance of equity and cash. If I fail to do that, I won't be able to fill my job openings. Or, I'll fill them with people who are irrational or bad at basic math, neither of which would help my company succeed. 2. If I'm an employee, I'll be weighing more job offers than just the startup's. I'll have high-paying jobs at established organizations available to me. If you're offering $70,000 at 80 hours a week, and MegaCorp is offering $120,000 at 40 hours a week, you need to offer something to make up for that enormous difference. If that something is equity, it needs to be a decent amount of it, and you need to convince me of its future value. If you fail to do that, I'll go work for MegaCorp. Granted, there are plenty of people who won't reason this out. Employees sometimes accept a bad deal without realizing it. But as a business owner, I want employees who are capable of making smart business decisions, even if they're not in an executive position. I'd much rather pay fairly than build a company entirely from the subset of people that I can scam.
joblessjunkie 15y ago
Fair enough. Being employed by a startup is akin to taking a vow of poverty. But it's not about getting "utterly screwed". It's about making a rational decision that some things in life are worth more than financial reward. Working at a startup has a multitude of non-financial benefits. You'll work with the latest new technologies. You'll play a key role in a small team. You'll be forced to learn all kinds of new skills. You'll meet lots of people. You'll acquire a sense of ownership and confidence that you may never feel when working in a large corp. If you've got a family to raise and you're worried about your retirement savings, by all means, follow the math and don't expose yourself to the near-certain financial ruin of a startup. But if you're young, adventurous, or simply value interesting work over a high salary, it can be a lot of fun to get utterly screwed with your measly 2%. I enjoyed my last shot.
- hythloday 15y ago
  Aren't all of your upsides shared more strongly by the founders, who also benefit more from a positive outcome? It seems to me that if you accept the arithmetic in the GP post is correct (which a lot of people don't), being an employee is almost never a good idea.
  - sunnysideup 15y ago
    Some people are great coders or marketers, but just dont have ideas for a startup of their own yet! For them is being employee #1 a great training.
    - deleted 15y ago
      [deleted]
    - reinhardt 15y ago
      No idea why this was downvoted but it rings true to me. I can't imagine myself as a (co)founder, even employee #1/2 is pushing it. And still I'd rather get screwed over financially in a startup hacking on stuff I find interesting than slaving away at a MegaCorp doing "enterprise" CRUD apps.
  - 15y ago
TheSOB88 15y ago
I think you're discounting the other benefits of working at a startup vs. a larger company. More freedom, more high-tech, more excitement. This pays you back as well. Not everything is just a cash value.
- psykotic 15y ago
  > I think you're discounting the other benefits of working at a startup vs. a larger company False dichotomy. There are plenty of smaller non-startup companies that pay well and offer everything else you mention without asking you to gamble your salary on a big payday.
Pound6F 15y ago
The last part should be stressed. If you are just out to make money don't join a startup. Even employee #1 (after the cofounders) in most startups will get next to nothing in a multi-million dollar buy out. I witnessed this first hand a few months ago. People who joined the company extremely early and worked their asses off for 4 years got very little when the company sold for 20mm. Of course money isn't everything, and the real reward in joining a startup early is to have a huge impact on the company, and potentially the world.
BadassFractal 15y ago
I agree with all the other posters. I'd like to add that this all depends on your own character and disposition. For some people being a cog in a wheel in an organization with 100k employees for 140k a year isn't worth even a fraction of the opportunity to learn, contribute and matter on a 5-10 people team for 50-70k a year. Others like the comfort of their 9-5 routine and of their 401k and might have all kinds of duties that make them a bad fit for a startup (for example a large family to support), in which case a startup might not be for you.
vidarh 15y ago
I never took those kind of paycuts in any of the companies I've been an early stage employee in. In fact, in a couple of them I got significant increases in salary to compensate for the risk, and then options on top to further compensate for the risk. The only times I've taken paycuts to do a startup was as a founder, in situations where I've had 20%-25% of the company or more. If you let people talk you into taking a lower salary to work for a startup without getting a reasonably large chunk of equity, I agree with you, it doesn't make that much sense - at least not unless it's a calculated gamble for a huge exit rather than a startup where the founders are talking about a relatively low priced sale. But most of the time, if the company has a solid idea and really need you, taking a big paycut isn't necessary. If a startup is going to be sunk by a few tens of k of difference in salary costs, then I wouldn't join it. I might get talked into deferring some of my salary (at a price) until after an A round, but that's it. You get what you ask for, pretty much. And I always ask. If you take the first offer on the table, then you'll be paid accordingly.
ejain 15y ago
Perhaps working at MegaCorp is a better deal, in financial terms. But the programmer already decided that there are more important criteria when she chose that career over getting a business degree or going into finance...
hello_moto 15y ago
If you look at it from the number perspective, it sucks. I think we all know that by now. Those that don't know these kind of things are really naive or they focus solely on technical implementation and block everything else in their life. Having said that, there are other not-so-visible benefits that can swing both ways: 1) A moderate exit but with lots of buzz in hi-tech community can push your portfolio a little bit. - "Designed and implemented Path" - "Architected Justin.TV chat component" Of course if the said company had scaling issues, your name will be associated with it as well. But if your marketing department can twist the words, luck might be on your side. Once you're done with this company, start reaping the benefit of higher compensation. 2) Skill improvement. Assuming your bet paid off, using cutting-edge technology can put yourself in the fore-front of consulting game as well. The early Rails adopters are reaping the benefit of this since a few years ago. Sought after and probably making good money as a consultant if needed. I have little doubt MongoDB-ers (or the NoSQL-ers) and Node.js-ers are off by much. After seeing what's going out in the hi-tech community, I believe it is no longer about the "right tools for the right job" for some people. The "changing-tools-and-languages" have become the "game" for some of the developers. At the end of the day, it depends on how the person handle the situation and flip it to his/her benefits. I don't mean to sound like a snake oil salesman but it's what you make out of it.
prostoalex 15y ago
>>> In any sane world she would earn 25% more for that amount of work. Except in the insane world of salaried corporate jobs, where overtime doesn't apply.
- autarch 15y ago
  The point being that one should compare both the pay and the hours of the two jobs. Another way to look at it. If you get paid $100k per year for 40 hours a week, you might consider taking a job at 32 hours a week for $80k.
bjornsing 15y ago
> Early startup employees get completely and utterly screwed. I think there's some after the fact reasoning here: Of course, if you look only at the startups that make it far enough to hire those first employees then risk/reward is much better for founders. But then you have discarded from your sample set all the startups that fail before getting access to the cash needed to hire (revenue or investment). At least where I'm coming from that's the more common case by far, and in that case founders get utterly, royally screwed.
DanielRibeiro 15y ago
Naval, the creator of Angel list, made a similar point[1]: And if you see someone who’s doing that and becomes indispensable to the company, I’m a big fan of giving them a lot of stock and treating them like a late co-founder. [1] http://venturehacks.com/articles/co-founder-interview http://venturehacks.com/articles/co-founder-interview

by autarch 15y ago

ChuckMcM 15y ago

"Early startup employees get completely and utterly screwed." Except that early Google employees all had stock worth over a million dollars. Same with all early Sun employees, all early eBay employees, all early Amazon employees, all early Yahoo employees (basically anyone with an employee # < 100 was in darn good shape at all of these companies. The generalization that all employees get screwed, is based on your experience. and I understand that pain, my first startup I was employee #9 and my stock at the time it was acquired [1] was worthless. But it is just that, a generalization. And it is perfectly reasonable to say "My threshold for risk is lower than the risk of working at a startup." And by telling a startup you won't work for less than 10% equity or even going in with that thought is one way of saying that. I interviewed a guy for the second startup I did, FreeGate, who told me basically he had 'done his homework' and he needed 4 million (about 5% of the outstanding at the time) shares and a competitive salary (which during the boom was insane) and while I loved his skills I wasn't comfortable risking that much equity on this guy who might or might not work out. So we passed. He eventually went to work for Oracle because no startup he talked to would (or perhaps even could) hire him based on his risk tolerance. In that case I think the market did the right thing, he didn't work at a startup. Now had he come to work for me at the 'standard' offer during that period, he would have done OK, better than 4 years of Oracle salary + their option, but not the multiple millions he was dreaming about. I always recommend that people who absolutely have to be employed for the next 'n' years, avoid start-ups. Too much existence stress. That being said, I like Joel's approach. The only wrench I see in it is that there often comes a time when you need 'that guy' (or 'that gal') who will take the company to the next level. Could be a VP of sales, or a Manufacturing, or some other part of the company that it needs to do, but nobody in the company is experienced or ready to take the company to the scale it needs. That is a person who comes late but you end up doling out lots of equity to. The return is that everyone's equity value will go way up. Sometimes this person is the difference between continued climb and spiraling death. So in that regard their 'impact' is as much as a founder who got the company to this point. When that situation comes up, it's always got its own wrinkles to deal with, but generally it comes up because you are doing well, not you're shopping yourself around to try to exit with a positive spin. [1] http://www.linksv.com/compSummary/2172/GolfWeb http://www.linksv.com/compSummary/2172/GolfWeb

deleted 15y ago
[deleted]

biobot 15y ago

Interesting! But I think $70k salary for early employees is not realistic. They will probably take $10k-$20k less than market price for significant shares.

rokhayakebe 15y ago
If you can pay someone 100K + equity, you should just pay them 120K and not have to worry about that.
autarch 15y ago
My experience has been that startups demand a larger pay cut of early employees.
vidarh 15y ago
If even that. As I've pointed out elsehwere, when I've joined startups as a regular employee, I've demanded raises and gotten them. If those tiny differences would make and break the company, it's underfunded and I won't have anything to do with it, or it's too early for them to start hiring and they should offer substantially more equity and involve me as a co-founder.

jarrett 15y ago

Given the numbers you've presented, then yes, it seems like a bad deal for an early employee. But here's how I think the market may correct for that: 1. If I'm a startup founder, I want to recruit smart employees. Smart employees will do the math you describe above, and they'll know if I'm offering a raw deal. So, in order to attract smart employees, I'll have to offer a fair balance of equity and cash. If I fail to do that, I won't be able to fill my job openings. Or, I'll fill them with people who are irrational or bad at basic math, neither of which would help my company succeed. 2. If I'm an employee, I'll be weighing more job offers than just the startup's. I'll have high-paying jobs at established organizations available to me. If you're offering $70,000 at 80 hours a week, and MegaCorp is offering $120,000 at 40 hours a week, you need to offer something to make up for that enormous difference. If that something is equity, it needs to be a decent amount of it, and you need to convince me of its future value. If you fail to do that, I'll go work for MegaCorp. Granted, there are plenty of people who won't reason this out. Employees sometimes accept a bad deal without realizing it. But as a business owner, I want employees who are capable of making smart business decisions, even if they're not in an executive position. I'd much rather pay fairly than build a company entirely from the subset of people that I can scam.

joblessjunkie 15y ago

Fair enough. Being employed by a startup is akin to taking a vow of poverty. But it's not about getting "utterly screwed". It's about making a rational decision that some things in life are worth more than financial reward. Working at a startup has a multitude of non-financial benefits. You'll work with the latest new technologies. You'll play a key role in a small team. You'll be forced to learn all kinds of new skills. You'll meet lots of people. You'll acquire a sense of ownership and confidence that you may never feel when working in a large corp. If you've got a family to raise and you're worried about your retirement savings, by all means, follow the math and don't expose yourself to the near-certain financial ruin of a startup. But if you're young, adventurous, or simply value interesting work over a high salary, it can be a lot of fun to get utterly screwed with your measly 2%. I enjoyed my last shot.

hythloday 15y ago
Aren't all of your upsides shared more strongly by the founders, who also benefit more from a positive outcome? It seems to me that if you accept the arithmetic in the GP post is correct (which a lot of people don't), being an employee is almost never a good idea.
- sunnysideup 15y ago
  Some people are great coders or marketers, but just dont have ideas for a startup of their own yet! For them is being employee #1 a great training.
  - deleted 15y ago
    [deleted]
  - reinhardt 15y ago
    No idea why this was downvoted but it rings true to me. I can't imagine myself as a (co)founder, even employee #1/2 is pushing it. And still I'd rather get screwed over financially in a startup hacking on stuff I find interesting than slaving away at a MegaCorp doing "enterprise" CRUD apps.
- 15y ago

TheSOB88 15y ago

I think you're discounting the other benefits of working at a startup vs. a larger company. More freedom, more high-tech, more excitement. This pays you back as well. Not everything is just a cash value.

psykotic 15y ago
> I think you're discounting the other benefits of working at a startup vs. a larger company False dichotomy. There are plenty of smaller non-startup companies that pay well and offer everything else you mention without asking you to gamble your salary on a big payday.

Pound6F 15y ago

The last part should be stressed. If you are just out to make money don't join a startup. Even employee #1 (after the cofounders) in most startups will get next to nothing in a multi-million dollar buy out. I witnessed this first hand a few months ago. People who joined the company extremely early and worked their asses off for 4 years got very little when the company sold for 20mm. Of course money isn't everything, and the real reward in joining a startup early is to have a huge impact on the company, and potentially the world.

BadassFractal 15y ago

I agree with all the other posters. I'd like to add that this all depends on your own character and disposition. For some people being a cog in a wheel in an organization with 100k employees for 140k a year isn't worth even a fraction of the opportunity to learn, contribute and matter on a 5-10 people team for 50-70k a year. Others like the comfort of their 9-5 routine and of their 401k and might have all kinds of duties that make them a bad fit for a startup (for example a large family to support), in which case a startup might not be for you.

vidarh 15y ago

I never took those kind of paycuts in any of the companies I've been an early stage employee in. In fact, in a couple of them I got significant increases in salary to compensate for the risk, and then options on top to further compensate for the risk. The only times I've taken paycuts to do a startup was as a founder, in situations where I've had 20%-25% of the company or more. If you let people talk you into taking a lower salary to work for a startup without getting a reasonably large chunk of equity, I agree with you, it doesn't make that much sense - at least not unless it's a calculated gamble for a huge exit rather than a startup where the founders are talking about a relatively low priced sale. But most of the time, if the company has a solid idea and really need you, taking a big paycut isn't necessary. If a startup is going to be sunk by a few tens of k of difference in salary costs, then I wouldn't join it. I might get talked into deferring some of my salary (at a price) until after an A round, but that's it. You get what you ask for, pretty much. And I always ask. If you take the first offer on the table, then you'll be paid accordingly.

ejain 15y ago

Perhaps working at MegaCorp is a better deal, in financial terms. But the programmer already decided that there are more important criteria when she chose that career over getting a business degree or going into finance...

hello_moto 15y ago

If you look at it from the number perspective, it sucks. I think we all know that by now. Those that don't know these kind of things are really naive or they focus solely on technical implementation and block everything else in their life. Having said that, there are other not-so-visible benefits that can swing both ways: 1) A moderate exit but with lots of buzz in hi-tech community can push your portfolio a little bit. - "Designed and implemented Path" - "Architected Justin.TV chat component" Of course if the said company had scaling issues, your name will be associated with it as well. But if your marketing department can twist the words, luck might be on your side. Once you're done with this company, start reaping the benefit of higher compensation. 2) Skill improvement. Assuming your bet paid off, using cutting-edge technology can put yourself in the fore-front of consulting game as well. The early Rails adopters are reaping the benefit of this since a few years ago. Sought after and probably making good money as a consultant if needed. I have little doubt MongoDB-ers (or the NoSQL-ers) and Node.js-ers are off by much. After seeing what's going out in the hi-tech community, I believe it is no longer about the "right tools for the right job" for some people. The "changing-tools-and-languages" have become the "game" for some of the developers. At the end of the day, it depends on how the person handle the situation and flip it to his/her benefits. I don't mean to sound like a snake oil salesman but it's what you make out of it.

prostoalex 15y ago

>>> In any sane world she would earn 25% more for that amount of work. Except in the insane world of salaried corporate jobs, where overtime doesn't apply.

autarch 15y ago
The point being that one should compare both the pay and the hours of the two jobs. Another way to look at it. If you get paid $100k per year for 40 hours a week, you might consider taking a job at 32 hours a week for $80k.

bjornsing 15y ago

> Early startup employees get completely and utterly screwed. I think there's some after the fact reasoning here: Of course, if you look only at the startups that make it far enough to hire those first employees then risk/reward is much better for founders. But then you have discarded from your sample set all the startups that fail before getting access to the cash needed to hire (revenue or investment). At least where I'm coming from that's the more common case by far, and in that case founders get utterly, royally screwed.

DanielRibeiro 15y ago

Naval, the creator of Angel list, made a similar point[1]: And if you see someone who’s doing that and becomes indispensable to the company, I’m a big fan of giving them a lot of stock and treating them like a late co-founder. [1] http://venturehacks.com/articles/co-founder-interview http://venturehacks.com/articles/co-founder-interview