4 ms·

Every thing comes down to risk vs reward. Founders risk it all to found companies and rightfully have the greatest reward. Startup employees haven't risked as m

Every thing comes down to risk vs reward. Founders risk it all to found companies and rightfully have the greatest reward. Startup employees haven't risked as much but their risk is compensated with appropriate equity the earlier they join and the more risk they take on in the form of lower salary and benefits. YC definitively reduces risk and increases the potential for reward. It's easier for YC companies to raise funding (allowing them to pay market salary and benefits faster) and they have been vetted so we can assume the idea and team have a better shot at success. If you want to work in startups, working for a YC company is a better risk vs reward scenario as compared to a non-YC company. In regards to the post, just ask for more equity in scenario 1. IMHO the first 10 engineers should roughly own all of the "20%" first round option pool and should be able to get the company to an exit, massive profits or the next round. EDIT: last sentence for clarity.

uribs 14y ago
Isn't simply being profitable a much better credential than being vetted by YC?
- seeingfurther 14y ago
  It's not that black and white. But being profitable is definitely a great data point.
jroseattle 14y ago
Heh, well kind of. I've learned that founders have a much greater risk/reward ratio than employees. The ratio is really not even close. The assumption that founders risk it "all" is a fallacy. The assumption that employees have less risk is also inaccurate. It depends on the situation, sure -- but I know plenty of startups founded by people who can crash and burn and not have their livelihood affected. As for "risk compensated with appropriate equity", I'd have to say that most early-stage employees get screwed. The only case where early-stage pans out with commensurate reward at the employee level is when a company goes public. Given that most successful exits nowadays are through acquisition, most early employees are simply hosed.
- seeingfurther 14y ago
  If the risk isn't being compensated, I'm with you on that point. That's Bullshit! But the... "founders have a much greater risk/reward ratio than employees", that is not a fallacy in most cases. In my own case, I've been working for 18 months with no salary and I don't consider myself unique. Most founders go down the same long long road before they bring on their first employee. I've learned that most employees (if they haven't gone through the process of founding a company) dismiss the amount of risk founders take on to get a company to the point of even being able to make their first hire. The whole question seems like we should create a standard model for the risk reward and set equity appropriately.
  - potatolicious 14y ago
    > "dismiss the amount of risk founders take on to get a company to the point of even being able to make their first hire." I don't think this is really the issue. The issue is that the economics of startups don't really work if you expect below-market salaries to be a thing. Founders shoulder tremendous risk and (the smart ones) live on starvation-level salaries for months, if not years, before they bring on their first employee. Sure - and they deserve to be compensated appropriately via equity. Employees, having taken on only minimal risk, don't deserve much equity at all - equity at this point is a bonus and a motivator to act in the company's best interests. This works great. The problem comes along when we bring in sub-market salaries. The reduction in salary or benefits demands an increase in equity - equity coming directly out of the founders. And here's where it all falls apart: to make up for below-market compensation, the amount of equity that would be rationally required would mean too little equity to account for founder risk. The numbers simply do not add up.
    - seeingfurther 14y ago
      I agree, the risk vs reward has to be fair and make sense. Below market salary AND very little equity is just plain wrong. You better be curing cancer, going to space or some intangible that makes that sort of equation worthwhile. Most startups don't. Space X comes to mind though :-)
potatolicious 14y ago
> "Startup employees haven't risked as much but their risk is compensated with appropriate equity the earlier they join and the more risk they take on in the form of lower salary and benefits." This is the part where we wave our hands and drop a smoke bomb. You're theoretically right, but it never works out that way. For all intents and purposes, in the current state of the tech economy, there is no inherent risk to working for a startup. If my company went belly-up today I'll bounce off the floor juuuust fine. Equity at this point is not being given in exchange for the risk of the company failing, it's given as a tool to decrease other forms of compensation. And it's a shitty trade. Founders know it and experienced employees know it. The only people who are falling for this are the fresh-faced college grads who think 0.1% pre-dilution of your startup will make them rich. But lots of engineers get convinced to take huge pay cuts in exchange for a pittance in equity, and to forego huge amounts of benefits that are worth real cash. "Compensated with appropriate equity" is bullshit. If this was standard operating procedure we wouldn't be walking around acting like sub-1% pre-dilution is worth anything whatsoever.
- waterlesscloud 14y ago
  I've been amazed the typical equity for early employees has stayed as low as it has for as long as it has.
  - seeingfurther 14y ago
    It's going to change.
  - doktrin 14y ago
    I would replace "early employees" with "early engineers". Not sure why, precisely, but it wouldn't surprise me if negotiating prowess played a role. Companies I've worked for in the past would never dole out more than 1% to engineers, but dropped anywhere from 2-5% on sales / biz-dev / managers. In one case, the engineers had actually been with the company for years and working at half-market wages prior to the non-technical hires.
    - 14y ago
abstractbill 14y ago
Founders risk it all to found companies and rightfully have the greatest reward. Startup employees haven't risked as much True(er) a decade or so ago, but definitely not true today. Founders currently, if they're doing it right, risk a bruised ego and a submarket salary for a few years. Employee risk is about the same.
- seeingfurther 14y ago
  Not true in the least. Maybe for a tiny fraction of founders who can de-risk incredibly fast, get funding or profits and make their first hire. This is not the typical scenario by a long shot.
CleanedStar 14y ago
This argument put forth is part of a tautological one its proponents make. Some of you may be too young to remember the good old, bad old days of the Cold War, but one thing that was supposed to be anathema to Americans were "planned economies". It was proposed, mostly by corporate types and their supporters, that the US should not be a planned economy, it should be an economy like how the US is run - the majority stockholders of corporations make decisions about capital and production. What happens when production decisions are not planned? There is a risk capital can be spent to create a product no one wants. Isn't that half the discussion on HN - minimal viable products, agile development, and other methods to try to avoid this? Why do the angels, VCs, and now blessed founders deserve so much money? Because they took on risk. So the VCs tell us we should avoid planned economies and have an economy with risk - where capital is wasted on products no one wants. Then we're told they deserve all of this money because our economy has so much risk. It's a great tautology if you're willing to swallow it.
- seeingfurther 14y ago
  Because planned economies worked out so well for soviet bloc. Sorry, the cold war did not create the conditions to 'propose' our capitalism it proved it. Its current form might be flawed (corporate bailouts, uneven distribution of wealth etc) but it's a far better model than planned economies comrade.

uribs 14y ago

Isn't simply being profitable a much better credential than being vetted by YC?

seeingfurther 14y ago
It's not that black and white. But being profitable is definitely a great data point.

jroseattle 14y ago

Heh, well kind of. I've learned that founders have a much greater risk/reward ratio than employees. The ratio is really not even close. The assumption that founders risk it "all" is a fallacy. The assumption that employees have less risk is also inaccurate. It depends on the situation, sure -- but I know plenty of startups founded by people who can crash and burn and not have their livelihood affected. As for "risk compensated with appropriate equity", I'd have to say that most early-stage employees get screwed. The only case where early-stage pans out with commensurate reward at the employee level is when a company goes public. Given that most successful exits nowadays are through acquisition, most early employees are simply hosed.

seeingfurther 14y ago
If the risk isn't being compensated, I'm with you on that point. That's Bullshit! But the... "founders have a much greater risk/reward ratio than employees", that is not a fallacy in most cases. In my own case, I've been working for 18 months with no salary and I don't consider myself unique. Most founders go down the same long long road before they bring on their first employee. I've learned that most employees (if they haven't gone through the process of founding a company) dismiss the amount of risk founders take on to get a company to the point of even being able to make their first hire. The whole question seems like we should create a standard model for the risk reward and set equity appropriately.
- potatolicious 14y ago
  > "dismiss the amount of risk founders take on to get a company to the point of even being able to make their first hire." I don't think this is really the issue. The issue is that the economics of startups don't really work if you expect below-market salaries to be a thing. Founders shoulder tremendous risk and (the smart ones) live on starvation-level salaries for months, if not years, before they bring on their first employee. Sure - and they deserve to be compensated appropriately via equity. Employees, having taken on only minimal risk, don't deserve much equity at all - equity at this point is a bonus and a motivator to act in the company's best interests. This works great. The problem comes along when we bring in sub-market salaries. The reduction in salary or benefits demands an increase in equity - equity coming directly out of the founders. And here's where it all falls apart: to make up for below-market compensation, the amount of equity that would be rationally required would mean too little equity to account for founder risk. The numbers simply do not add up.
  - seeingfurther 14y ago
    I agree, the risk vs reward has to be fair and make sense. Below market salary AND very little equity is just plain wrong. You better be curing cancer, going to space or some intangible that makes that sort of equation worthwhile. Most startups don't. Space X comes to mind though :-)

potatolicious 14y ago

> "Startup employees haven't risked as much but their risk is compensated with appropriate equity the earlier they join and the more risk they take on in the form of lower salary and benefits." This is the part where we wave our hands and drop a smoke bomb. You're theoretically right, but it never works out that way. For all intents and purposes, in the current state of the tech economy, there is no inherent risk to working for a startup. If my company went belly-up today I'll bounce off the floor juuuust fine. Equity at this point is not being given in exchange for the risk of the company failing, it's given as a tool to decrease other forms of compensation. And it's a shitty trade. Founders know it and experienced employees know it. The only people who are falling for this are the fresh-faced college grads who think 0.1% pre-dilution of your startup will make them rich. But lots of engineers get convinced to take huge pay cuts in exchange for a pittance in equity, and to forego huge amounts of benefits that are worth real cash. "Compensated with appropriate equity" is bullshit. If this was standard operating procedure we wouldn't be walking around acting like sub-1% pre-dilution is worth anything whatsoever.

waterlesscloud 14y ago
I've been amazed the typical equity for early employees has stayed as low as it has for as long as it has.
- seeingfurther 14y ago
  It's going to change.
- doktrin 14y ago
  I would replace "early employees" with "early engineers". Not sure why, precisely, but it wouldn't surprise me if negotiating prowess played a role. Companies I've worked for in the past would never dole out more than 1% to engineers, but dropped anywhere from 2-5% on sales / biz-dev / managers. In one case, the engineers had actually been with the company for years and working at half-market wages prior to the non-technical hires.
  - 14y ago

abstractbill 14y ago

Founders risk it all to found companies and rightfully have the greatest reward. Startup employees haven't risked as much True(er) a decade or so ago, but definitely not true today. Founders currently, if they're doing it right, risk a bruised ego and a submarket salary for a few years. Employee risk is about the same.

seeingfurther 14y ago
Not true in the least. Maybe for a tiny fraction of founders who can de-risk incredibly fast, get funding or profits and make their first hire. This is not the typical scenario by a long shot.

CleanedStar 14y ago

This argument put forth is part of a tautological one its proponents make. Some of you may be too young to remember the good old, bad old days of the Cold War, but one thing that was supposed to be anathema to Americans were "planned economies". It was proposed, mostly by corporate types and their supporters, that the US should not be a planned economy, it should be an economy like how the US is run - the majority stockholders of corporations make decisions about capital and production. What happens when production decisions are not planned? There is a risk capital can be spent to create a product no one wants. Isn't that half the discussion on HN - minimal viable products, agile development, and other methods to try to avoid this? Why do the angels, VCs, and now blessed founders deserve so much money? Because they took on risk. So the VCs tell us we should avoid planned economies and have an economy with risk - where capital is wasted on products no one wants. Then we're told they deserve all of this money because our economy has so much risk. It's a great tautology if you're willing to swallow it.

seeingfurther 14y ago
Because planned economies worked out so well for soviet bloc. Sorry, the cold war did not create the conditions to 'propose' our capitalism it proved it. Its current form might be flawed (corporate bailouts, uneven distribution of wealth etc) but it's a far better model than planned economies comrade.