3 ms·
I often see people refer to employee/founder risk as a reason for for employee's getting less stock in the early days, but I think this is the wrong way to thin
by sulam 12y ago
I often see people refer to employee/founder risk as a reason for for employee's getting less stock in the early days, but I think this is the wrong way to think about it. As an employee or a founder, your risk in working at a startup is very low. Both of you experience some degree of opportunity cost, but you're mostly "risking" the possibility of having to go work at a significantly higher base salary with more benefits, perks, and possibly the same expected value in terms of stock. So, what gives?
The answer is that we don't pay people based on risk. Fire fighters truly have a high risk job, yet they typically earn less than many skilled white collar jobs. Rightly or wrongly, we pay people roughly according to their economic output, and probably not even their fully captured economic output (see: teachers).
The reason people use this risk language when it comes to startups is because there's a place where there _is_ some economic risk being experienced, and these people talk about "de-risking" the business all the time: investors. Investors are risking capital, typically all of it, for the chance of an outsized return. As a company de-risks, meaning as it becomes more of an actual business vs a business model search engine, the return an investor might expect for their money is naturally reduced (from 100X to 10X to 2-3X over the course of funding a 'typical' SV startup).
Founders often put capital into a business as well, in the form of maxed out credit cards, deferred salary, and sometimes actual bootstrap $$$. Their monetary contribution is typically quite a bit smaller than an investor's, though, so why do they get such a huge share of the ownership? Again, it comes down to economic value. A founder is producing a huge amount of economic value simply by taking an idea and turning it into a real thing that people can evaluate, invest in, work for, etc. An employee isn't creating nearly as much value, although I think it's pretty obvious that the first employee at a YC startup is probably creating more than %.01 of the value in the company so an offer like that isn't fair.
I do find it fascinating that so much of the investment language of risk gets used when speaking about employees. I think some of this is just lazy thinking, but it's also partly psychological -- you want employees to feel like investors vs having them feel like contractors, for instance. And honestly, if a company gets really big, an employee with 1% stake in a company is still filthy rich, even if the guy he had beer with the whole way is now going to Davos on his private jet.
- pcthrowaway 12y agoI don't know about the bay area, but fire fighters can make over $80,000 a year in Portland, OR[1], which isn't so bad I agree with the point that we don't pay people based on the risk though, as I worked at arguably one of the most dangerous jobs in the U.S. (pizza delivery in a top-5 violent crime rate cities) for years, making far less than a fire fighter. [1]http://www.portlandoregon.gov/bhr/article/462925 http://www.portlandoregon.gov/bhr/article/462925
- cwp 12y agoI don't think that's the case. It is appropriate to think and speak in terms of risk for employees. Consider the contrary case: self employment. I don't mean founders here, but freelancers, consultants, bootstrappers etc. They really are paid by the amount of value they produce, or as close to it as we can determine via the market. Success as a freelancer depends on being able to produce a large amount of value and being able to capture as much of it as possible. There's an incredible range here, from getting $0.03 to do human-OCR on Mechanical Turk to Hillary-Clinton-style $300,000 speaking engagements. It's highly variable over time as well. Freelancers are constantly looking for new clients, and badgering existing clients to actually pay them. They also have to be prepared to have dry-spells where they're not earning at all. In other words, it's risky. Given that backdrop, the value that employers offer to employees is reduction of risk. Employees are not exposed to the downside risks of the market, nor do they participate in the upside when the business does well. Employees do risk losing their job, but that risk is generally pretty low. Startups, though, offer less risk reduction than more established companies. Some of this is intentional, to align incentives and select for employees comfortable with the big-risk-big-reward reality of a startup. Some of it comes from the inherent instability of startups. Chances that a startup employee will abruptly lose her job, or not get paid for work already done is much higher employees of established companies. Even the "big reward" scenarios tend toward instability—for example, "Good news, we being acquired by Google! Now we all have to move to Mountain View." Because of this, evaluating a job offer from a startup has to involve an assessment of the risk it involves. A portion of compensation is usually equity, and that equity is of completely unknown value, compared to say, RSUs as Facebook. The job being offered is inherently temporary, since the company will either fail, be acquired or transform into a completely different company within a few years. It's less risk than freelancing, but much more risk than working at a big company.