Hacker News Reader

Comment by doublerebel | Hacker News Reader

I have to say, I usually love Janz's writing, but I think this model is too simplistic and does not provide enough evidence.

As a technical founder with a successful track record, I could be working with any number of businesspeople or all sorts of opportunities, and I'm good at math. Why should I forgo a market rate salary to take a 1 in 100 chance at a lottery ticket, where my likelihood of success is largely determined by the people who also choose my salary? Major conflict of interest. The math does not add up.

I would think my team should be motivated to pay enough to keep each other from leaving for attractive opportunities in this lucrative market. It's one thing to voluntarily give up salary to help the company. It's another to force it by means of a questionably sustainable business model.

Evidence: try to hire yourself a technical co-founder from their job at FaceGoogAmaSoft (or pay equivalent) and find out that money talks.

View on HN

"Why should I forgo a market rate salary"

You have to do the math, of course, to see whether it makes sense for you, given your estimate of chance of success, and payoffs under different scenarios.

But it usually makes sense to forgo a market salary early on because you don't want to give up too many shares. Imagine you're about to start a business, and are looking for investors to fund the first 12 months. Imagine the terms an investor might offer if you need:

A) $500k (of which $80k is your salary, payroll taxes etc.)

B) $700k (of which $280k is your salary, payroll taxes etc.)

In (A), the investor is contributing $500k of cash, and you're contributing $200k in foregone income.

In (B), the investor is contributing $700k (out of which your market salary is being paid). You're already being compensated in cash for your contribution, so why would any of your shares vest during this period?

Another thing to consider is perceived alignment of incentives. If you're not risking anything (because you're earning the same as you would with a regular job), and you're the CEO, what reason is there for you to optimise for the success of the company? You could rationally decide instead to just chill out, or spend all day learning new front-end frameworks, or whatever you feel like.

Thank you for your comment!

Making the case for becoming a founder using math is tough. It's well possible that the expected value is higher for an employee career because, as you say, most startups fail, although it's difficult to do this comparison really well methodologically.

I think if you become a founder you do it because you just want to start your own thing and love the freedom and satisfaction of working on your own idea. And maybe because you think you can beat the odds and get rich.

As an aside, the probability of a startup to become a unicorn may be 1 in 10,000, but the chances for a more modest (but still financially very rewarding) outcome, say a $20M exit, are of course much higher. Also, you learn so much as a founder that your chances increase for your 2nd or 3rd startup.

This topic has been studied in depth. I recommend a thorough read of this paper before being tempted to use gut-feelings.

http://web.stanford.edu/~rehall/Hall-Woodward%20on%20entrepr...

I'd say the expected value is almost certainly higher for an employee career, assuming some financial discipline. After 10 years so in the industry, you should be able to get $100k/year, more in high expense areas. That's $5.8k/month after taxes (assume 30%). Assuming you are single, at $1k/month rent, $300/month food, and $700/month for other things, you have $3.8k/month left over. That's about $45k/year you can save, say $50k for easy math. So in 20 years, you can save $1 million, buy some large-cap stock at 3% dividend and have $30k/year for free (more if you buy a higher-yield utility-type stock like AT&T or Verizon). But the stock market grows by 6 - 8%, on average. If you invest in large, "safe" companies, or in an S&P 500 index fund, at 7%, you'll double your money in 10 years, so you'll end up with $2 million (I did the math on a spreadsheet: yearN = yearN-1 * 1.07 + $50k). That's $60k/year at age 50 (not including 401k matching, and assuming that ages 20 - 30 are years of profligate spending with no saving), about as risk-free as you get.

Compare that with a statistical 90% of failure starting a company, but frequently resulting the loss of the founder's savings due to having invested it in the company. Basically the startup should give at least $50k/year of increase (above the cost of living), plus a 7%/year growth, so for two years doing a startup, you need to walk away with a little over $100k. At a 90% failure rate, you need to exit at $1 million for the expected value to break even. If you are not the sole owner and/or with VC funding it will need to be even higher. (If you are an early employee getting 1% or something you'd need about a $1 billion exit for a positive expected value.) That's some pretty uncompelling math. It gets even worse if you have a family.

> After 10 years so in the industry, you should be able to get $100k/year, more in high expense areas.

Indeed it's higher in some areas. In Metro Boston, that's not uncommon compensation 10 seconds into your career.

You might find this blog entry interesting and on the same line of thinking you laid out above: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...

I should clarify I'm playing Devil's Advocate. I do try to bootstrap my startups part-time, no salary until we have enough cash to pay decent full-time salary to founders.

Good reasons to forgo salary:

- startup already has revenue and/or a clear path to profitability that would be affected by the salary decision

- because you probably need as much cash as possible for the first technical hire(s). This is a good problem and usually indicates growth

- because you legitimately don't need or want it (e.g. cash from successful exit or good pre-fulltime planned savings)

Why should I forgo a market rate salary to take a 1 in 100 chance at a lottery ticket, where my likelihood of success is largely determined by the people who also choose my salary?

Because as a founder you have a great idea that you think will be worth those odds. If you truly think it is a lottery ticket then your idea isn't that good and you should look for another idea.

You can always make more money working for BiggleCorp. The benefits are always better at NanoSoft. So the deciding question for you is not what flavor of ramen you'll eat but whether your idea is so insanely great that you're willing to suffer.

Moreover, your skillset is already factored into both your stock and the relative ease vs difficulty of your raise.

Ideas are cheap, execution is everything. Actually getting liquidity for equity compensation is a function of the execution of the team, not me as an individual. So the real question of how much to pay yourselves as founders is "what makes you all get along and feel worthwhile?" so that you can maximize your productivity.

Like equity, founder salaries are a major source of dispute, and if the business takes too long to reach market rates then it becomes a source of tension. That's why I think relying on low salaries as a business model is a bad idea -- the business should be focused on sustainably paying market rate ASAP, which should mean that the business has revenue or customers incoming steady and growing.

I would argue that as a rule below market salaries means the business is unsustainable and has not found market fit. Founders can (and often do) still choose a lower salary when it makes sense to them.

Yes, ideas ARE cheap but good ideas are very expensive. Hell, YC was giving away some ideas for free yesterday. But I don't think any of them were good ideas and respectfully, I don't think your successful track record as a technical founder could save AI for Communicating with Dogs or Social Network for Children regardless of the amount of VC dumped in or your founder salary. They just aren't good ideas.

Myself, I don't think execution is everything. It is a lot but you can't execute a mediocre idea into a success.

If I'm wrong about that, and I could be given my technical bias, then I'll rephrase that to if you can execute a mediocre idea into a success then anyone can and it just becomes a lottery. Been there and I won't revisit there.

BTW, we are talking about initial salaries. If your startup is killing it then you can dictate your terms and your funders will still say thank you.

> you can't execute a mediocre idea into a success

No, but great founders can realize this sooner, wasting less money and decide to either return what's left of the money or pivot.

Very few successful companies grew into their original vision - they changed along the way because they had great leadership (and luck).

I would have thought great founders would have realised this before wasting time on a bad idea. I have never understood the logic behind working on something bad just on the hope you will pivot to something good later.

You mean like google, facebook and amazon?

Google initially didn't want to sell ads. Amazon was an online book store. Facebook, admittedly, seems to be the exception to the rule.

Amazon is still an online bookstore and Google did want to sell ads. But they just wanted to sell search first which they did, to Yahoo.

Oracle is still a database company. Apple still makes computers.

I’m blanking on a great founder who successfully pivoted, operative word being great. Successful is a lower bar.

> try to hire yourself a technical co-founder from their job at FaceGoogAmaSoft (or pay equivalent) and find out that money talks

What an incredibly simplistic view of the world. Even as someone living on the west coast I still find it insane that people think the best engineers only work at FaceGoogAmaSoft or somewhere else paying exorbitant salaries.

There are thousands of engineers that work for far less. They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine.

Not having to work for FaceGoogAmaSoft is likely worth hundreds of thousands of dollars to some people (I know it is for me).

That comes across as sour grapes reasoning, have you actually spent any time working for one of them? If so please forgive my assumption, but your points depend on a couple of huge assumptions.

Why are you convinced there are no roles as these companies for people who want to make a difference, or that everyone feels like a cog in a machine?

These companies are not my cup of tea at the moment, but I know your assumptions are wrong for a fact. Proof by counterexample only requires one data point, and I've been there and seen people who share your ethos and make that kind of money.

This is not to say you can't find any number of people there that feel their jobs are thankless, insignificant, life force draining prospects. But we're talking about hundreds of thousands of people, and there are a variety of experiences people have. What percentage of them have you asked to be certain it's necessary to give up hundreds of thousands of dollars?

I can imagine a more productive interpretation of your post, which may or not actually match your opinion, that goes like this:

Those attributes are difficult to find in general at companies large and small. If you're fortunate enough to find a job that has them, think carefully before giving them up to make a few bucks more.

> What an incredibly simplistic view of the world.

I could make the same argument of your point of view as well. I work at Google precisely because I think I can make a difference here.

That means something different to different people I imagine

Nope, your parent is absolutely correct ( most likely because he is successful technical co-founder with a track record, which would put him into his mid thirties or more). People get wiser with age and realize that while money may not buy one happiness, it certainly removes barriers to achieving happiness.

> They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine.

That means their take home is roughly $150k/year after taxes, which is $12.5K/mo, which is not an great take home. Most likely the take home for his partner would be about $4-$5k/mo. Lets make it $5k. So the total take home is $17k/mo. For someone in his thirties the apartment would be about $5k/mo. Wife's personal trainer + ClassPass ( you are accounting for things like that, right? You realize that 'I like the way you look' costs real money?) is $1k/mo. Food + incidentals is another $1k mo. Utilities + misc recurring is another $1k mo.

So we are down to $9k/mo not going to anything before:

1. Going out

2. Clothes

3. Trips

4. Parties to host or go to

5. Emergency funds

By the time this is all accounted for $300k/year income is perfectly fine but not extravagant in any of the areas where one gets $300k/year for his co-founder worthy skills.

Spending $1k/mo on personal training is _not_ extravagant? I realise I must be living a much poorer life than I thought...

ClassPass is $125/mo.

Twice a week personal training is 8 sessions a month. That's $875 per month. Divided by 8 it is slightly less $110 per hour. A good personal trainer can easily charge $110 per hour, including facilities charges.

Spending money on personal trainers allows you and your wife not to look like tubs of lard by mid thirties which in turns solves a boat load of very expensive problems in your forties and fifties. It is difficult to "change the world" with high blood pressure and diabetes.

I don't think he was asking for a breakdown of what goes into the cost - I think the point is that most reasonable people would conclude that $1,000+/month spent on personal training very much qualifies as extravagant spending.

Most of people, especially in the tech world are clueless, which is why the US is obese.

Am I to understand continental Europeans, for example, are in much better shape than Americans because they employ more personal trainers?

C'mon. I agree a gym membership is required, but a 1k/month personal trainer is certainly not.

You are just naming a bunch of things and then assigning arbitrary numbers which you could possibly spend on those things, if you really loved spending money. I am your exact demographic target audience, and I and my partner spend on the order of 4k/month each, while being healthy, happy, and so on, and it's not because we try super hard.

You think 1000 a month on food for two people is normal?

Yes, a month is 30 days. 1000/30 is slightly more than $33 per day for two people. Your lunch coffee at starbucks habit is $5 per person per day. So with that or with "i grabbed an apple" or "I got a granola bar" habit that you or your wife has you are at $26 per person per day for breakfast/lunch/dinner for two people, which is $13 per person per day for breakfast, lunch and dinner.

I seem to remember people arguing with me that $10 per person per dinner is the lowest that they pay per person ( see Blue Apron/Home Chef/Plated/etc business models) So based on their math it is $20 for two people per dinner. Now I personally think it is too much because I automatically only shop sales but I'm weird.

Maybe if you're a literally-every-second-of-my-time-is-money sort and never, ever cook, and you're also socialized to a certain standard of living and never eat cheap take-out or low-end frozen meals or whatever.

Reply on news.ycombinator.com