Easy. Disclose the preference of the terms you got from investors to your early employees.
This problem is self created. If you don't tell them the terms of your deal, they rightfully assume the terms will screw them, since otherwise why wouldn't you be transparent? Good workers rationally and rightfully go to FAANG instead of a startup if it doesn't feel like the startup is being fair.
Honestly, startups should be more transparent, because they can't compete on money. If they can't even offer trust and upside, they are offering literally nothing over an established public company.
Edited to add:
It would be nice if there was an equity dashboard inside each and every startup that basically said, "If the company is sold today at $100M, you get $X." Not only would it serve as motivation, but it would also show every effect every VCO demand on the corporation to your equity.
Ideally it would be a graph over time so you can see if your equity stake is going down or up in value, and you can make an informed decision about leaving. Also many of the VCO shenanigans might stop if people know ahead of time what it means.
In capitalism man exploits man, in communism it’s the other way around.
I think you're missing the parent's point. The behavior of the "bad apples" makes people turn away from startups entirely, myself included.
Also:
> How is a legitimate startup supposed to recruit the best people under these conditions?
I’d argue most startups don’t need “the best people”. They need a few hard workers who can wear multiple hats and have a promising skills trajectory. The “social network for dogs” doesn’t need to hire Ken Thompson.
1. As a rule of thumb, you can't.
2. As an exception, you can if they really want to see you succeed (i.e. for your mission).
3. As an exception, you can if they're dissatisfied or bored with their FAANG career and the job represents growth or excitement that they want.
4. As an exception, you can splurge on a few key hires, in terms of salary and/or equity.
5. As an exception, you will find dark horses, people who are currently undervalued by themselves and others.
But as other posters mentioned, the reason I agree with the advice about pricing equity at $0 is because that's rationally the most likely outcome. Honesty about that fact is very much appreciated, but rationally the expected value is actually (approximately) zero.
Not only are the founders going to need to be super transparent with their finances to get good interviewees, but some other event will need to take place in addition [1]. That makes hiring good employees even more difficult, especially as the company grows.
This behavior by the current unicorns can be overcome, but man will it take a change in the funding ecosystem. Since the current crop already has two unicorns (Uber, Wework) with major funding rounds by a shady group (the Saudis), I really doubt the ecosystem will change for the better of prospective employees.
Like it or not, the wild west phase of tech is over. It is better to join up with the FAANGs at this point for most folks. The expected value of joining a start-up is unlikely to be positive.
[0] Yes, there is a sucker born every minute, but in general, that's the idea.
[1] Events like the prospective employee will require really good healthcare that only this company provides, or the prospective employee really really needs a job for some reason, or the prospective employee lives 5 minutes away, or the prospective employee really is super passionate about the idea, or the prospective employee is a good friend of the founders, etc. Each prospective employee you hire is also unlikely to share any of these events with any other prospective employee, and these events are likely to change over time.
I don't think that's "the entire point" for all of us. I enjoy the challenges of scaling products that already have product market fit; startups are a great place to do such work. I also enjoy small, but not too small, teams; somewhere between 50 and 150 is a nice sweet spot for me. This setup is also found at many startups. Sometimes, markets lack institutional players as well. If I want to work on certain kinds of healthcare, financial technology or cryptocurrencies, startups are also a great place.
Most of the people I know at the first tier also joined mostly for the money. Those in the second tier, it’s because that startup was the best opportunity they had. Or in some small cases, because it gave them experience in something they couldn’t get at other companies (eg a pure ML role).
So, I'm post-exit from a startup I founded. It was >10x on returns, but not a supermassive company. I've also been part of a few other exits now in various capacities. So let me just tell you:
Startup founders get better stock than they give employees. They also often write themselves in super powers or special exit clauses. So for founders, the deal is nearly always better unless things get very bad (and it's usually better to wind down the company rather that push if things look that bad, a tough call).
Most folks have a very distorted view of what startup equity is. People think the equity will be worth a lot. And it could be in very specific cases, like an IPO. In those cases, stock is often great. In acquisitions, it's usually not quite as amazing.
If you do find yourself holding stock in an acquisition as an employee, usually what happens is either your stock is bought from you for a fee, or in rarer cases it's converted into company stock (which is usually the better option if it's a publicly traded company). You can expect some modest five digit sum from even the best outcomes here. But what will probably happen to said engineers or staff is that they'll get "retention bonuses." For engineers, retention bonuses for folks they want to keep on are roughly double-pay wages on a non-incremental payment schedule (e.g., 25% the first year, 25% the second year, 50% the third year) to try and get folks to stay on and embed themselves in the company. This is often a lot more valuable than the stock you're awarded if you can stick it out.
A famous explanation of a big (but not superhuge) acquisition is an old post by then-workaday engineer and founder of a small startup called GitHub named Tom-Preston Werner [0]. In that post he details the nature of his deal with Microsoft and why he didn't take the money.
Considering what he ended up with, it seems like a good deal, but only because he was one of the very few people who managed to pass a company into profitability.
[0]: https://tom.preston-werner.com/2008/10/18/how-i-turned-down-...
Another might be to just pay engineers in cash closer to their market value. I think (not sure) that people in other fields who work at startups end up having a smaller gap between elsewhere comp and startup comp? Though that also usually comes with even less equity.
All that said, most startups seem to still be able to hire. Maybe people find the experience rewarding enough relative to FAANG to accept the gaps. Maybe people don't quite do the math to understand what the outcomes look like.
Personally, I had left FANNG to go to a startup a few years ago, was recently looking for a new gig, considered going back to FAANG, but decided on another startup that I liked for a lot of reasons, and got myself to a point where I thought the break-even valuation wasn't too crazy. But it's very much not "this will make me rich" and more "this seems like it'll make me happy and I feel like I'm not literally setting money on fire by going there".
For what it's worth, I've always valued options at private companies as zero in making career decisions and looking back I don't think that heuristic ever steered me wrong (even at a company that is now a "unicorn")
I would not change what we did (which was basically full disclosure) but it was challenging to deal with.
Passionate young programmers who want to work for a startup don't have the background to understand it, even if the raw information is given when signing up.
Plus, you have no idea what the next round of funding will do to the equity structure...
Isn't it time for regulation to limit this complexity?
One is to deceive or withhold information from potential hires and hope they buy the sales pitch about the company's prospects enough to not care to ask anything.
Another is to be honest and find employees who agree with the sales pitch, even given full information.
Yet another is to just pay a high enough cash salary to attract good-enough candidates.
Never join a startup for riches. You join because you join for professional enrichment. That’s it.
People in this position can get screwed on exit of course but it's harder (and usually they are the ones you'll want retention terms for anyway).
Doesn't' work at all past the first small handful of core people.
Sound too expensive? Not early enough? Pay something close to market rates and be doing something interesting.
I'd tend to assume that if you want highly skilled engineers at a reasonable price, you probably have to know them personally and sell the idea of building the company together to them.
Why should startups be entitled to recruit best people?
I don't have a good answer for this. Humanity in general is terrible at coordination problems like this, even when our survival is on the line, so I'm not sure how a purely capitalist endeavor like startups are supposed to do anything about it.