I personally think the first one to five employees in a minimally funded startup with small m&a exit as the likely exit are getting a bad deal, vs. the founders or employees who join after financing.
An early employee will get about a percent tops as an individual contributor...maybe up to five percent tops if he is more of a vp engineering. In exchange, a seriously below market salary, equally high if not higher risk of losing one's job vs. founders, and vastly less respect when he later goes to try to do his own startup.
Assuming the same caliber of individual, it makes a lot more sense to either found your own startup, or join after real financing (where you get a market salary, and have a lot less risk, plus a lot of startups with problems have been shaken out.).
Obviously being am early employee at a great startup like google or Facebook makes sense, but for companies more likely going for 10 to 50m base hits, I don't think early employee is a financially rational decision. (note to future people I want to hire: I only do high risk potentially high value exit startups, so your initial equity actually is worth it!)
As employee #2 of a now well-funded startup, I would have to agree with this whole heartedly. I wrote a large part of the company's initial product. I can't say that it's translated into nearly the respect, career advancement, and stock options I was sold on. Remember that a startup is as much about business connections as anything - who do you think the VCs are going to credit with success, the guy like them, or the technical founder(s) they barely understand?
If by "real" financing you mean a series A round, then you're probably mistaken. People who join a startup with just angel funding might get roughly 4-5x as much stock as they'd get post series A. It's only a worse deal if a series A round makes a company 4-5x less risky.
There's a market price for all the different options, from founder to early hire to later hire. It would not make sense for there to be points on the continuum that would suddenly be a much worse (or better) deal, and in my experience there aren't.
You're also mistaken in saying that an early hire will get 1 percent tops. This number varies by 30-40x, depending on where the company is and how early the hire is. 1 percent would be typical for a very good hacker fairly soon after a series A. You can get much more pre series A.
I am drawing a distinction between someone likely to only currently be a good individual contributor, and thus who will not have the option of founding his own startup at that point in time, and a well rounded candidate who brings a lot more to the table. One percent is a lot of equity even as employee one if that person is not going to be in a leadership role later. It was what the mint designer and a few other first hire top notch individual contributors at startups I know have received.
I definitely agree you get more equity during bootstrap time vs. in series a funded startups. I just think the combination of survivorship bias and cash comp makes it a better deal to wait.
Actually someone respectable (Suster?) posted a few months back about how there are discontinuities...and that immediately pre series a closing is a much better time to join than immediately post, since the reduction in risk is far smaller than the reduction in equity. I think the opposite is true between employee one and immediately post a.
By real financing I include mega angel seed rounds. For me a 1.5 seed round vs a 3 vc series a is a distinction without a difference.
My experience as en early-stage employee wasn't quite so bad. As we received funding my salary tended to increase pretty nicely. There was a point that I was the lowest paid employee (with the highest level of responsibility)... but I quickly moved to fix that.
The biggest mistake I find that folks in that position make is in how they value their equity (in that they HUGELY over-value it).
"There's a market price for all the different options"
The market isn't efficient though, because there isn't enough information (tho your comment and the GP are helping increase that). It may very well be that there are worse deals at some points.
Believe me, I know how inefficient the market is. There are certainly overpriced and underpriced startups. But his claim requires more than an inefficient market. He's saying that startups in a certain phase are consistently overpriced. That I've seen no evidence of.
One company might choose to give an early hire 20%, possibly even making them a cofounder. Another company might give an early hire 0.5%. Hence the 40x variability in the amount of equity given to early hires.
Also none of my argument applies to a startup with one or more non technical non domain expert founders hiring a tech guy as employee number one. In that case he is a founder without the title and might get a founder level share. However I think those companies are generally born wearing the stink of death and nor worth consideration.
"depending on where the company is and how early the hire is." In the case where a new hire gets 30%, presumably the company is early enough that they are basically joining as an additional co-founder. Certainly possible.
That's probably true, but there's a lot more that goes into employment decisions beyond compensation.
As an early startup employee, I'm working for (all things considered) less money than I was when I was working in the defense industry. But I also don't loathe my job or lay awake at night, stressed about the idiocy and bureaucracy that made my days hellish, Kafkaesque, comedic nightmares.
That's worth more a LOT more than ~$10k/year and a guaranteed 'career'.
False dilemma: there are plenty of jobs that pay fair market rates that don't involve hellish idiocy and bureaucracy. It's not somehow automatic in companies that are a different age than post-founder pre-funding.
There's nothing about a pre-funded startup that magically banishes the "kafkaesque". Conversely, there's nothing about being well-funded that keeps you from sleeping at night (quite the opposite, actually).
But the implication was that it had something to do with it being a startup. There are plenty of startups with neurotic founders, and plenty of big companies that aren't a Kafkaesque nightmare.
Right, I implied that it had something to do with being a startup because it does. In this specific example.
I'm not saying that 'all startups good, all big company bad' is some sort of globally applicable law and I'm not sure how or why anyone would read that into what I've said.
"False dilemma: there are plenty of jobs that pay fair market rates that don't involve hellish idiocy and bureaucracy. It's not somehow automatic in companies that are a different age than post-founder pre-funding."
True in California.
Not so much in other places. In India, you can work for body shopper process heavy companies (Wipro Infosys etc) , "India dev center" s of MegaCorps, which are universally severely dysfunctional and bureaucratic (Even Google and Yahoo aren't immune, their Indian operations are overrun by Middle Management and by and large, you get (relatively) crappy work (ops/legacy code etc)). Or you can work for the very few decent startups at below-market rates.
Choices, choices ;-)
Not so much opposing your view point as qualifying it a bit.
PS: If anyone knows of an Indian company that pays well, has great work, and is not infested by bureaucracy, let us know. I have friends who are looking to move from both Kafkaesque BigCo jobs and underpaid startup jobs.
Financial compensation is only part of it. Most startups include longer hours and additional responsibilities that limit what else you can do with your life, such as have a relationship, spend time with friends, or work on a side project.
I'd guess you're at an established startup if you're only making ~$10k/year less than your last job in the defense industry. Pre-Series A startups are unlikely to pay even a third of what you'd make in that industry.
A good eng in defense (at the level needed to be a startup founder) should be making 150 uncleared to 250 secret to 300 ts or project lead or more if deployable. Working 40 hour weeks (well, working 5 hour weeks with 35 hours of meetings, admin, paperwork, and overhead)
A pre series a eng is making 30 to 60 if lucky. At series a, maybe 80 to 100.
Defense is almost a perpetual job, whereas the half life of a pre series a startup is maybe 3 months, 1 yr for series a.
A programmer working defense state-side does not make nearly those figures.
80 to 100 is much closer to what a software engineer with several years of experience makes working for a defense contractor than 250, though of course actual years of experience and how well one has played the corporate ladder game can make a big impact.
Past a certain point it is relatively difficult to advance salary-wise without taking on management roles and giving up the hands-dirty side of programming / engineering. Once you're there it's an apples-to-oranges comparison for the kind of startups that are typical for HN-types ~ certainly no early stage startup is going to hire a 10-year manager to be employee #1 when what they really need is a hotshot programmer.
I admit my knowledge of stateside engineers in the large defense contractors is secondhand; trying to convert known deployed salaries and known eng and pm salaries at small product companies selling to usg.
Substitute working for a fund on the dev side and double my numbers to make the original argument stronger.
the thing is, the startup job market selects for people who don't place a high value on job security, and who are willing to work (temporarily, at least) for below market rates. If you want something safe and high paying, startups generally don't compete with the big boys.
Now, obviously, the first hire gets a worse deal than a founder wrt compensation... but I think everyone is aware of that going in to the deal, and that this is part of why it's so hard to hire experienced people for those (non-founder, early employee) roles.
The big factor people don't realize is employee number one has worse job security than the founders. If you they have huge equity and no salary, and you draw a salary, guess who goes when the bank account is short? If you all make subsistence only, you are losing due to lack of equity and opportunity cost. And still, if there is only enough for 2 of 3 to subsist, the employee goes. If the company tanks, you all go.
I think people realize this. Nobody who cares about job security works for a startup unless they have no other options.
Working for a startup when you want job security would be like getting an art degree if you want money.
My experience has been that if you want to hire people for significantly below market rates, you need to accept that you will be getting inexperienced people who probably can't get good stable corporate jobs. They are getting paid in experience rather than equity. It's just not really something that people who are good and experienced do very often, because as you said, it's not a very good deal compared to the other options available to people who are good and experienced.
(note, I said "hiring" - the rules are rather different if you make them a founder, or give them founder-level equity.)
Or excellent, qualified employees looking for a lot more security. For me to go that route again, I'd be looking for a lot of vacation time (6-8 weeks). Even then the salary would have to be pretty solid as well.
edit: I think something far more deceiving is employee #75 receiving 10k shares and the impression they're walking away with gobs of money after a big sale.
Someone who comes in for five is a potential founder anyway.
At 1 you have another fifty percent dillution from follow on financing, and the odds of any exit at all.
Exmployee 75 is making market, and a 75 man shop will not sell at 50. They are shooting for 500 or more, or failure.
A 5 person startup might sell for 5 to 10 direct, in which case your 1 just bought a nice car, after tax, but not a really nice car, and less than your risk adjusted forgone salary vs. Being a soulless corporate drone in defense, or maybe number 75 at a well funded tech company.
Liquidation preferences are wacky -- I would have never understood them without several patient explanations on HN. I'm curious: is modeling their effects just common Valley knowledge that you'd do effortlessly during a job interview, or would most candidates be as unknowingly ignorant of their effects as I was a year ago?
I sit with people with a googledocs spreadsheet and we plug in numbers for various scenarios, so they can see what happens if there is a quick sale vs. multi round and then later. And show how cash comp to engineers affects this too. I believe in total transparency for at least the first 20 or so employees wrt budgets, salaries, equity, etc.
If you "trick" someone into working for less, you have screwed yourself more than you have saved money.
Right..when your best case is less than salary differential, before factoring in working 3x more, and the ten percent or less odds of getting the 50 exit! Something is irrational about participating.
That said I would work with certain people or on certain projects as an early employee. With some, it would be economically rational, with others then entertainment value would be worth it.
GitHub's first employee owns more than 1% of the company, so I'm not sure why it's unrealistic. Maybe in the world of businesses letting VC's tell them how to run their company this is the norm, but it doesn't have to be.
Wow. I was secretly trying to get you to find an answer to one of Keith Rabois questions on quora. I forgot he qualified it as post 1999. Can you do that too?
National Instruments is an amazing company...I was fortunate to get to use their products on some projects as a teenager.
The first few hires often happen before VC funding is raised, right? And 2-3% for the first few employees isn't unusual amongst companies that later raise VC funding and make it big.
If you are founding CEO of a startup which fails honorably, or exits, investors and future team members pretty much ascribe all the good accomplishments of the company to you personally, and think you have a good shot at doing it again. A non CEO founder gets a lesser share of the resulting glory, plus way less name recognition.
Only rarely and with big successes will vp eng, product designer, non founding cto, etc get much cred from a startup. If it fails, ceo can usually easily get a job (sometimes as eir or though investor portfolio companies)
be a sole founder and get 100% equity. then land some paying customers. keep the 100% equity. add features, polish, maybe hire other folks, maybe give away some equity early to bring on a contributing partner with key skills, etc. then this whole "1% is generous" belief and worrying about dilution caused by outside investment rounds simply goes away. does it always make sense? no. but I think it's ideal.
Of course it's "ideal", but in almost every case capitalization gives you a huge advantage and greatly increases your odds of success. You can only iterate and perform customer development as long as there is money to fund that. The less money you have, the greater your chance of failure (but the greater the reward at the end as well).
An early employee will get about a percent tops as an individual contributor...maybe up to five percent tops if he is more of a vp engineering. In exchange, a seriously below market salary, equally high if not higher risk of losing one's job vs. founders, and vastly less respect when he later goes to try to do his own startup.
Assuming the same caliber of individual, it makes a lot more sense to either found your own startup, or join after real financing (where you get a market salary, and have a lot less risk, plus a lot of startups with problems have been shaken out.).
Obviously being am early employee at a great startup like google or Facebook makes sense, but for companies more likely going for 10 to 50m base hits, I don't think early employee is a financially rational decision. (note to future people I want to hire: I only do high risk potentially high value exit startups, so your initial equity actually is worth it!)