4 ms·

Can you put a number (or range) on what is generous for the first engineering hire? 2%? 3%? 5%?

jusben1369 13y ago
I think the answer is all of the above. Are they pre funding? More risk = closer to 5%. Are they on their third startup with two successful exits and raised $1.5 - $3 mil in Angel already? 1 - 2%. But you're in the right range for sure. (this is the first true outside hire)
deleted 13y ago
[deleted]
toby 13y ago
Play out the numbers (assumptions completely speculative): - How much more would this person make at a big company? ($50k?) - What's the time frame for success? (4 years vesting?) - What's the distribution of possible exits? (5% chance of $100M, 30% chance of $10M acquihire, 0.1% chance of $1B) Under these assumptions, you hit about 2.3% to make the expected values match assuming absolutely no investor preferences (which is itself silly). It would be interesting to use real seed fund data to generate the distribution and proper salary comparisons.
balls187 13y ago
This is a great post by Fred Wilson about this subject. http://www.avc.com/a_vc/2011/04/how-to-allocate-founder-and-employee-equity.html http://www.avc.com/a_vc/2011/04/how-to-allocate-founder-and-... Essentially, figure out what market rate is for their salary. Since you'll likely pay a discount rate, the equity should bring them at or above market. So if Market is 105k, and I'm going to pay 55k, I will give you 50k in equity (based on a reasonable valuation--assuming you don't have an actual valuation). Using a flat rate percent can get tricky, and you can easily end up unnecessarily diluting yourself. I also think it's important to think of your first 1-3 hires as Key hires, the same way a new CEO or VP of Sales would be a key hire post Series-B. You want them to get a big chunk of money if there is a positive liquidation event.
- jbail 13y ago
  A bird in the hand is worth two in the bush. If market rate is $105k and you're paying me $55k in cash, then I'd want $100k in equity, not $50k. This is something many startups get wrong. It isn't a one-to-one swap. Even if you have some sort of reasonable valuation, equity is worthless until there's someone to sell it to. There needs to be an uncertainty/illiquidity multiple applied. Otherwise, I'll take the cash. That has literally always worked out to my benefit throughout my 15 year career in software development (even working for companies that got acquired for 9 digits).
  - scott_s 13y ago
    I think another way to put it is you need to pay them for the risk they are taking. That's why you can't do a one-to-one swap. If they get the same total amount of money that they would in a more stable position, they have no reason to take the risk.
  - balls187 13y ago
    Fair enough. I was paraphrasing the actual formula. That said, if you think equity is worthless, why are you considering being employee 1 at a startup?
    - jbail 13y ago
      I never said I thought equity is worthless. I said I would choose cash over equity if the equity is not weighted heavier than cash to account for the risk and illiquidity inherent in startup equity. I am engineer #1 at a startup right now. The equity was very generous and weighted appropriately vs cash.
      - balls187 13y ago
        Sorry, I mistook your earlier statement to believe that you thought equity is worthless, when you were just saying there is no cash value for equity. And yes, you're correct, the equity should be setup in a way that offers early hires significant upside. Curious, did your founders use a flat %, or did they figure out some weighted amount?
candybar 13y ago
Aside from where the startup is, it is also hugely dependent on who that first engineering hire is. If it's a junior developer with a lot of potential but not much experience that they are taking a chance on because one or more of the founders are quite advanced technically themselves and are willing to mentor, train, etc, even 1% is quite generous. If the hire is either on par with the founders in terms of technical skills and experience or even the sole technical employee expected to be lead the effort and eventually build the team, even 5% can be considered quite low, depending on what the founders bring to the table.
pg 13y ago
Depends on the situation. If you're a single founder and you've only been working on the company for a couple months and the person you're hiring is as competent and dedicated as you are, 50% could be reasonable.

I think the answer is all of the above. Are they pre funding? More risk = closer to 5%. Are they on their third startup with two successful exits and raised $1.5 - $3 mil in Angel already? 1 - 2%. But you're in the right range for sure. (this is the first true outside hire)

deleted 13y ago

[deleted]

toby 13y ago

Play out the numbers (assumptions completely speculative): - How much more would this person make at a big company? ($50k?) - What's the time frame for success? (4 years vesting?) - What's the distribution of possible exits? (5% chance of $100M, 30% chance of $10M acquihire, 0.1% chance of $1B) Under these assumptions, you hit about 2.3% to make the expected values match assuming absolutely no investor preferences (which is itself silly). It would be interesting to use real seed fund data to generate the distribution and proper salary comparisons.

balls187 13y ago

This is a great post by Fred Wilson about this subject. http://www.avc.com/a_vc/2011/04/how-to-allocate-founder-and-employee-equity.html http://www.avc.com/a_vc/2011/04/how-to-allocate-founder-and-... Essentially, figure out what market rate is for their salary. Since you'll likely pay a discount rate, the equity should bring them at or above market. So if Market is 105k, and I'm going to pay 55k, I will give you 50k in equity (based on a reasonable valuation--assuming you don't have an actual valuation). Using a flat rate percent can get tricky, and you can easily end up unnecessarily diluting yourself. I also think it's important to think of your first 1-3 hires as Key hires, the same way a new CEO or VP of Sales would be a key hire post Series-B. You want them to get a big chunk of money if there is a positive liquidation event.

jbail 13y ago
A bird in the hand is worth two in the bush. If market rate is $105k and you're paying me $55k in cash, then I'd want $100k in equity, not $50k. This is something many startups get wrong. It isn't a one-to-one swap. Even if you have some sort of reasonable valuation, equity is worthless until there's someone to sell it to. There needs to be an uncertainty/illiquidity multiple applied. Otherwise, I'll take the cash. That has literally always worked out to my benefit throughout my 15 year career in software development (even working for companies that got acquired for 9 digits).
- scott_s 13y ago
  I think another way to put it is you need to pay them for the risk they are taking. That's why you can't do a one-to-one swap. If they get the same total amount of money that they would in a more stable position, they have no reason to take the risk.
- balls187 13y ago
  Fair enough. I was paraphrasing the actual formula. That said, if you think equity is worthless, why are you considering being employee 1 at a startup?
  - jbail 13y ago
    I never said I thought equity is worthless. I said I would choose cash over equity if the equity is not weighted heavier than cash to account for the risk and illiquidity inherent in startup equity. I am engineer #1 at a startup right now. The equity was very generous and weighted appropriately vs cash.
    - balls187 13y ago
      Sorry, I mistook your earlier statement to believe that you thought equity is worthless, when you were just saying there is no cash value for equity. And yes, you're correct, the equity should be setup in a way that offers early hires significant upside. Curious, did your founders use a flat %, or did they figure out some weighted amount?

candybar 13y ago

Aside from where the startup is, it is also hugely dependent on who that first engineering hire is. If it's a junior developer with a lot of potential but not much experience that they are taking a chance on because one or more of the founders are quite advanced technically themselves and are willing to mentor, train, etc, even 1% is quite generous. If the hire is either on par with the founders in terms of technical skills and experience or even the sole technical employee expected to be lead the effort and eventually build the team, even 5% can be considered quite low, depending on what the founders bring to the table.

pg 13y ago

Depends on the situation. If you're a single founder and you've only been working on the company for a couple months and the person you're hiring is as competent and dedicated as you are, 50% could be reasonable.