Comment by jasode | Hacker News Reader

Comment by jasode | Hacker News Reader

>And yet we treat it like something that is non negotiable,

Sometimes, it's non-negotiable because there's no money to pay Google-style $300k salaries + benefits.

Fred doesn't make it clear whether he's talking about young startups with very little money in the bank or a mature 8-year old "startup" like Uber that raised $22 billion from investors with $6 billion in revenue. If it's a young 2-person startup that just got a modest $120k investment from YCombinator, a "3rd employee" will not be able to get a $300k salary. The only monetary recruitment tool left is equity.

Fred is also leaving out the game theory aspects of the equity as a deliberate filtering mechanism to attract employees aligned with the founder's vision. Yes, many workers are definitely cynical of startups' self-aggrandizing "we're going to change the world" so they only see one (and only one) way to compensate employees: pure 100% cash and fuck off with your options. An employee certainly has every right to stay rigid to that point of view. However, it still doesn't change the psychology of founders wanting to filter out the candidates with a "mercenary" mindset. They often have no money to pay the mercenaries anyway so they have no choice.

> "mercenary" mindset

a.k.a. "professionals"

I agree with your assessment that what it really comes down to in most cases is that companies don't have the money and so they are trying to hustle something on the cheap.

The other factor is that unless a startup happens to have some very talented technical co-founders (very rare, even though they all think they do) they aren't going to be able to identify or attract real talent anyway. If they were paying premium salaries the money would most likely be wasted.

> a.k.a. "professionals"

Exactly. A salesman I used to work with said "Everyone is coin operated." You might be able to go 5-10% either way for intangibles like the stack being used or interest in the product, but at the end of the day everyone has to make the mortgage.

Unless you live in a van, or in a low cost of living situation, which admittedly 99.999% of programmers choose not to do thanks to the power of "lifestyle inflation".

I'm not sure owning a house or reasonable apartment should be considered "lifestyle inflation", when working in an industry that continually creates some of the richest people in the world.

I think at least some of the cynicism comes from founders offering salaries that are 30-40% of the rate they might get from 'bigcorp of choice' and then offering derisory amounts of equity in compensation.

If the equity you offer is just about enough to make up for the employees loss of income if you get both a minimum $100million+ exit and no future dilution, then your offer isn’t going to be very enticing to jaded potential employees who have been round this particular block once or twice before.

I inteviewed for a startup once (I don't live in a big startup hub).

I was offered a 40% drop of my current salary, no benefits, no equity and no options. I was also sternly warned during the interview that they were looking for someone highly engaged in making the company grow.

I cannot begin the understand the reasoning of the founders on that one.

A lot in this industry begins to make sense once I accepted that a lot of very otherwise intelligent and capable people are simply delusional.

Or suffering from dangerous levels of hubris.

I think of hubris as a form of delusion.

A few years back I was approached by a recruiter for an investment bank who seemed to think I should be delighted to take a lower salary and bonus and much fewer holidays (I think I was on 38 days a year) for the pleasure of working in what they described as a very "high pressure" environment.

That actually got annoyed when I laughed and questioned why I'd want to work for them.

It is surely delusional but the founders tell themselves they are going to exit for 1B. So the chump options you would get for 1% worth is still going to net you 10M, which would be quite nice.

Obviously, they are going to have to take more money and you are going to be diluted to nothing and you'll be lucky if the whole company exits for 10M. Equity seems only to have value as golden handcuffs, keeping early valuable employees at the company since they lose everything if they leave and can't afford to exercise 400K of options plus face the tax implications.

1%? We used to dream of 1% (cue the Four Yorkshiremen).

One startup I know of offered 0.1% to a potential employee No 2. I don’t think they took the offer.

It's laughable how low many options grants are for early engineers, given the risk and the required contribution. The first few technical employees have to do a disproportionate amount of work. This is especially true when the company consists of all non-technical founders.

I kept reading down this chain intending to reply but every reply added something relevant to my comment.

I was once asked to join a company as employee number 13, and I would have been the first technical person to join the company. They offered me a salary of zero dollars and one percent, and the founder of the company said in every meeting before he was willing to reveal the numbers -- the stupidest game on the planet -- that he truly understood the value of engineers and was going to be offering very generous pay packages. Haha I actually laughed at the guys on Skype -- funny how they also tried to gang up on me to turn the screws, as it were! -- when they told me the numbers because I thought they were joking, and they weren't. I don't want to reveal too much about the company because they would be easy to identify based on this, but they had this one weird trick they were trying with shares in order to win investors and generate media buzz, which was actually just hilarious and ridiculous. I will say that they were going to issue billions (with a "B") of shares to begin with. They were so convinced they were going to become the next Google. Surprisingly, their website is still up, but all of my contacts from that company are now listed as working elsewhere on LinkedIn. Shocking, I know.

I was briefly engaged as an early technical employee number X (somewhere between 3-15 because later I discovered they apparently kept leaving) at a small startup (sans-funding) here. It was a bit of a mess. Offered 0.05% maturing in 4 years (or you take a substantial cut for maturation in one year), with no salary and vague promises of expenses covered, and unhinged scope creep that I'd only hear about while sitting next to the (non-technical) founder in a sales pitch.

Needless to say, I didn't stay long.

Bet they complain that it's so hard to hire people, and that there's a shortage of tech talent.

Where is the company today?

I’ve been offered 40% of my current salary, with 0.05% equity. As first engineering hire. I had a hard time keeping a straight face.

I’ll keep my current salary, along with three tranches of RSUs vesting per year thanks!

Exactly. If you're a founder, you're looking for investors. Some investors pay with money. Some investors pay with time and talent. If you succeed, all of your investors deserve to share in your success. If you're not willing to share your success with those who are investing their time and talent, why should they be willing to invest with you?

Well if there is no money then pay with "fair" equity. I.e. you give a person 0.5% of a company and they have that same 0.5% in the next 5, 10, 20 years etc. No preferential share classes, no dilution, no golden parachutes for corporate investors, have predefined IPO date (e.g. no later than in 10 years or something like that), no any of the popular ways to screw employees with equity/options out of their shares.

>Well if there is no money [...] No preferential share classes

You're creating a circular contradiction about the money flow.

A founder has no money.

He gets interest from a VC like Sequoia Capital to invest $10 million. The standard and non negotiable terms of the deal means Sequoia gets "preferential shares" as a condition of writing a check for $10 million.

One of my potential employees (Yizahi) I'm trying to recruit insists on "no preferential shares!". Sequoia then says, "Ok, no $10 million deal then. Bye!"

As a result, both the founders and the employees have no working capital to build a more valuable company.

We can't just shout out "no preferential shares" and "no dilution" without understanding the full ramifications of what that actually means.

I wish more people would understand this. It generalizes.

We say "no DRM on the Web!" Hollywood says "Okay, no cross-platform movies on the web then, either. Bye!"

Right. People often fail to recognize that without preferential shares startups would just raise at a lot worse valuations.

If Sequoia is offering $10m at a $40m post money, how do you think that would change if they weren’t getting control and a guarantee they get paid first? Because without preference the founder incentive is a quick low risk liquidation at a price notably lower than $40m as soon as possible, because they’ve got 50% of the equity. This is another way in which financing valuations are an optimistic fiction.

Another option people fail to consider is not pursuing a term sheet from Sequoia in the first place. Go get money from customers, instead.

Some products require a great deal of initial investment to even roll one unit out. Not everything is an app or a service.

The initial cost for unit 1 can be quite expensive (>500k) if its a non-consumer product.

Outsourcing production is hard with lower volume products that require modifications to meet customer needs (eg: they need M6 screws holes instead of 1/4-20 or want it in a particular metal). Contract manufacturers are generally interested in making 10k+ of the same item, not 100.

That's a great option for a founder to consider, but it means you won't have the resources to give compensation that's even competitive on paper.

No, but you can grant shares to employees whenever there is a round so that their share stays the same? Many times shares are being created to sell in the round, why not create shares for the early employees?

Because the goal is to dilute early employees so that their shares are worth less. The literal and specific goal of the modern stage of tech VC is to reduce all other holders of equity to the point where the money, if any is made, is going to the "right people"--the folks who came in with the cash in the first place.

You're mixing up symptom with cause. The employee is the sucker at the table. (Most founders aren't far behind.)

No the goal is not to dilute early employees so their shares are worthless. You’re mixing up symptoms with cause.

This is bass ackwards. The founders get diluted more than anyone else. Every time you issue a new tranche of equity, the existing holders take dilution proportional to the share they currently own.

If the original founders each hold 40%, and some employee holds 1%, after 50% dilution (common after the first couple rounds) the founders are down to 20% and the employee is down to 0.5%. It's possible to bump a star employee up by 0.5% to counter dilution. It is impossible to bump the founders up by 20% to get them back where they started.

The reason founders are OK with this is that they understand that 40% of a $1m company is worth less than 20% of a $10m company.

The founders get diluted more than anyone else. They also start with overwhelmingly more than anyone else. Pity the poor founder with their meager twenty percent--an employee at their pennies of equity is vanishingly unlikely, even at a successful company, to make back the opportunity cost of having their salaries gashed by going to a startup.

Also founders have shares. Employees get options with some crazy three letter types. They HAVE to pay in advance to get even those 0.0001% of shares after dilution. Not only that but they have to conjure that money in what, 3 month term, 1 month? I don't remember exactly.

Effectively what you are saying is that venture capital funds (correctly) think that that percentage of shares aren't very valuable when they are equal preference to the employees. The employee should use exactly the same evaluation framework: if the VC had nonpreferencial shares they wouldn't be worth the cash equivalent, so don't value your sweat equity that way either. Having the lower class of share should be valued even less.

It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"

>Effectively what you are saying is that venture capital funds (correctly) think that percentage of shares aren't very valuable when they are equal preference to the employees.

That's not quite right - instead, he's implying that vc funds (correctly) think that the chance that this company's shares standing alone will suffice to return a multiple of the fund is low if they are of equal preference to the employees. That's not the same thing as "not very valuable", and the very counterintuitiveness of vc math should tell you that an asset a vc may not want (say, 5% of a company that sells for 75M after 3 years) may in fact be pretty valuable for the median employee.

>It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"

Not at all - look, there are lots of good resources where you can learn more about how your equity works, and good founders will probably point you to them (e.g [0] and [1], although if you need a pointer to this instead of doing the 2-second google search yourself, you're probably not a great startup candidate anyway). Deception need not and should not enter into it. Not to say that there aren't scammy founders, but it's not best practice, and I don't believe Fred Wilson or most other reputable VCs would claim otherwise.

[0] https://blog.dweek.ly/introduction-to-stock-options-startup-... [1] https://foundersgrid.com/employee-equity/ ...

I don't believe VC math actually has the property you are saying: the thing about most preferred shares isn't just protection from routine dilution (which makes you more likely to 'win big' if the company becomes a unicorn), they also tend to be much less likely to receive actually zero (better protection from recap), right?

The idea that regular employees are somehow better served by shares that rational investors won't touch takes a lot of justification.

>most preferred shares isn't just protection from routine dilution

There's some misinformation there. Preferred shares do not have protection from "routine dilution". In fact, dilution is the very mechanism to sell more equity to subsequent investors at a higher price. (E.g. When Accel Partners invested $12 million for 15% equity of Facebook in 2005, they got diluted when Microsoft later invested $240 million to buy 1.6% equity in 2007.)

The "anti-dilution" provision that VCs get is not for "routine dilution". Instead, it's for a really bad event called a "down round"[1] where the next investor pays less than the current investor. We could ask The Universe why employees don't get the same anti-dilution protection but I think it's a moot point... If the company is getting devalued, employees are gonna worry way more about finding a better job somewhere else instead of staying employed on a sinking ship. In other words, a "down round anti-dilution" protection for employees is kind of mathematically pointless.

On the other hand, the type of favorable "anti dilution" for employees that most people are thinking about such as as a 1% grant at hire, and staying at 1% through all subsequent positive "up rounds", and finally at IPO -- is something even VCs don't get. Nobody has that type of dilution protection. Not the founders, nor angels, nor any investors. The closest approximation would be a provision for VCs to pay for more shares to keep their % ownership the same. That's more like "pay to play" rather than "anti dilution". In any case, people don't need that type of dilution protection because what matters is the #_of_shares_ multiplied by _price_.

[1] https://www.feld.com/archives/2005/03/term-sheet-anti-diluti...

It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity

I'm about 10 years on from learning this lesson, and I've refused offers since that try to plod the same trail. It's a red flag that doesn't appear until after you've been taken. I would say "scammed," but I do assume companies aren't just out to rip their employees off, they're just going with conventional (received) management wisdom.

You can't really have "equity" without the possibility of dilution. The nice thing about shares is you can always create more of them.

(Most companies will be lucky to be acquired, never mind IPO. Unless you're talking listings on the pink sheets.)

This is practically impossible. That’s like saying you should give out equity and make sure to never raise money again. Even investors in early rounds that put in $500k are later putting in millions upon millions to hold their stake exactly the same.

Employees are continuing to put in effort through all those rounds and spending their most valuable resource to do so - time. Why shouldn't they be compensated with equity when there is a round so they keep their same share for putting in the same amount of work?

They are, it’s called vesting. You don’t get the equity in one lump sum up front, you get it over time.

Not the same. If you got new stock grants in each round and they all vested on that schedule extending farther and farther in the future, then yes, you are correct.

But to say that

'you should take a reduced salary because you get this awesome stock grant that vests over four years'

then for four years say

'you should stay at this lower salary as you are diluted because we are giving you stock every year'

followed after four years by

'you got your stock and that's it so keep working at the lower salary and your now diluted worthless stock'

is not the same at all.

Good startups (and big tech companies) give employees refresh grants - if they continue to be a good performer, they get follow-on equity grants to replace the ones that have vested, and if they're a really good performer, the refresh grants are often significantly larger than the original hire grant.

And the employees are continuing to work; i.e. continuing their investment of talent and time.

That doesn't make any sense (i.e., you can stipulate this maintenance of %age, but you are crippling your ability to raise money). Predefined IPO data is similarly unrealistic, as there are too many external factors.

What does make sense is to have a risk conversation with these early people, and be willing to give up enough equity to have that make sense to them. So, if your target is to give them 0.5% "at exit", you're going to be giving them, say, 1-2% initially. And do this in the best way, tax-wise, for them in your jurisdiction.

If it's a young 2-person startup that just got a modest $120k investment from YCombinator

I didn't know it was a thing that anybody should be hired from YC seed. I thought it was just to support the existing team.

2 comments:

Check out ICOs... They are a bit scammy but deal with liquidity and resell. Second I would say is allow share purchase at a discount... This is better than options and filters out employees who don't care.

Finally ... As many companies go bankrupt - cash is king. I've worked for companies who try to pay in shares just before going bankrupt...

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