Early employees take the most risk today | Hacker News Reader

Early employees take the most risk today

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227 pointsgyre007150 comments

Great, great article.

I'd like to add: This, I think, is one of the big reasons why startups prefer hiring young people (ie, recent grads) - young people just don't know any better. They have the barest idea (if any) what dilution, ratchets, preferred participations, etc does to their already minuscule equity package.

"OMG I'm getting 70,000 shares!" is what I thought about my first startup. Wasn't even offered (and didn't bother to think about) anything else.

Perhaps I'm projecting too much of my ignorance back then on newly minted grads now, but it's safe to say that lack of experience in the myriad of different ways things can (and most likely, 99% chance) will devalue the work I'm willing to put into a company at 80+ hour weeks.

The most inane argument I hear from founders nowadays is "we just got funding, so we're de-risked". Nice try. Just cause you sold someone with money to burn (VCs have a bias to action - "gotta get that IRR to our LPs in 10 years!") does not mean you've de-risked anything. Proper de-risking comes from finding a real product-market fit, with achievable financials metrics that pave the way to real profitability. Anything else is just greater fool theory - hoping a greater fool comes around and buys the company's story.

EDIT: Member notacoward has a great comment about rank and file employees also not appreciating the back-end commitment usually required at an acquirer. In the highly "fortunate" event where the startup is acquired, there's usually at least a 2-3 year commitment after that fact to get liquidity. This is assuming liquidity is even available! With the ever-telescoping horizon to an IPO for even the "unicorns", I wouldn't be surprised if most rank and file employees are committed to 6, 7, even 8 years to achieve full (diluted) value of their option packages.

Recruiting younger persons carries also more risk. It is very common, almost universal for younger people to earn less than older people, also their value to the organization is less well defined.

Also I would like to say that it makes sense as a young employee to focus on salary, but I'm not really sure of that.

It's fair to note there's a significant amount of risk in hiring recent grads, because largely they aren't great at actual engineering, just coding.

Isn't the armed forces model relevant here, which also happens to fan out:

  "Experienced" soldiers work on the strategy while 
  new recruits work in the trenches.

No the wet behind the ears Rupert's (lieutenants) ask the Sargent's what to do next.

If you're developing software and there's a lot of "trench work" that usually means you're doing it quite badly.

How so? Doesn't this completely depend on the actual product being built?

And please correct me if I'm wrong, but isn't there also often a risk that they get fired or laid off at an acquirer and lose it all?

Nice piece. Many good points, but my favorite was this one.

"they need to spend years at the acquirer for whatever the founders and m&a department decide behind closed doors."

That's an under-appreciated risk. Of the ten startups I worked at, two went this route. For one, I'm pretty sure I was the last person to leave voluntarily; I had trouble finding someone to take my resignation letter because they were all in negotiations. Some of my coworkers ended up working for Symantec. At the other one, a bunch of us ended up working for EMC. At least that worked out OK financially, but it was not not not a choice any of us would have made for ourselves. Not a one. We'd all had that option before, and not taken it. Since acquisition is a far more common kind of outcome than IPO, even for "successful" exits, that's worth thinking about.

Employees have always shared more of the risk than founders and investors would like to admit. That's part of the package, and I was OK with that for a long time. Nowadays, it seems like the share of risk is even larger and the share of success even smaller. I guess it's still worth it as a career-building move, if you're that way inclined (Google doesn't look bad on a resume either), but as a way to make good money it's becoming kind of a bad deal.

I dunno about the amount of risk, but at least the risk is quite well-defined for the employees from the start. You get your salary each month, and maybe something on top of that. You might learn something in your job, or maybe not.

Founders have to start with their own savings/debt and salary in the beginning is usually zero. Of course situation changes if they get investors etc. But I would say that the risks are really not that easily comprehensible for founders.

Fair enough. I certainly didn't mean to suggest that the risks are the same, just that the difference isn't as great as commonly presumed. People still get stars in their eyes about joining NextBigThingCo as an employee. They're aware of the risk that the startup will fail, of course, but they often don't think about the risk that it will succeed and they'll still get squat or that they'll suddenly end up chained to AlreadyBigCo for a few years. Those should be factored in as well.

In my experience talented early employees tend to take a tremendous amount of insufficiently-compensated risk. The founders can of course lay them off at any time, dilute them, give them paychecks that bounce, outsource their jobs after a year or two, sell so much equity that employees stay underwater or barely in the money, etc. The founders take a lot of risk themselves, but they are in control, and they usually reward themselves for it. Whereas volumes could be written about early employees at successful companies who maybe got a solid bay area house downpayment out of their stock options, after working 60+ hours a week for ten years.

I have to respectfully disagree with this article. While it may be spot on in some scenarios, it couldn't be further away in others.

As a co-founder, I didn't take a salary until a year into the startup (same with my other two co-founders). Even when we received our accelerator funding, all of it went towards our first hire's (an engineer) salary and operating expenses. At this point, our risk was significantly higher, not slightly. If the company didn't succeed, I can tell you our first hire was next in line for a cushy market job, and he was being actively poached, not us.

After we graduated the accelerator we raised a ~$1M seed round. We hired more two early team members at market salaries. Each of the co-founders were taking $33K salaries. Why? We wanted the budget to hire great people. So no, they definitely not a similar pay cut. In fact, it's increasingly hard for early stage startups to hire good talent at less than market rates because there are plenty of amazing startups hiring above market. Our risk at this stage was even higher, because failing would burn most of our bridges with our new investors (maybe a couple wouldn't hold it against us), where as if our engineers went on to start something, no investor would think twice about their history working at a failed VC-funded startup.

We didn't increase our salaries again until we were generating revenue. Even now, ~four years in, I'm taking $20K less than the starting salary for a junior person in the role I have. While I want to increase that a little more as our revenue grows, I don't think it's fair to take a market salary at our stage.

I'm not complaining, but to say being an early employee is a rotten deal is unfair. If our startup goes under, I definitely have the more rotten deal. It only looks like I had the better deal if we succeed.

And if you want to start a startup, I encourage it, that's the only way you'll know how truly hard it is.

NOTE: This comment is a rehash of a comment I made on a similar statement. I am reposting it because I feel like it addresses this and sheds a little light on the other side of things.

When you weren't taking a salary, how did you support yourself and pay for your [living] expenses?

Savings from my first job out of college (was able to save by living with my parents at the time) and major sacrifices. By the time we started taking salaries, my savings was nearly completed drained. I will say that I was lucky enough not to have to take student loans so I did graduate debt free.

If you don't mind me asking, if the company failed to turn a profit what was your next step? Savings gone, no money coming in, living with your parents and not being actively sought after. It sounds like you went "all in" which is very admirable.

Honestly, I had no backup plan. All I could think about is making my startup succeed. Because I made failure not an option, I was willing to pivot twice instead of giving up. But I had nightmares about running out of cash. I was scared.

This does make sense, primarily you take a bunch of stress and less money now. In the long or medium term, what punishment or repercussions would there be for you if it failed? You too are probably 'next in line for a cushy market job'. What is the opportunity cost you're passing up, but what are you gaining, including experience and connections?

"You too are probably 'next in line for a cushy market job'" - Now, maybe. But it wasn't like that during the first year, or even the second. I can honestly tell you I was very very afraid of what my life would be like if we failed back then. I promise you, I wasn't getting emails from Google recruiters back then. It's only now (four years and pivots later) that we've gained traction that I have opportunities.

I think your situation differs significantly from the one the author is depicting. You sound like you treat your employees correctly, offering them market rate compensation instead of a carrot on a stick.

It's honestly an engineer's market. Nobody is forcing them to take these below-market jobs for crappy options. If they keep taking them, nothing will change. If you would rather have market salary and little to no equity, most founders are willing to accommodate. But I guarantee that years later when the startup is worth something or exits they complain that they got a shitty deal (when they weren't willing to take on the risk).

Yes, you might face a greater economic risk than any one employee, but how does your risk compare to that for all of them? The employees, after all, are more numerous. How much total salary, both present and future, did the whole set of them lose vs. if they'd gone elsewhere? Are you sure that, in aggregate, it's not more than you've been set back personally? How does that change for a couple of employees vs. ten, or twenty?

Let's also not forget that this is about risk, not just salary. The thing about risk is that it's not merely additive. A catastrophic outcome that's only 10% likely for one person is not still 10% likely for ten. It's 65% likely to affect at least one. You might not even have faced some of the risks that your employees do, such as arguments about financial decisions landing someone in "family" court. Who's taking the biggest risk, in aggregate, again?

Comparing risk for one vs. risk for many is a tricky proposition at best. The article might well be wrong for taking one position, and you just as wrong for taking its opposite. The real point of the article might be that founders should not turn a blind eye to employees' risk, regardless of whether or not it's greater than their own. Did it succeed at least that much?

What is the name of your company? I want to buy whatever you make.

I agree with the spirit of your comment.

twostorytowerseems seems like an articulate fellow, and even if his or her industry is not of interest to me, I'd like to keep tabs on what's he or she is working on.

A link to the company in a his or her HN profile would help here.

While you may have made poor financial choices that does not mean you represent the aggregate market. Further, the risk your stock is worth nothing is lower than the risks your initial employees stock is worthless. EX: Many smart founders take a little money off the table when they get a large funding round. Early employees don't get that option.

Finally, founders tend to have better long term career opportunity's which reduces risks. (Much like how spending money on collage is less of a risk than spending the same money playing blackjack.

PS: While often overlooked, having a deeper incite into a companies finances also allows you to better hedge long term risks.

"Many smart founders take a little money off the table when they get a large funding round. Early employees don't get that option." it usually takes years to get to that point.

O, I agree. My point was simply the odds of your stock being worth nothing are slightly less than the odds of your employees stock being worthless.

There is a huge temptation for founders to put a lot of their own money at risk. But, from a risk reward standpoint founders are better off minimizing there personal risk ASAP as in rarely impacts the odds of long term success just slightly boost the potential magnitude of that success.

I don't understand what you disagree with. You can hire talent both with cash and with shares. If you are paying market salary - fine. The article clearly talks about situations 40% below market pay and such. If you don't like the 33K salary and your risk level then just pay yourself more money and give the equivalent book value shares to the employees. That's a fair deal too.

I have worked at companies where more balanced policies obtained. For examples, founders paid themselves the current median engineering salary; but no raises were offered to engineering staff. So who ended up with the paycut?

I don't think the author is saying all startups are pushing disproportionate risk on to the employees -- only that most are.

To be able to make an argument like the author is making, we can't work from one or two individual experiences -- which is what both you and I are doing with our examples -- but rather take in the field as a whole. Standardized agreements and standardized terms provide such an aggregate view; they are the best estimates of informed participants as to what they can get away with. The point about inflexibility as regards equity compensation is a bellwether.

"I can tell you our first hire was next in line for a cushy market job, and he was being actively poached, not us."

Was this really your experience? Mine has been that if you had to move on to a cushy market job you would have gotten a much better one than your employees. Founders are rarely actively poached but that's only because everyone assumes the attempt would fail.

I agree with this. I work at a well-funded startup, but despite the funding, most of us are working for below market wages. I'm employee 22 and my options are about 0.02% of outstanding shares.

It's disappointing to me to see so much disparity between the compensation for C-level and VP-level versus engineering. Without engineering, there would be no product to sell and nothing for investors to invest in. Ideas are nice, but implementation is hard.

You're getting ripped off.

We can have a debate about whether "industry norms" are fair or not, and that's an interesting conversation to have. But your stake there is well below industry norms.

Agreed

Thirded. Go find somewhere else to work.

Sometimes the only way to fix that is to quit your job, start your own startup or get another job. Or maybe you should talk to your employer about your point of view, if you haven't done that already?

The job market might change on these invidual opinion pieces a little, but on invidiual level the most realistic options are either renegotiations or getting a new job.

You can fix that right here: https://angel.co/ =P

Sadly, you don't normally get your 'real' offer until you announce intention to leave. This is partly because all hiring processes are flawed and you can't really evaluate an employee until after a few months at least. In the last ditch attempt to keep you (assuming they decide to) you'll see a more true value driven offer.

Ugh, I was employee 5-6 and got less than that... I have terrible negotiation skills

I was a lowly engineer at a huge company with a huge product. It had one product manager whose job was to come up with product features, about a dozen engineers and a tech lead. The product manager was a nice guy, but we (the engineers) consistently used to come up with better, simpler and useful ideas/UI for the product all the time - this was without any of us talking to any of our customers while the PM constantly used to ask/receive feedback from customers (sometimes our ideas would be shot down, only to be accepted in the next release).

My boss (tech lead) was making a pittance compared to the PM - without my boss the product would literally come to a standstill. The inequality/unfairness of it all was just sad.

I don't see this changing anytime in the near future.

This is sadly the norm in non-software industry where IT is just a peripheral service rather than the core domain.

To add insult to injury, Software Engineers are treated as bunch of nerds who are replaceable.

> It's disappointing to me to see so much disparity between the compensation for C-level and VP-level versus engineering. Without engineering, there would be no product to sell and nothing for investors to invest in. Ideas are nice, but implementation is hard.

It's exactly what you'd expect when programmers are willing to sell their birthright for lentil stew.

Frankly, most C-level executives at a small startups are glorified secretaries taking care of the paperwork for the people who provide most of the actual value. They get paid more because they've played the social game well enough to persuade engineers to work for them instead of the other way around.

I work at a big company, and I also consider most C-level executives here to be glorified secretaries. All they ever do is write emails, stare at some charts, and yell at engineers to write code faster. What's most annoying is that sometimes they pretend to understand engineering challenges -- they learn some jargon and start throwing it around. That makes things worse; a little knowledge is a dangerous thing.

We engineers are nothing but servants to these people.

If what they do is so easy, and if they are much better paid than programmers, why aren't the programmers doing those jobs instead?

> We engineers are nothing but servants to these people.

Which is funny you say that because apparently the "SV elite" think quite the opposite: https://twitter.com/sama/status/641281287660007424

Career advice from a VC is given with the VC's interest in mind, not yours.

Exactly my point :)

> a little knowledge is a dangerous thing.

Indeed. I'd suggest that your understanding of what they do might be a little underdeveloped. (And perhaps your company is particularly dysfunctional.)

It's exactly what you'd expect when programmers are willing to sell their birthright for lentil stew.

Anyone can learn to code! Software should be free!

And they wonder why programmers don't get paid... No other profession talks themselves down like us.

I agree with you that "Anyone can learn to code!" is wrong. Anyone can learn to code... badly, so badly that they're a danger to every piece of code they touch.

However, dragging software into it is a bit misguided. The value a programmer provides is a service (the production of software) not a commodity (the software). The software has almost no monetary value because it can be reproduced at will. Various DRM schemes attempt to make software a commodity but this viewpoint in general holds humanity back.

More to the point, viewing the production of software as a service rather than viewing software as a commodity demonstrates why programmers are the real value. If you view the C-level execs as retailers of a commodity, their business model makes sort of sense. But if you view software engineers as providing a service, it becomes strikingly obvious that the executives are extraneous, unnecessary middlemen attaching themselves parasitically to a service transaction.

Sure, but it creates the general impression that programming has no monetary value so why should programmers be paid to do it?

I don't think people's inability to distinguish between paying for software and paying for programming makes the statement "Software should be free" a bad statement.

go ask for more money. today.

Well quit! The first time I did I was really underpaid and was asking for a 30% increase for a year, after the notice I got a 3x salary increase proposal (which I ditched because of assholiness)

Now I am happily employed at a place that pays a very nice salary and I love my job, win win!

Based on the info you gave here, I'd highly recommend you get some courage together today, and see your boss/major decision maker, tell them: "I am discontent with my current remuneration. I feel I'm not being paid what I'm worth to the company. What can you do about it?"

If they don't offer you a significant raise with 24 hours, start applying for other jobs.

>If they don't offer you a significant raise with 24 hours, start applying for other jobs.

Start applying for other jobs anyways. Schedule on-site interviews more than 24 hours after you talk about getting a raise. If they offer a significant raise, cancel the interviews.

I'm making between 40-45k at a startup in <username> with 0.2% equity. Software developer #2 (excluding one of the cofounders). I feel like I got ripped off regarding my equity stake after reading this article. This startup has around 12 people working for it now (all of whom are in sales with the exception for us two developers and the tech cofounder).

Edit: been with the startup for over 6 months now and have helped design and develop the software as much as you would expect your second engineering employee to.

If it's your first job, you should stick it out for a full year and then move to another company for a larger salary.

it's my second job out of college. Worked for a year at a large consulting company.

Oh, I would just find a new job ASAP then.

seriously? I mean upstate new york isn't exactly NYC cost of living wise (and obviously not near SF CoLA) but you think the renumeration is that bad?

Yes, you're being paid severely under market even taking that into consideration. I would probably flat out them them, "I'm going to take an extended break so I can look for a job that doesn't pay 50% less than the market. Hope you understand."

That is less than a waiter earns in that area($23/hr on average). If you think that is fair remuneration for a professional job, you need to re-calibrate.

One thing that's not discussed enough in the context of employees compensation (especially early ones) is prestige. Many people join startups because of the promise that that company will become the next Google. They see peers who follow the same logic (Marissa Mayer, the PayPal Mafia, any PM at Google in the early 2000's, etc) and see what fame, riches and following those people gain as a result of being part of the early days of a massively successful company. This is also why YC companies categorically can attract better talent, because even if the company fails, you can still tell your next potential employer you worked at a "YC backed startup". It's almost the equivalent of a Stanford degree. So, if you're an employee of a company that is already vetted by a number (i.e. amount of funding) of well-known backer (i.e. YC), you're risk is massively reduced given the insane amount of recruiting opportunities available.

YC-backed meaning almost nothing these days in terms of my friend group. It carries no additional prestige.

Just as a quick aside of the prestige thing. It is a lot easier to get "prestige" by being a founder of a barely successful startup than it would be to be an early employee of an extremely successful one. The whole startup ecosystem is very friendly to founders in this respect.

And when it comes to recruiting, you are much better off getting a job at a large prestigious company like Google, Facebook, Amazon than you would be at a random startup. The quality of engineering at a random startup, even YC startups, is extremely low when compared to large prestigious companies. This is due to the fact that the engineering talent at startups is generally below that of employees at (Google|Facebok|Amazon|etc), and startups are incentivized to ship stuff quickly and not necessarily work on engineering quality software. If your goal is to found a startup, then maybe you are better off working at another startup to pick up a more diverse set of skills. But if your goal is to get hired as an engineer, a big prestigious company is way way better than a random startup to have on your resume.

I'm a consultant in Silicon Valley. Rails engineer.

I've done hundreds of hiring interviews and coming from a YC backed startup might get you a "cool, ever meet Paul Graham", but that's about it.

You're still going to go through the same live coding exercises as every other candidate.

> Back in the day, founders would go into debt to buy a hard drive. Some even mortgaged their homes to keep things afloat.

I can remember my first company, Magicomm, in 1988 bought two 25Mhz 386's after we released our first BBS-based search engine and we literally went into pretty severe debt IE no paychecks for a month/living off raman, so this isn't just bullshit.

It really was that.

I still remember our first "partnership" offer (not sure what its called now)...."free" office space and $5k for 51% of the company from a local guy who owned a shady call center. I had to beg my partner not to take it, too.

My dad ended up letting us borrow a few $k and gave us a closet to work out of at his medical office.

Note that the major risk for an employee isn't that the startup fails in 2, 3, or even 6 months. The risk is that 5 years down the line their stock ends up being worth 0-249k, but they gave up 250k in salary in the same time period.

We're also in the situation that we likely have no way to asses whether the risk we're taking is a good one. Especially if the company takes on investors. Especially as the years go by - it can be difficult to figure out when it's best for us to cut our losses.

An individual employee might not be taking on more risk than a founder. But in aggregate they might be.

Outside of evaluating the risk, are there an good calculators out there for doing the math on this with various exit scenarios?

Not that I know of. As a regular employee you probably don't even have access to enough information to do the calculation yourself.

> Employees take the most risk today. Not the investors or the founders — it’s the employees.

I agree that in many places employees should be given more options and better compensation. I also agree that many founders don't realize how large the opportunity cost for talented people can be. But I also think that statement is categorically false.

Most founders I know work for several months (or years) for zero pay, and then pay themselves the minimum amount possible while the company is growing. The founders have opportunity cost too, and if the company fails they get nothing, too. Using the superlative that employees are taking the most risk is often simply not true.

True, usually founder risks > employee risks, but I do agree that employee risks are often down played.

But is this true relative to the reward? It of course depends greatly on the individual. A senior SE who walks away from an offer at Google or Netflix to work for a startup could be forgoing as much as 100k a year in salary. Five years in that dev might have banked a half mil.

Yes the founders are giving up a lot too bit the equity they receive may be vastly higher.

It all depends on the numbers but adjusted for reward and equity? Yeah by that measurement I'd say its certainly possible that an early engineer is taking on the worst risk to reward ratio.

Lastly keep in mind that a founder who does not have strong tech skills may not be giving up as much in potential salary even if he or she works for "free". Again this all depends on the individual.

Or said differently, what do you bring to the table as a founder that I (as a highly talented employee) cannot immediately replicate on my own?

This gap has been getting very narrow lately.

- Money? Not really; if we assume I'm coder #1, the cash cost of launching a product/service is <$100,000, well within the range of many mid-career folks with savings. - Relationships? eh, Linkedin and Google can connect me with many people - most of whom would like an alternative source. - Business model idea? Oh please, it's most likely been done before in an adjacent segment and well documented; actually, I'm not interested in a model that hasn't been. - Technical / Process knowledge? um, that's why we're talking...

So yeah, if your goal is to take my contribution, give me 1% equity and keep 20%, it gonna be a difficult conversation...

The typical founders spend maybe 6 months building a prototype on nights and weekends, then another six months full time without any pay, and then another six months at least at minimum wage. And then they usually never get beyond that, and are just out all those hundreds of thousands of dollars they would have otherwise earned.

As an early startup employee you might only get 1% as much equity as the founders, but you're also only taking 1% as much risk unless you're working for vastly less than market rates.

Source? Most startup founders pay themselves a market rate salary after funding[1] (even if it's seed).

1. https://docs.google.com/spreadsheet/ccc?key=0AgrWVeoG5divdE8...

Data is the plural of anecdote:

"The founders whose companies die usually only earn small salaries. Before being admitted to Y Combinator, founders usually live off savings or taking loans. During the Y Combinator program, they use a one-off seed investment from Y Combinator of US$120,000 to pay living and business expenses15. If they go on to receive angel investment, they can pay themselves about $50,000 per year. With venture capital funding, this tends to increase to about US$100,000 per year"

(From the section on "What about the companies that died", namely, the case for most founders.)

I think you're vastly overestimating the value of those early days. Valuable startups are built over ~10 years, and people who join early are every bit as important to that success as the founders.

Consider what returns seed investors get. Someone who puts $250k on a $5m "valuation" gets 5% of the company. Most founders aren't giving up _that_ much money before hiring employees. Over the 5-10 years it takes a startup to make options valuable, pretty much every early hire (founders included) loses at least $250k in salary differential. Employees are lucky to make that back for middle of the road successes.

In the recent Square IPO, it showed that Jack Dorsey has an ownership stake worth $1.5 billion, while the (estimated) 1000 employees have an average stake of roughly $300K.

Think about what you can do with one and a half BILLION dollars. Now think how far $300K will get you in the bay area.

This is completely typical and representative of the disparity between founder and employee equity.

The math that you did in the Square IPO thread was completely and totally wrong. Any conclusions you drew from your results are based on a false understanding of reality.

1. https://news.ycombinator.com/item?id=10389397

Ok, please post the correct math, then we can compare and see who got closer. Jack's percentage is spelled out in the S-1, along with the top execs, directors, and investors.

If you have any better data, including median equity and other percentiles for non-founders, that'd be very useful. Thanks.

The "13 people" you thought owned 61.5% of the company were VCs who did not own those shares as individuals but as managers of their VC funds.

I didn't mention exec/directors in my original comment above, only Jack at $1.5B and average employee at $300K. Which of those is totally and completely wrong, and why?

Are you saying that employees retained the full remaining 38.5% ?

Yes, you have massively miscalculated the % of the company owned by employees.

On a further note, even once you get that number right, it silly to talk about the average employee stake from that number. You're dealing with a power law here where talking about an average makes very little sense.

no, we don't.

There are plenty of reasons to argue for more equity but risk is not one of them. If you're good at what you do you can get a job tomorrow anywhere and there is near zero stigma about being associated with a failed startup unless you're on the founding side AND you've failed multiple times.

The salient point in the article is about opportunity cost. When you take a 100K startup job, and could have been making 200K somewhere else, that's a very real loss. Now, those are made up numbers, and you need to plug in real ones to make an accurate assessment, but that's his point.

right, and that is completely valid to discuss.

I think it does a disservice to the other problems and discussion points to toss everything under "risk".

But what would you call it besides risk? ie you're gambling (risk) that your opportunity cost will be made whole (and hopefully even exceeded!) via a liquidity event.

I'm not denying that it is risk, I argue that it doesn't allow for the subtleties and nuances (opportunity cost vs responsibility increase vs positive/negative association after exit/failure).

There are a lot of different variables involved and a great many of them boil down to calculated gambles on the part of the employee and employers. Those are worthy of discussion and there are plenty of discussions to be had around those. But simply calling it "risk" and saying you need more of the upside is so simplified its nearly meaningless and impossible to have a conversation about with everyone involved having the same idea about what is being discussed.

There are certainly non-monetary benefits to working at startups, as well as costs. It certainly makes sense to include those as part of the calculation, but money is not a small part of that, either.

What else is opportunity cost in this case but risk that an early employee at a startup misses out on a much better financial endpoint at a non-startup with much higher salary and benefits (401k matching, etc)?

In my experience startups typically pay more than other well established organizations, at least for Design/front-end roles. Agencies and Enterprise is typically where the low wages come from.

This doesn't factor in Silicon Valley. SV is an entirely different animal. The cost of living there throws the math way off. I can imagine that those wages are typically very low. $200k in SV is comparable to $70k in most other cities. This is why it's beneficial to work remotely for a SV startup and live somewhere more desirable.

I think we're conflating all startups with SV, which shouldn't be the case. Certainly folks joining SV startups IN SV are being taken for a ride.

> $200k in SV is comparable to $70k in most other cities.

What's the basis for that estimation? Given California's income tax and higher rent, I'd say that the difference in cost of living is $20-30k, not $130k.

Purchasing a home. That should be the standard.

Most people don't want to rent for the entirety of their lives.

Part of the problem is the rampant NIMBYism in that area, which isn't really the fault of people doing startups. Still, though, it really adds to that area being expensive.

One can easily work a few years in the Valley and buy a nice house in much of the country...and likely get an opportunity to work remotely if he/she has worked at the company a few years.

The raw numbers are nothing to sniff at, and you don't get that buying power in much of the country.

Tell that to someone who is over 40, has kids and is in the Tech Sektor. Age is a huge stigma.

I wonder if it's looking old versus actually being old? If you look like you're in your 20s but are 40 (low body fat, not many wrinkles) maybe you won't be stigmatized against as much. I'm just curious about whether it's the appearance that matters, or the number.

Me, too. I just turned 40, and got carded for alcohol two days later. I've always looked far below my age, but I have no guarantees about how long that will last.

I'm only getting better as a developer.

Interesting but moot, when you don't get past the phone screen.

Funny story, one hiring "kid" the other day asked me if I like to wear ties... ha! I thought, I'm roughly ten years older than him, and wasn't working in the sixties, or whenever ties were popular.

would someone over 40 with kids, who doesn't have some self-provided stability be working at a startup with high risk anyway? That seems both foolish and more or less no-existent in any I'm familiar with.

I'd modify the headline to say "Early Employees....".

They're the folks typically being asked to take below market salaries, but unless they're founders they won't see tremendous upside without a larger equity stake.

Thanks, that is a good suggestion. Changed.

Thanks!

> If you're good at what you do you can get a job tomorrow anywhere and there is near zero stigma about being associated with a failed startup

Only true in good times. Ask the employees who were associated with failed startups during dot bomb, circa late 1990s and early 2000s. You were SOL if you worked for a failed startup or a high profile failed public tech company. You were at the bottom of the pile in consideration. I know several companies that excluded employees from consideration that were previously associated with such failed ventures, Guilty by Association. This didn't change until 2004+ or so.

History will repeat itself.

Competing anecdotes here and both can be true, but as someone working in the industry since the 1990s I personally never noticed any particular bias against people due to the prior company associations during this time period.

People who lost jobs due to their companies going out of business were pretty SOL during this stretch of time (early 2000s), but in my experience the problem wasn't bias against them due to prior employers but rather that hardly anybody was hiring at all. Almost everyone (that wasn't busy filing for bankruptcy) was in a hiring freeze holding pattern waiting for the sky to stop falling.

Your sample of "hiring-freeze" companies is totally different from my sample of "hiring" companies in that time period. Employees looking for job don't care about the practices of the companies that are not hiring. They care about the practices of companies that are hiring.

Founders probably aren't able to hire because they can't get enough money from investors to pay market salaries or because their company just plain sucks. Maybe they think that because they've convinced investors that they're onto something that it means prospective hires won't know better?

Put yourself in these people's shoes. Even if your company has a chance to be worth a billion dollars, you're going to have to do better than a quarter point. After several rounds of dilutions, a seed-stage employee with a quarter point of even a $1B company would end up with ~$1.5M. You've got to be offering people a 10-100X opportunity of what they'd get working at BigCos to get good talent, not 50% more.

Corollary: if you are giving engineers at your pre-series-A company less than a point and 50% of market salary, you are probably not hiring great talent.

And 1.5 isn't that much at poptel in the UK at one point all the employees where worth around $1m each.

No if only .coop had taken off (and we hadn't been screwed by ICAN) and the coop had brought us out ;-)

I know some on just retired from BT that has over $.5 million in stock from his various share saves

I think it depends a lot on the market you're in, how you've funded your company, and where you live.

A founder of a bootstrapped, remote company in Iowa has far more risk than almost any engineer in NYC or SF. Relatively speaking, if you are a not-terrible engineer in SF/NYC you can have multiple jobs competing for you within a day of your company going out of business.

A non-well-off or not-well-connected founder has comparatively little opportunities to "fail up" when their company goes out of business. I'm a founder of a bootstrapped, remote company, in a non tier-1 tech city. I'm the lowest paid person in our company (of all engineers). If we go out of business, our folks will have jobs in days. I won't. Does that mean I have more risk? In a certain dimension, yes. In others, definitely not.

Of course, nothing in my post suggests that early engineers shouldn't be paid reasonable salaries or have reasonable options. They should. But I don't think risk has anything to do with it - common decency does.

Makes sense to me. I have no clue why people take shit salaries in exchange for a tiny slice of a company that will probably fail and if it succeeds, still not give them a down payment on a house.

What's especially troubling is the difference between early engineers and early exec type hires. Engineers tend to get marginal salaries and not enough options. Early marketing, sales, ops hires tend to get more than all the engineers, even if they join post series A as person number 40.

So what you're saying is that more people should start companies? Maybe you're on to something...

Being acquihired by the startup is much better than being early employees of same startup

He is calling something out as unfair, and your response is that more people should be unfair?

Yeah because being a founder equals to being unfair, always.

I don't think that what the article describes is a balance of fairness, rather an observation that employees are taking a lot of risk! The message to me is that you should probably think twice before joining a company. This is not a one-sided battle. Employees clearly have the power to start their own company, avoid risk, and reap the same rewards that so many founders are achieving.

Over time, if enough people are starting companies, then risk will have to be shifted back in the direction of founders and becoming an employee will become more appealing.

The opening paragraph:

> Why are we still using old 1990’s cap tables and the same tiny option grants for employees as we did back then? Is that fair? To whom? Is it the right thing to do? I don’t think so.

We're talking about fairness. Not the abstract elementary-school concept, but simply that employee equity compensation should not be wildly disproportionate to their risk (and, this is not counter-balanced by their salary or perks).

I joined a startup that went IPO and experienced how those options are worthless, funny enough my options are negative with current stock price!. Now if I decide to join a startup company I would just value the options precisely $0.00

Everything written about here is in relation to VC funded companies. For people building companies without outside investment, and who pay employees with money, none of this is true at all and in fact sounds nonsensical.

Have you considered forming a tech workers union? Collective bargaining would be very strong.

At least in my experience the moving from founder to an employee to an employer is quite common phenomena in tech circles. There would be moles on both sides trying to sabotage and terrorize the other side.

It might be interesting to note that there's a tech workers union in Finland[1]. The collective bargaining is mostly non-existing, as people tend to get paid more than the minimum wages bargained by the union. Finland has the highest union memberships in the world too, but membership is less than average for this particular union from what I understand. (I'm not a member).

1. https://fi.wikipedia.org/wiki/Tietoalan_toimihenkil%C3%B6t

Typically in that case you bargain with individual employers for your grades.

M&P (managerial and professional) Union's work quite differently to the sector wide EU model

A professional guild - like lawyers, accountants, or actuaries - is a much better structure, IMO.

Plus nerdy folk love guilds.

Unless you're a founder, joining a startup is a terrible deal. There's no two ways about it.

Because everyone should have the exact same risk tolerance as you. And if they don't, they're wrong. There's no two ways about it.

Both the odds and rewards are much smaller than most people assume. You can take all the risks you want - if the rewards don't justify it, it's a bad deal.

I agree with you that some people probably overestimate those two things.

But I also think that other people tend to lump all startups together with the assumption that the risk is more or less the same across all of them. In reality risk/reward ratio certainly varies by at least 10x across opportunities. Consider the difference between a seed stage company with no users and a product that doesn't even work yet vs a Series B company with significant traction and 10s of millions in the bank. These can be hugely different situations.

But, even if you ignore this, I come back to the concept of risk tolerance. No matter what #s you choose, there are certainly people out there who by dint of personality, age, or financial situation are perfectly willing to take on a lot of risk.

All fair points and something that should change, especially (imo) the clause around options expiry as well as %age.

I have just one honest (not coming from a place of sneer) question: did the OP follow his own advice in the startup he founded (Parse and/or Scribd)?

If that were true, wouldn't you expect real estate prices around San Francisco not to be rising as fast as they are? Something is driving up wages around the startup hot-spots, isn't that a sign that there really isn't that much risk?

Depends on the change of real estate prices relative to changes in wages. Wages can go up but after cost of living the effective wage might be quite low.

Real estate prices are not equivalent to real estate values. One could argue that real estate values have actually gone down because prices are driving out a lot of the culture that caused the real estate to be valuable in the first place. This disparity between price and value is called a bubble, and it will likely pop when the disparity between startup prices and startup values (the tech bubble) pops.

A big piece of that is nimby pricks up and down the peninsula are adding companies but very little housing, then dumping their housing needs on sf.

viz mountain view authorizing some 2-5 million ft2 of office space for linkedin, et al, [1,2] and maybe adding a couple thousand homes [3]. Where are those thousands of new employees going to live? Not in Mountain View, pop 75k. So they have to get housing where there is housing available, and so lots of them will live in sf by necessity.

[1] http://www.mercurynews.com/business/ci_28058088/google-linke...

[2] http://www.bizjournals.com/sanjose/news/2015/05/06/in-stingi...

[3] http://www.mv-voice.com/news/2015/05/15/housing-dealt-setbac...

Nope.

The Bay Area is home to some major tech employers (Google, Apple, Oracle, Cisco, Salesforce, Intel, etc), and is also a major outpost for other big names (Microsoft, Samsung, Sony, etc). There are also a number of major employers in high-compensation jobs (finance, bio-tech, law). Even among startups, there is a big difference between a scrappy little company of three folks and a company like Uber.

Bottom line: there is lots of money floating around the Bay Area. As much as we might like to believe otherwise, the amount in small start-ups is just not that much.

There's also a lot of overseas money being invested in real estate, driving up the prices. The same is happening in Seattle.

The same places that are startup hot spots are also full of even more people drawing big paychecks from Google, Facebook, Apple, and a horde of other no-longer-startups. That's probably exerting an even greater influence on real estate and rental prices.

> if adding a particular engineer to the team increases the company’s value by 10% overnight

Btw, how do you prove that? For me hiring seems more difficult than that, you start to grasp the value of an employee after 6 months or so.

Take the case of Instagram, they hired several Android Engineers. They added 1 million new users on the 1st day the app was released.

Yeah, take this one company and generalize it, makes perfect sense. There are bazillion of companies and only one instagram.

Wow. Pretty hostile.

Where did I generalize?

I was just giving an example that you can consider.

You don't with certainty, you make informed guesses (just like employees do with options). Vesting solves this problem, though, most people get 1 year cliffs which is effectively a 12 month window to make sure the person works out.

Well if the engineer is checking in working code to features that the company's management prioritizes, then that engineer is definitely adding value. Otherwise it is management's fault for poorly prioritizing.

I think I get the point, but I really had to work to keep reading it. The tone is relatively difficult to want to absorb without already being wholeheartedly on board with the premise.

The main problem I have is that it troubles me to feel a sense of agreement when the rhetoric is so emotionally manipulative, because parsimoniously, I've been manipulated into the agreement.

Ok, let's see some numbers!

Founders, post how much % you have.

Employees, post your employee # and your %.

Let's see if this disparity exists.

Reminds me of a post by Sam Altman: http://blog.samaltman.com/employee-equity

Huh. Well written. I've been a founder and not a startup employee, and I found myself paying attention.

A lot of hyperbole in this article. The overarching message might be true but the article basically reads as one sarcastic complaint to me.

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