6 ms·

How YC Companies Found Employee #1

54 points by ivankirigin 13y ago

codex 13y ago
Hiring #1 is tricky: you need to find someone good, but also naive. In this era of the ray startup, it makes little sense for a great engineer to work for someone else: the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company. In the age of the acqhire founders' risk is very small.
- ivankirigin 13y ago
  But they also get a salary: money the founders raised. That difference is huge. That said, I completely agree. It takes a great match. Equity percentage can't be the only dimension considered. Also, if you're struggling with hiring, giving more equity can be a solution. There are plenty of "cofounders" that came on as employees after money was raised but needed a sweeter deal to join.
  - deleted 13y ago
    [deleted]
- tptacek 13y ago
  It depends. Practically by definition, employee #1 is shouldering less opportunity cost than the founding team. The founding team was able to start a company and raise money sufficient to pay the employee. The employee is accepting full-time employment. Why would they do that unless they didn't believe they could be successful (whatever that might mean) starting something themselves? I think there's a whole lot of taking-advantage happening in startup hiring, but there's also an industrywide lack of understanding of how risk and basic economics work, too. Equity isn't a merit badge.
  - jt2190 13y ago
    > I think there's a whole lot of taking-advantage happening > in startup hiring... One warning sign of this is when the salary is below market rates. Founding members take low salaries and lots of preferred equity (and lots of risk), while employees take a market salary and a few incentive stock options.
    - mchusma 13y ago
      One quick correction is that founders typically have common stock, not preferred.
      - nerfhammer 13y ago
        They get common stock but without a cliff or vesting period
        jenandre 13y ago
        not true if they are taking on money. any investor will require a vesting period over 4 yr w/ usually a 1 yr cliff (which resets every time you take money)
        tptacek 13y ago
        No, founders vest. For the love of all that is holy, don't join a founding team with no vesting. Funding or no funding, vesting is non-optional. Get vesting worked out from the jump.
  - _delirium 13y ago
    It sounds like there's a bit of a trend towards passing some of that risk on to the employee early-on though, by not really considering the job a real job with a presumption of continuation. The 2nd story here recommends only "trial-hiring" people for 1 or 2 months at a time, and even companies that don't go that extreme have been trending towards quick-to-fire for vague reasons like "poor fit" (more than bigger companies). Of course, you can always be fired in a regular job (in at-will states), but the understanding is that you normally won't be fired one month in, unless either you totally screw up or the company's situation changes significantly. Hence you have a bit less risk because you have normal job + salary, while founders have more risk, but that's not as true if you don't really have normal-job anymore. Of course, if you have a pile of contract work you can transition to at a moment's notice even this arrangement might not be a huge risk, but depends on the person. And in that case you might prefer to just stay a contractor and bill your regular rates, rather than shouldering the opportunity risk of committing to a possibly-evaporating job.
- jbcurtin2 13y ago
  Looking for someone who is naive is the problem. I've walked away from countless opportunities because I got the sense that I was being handled.
- webwright 13y ago
  "...but also naive." That's silly. You need someone who values the startup experience in some way to balance out the salary hit. That's all. They may love small teams, might be seeking early experience, might want to build cred so they can raise money someday themselves, etc. "the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company." The founders take considerably more risk working for free, raising money (time consuming for 99% of startups), and greater opportunity cost... Working 6-9 months or more on an unproven/unfunded startup is WAY RISKIER than joining a funded startup for a slightly reduced salary. "In the age of the acqhire founders' risk is very small." This is just plain wrong. What % of failing teams are acqhirable? Stanford grads will have no problems, but many/most teams are too small or too weak from a resume point of view to get a deal done. I've watched very solid teams fail to find a suitor a LOT (including MOST failing YC companies).
- Estragon 13y ago
  What is a ray startup?
Aloha 13y ago
"It’s when we hired full time employees immediately without that trial period where I’ve really regretted things. You go through so much extra work to figure out insurance and stock plans, only to want to fire the person in a couple months." It's very very hard to get people to move from one contract to another without some sort of permanence, I'm a contractor now, why would I change to another contract even for slightly more pay? I'm content here, more or less, offer me a fulltime job, sure, I'd move - but not for another contract.
- tptacek 13y ago
  I agree strongly. Contract-to-perm hiring seems like a great way to filter out the best candidates, who will tend to have better options.
  - ivankirigin 13y ago
    It's a pretty big issue because you don't really know what working with them will be like. Weebly does a trial week, which is a good balance of time and commitment. http://www.sequoiacap.com/grove/posts/akzj/trial-week-our-hiring-secret http://www.sequoiacap.com/grove/posts/akzj/trial-week-our-hi...
    - tptacek 13y ago
      Aside: let's be careful not to pretend that temp-to-perm hiring is any kind of norm. The overwhelming majority of hires are hired conventionally, after an interview, with an immediate full-time offer. That includes "employee #1" hires.
      - ivankirigin 13y ago
        You're right
        tptacek 13y ago
        I'm also a crusader on this issue, as you know, so don't let me steamroll the thread.
isadeal 13y ago
What if a good potential #1 asking for founder position?
- kansface 13y ago
  The difference would be from about 5% to perhaps 15%. There should be a damn good reason to make this happen (you wanted the person as a founder at the start, but external forces kept it from happening). A bad first hire can sink your company, so be careful.
- balls187 13y ago
  You have to ask yourself: 1. Are you a single founder, would a 2nd founder help? 2. Do you already have a 2nd founder who is technical/business? 3. How far along are you? 4. How much salary are they willing to give up? 5. Are you a first-time founder? I was brought on as a co-founder, even though the business had a few months head start. However I was the only dev, I was going to make the same "salary"--20k/yr, and that the company didn't really have much more than a simple proof of concept. Employees should expect a "reasonable" percentage of market salary. Founder's should not.
jason_wang 13y ago
I used to have the "trial period" mentality even though I didn't have an answer for the "that's starting out on the wrong foot" skepticism. But recently, a smarter-than-me CEO shared his hiring practice and he has won me over. He proposes: hire the candidate as a full-time employee and offer the candidate the salary/equity package as if the candidate has achieved his full potential. Then, if the candidate works out as expected, then everything is well. But on the other hand, if the new hire turns out to be sub-par, it would be a lot easier for you to let him or her go. Because it'll simply be too expansive to keep a sub-par employee around at the compensation package you offered. I think this is a great implementation of the hire fast and fire fast philosophy.
- throwaway7487 13y ago
  Optimizing and experimenting on your hiring and firing practices is very important. Have fun. Also, do read the book and do take the example from Steve Jobs. Distort the reality. Lie to your employees and partners creatively. Be free.
Jemaclus 13y ago
One thing to be careful of when hiring is treating equity as a replacement for salary. I've had a few offers in the last year where they offered me X amount of money and Y amount of equity, and then got pissed off when I turned down the salary. One guy even told me I was an idiot for disregarding equity. But the truth of the matter is that, like this article says, you could fire me in a month, and in the mean time, I've taken a significant pay cut in favor of equity that will never pay out. And even if I do wind up working for you for a year, your equity is worth $0 (regardless of your company's valuation) until you get acquired or otherwise exit. You can sit there and tell me your company is worth $1B, but your equity is worth $0 until you can actually pay out on the stock. I understand that founders have to work under the assumption that equity is money, but your salaried employees do not. Anyway, just wanted to mention that. Like codex said, you have to find someone good but also naive -- good enough to do a good job, but naive enough to accept that low salary in favor of equity and the risk that goes with that. For a very experienced senior developer, that's generally not going to be enough, unless they're founder-level or really, really, really, really, really, really believe in the company. Or if they hate their current job enough.
- the_watcher 13y ago
  Have any founders tried recruiting with an equity + salary offer where for the first year, the equity offer is translated into salary? Not like Buffer's offer of equity instead of salary, but as something like "we acknowledge you could be working hard for something that never vests. Your fair value is X. We've offered you .5X + equity. For the first year, we are willing to offer you .8X, which then drops to .5X." Any raises could be translated into a percentage raise, or could just be added to the changing basis. It's a weird idea to have your salary drop after a year, but it might be an interesting avenue to pursue. However, successful startups usually don't have the salary issues outside of the beginning, so it may not work just because of that. I'm just really interested in trying to perfectly align incentives, and the founder vs. first employee one is the toughest nut to crack for me.
  - chrisabrams 13y ago
    I know of some companies that do this. The drop isn't quite as large as you describe, but it's the same idea.

54 points by ivankirigin 13y ago

codex 13y ago

Hiring #1 is tricky: you need to find someone good, but also naive. In this era of the ray startup, it makes little sense for a great engineer to work for someone else: the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company. In the age of the acqhire founders' risk is very small.

ivankirigin 13y ago
But they also get a salary: money the founders raised. That difference is huge. That said, I completely agree. It takes a great match. Equity percentage can't be the only dimension considered. Also, if you're struggling with hiring, giving more equity can be a solution. There are plenty of "cofounders" that came on as employees after money was raised but needed a sweeter deal to join.
- deleted 13y ago
  [deleted]
tptacek 13y ago
It depends. Practically by definition, employee #1 is shouldering less opportunity cost than the founding team. The founding team was able to start a company and raise money sufficient to pay the employee. The employee is accepting full-time employment. Why would they do that unless they didn't believe they could be successful (whatever that might mean) starting something themselves? I think there's a whole lot of taking-advantage happening in startup hiring, but there's also an industrywide lack of understanding of how risk and basic economics work, too. Equity isn't a merit badge.
- jt2190 13y ago
  > I think there's a whole lot of taking-advantage happening > in startup hiring... One warning sign of this is when the salary is below market rates. Founding members take low salaries and lots of preferred equity (and lots of risk), while employees take a market salary and a few incentive stock options.
  - mchusma 13y ago
    One quick correction is that founders typically have common stock, not preferred.
    - nerfhammer 13y ago
      They get common stock but without a cliff or vesting period
      - jenandre 13y ago
        not true if they are taking on money. any investor will require a vesting period over 4 yr w/ usually a 1 yr cliff (which resets every time you take money)
      - tptacek 13y ago
        No, founders vest. For the love of all that is holy, don't join a founding team with no vesting. Funding or no funding, vesting is non-optional. Get vesting worked out from the jump.
- _delirium 13y ago
  It sounds like there's a bit of a trend towards passing some of that risk on to the employee early-on though, by not really considering the job a real job with a presumption of continuation. The 2nd story here recommends only "trial-hiring" people for 1 or 2 months at a time, and even companies that don't go that extreme have been trending towards quick-to-fire for vague reasons like "poor fit" (more than bigger companies). Of course, you can always be fired in a regular job (in at-will states), but the understanding is that you normally won't be fired one month in, unless either you totally screw up or the company's situation changes significantly. Hence you have a bit less risk because you have normal job + salary, while founders have more risk, but that's not as true if you don't really have normal-job anymore. Of course, if you have a pile of contract work you can transition to at a moment's notice even this arrangement might not be a huge risk, but depends on the person. And in that case you might prefer to just stay a contractor and bill your regular rates, rather than shouldering the opportunity risk of committing to a possibly-evaporating job.
jbcurtin2 13y ago
Looking for someone who is naive is the problem. I've walked away from countless opportunities because I got the sense that I was being handled.
webwright 13y ago
"...but also naive." That's silly. You need someone who values the startup experience in some way to balance out the salary hit. That's all. They may love small teams, might be seeking early experience, might want to build cred so they can raise money someday themselves, etc. "the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company." The founders take considerably more risk working for free, raising money (time consuming for 99% of startups), and greater opportunity cost... Working 6-9 months or more on an unproven/unfunded startup is WAY RISKIER than joining a funded startup for a slightly reduced salary. "In the age of the acqhire founders' risk is very small." This is just plain wrong. What % of failing teams are acqhirable? Stanford grads will have no problems, but many/most teams are too small or too weak from a resume point of view to get a deal done. I've watched very solid teams fail to find a suitor a LOT (including MOST failing YC companies).
Estragon 13y ago
What is a ray startup?

Aloha 13y ago

"It’s when we hired full time employees immediately without that trial period where I’ve really regretted things. You go through so much extra work to figure out insurance and stock plans, only to want to fire the person in a couple months." It's very very hard to get people to move from one contract to another without some sort of permanence, I'm a contractor now, why would I change to another contract even for slightly more pay? I'm content here, more or less, offer me a fulltime job, sure, I'd move - but not for another contract.

tptacek 13y ago
I agree strongly. Contract-to-perm hiring seems like a great way to filter out the best candidates, who will tend to have better options.
- ivankirigin 13y ago
  It's a pretty big issue because you don't really know what working with them will be like. Weebly does a trial week, which is a good balance of time and commitment. http://www.sequoiacap.com/grove/posts/akzj/trial-week-our-hiring-secret http://www.sequoiacap.com/grove/posts/akzj/trial-week-our-hi...
  - tptacek 13y ago
    Aside: let's be careful not to pretend that temp-to-perm hiring is any kind of norm. The overwhelming majority of hires are hired conventionally, after an interview, with an immediate full-time offer. That includes "employee #1" hires.
    - ivankirigin 13y ago
      You're right
      - tptacek 13y ago
        I'm also a crusader on this issue, as you know, so don't let me steamroll the thread.

isadeal 13y ago

What if a good potential #1 asking for founder position?

kansface 13y ago
The difference would be from about 5% to perhaps 15%. There should be a damn good reason to make this happen (you wanted the person as a founder at the start, but external forces kept it from happening). A bad first hire can sink your company, so be careful.
balls187 13y ago
You have to ask yourself: 1. Are you a single founder, would a 2nd founder help? 2. Do you already have a 2nd founder who is technical/business? 3. How far along are you? 4. How much salary are they willing to give up? 5. Are you a first-time founder? I was brought on as a co-founder, even though the business had a few months head start. However I was the only dev, I was going to make the same "salary"--20k/yr, and that the company didn't really have much more than a simple proof of concept. Employees should expect a "reasonable" percentage of market salary. Founder's should not.

jason_wang 13y ago

I used to have the "trial period" mentality even though I didn't have an answer for the "that's starting out on the wrong foot" skepticism. But recently, a smarter-than-me CEO shared his hiring practice and he has won me over. He proposes: hire the candidate as a full-time employee and offer the candidate the salary/equity package as if the candidate has achieved his full potential. Then, if the candidate works out as expected, then everything is well. But on the other hand, if the new hire turns out to be sub-par, it would be a lot easier for you to let him or her go. Because it'll simply be too expansive to keep a sub-par employee around at the compensation package you offered. I think this is a great implementation of the hire fast and fire fast philosophy.

throwaway7487 13y ago
Optimizing and experimenting on your hiring and firing practices is very important. Have fun. Also, do read the book and do take the example from Steve Jobs. Distort the reality. Lie to your employees and partners creatively. Be free.

Jemaclus 13y ago

One thing to be careful of when hiring is treating equity as a replacement for salary. I've had a few offers in the last year where they offered me X amount of money and Y amount of equity, and then got pissed off when I turned down the salary. One guy even told me I was an idiot for disregarding equity. But the truth of the matter is that, like this article says, you could fire me in a month, and in the mean time, I've taken a significant pay cut in favor of equity that will never pay out. And even if I do wind up working for you for a year, your equity is worth $0 (regardless of your company's valuation) until you get acquired or otherwise exit. You can sit there and tell me your company is worth $1B, but your equity is worth $0 until you can actually pay out on the stock. I understand that founders have to work under the assumption that equity is money, but your salaried employees do not. Anyway, just wanted to mention that. Like codex said, you have to find someone good but also naive -- good enough to do a good job, but naive enough to accept that low salary in favor of equity and the risk that goes with that. For a very experienced senior developer, that's generally not going to be enough, unless they're founder-level or really, really, really, really, really, really believe in the company. Or if they hate their current job enough.

the_watcher 13y ago
Have any founders tried recruiting with an equity + salary offer where for the first year, the equity offer is translated into salary? Not like Buffer's offer of equity instead of salary, but as something like "we acknowledge you could be working hard for something that never vests. Your fair value is X. We've offered you .5X + equity. For the first year, we are willing to offer you .8X, which then drops to .5X." Any raises could be translated into a percentage raise, or could just be added to the changing basis. It's a weird idea to have your salary drop after a year, but it might be an interesting avenue to pursue. However, successful startups usually don't have the salary issues outside of the beginning, so it may not work just because of that. I'm just really interested in trying to perfectly align incentives, and the founder vs. first employee one is the toughest nut to crack for me.
- chrisabrams 13y ago
  I know of some companies that do this. The drop isn't quite as large as you describe, but it's the same idea.