Comment by dunpeal | Hacker News Reader

Comment by dunpeal | Hacker News Reader

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> If a founder can't afford employees at market rate, they shouldn't be hiring yet.

That's a little bit too strict, and as such is not a position founders are likely to accept. Sometimes they need employees before they can pay market rate, and market rate is pretty steep for a senior engineer in the Bay, for example, and most other areas startups are heavily recruiting.

It's reasonable to offer generous equity for early employees willing to take the risk. What does need to stop is the toxic culture of giving out 0.01% even to earliest employees (engineer number less than 10, often less the 5) with the cynical fake-stardust pitch that "this will be worth tens of millions since we're definitely exiting at $1bn+".

As you mentioned, this culture of deceit has become commonplace and it's poisoning the well of future employees. You can witness its corrosive effect throughout this comment thread.

Give out substantial equity to those early engineers who take risk. Give them a realistic estimate of the risk they're taking, and the value they can get. If they take it, it's their prerogative.

> Sometimes they need employees before they can pay market rate,

But you don't get to have something just because you need it. That's not how it works. You need to raise more money, so that you can afford to pay the employees. It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept.

> giving out 0.01% even to earliest employees

I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?)

But if you go based on the valuation paid by the investors, then even 1% is a laughably low offer during the seed stage.

> It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept.

Which is why I'm saying they should be offered a deal that investors would accept.

Demanding everyone pay market rate is just unrealistic. Never going to happen. I'm proposing a realistic, possible change.

> I hope that's an exaggeration and no one actually goes that low.

First ad I clicked on from Angel List front page:

https://angel.co/everlane/jobs

$130k salary and 0.01% equity. But that's OK, I'm sure their CEO will be happy to tell you about their surefire $Xbn exit.

Last I checked Angel List, 0.01% equity was quite common, even for early engineers at very early stage startups. It almost always goes hand in hand with blatant lies about the certain $Xbn exit.

> Which is why I'm saying they should be offered a deal that investors would accept.

> Demanding everyone pay market rate is just unrealistic.

But they're the same thing! If investors would accept it, then you could just as easily have the investors buy the equity, and then pay the employee with it.

So if it's totally unrealistic that founders would actually pay market, how could it be realistic that they'd offer equivalent equity?

> First ad I clicked on from Angel List front page:

> https://angel.co/everlane/jobs

> $130k salary and 0.01% equity.

That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

> But they're the same thing! If investors would accept it, then you could just as easily have the investors buy the equity, and then pay the employee with it.

See my [response to inimino](https://news.ycombinator.com/item?id=17291045). It's absolutely not the case that if I have $100m worth of stock according to some valuation, I can just go out and sell any amount of that for what you'd expect based on the valuation.

VCs are the only ones who are generally ready to buy this sort of equity, and raising money from them is a long difficult process, and I can't just decide I'm going to sell 0.5%, get $500k, and pay that to a new employee.

Finding a non-VC to buy your equity is very difficult too.

> That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

Like I said, it's the first random ad I clicked. Last I looked at Angel List, there were tons of startups offering 0.01-0.05% equity.

Also, notice they're offering this 0.01% with a maximum salary of 130k in SF who is skilled with "Python, Java, Scala, Ruby on Rails, React.js":

https://angel.co/everlane/jobs/306986-software-engineer

That's way below market.

> That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

Do you have any idea how many startups were worth >100m at one point or another on paper, and ended up with an exit where nobody but the VCs made any money due to stock preference? One down round is enough to effectively wipe out most of the rank-and-file equity in these scenarios.

> See my [response to inimino](https://news.ycombinator.com/item?id=17291045).

Yes I responded there.

> That's way below market.

I agree the salary looks lame but none of this conversation is about companies at that stage.

Equity packages in percentage terms are obviously going to be much smaller for later-stage companies, since there is much less risk baked into them. 0.01% of a company valued at $200m is equivalent to 1% of a company valued at $2m.

"You dont get something just because you need it"

Huge applause.

"You need to raise more money"

Crowd falls silent.

How about trying to sell something and generate revenue. I long ago stopped subscribing to Startup Porn but I remain baffled as to how seemingly smart people are so intoxicated by it that the notion of building an actual business is an afterthought.

Well yes. But the premise here was that in order to generate that revenue you need the employee. If you don't need the employee then by all means don't hire the employee (and don't raise money to hire them).

My view is that business owners hire too early. Nothing kills a business faster than hiring people.

ok

>> giving out 0.01% even to earliest employees

>I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?)

What I witnessed as guidance from a top-tier VC to its portfolio companies: 1% for employee #1, then ramp downwards for each employee: .07%, .05% etc and very quickly you reach .01%

> Give them a realistic estimate of the risk they're taking, and the value they can get.

Herein lies the problem. Founders are uniquely well-placed to evaluate the risk, and uniquely psychologically motivated to evaluate optimistically.

Because of that, founders sell equity dear.

If the generous equity offer is reasonable, then would be reasonable to make two offers, one with only cash and one with generous equity, in an "I cut, you choose" scenario. If a company has taken funding and isn't willing to do this, then employees are being asked to take risks that the financial backers are not willing to take themselves.

[Edit: removed something about a typo]

Again, you make it seem very cut and dry. It's not.

Suppose my startup is current worth $100m. According to you, I should be able to sell 0.5% of it for $500k and give that to the employee, or offer them that 0.5% directly, right?

Well, no. I can definitely offer them that 0.5% since I control the equity, but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".

Ever been close to a startup raising money from VCs? It simply doesn't work that way. VC investment is a big, complex package deal. They're not just going to accept whatever shares you give them, and pay you. They have their own idea of how much equity they want, how much they're willing to pay for it, how much besides equity they want (control of the company, seats at the board, various forms of preferred stock and other guarantees, etc).

Also, fixed the typo, thanks.

Yes, I'm eliding a lot of complexity, in that you can't just take the equity and sell it to the bank or to your VCs. However, you as a founder have some control over how much you raise and at what valuation. So the fact that you can't make that decision at the time of hiring is certainly true, but you are making those decisions when you decide to raise a round (or not).

That's why I restricted my final remark to companies that have taken funding. Of course there are a lot more moving parts than I let on, but if a company has taken funding and would rather keep their funding than their equity, then it makes sense to think carefully about why that is before buying that equity with, potentially, years of your irreplaceable life.

> Suppose my startup is current worth $100m.

Then you're way beyond the stage any of this conversation is about... But let's say you said a smaller number.

> Well, no. I can definitely offer them that 0.5% since I control the equity,

... no you can't. You can grant equity out of the option pool, which you defined in collaboration with your investors. If you want to grow the pool you're going to have to talk to them first. You don't have free reign to dilute the investors away at will.

> but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".

Well sure, not on a daily basis. You have to raise a round of funding, obviously. Hopefully you don't do that too often, but when you do, you make sure to raise enough to pay your employees a fair salary until the next round.

If you can't raise a round of funding, then your stock is worth nothing and the employee should consider it to be worth nothing.

> Ever been close to a startup raising money from VCs?

I have raised money from VCs.

> You can grant equity out of the option pool, which you defined in collaboration with your investors.

Obviously I'm simplifying here, but overall yes, it's far easier for a startup to give equity than cash, for the reasons I mentioned.

Especially if I'm an early stage startup, maybe after a small seed round, I will surely have enough options in the pool, or investors lenient enough to let me issue these extra stock in the unlikely case I'll need them.

> I have raised money from VCs.

So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.

> I will surely have enough options in the pool,

At a $6M seed stage valuation, 1% in equity (vesting over four years) is worth the same as $15k in salary.*

Which is harder for a founder to authorize, 1% in equity or $15k in base salary? Honestly $15k salary sounds a whole lot easier and cheaper to me.

$105k in salary converts to 7% in equity. So if you want to hire than $400k Googler you're going to be paying them $200k salary and 14% equity.

An entire option pool is typically 20% or less.

The only reason giving away equity seems so much easier than cash is because you can trick people into taking far less of it.

* Disregarding the fact that the valuation is based on preferred shares while the equity grant is common shares, which only makes the equity grant even more worthless.

> So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.

That's literally the entire point of raising a VC round?

If its worth 100 million it isnt a startup.

Hm? Plenty of startups have current valuation over $100m.

However, I just chose this number because it is nice and round so the math is obvious.

Then I would argue that they aren't startups, they are fully formed businesses.

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