First employee of startup? You are probably getting screwed | Hacker News Reader

First employee of startup? You are probably getting screwed

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389 pointsMurkin198 comments

Imagine three twenty-something guys working on a startup that has more lines of code than dollars in the bank. They're working out of an apartment and spend most evenings eating ramen noodles from the same MSG-laden box. They work approximately equal hours (too many). They suffer approximately equal stress (more than they ever expected). They bear approximately equal responsibility for not tanking the company through poor performance. They each accept dramatic pay-cuts relative to easier, better jobs which they could sleepwalk their way into.

Next door, there are another three guys, eating ramen, etc etc.

Now, it seems to me like the three guys behind Door #1 are very similar to the three guys behind Door #2. However, in one case they're all co-founders, and in one case they are two co-founders and a first employee. Those are very, very different statuses for the third guy. The third co-founder gets mentioned in press hits about the company. The third co-founder can call himself a co-founder, a status of value in an industry (and society) which is sometimes obsessed with status. The third co-founder cannot get excised from the cap table without that being mentioned as a subplot in the eventual movie.

The first employee will not usually get mentioned. The first employee gets no social status of particular esteem. The first employee will not have a seat at the table -- literally or figuratively -- when the eventual disposition of the first employee's equity is decided. The first employee's equity stake is approximately 1/6 to 1/40th (or less!) of what the third co-founder's was. Well, theoretically. 0.5% is 1/40th of 20% in engineering math, not in investor math, because investors can change the laws of mathematics retroactively. 0.5% of millions of dollars is sometimes nothing at all. (This is one of the least obvious and most important things I have learned from HN.)

If you're good enough to be a first employee, you're probably epsilon away from being good enough to be a third co-founder. There may be good reasons to prefer being an employee... but think darn hard before you make that decision.

Herein lies the problem for early stage companies trying to hire. The people they really need/want are probably capable of starting their own companies.

<epiphany> A small non-technical founding team looking to hire the best technical person they can is effectively looking for a co-founder, not an employee.

So you're right, the coder who would be willing to consider such early involvement in a project is probably fairly entrepreneurial and will lose out if he is taken on as anything other than an equal co-founder. </epiphany>

This has been my feeling previously, but this post and the comments helped make it concrete.

At the same time, unless you're lucky enough to start with the backing of Y-Combinator or somesuch, there can be value to learning about the process while the money involved is someone else's and not your own.

Edit: I realize this is a somewhat heretical idea around here, but the difference in stress when it's your life savings in the mix and your responsibility to make payroll is quite substantial, and being an early employee gives you a window into the process without having to push all your chips to the middle of the table on your first go around.

Not necessarily. At my company, all our early dev hires are awesome people we think will be capable of starting a company one day, but aren't yet. Our goal is to teach them what they need to know so that in a few years they can do that handily.

Some of the things we plan to help them learn: corporate equity, pitching VCs, negotiating investments, dealing with investors, handling PR, user testing, user context research, product management, UI design, A/B testing, running production systems at scale, software processes, and engineering management.

We definitely can't offer them more money than Microsoft or Google can, but we sure can teach them a lot more.

That's... actually a really great pitch. Job as startup school. Nice!

Thanks. I figure it will motivate us to keep the work interesting enough that they won't flee. Which in turn will force us to build a much more robust company. We'll see, though.

What are you doing to ensure that employees receive that broad an experience? In the startups I've worked for, the founders were loathe to involve employees in business development, let alone financing.

Depends on the person and their interests, really. A lot of the day-to-day stuff (product prioritization, feature design, user testing, operations, development process) is easy to get people involved in if they want. We definitely involve everybody with recruiting and hiring, which I think is vital for startups.

Direct involvement in financing is, as you expected, hard. But we try to be very open. Everybody knows the burn rate and the terms we took money under. Everybody regularly gets updated on dealings with our investors. We also have a regular brown bag series. A couple months back, my co-founder did one on venture financing, covering both the basics and our specific fundraising effort. He did another one recently on the competitive landscape. And he's an awfully good presenter; you can see a 5-minute talk he did recently on our approach to testing product ideas:

http://vimeo.com/24749599

Thanks for responding! Sounds like an interesting company. I wish more founders took this attitude.

There's a simple solution: employees shouldn't accept a lower-than-market salary. Having been in this situation myself I understand that the psychology of these situations makes it difficult for early employees to maintain an employer-employee distance from the founders, but (in my experience) that spirit of camaraderie ends with the acquisition. The founders will likely be gone within a year, the unique cultural aspects of the company will be subsumed by the acquirer, and early employees will be stuck with nothing in exactly the kind of company they were avoiding when they took a startup job.

Kinda boils down to timing of the opportunity and how much risk is on the table before you sign up.

Employees generally come post-funding, get paid, etc. Co-founders work with free with no assurance of EVER getting paid, have to pony up when the company needs cash, etc.

In spirit, though-- I agree. If your risk level is the same as the founders, you should be a founder. If you can't handle or afford the risk but still love the idea of startups, try being an early employee.

Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say:

• Employee given 1%

• Two additional funding rounds at 30% dillution each bring that to 0.49%

• In a $30 million exit the employee will get $147,000

• Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter)

• So the adjusted value, including probability of failure, of those options is just $14,700

You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).

You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.

Something to further emphasize here: time to exit.

Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.

The seed round _is_ the 'probable return' calculation.

Seed numbers should tell you what other (professional) investors consider to be a 'good deal'.

If you are willing to get in and worse conditions, you are either brilliant or..

That's partly true, but there are some subtleties not conveyed by such:

If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life.

And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset).

Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.

I hope I didn't just get screwed then..I've been given 1.5% equity as a first employee, with an option to get additional 1.5% over the next 9 months (0.5% every quarter). With a salary of 65,000. I'm the web programmer developing the product from the ground up. We haven't yet raised any VC money, it's self funded by the 2 co-founders, one of which is a doctor who is primarily the finance arm. Did I just seal my fate? I'm 22 and have not dealt with being part of a technology startup so I wasn't really sure what percent equity was fair. I believe my shares won't get diluted with investment rounds based on the paperwork that I signed though, they're preferred as opposed to common, if that makes any difference?

Did you discuss the papers with a lawyer?

I am very wary of assuming too much from the limited details you've given.

However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now?

If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.

Well you're building their product for 1.5% or potentially 3% and the product hasn't even been validated by outside investment... I think you know the answer.

You're only 22 though, so I'd make the most out of it (learning experience).

One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.

"One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation."

If they view this guy as a code monkey now, when he comes in to renegotiate they'll tell him to take a flying leap on the assumption they can just hire some random off craigslist to replace him. Assuming he's a good developer this is of course not true, but they won't know it. Eventually they will realize the terrible mistake they made when the replacement screws the pooch, but that's like 6 months later after the original developer is long gone.

If they're just becoming successful they probably won't want to rock the boat too much by firing their first employee. You could be right though if they're real douches.

It hasn't yet been validated by outside investment, but it's somewhat being validated by user tester sessions -- 3 user sessions thus far which were pretty positive (albeit they're somewhat close to the co-founders so judgement/impressions might be skewed, which is what I'm afraid of..I think they feel the same way and are looking for several outsider testers)

My dad told me the same thing, to use it as a learning experience and see how things play out over the next year...if nothing else I made 65k and it could potentially be a hit of which I own a 3% stake, worst case scenario I now have 65k in my pocket that I can use to come up with and fund my own ideas (as I have several).

Yeah I think that's a healthy attitude.

Curious what the co-founder does, is he the idea guy, or is he the dude that will start thinking about marketing and sales sometime after the product is done. Is he getting a salary from the primary investor or is your salary the only expense.

If your salary is the only expense, then you are investing $65k a year as well since you are working for half normal salary in order to design and build the entire product that is the basis of the company from scratch. Given this, I'd estimate your contribution as either 50% or 100% of the company value depending on whether or not you are getting this salary from the investor, aka founder man.

Not that you'll get this of course, unless you had previously chosen to go for 100% by simply developing it on your own after asking yourself what the other guys were contributing (not much).

But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job. Thinking you were screwed won't do anyone any good, but if a job appears that offers more than $65k, if it was me in your position I wouldn't feel all that bad about taking it.

"But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job."

No. Per your contract, you are an at-will employee. You are free to quit at any time, and if you're a valuable employee that gives you a constant source of bargaining leverage.

$65k for a 22 year old is not "half normal salary". In many places in the US, that is full salary. And you are way overvaluing the contribution. Sure, building the whole system is a big part of the company but lots of people could do it. You are also undervaluing sales which for many companies is harder and more valuable than the technology.

He is single handedly creating the product that is to be the source of their income from scratch. $65k is much less than half salary for this position.

But he's also been given a % equity stake as well. You can argue it's not enough, but he's got a % stake in this which is far beyond what most people have where they're working.

But that's not how it works. There are a lot of people who could do it. In fact, there are consultancies who could do it, probably better, for less than $65k.

The value of your equity depends. If the company never takes outside investment then a $35 million "dipshit" exit makes you a millionaire - a $10 million exit in three years would offer an ROI which would give you options (though not (Fuck You Money").

On the other hand, how much of a track record do the cofounders have in building and selling companies - as opposed to building and running lifestyle businesses?

The issue regarding preferred shares is a potential lack of voting rights. The other issue is what particular preferences those shares get.

Finally, at 22 just see what happens and learn something - the difference between serial entrepreneurs and serial failures is largely a matter of semantics and persistence.

With a salary of 65,000, you aren't making that much below market for a 22 y/o developer. The CS grads I know got offers in the range of 40-85k, so you are square in the middle. It's not like you are making $30k.

Typical 22 yr old developer making market rate isn't in charge of creating the foundational product of a company single-handedly. So those numbers are irrelevant. For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary. He's not a code monkey, he's the main guy in charge of, and doing, it all.

A typical 22 year old developer is not capable of creating a foundational product. Sounds like he's getting what he's worth. Doesn't matter what the developer they should have hired would be worth.

People always want to skimp on developers. Would you hire a new college grad to design a $100 million building? No? Then why hire one to build the foundation for a $100 million company? It's certainly not simpler.

I was in a similar situation to the OP about ten years ago - 21 years old, very little experience, first technical employee at a company founded by two doctors, low pay, meagre equity given my responsibilities - and honestly, in retrospect I think they should have taken on a full-fledged technical co-founder with more experience and full equity instead of me. I did pretty well on the technical side, all things considered, but I didn't have the knowledge, confidence, and authority to assert myself when the founders pushed the product in unmarketable and technically unrealistic directions. We wasted far too much time writing code that did more to resolve disputes between the founders than to address the needs of potential customers.

As a result of that experience, I'm extremely skeptical of companies with older non-technical founders that hire inexperienced programmers as their first technical employees. It usually means they just want a code monkey to implement their brilliant ideas, and don't understand the engineering and financial challenges inherent in any startup.

I do find that some of the co-founders "ideas" are technically not feasible and this is causing some distress, when trying to explain it to them how things work. Both of the 2 co-founders are mid-to-late 30s, one is a doctor and one had successfully built and sold a company (although in an entirely different industry, a consultant recruiting company actually). Both of the founders have limited technical knowledge and I don't think they understand the iterative process that programming is, they don't understand about refactoring code and rewriting/etc...and so as soon as I create a new feature, they already want to move onto creating another feature without refining what we have

They basically have a time-line of launching in March 2012, and we only started in May of this year. One thing that's worrying me is that I haven't yet done a second iteration of the code and they keep wanting more things added..and I feel that we're not focusing on solving one problem but many (too many). Products that are successful start off as being simple and then more gets added over time...

One of the issues is that one of the co-founders is my Dad's former co-worker's Son, and even though I have some say now that I have equity, it won't necessarily be heard because what does a 22 year old know anyway, right? My suggestions might seem too radical to them, and that is to drop a bunch of what we have, and now that we've had some testers, to focus on what the testers liked, and remove what they didn't.

Several of the testing sessions that we had, the people using this new service had mentioned that because of the relatively private nature of this service, that they feel uncomfortable with a linkedin/facebook login button on registration because they feel like the private information available on the service will be shared with other more public networks. My vote is to drop these "features" but the cofounders seem insistant that we keep them and feel that it "adds legitimacy" even though the testing sessions seem to show otherwise. There are other examples of this based on tester feedback, this is just one of them

"A typical 22 year old developer is not capable of creating a foundational product."

Yes that is what I said. I'm not sure if you're restating my point as a rebuttal or if you are agreeing with me though.

If you can create a foundational product, you are worth what I say. If you can't, then it appears the founders don't know what they are doing and the equity is worth absolutely nothing because the business has no chance of success.

> For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary.

This is delusional. $500k isn't the going rate for senior software architects even at major companies. It's certainly not the going rate for a junior engineer building a product that may not even have a market.

I'm sure that $500k annually is a reasonable salary for product managers, just as it is for university presidents.

Edit: Trolling successful!

I don't get out of bed to write code for less than $500K.

That is a perfectly fine deal for you. $65k plus 1.5-3% equity is generous compensation for a 22 year old at a pre-funded company. Don't get too hung up on the fact that you are "developing the product from the ground up". The going rate for that is perhaps $10k-100k.

On my To Do list is to invent a time machine and send a decent lawyer 15 years back in time to teach the younger me some sense about early stage companies.

1.5% - 3.0% is fair for a first employee if you are also earning a decent salary, it's comparable to the deals I've seen around the Valley.

If you weren't making a salary, you should have a conversation about being a cofounder instead. It would be reasonable for you to ask for a lower salary and more equity, or no salary and a cofounder title.

You would probably be making $20,000 - $30,000 more at a non-startup job but getting no equity (and have a more boring job). The tradeoff is probably worth it depending on your risk preferences.

You should make sure that your stock is the same kind as the founders stock. If not, you should understand the difference. As long as everybody gets diluted equally in case of stock issuance and the guys aren't super shady, you are probably safe. Also, make sure that your stock grant has an acceleration clause and that it all vests in case of an exit. Otherwise you are definitely a chump.

I forgot to mention all unvested equity automatically vests upon a sale, I did read the entire contract

You can write an article claiming that anyone doing x is probably getting screwed, if you choose numbers that make it a bad deal. In my experience (which at this point is pretty extensive) the numbers he uses here are extreme outliers.

I'd expect a startup that was only able to raise money at $2m pre to be giving the first employee way more than 1%. How much more depends on how good he is (a factor that's not even considered in this article). Someone as good as the founders could reasonably expect 15%.

Interesting that your figure seems to be similar to the number another commenter came up with (assuming this guy is as good as the founders).

What do you think of his reasoning? [edit: from 7th para at http://news.ycombinator.com/item?id=2949795]

"What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right."

It's been my experience that they get about 3% or 4% and if they are good they get more in subsequent bonuses. Usually totaling to around 5%. If they end up in an executive role they get about 7% to 10%. But maybe YC companies have different metrics than my local TO startup scene.

I received 4 subsequent bonuses in about 20 months before leaving a successful startup tripling my stake, but I was employee 20.

A more accurate title for this would be:

"Taking a pay cut that is more than the market value of your equity stake? You are probably getting screwed."

The comparison math forgot the impact of taxes. The employee's $50K "investment" is pretax money, whereas the investors are putting in after-tax dollars. The marginal combined state, federal, and payroll tax rate on that second $50,000 in earnings is probably over 40%, so maybe the actual take-home salary given up for the deal is $29,000. Plus the equity earned is taxed at much lower capital gains rates (15%).

Also don't forget that if the employee is not accredited, it's unlikely he could (legally) invest at all. So there's an opportunity that must be valued, as well.

Leaving aside that 1% is, in reality, too small a % for employee #1 of most startups, there are two factors that might make it worth it:

1. Route from employee #1 to v. senior position (with commensurately higher salary) is shorter* irrespective of whether the employee stays with the startup or moves on. (*Shorter than if the employee was working as a small cog elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can be made.

2. Route from employee #1 to owning your own funded startup is again shorter. As employee #1, if you do a good job, then you'll be considered a de facto founder, and thus will have that to add to your pitch when it is your turn to try and raise $500k.

A third factor is that money is not everything. Working for a startup can be awesome, and might give you a whole range of professional and life experiences that you would not get when sucking down at your $100k pa teat.

Agreed. One of the biggest intangibles of being an early employee is the amount learned, which (I imagine) is better than the learning for an investor.

The path of early employee => founder is pretty well trodden. Aaron Patzer of Mint and Drew Houston of Dropbox are two immediate examples that come to mind. Who else am I missing?

Adam D'Angelo

The founders are playing a dangerous game in this story. If key engineers don't have much reason to stick around other than it being exciting, they are likely to leave as soon as they get bored or tired. And yes, you can get bored while working 80 hour weeks.

I was once in this exact position. I was the first employee and over the next few years a bunch of senior managers came in and each got 5-10x the stock I'd gotten.

When the whole thing got old, I looked around and saw that I didn't have much upside potential (especially since there had been dilution), my salary was below market, and I left.

What was incredible looking back is that something similar happened with a truly key engineer... someone who was recruited out of a university because he had more or less built the text mining library the company was using by himself. A product line rested on his shoulders, so he had a ton of responsibility, but when things got rough he didn't have enough reason to stick around.

Added: The point is, there are good times and bad times in startups. In the good times you should look around and decide who you really need to stick around in the bad times and give out stock accordingly.

Happened to me.

Years of effort . . . startup bought . . . eventually wound up with 17 shares of Oracle.

I'm not bitter. It was a fun ride, I learned a lot, and after an initial pay cut (when I first joined, and funding was tight) I got paid a decent salary.

How much did the founders and investors get?

Some people are talking about the "expected value" of being an early employee, which is a very valuable view. I'd like to focus more on the best case to give a sense of what you can hope for if everything goes right.

I was fortunate enough to be an early engineer at LinkedIn after I graduated college. I was one of the first few engineers hired. I'm not an amazing company picker, and I barely knew what a startup was at the time -- I just got lucky because I knew one of the cofounders.

I received a decent option grant (especially for a kid just out of college!) and stayed at the company for two years. My options got diluted approximately 50% during the various funding rounds. Right now, LinkedIn is a top 20 website in the world, and there's a consensus that its current stock price is "very optimistic". My net worth on paper ends up being a couple of million. Needless to say, I'm thrilled. However, I also want to point out that there are only twenty "top 20 websites", and most of them aren't going to change anytime soon. So if you're one of the first few engineers at one of the 10-20 companies that's going to go from nothing to huge in the next 5-10 years, then you can view a few million -- perhaps 10-20 million -- as being the best that you can expect. And there are literally a few dozen, or maybe 100 people that will get this kind of success every decade. There is little skill involved here. It's all about getting lucky.

Furthermore, people forget that it takes time for value to build. It might take you 4 years to get most of your stock options and decide you want a more stable job or a change of scenery, but it might take another 10 years for your company to go public or get sold. You're giving up a big chunk of your 20s for the potential of a few million in your mid-late 30s -- but you could probably save close to that much anyway with good spending habits and better paying jobs.

So if you want to be an early employee at a start-up, it's an awesome experience. But you should do it because you love it, because you're passionate about the product, or because you cherish the learning opportunity. You shouldn't do it because you think it will make you a gazillionaire.

(just to be clear, I did love my time at LinkedIn -- I made some great friends, learned a ton, understood that startups are the kind of places that I like to work at, etc. I'm really happy I was there, and would be even if the company hadn't become a big success)

My first gig out of school was with a startup. First employee. They paid 20% below market wage and gave way less than 1% equity. I didnt know any better (young/naive). I got screwed, big time.

But comparing to the opportunity of somebody else is irrelevant. If the employee has 500k to invest, they're free to get the same terms as the investor. It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy. Ergo, the investor gets paid more.

Read the article. He is an investor, to all intents and purposes, and getting significantly worse terms than all other investors.

Uhm, I did read the article, and no, 'putting in' 50k by getting a lower salary is not 'being an investor to all intents and purposes'. For one because the investor brings cash, the guy just work and time. Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.

The investors invests $500k NOW, usually with no ability to take their money back. The employee invests $136 each day with the option to leave and cut their losses anytime.

^^ This. Plus, the employee is coming on AFTER a substantial fund raising round, and should not expect the same terms since the company is already validated (and capitalized); thus, the "investment" risk is reduced.

I also agree with the other posters: "paycheck" employees are not good hires early on in a startup.

> The employee invests $136 each day with the option to leave and cut their losses anytime.

(a) That depends on where you are.

(b) You are ignoring the opportunity cost to the employee (though admittedly this is consistent with the original article).

(c) You are ignoring the potential adverse consequences on the employee's future career of being associated with a failed start-up, leaving a job early to chase dreams, etc. (Please don't tell me that it's better to have a CV showing you worked at several failed start-ups than it is to have a solid track record of demonstrable good results at established companies. That is the kind of fiction that only people in the start-up community manage to believe.)

"The investors invests $500k NOW,"

Fair point - the value invested by the employee should be discounted, but:

"usually with no ability to take their money back"

Actually, the investors have more ability to take their money back than the employee. The investors can at least sell what's left of the company, while the investment by the employee is unrecoverable.

> Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.

"The market says x so it must be true" is a lousy argument. Markets get distorted all the time by unequal bargaining positions, one side having better information than the other, etc.

If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve. And if you're hiring employee #1 to join a small team of founders, you want someone who is at least at the top of that range.

What? I'm not saying 'the market says x so it must be true' - I'm saying 'the market sets the price and it has set at in such a way that one can deduce that it values cash over labor'. In other words, coming by cash is harder than coming by somebody who does whatever it is that the guy in the article would be doing (presumably programming). Which is a statement that is entirely reasonable, objective and morally neutral.

> In other words, coming by cash is harder than coming by somebody who does whatever it is that the guy in the article would be doing (presumably programming). Which is a statement that is entirely reasonable, objective and morally neutral.

Sure, and all I'm saying is that it won't necessarily remain the case if the obvious distortion in the market today is fixed by better informing software developers (or early employees generally, for that matter) of their true worth. That seems to be exactly what this article is trying to do.

Wait I forgot about this part:

"If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve."

That's ludicrous, because you're taking a narrow (and objectively wrong) definition of 'market' and 'market value'. The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference, and hence there is less room in willingness to pay (well that's talking from assumptions that are favorable to your argument - I think the much more rational explanation is that the '10 times difference' myth is a programmer circle jerk) (I'm a programmer myself)

> That's ludicrous, because you're taking a narrow (and objectively wrong) definition of 'market' and 'market value'.

No, I'm just suggesting that 'market value' has little relevance to 'actual value of contributions'.

> The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference

The thing is, if that were true, employers wouldn't be willing to spring for huge pay rises when they realise they are otherwise sure to lose a key developer. However, in my experience, they often are willing to go to those lengths.

I think there is a much simpler explanation for the discrepancy between performance and compensation for programmers: too many good programmers don't realise how much more productive they are than the bad ones, and they often don't have the kind of mindset and/or training to fight for better compensation alone, and in the absence of professional bodies/unions/whatever they will just accept what they are given. This doesn't mean they aren't worth more, it just means that as a profession software developers tend to be lousy negotiators compared to the people who do it for a living.

As for the 10x thing, it's actually much worse than that, because there are a lot of programmers out there who are clearly (to the rest of the programmers on their team) making a net negative contribution. They drain more from other positive contributors than they contribute themselves. In short, you would be better off firing them. This often doesn't happen, whether because employment laws make it prohibitively difficult in your jursdiction or just because management are too incompetent to measure and understand the problem so they can deal with it.

(I always find it odd that managers in software development groups seem convinced of their own worth and that it is higher than most people working under them, yet they rather consistently fail to measure and control even basic productivity and progress within their groups. If managers can't figure out which developers are the 10x guys and who to fire, maybe the managers need to take a pay cut to their own true and very small value until they can.)

"blah blah blah the market says otherwise"

The market says the employee could make twice as much elsewhere. Just sayin.

Flip it around: he's unlikely accredited and couldn't invest even if he wanted to. So how valuable is the opportunity to invest?

>It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy

Sure, and this article looks like an attempt to educate the tech guy, thus making "tech guys who don't properly valuate their contribution" more scarce.

It'd be very interesting to look at real data from real companies and see how early employees made out. And naturally you'd want to include a wide spectrum of companies, both successful and unsuccessful. You could look at what rates people were actually paid, how much stock/options they got, how much it turned out to be worth and so on.

Now that would be an interesting study that would be quite oft-quoted.

If only there were someone around here with access to a lot of data about startups...

I guess they're a bit conflicted though: YC startups need employees, and if their results showed that the early employees were getting screwed, they might not want to release them.

As one data point, following the recent sale to HP, Autonomy staff in Cambridge split £30m between 175 people[1].

I'm in Cambridge and know various people who work/worked there, so I'm fairly sure that those 175 include many of the remaining "early employee" group. They'll be getting a nice windfall, obviously, but it's not never-work-again money.

For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or so for his share of the company.

For those not familiar with the numbers, Autonomy was basically the most successful software company in the UK, and the sale valued its shares at around a 60% premium give or take market fluctuations at the time of the announcement. It was founded in 1996. HP is the currently the biggest IT company in the world.

In other words, this exit is as big as anything in its generation is going to get in my country, and if you weren't founder/investor/board level, you weren't retiring from it.

[1] http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambr...

Exactly. And I'd bet that the employee pool is conditional on staying with HP for 1-4 years, whereas Lynch will get most or all of his payout immediately.

I wonder if the Startup Genome guys would be interested in tackling that? They seem more focused on "what makes a startup successful," but they seem to work by doing surveys like what you're talking about.

I'm not sure, but if you want to build a world class team you need to pay more than market rate + excellent team/work environment + more responsibility + more impact on world + give equity. There is no free lunch. Really.

Did Facebook become successfully because they went cheap with hiring VP of engineering early in their game? (answer not: they recruited the top)

Yes, you can get lucky and build a successful company by hiring people which are fresh from college for less than market and dream about being rich.

The point is the following: DONT HIRE BAD DEVELOPERS.

Unfortunately, good developers are good in math and they were around so they will not go with salary cut + questionable equity stake. Yes you can get lucky but there are so many other unknowns when you run a business and you should limit unknowns to the minimum.

I didn't know the forgone loss of salary for equity could be compared with investment that easily. That's brilliant!

Why not? The salary money is real, even if you discount for the fact that it is not available immediately. The employee could as well stay at their current job and actually invest half of their salary in whatever they please - including a startup which pays its employees half of market salary.

If you give employee #1 only 1% of your startup, then there is something wrong with you, or employee #1 is more of an intern and not a key hire.

Alternative title: "Don't remember how to multiply, add, subtract and divide? You are probably getting screwed".

There's so many things in life where party A gets away with soaking party B because B didn't perform some simple arithmetic.

...and party A didn't encourage them to do so (or give them enough information to do so). That's the part I dislike about all the ads for early hires. 'Meaningful equity' is rarely put into context.

It's only simple if you can plug in accurate numbers.

This is such a case.

But your offer of equity paid on a probabilistic basis intrigues me.

"How much do you want your monthly payments to be?" -Car saleman

I find that it is often because of information asymmetry, not because person B can't do simple math, that they get screwed.

There's a mistake in the math: one year of a salary cut is given as the amount invested. Why one year?

He mentioned assuming the optimistic scenario that after one year they can pay him a full salary.

Without having a bias towards the investor community, I think this comparison is only done from a money standpoint. Its also important to note what other value investor money and involvement brings to the organisation.

Investors bring contacts from their immediate and extended network, sometimes a strong brand (think SV Angel/ YC), mentorship, experts in the given field, and media attention.

Equally a good programmer brings much more than just programming ability.

Being a programmer myself, I totally agree. I wanted to point out its not a linear comparison based on a money:equity parameter.

Just wanted to point out (read a bit) you get equity at big companies too? That's not a not negligible amount of cash. So the guy isn't just losing $50K in salary, but the equity that the other company (bigger company) would be giving him. Not sure what the equity grants at bigger companies end up being though.

Depends on if the startup got production material and deals. Letting people in more than a very small equity and salary is just plain stupid if you worked hard for a year to get anywhere. Hardest thing is not to compe up with an idea, hardest things are: start, execute, ship, and have models to get paid. When these are almost done, new founders are not needed - they should have joined earlier.

I've lately met people tryng to get onto the boat as if all we worked for was air. If I take someone more in for more than a good salary he/she better be a unshaped diamond.

Of course, the article mentions 50% of normal salary for 1% - that is just so stupid. The people who wants to signed up on that cannot be unshaped diamonds.

This post is missing the most valuable part of working at a startup: the experience.

Sure, you can go work at ________ (big company paying fresh developers $120k+), but you're going to be pigeonholed into working on a small aspect of the product/company.

If you join a promising small startup, you're going to learn about all aspects of business, startups, selling, marketing, fundraising, etc. These skills will be extremely helpful to you throughout the rest of your career, especially if you plan to start your own company someday.

Why pay for this experience, when you can get the same, with much better financial situation, by actually starting a company?

If you can start one then great, but it's difficult to get your own startup to the point where it is paying you and your cofounder's living expenses.

Most likely, starting your own company consists of working a full time job and half-assing a startup on the side. A much better first step is to immerse yourself in an existing startup, plus you'll have the added bonus of a large financial upside.

Besides the financial risks of starting a company, it's extremely helpful to learn from existing entrepreneurs, which you also get working at a startup.

Why work full time for startup for $50k when you can work half time for established company for the same salary and more benefits, and have more time to build your startup at the same time? If you're able to live off $50k/year, why not work for established company full time for one year for $100k, spending $50k and still having $50k to cover full year of searching for customers and investors?

1) You need a cofounder, for all practical purposes. So that costs more.

2) It'll probably take you longer than 1 year to make $50k/year/cofounder, so in your scenario you run the risk of running out of money after the second year.

3) In your scenario you have to wait a year to start. Plus, you run the risk of getting trapped in the job. Life happens, who knows what your circumstances will be like in a year or two.

And most importantly of all:

4) You'll be 100x better prepared after working at a real startup for a few years. All of the books and blogs are no replacement for real startup experience.

1) You need a cofounder, for all practical purposes. So that costs more.

2) It'll probably take you longer than 1 year to make $50k/year/cofounder, so in your scenario you run the risk of running out of money after the second year.

Are you suggesting that I am supposed to pay cofounder's living expenses?

3) In your scenario you have to wait a year to start. Plus, you run the risk of getting trapped in the job. Life happens, who knows what your circumstances will be like in a year or two.

So I will not have to wait to start when I work for a startup?

4) You'll be 100x better prepared after working at a real startup for a few years. All of the books and blogs are no replacement for real startup experience.

Why are you still suggesting, that by working for a startup you will learn more about them, than by actually creating one?

Then open your own startup, and get 99% of the shares for 0% of your previous salary

Having been employee one and started 2 companies - I strongly disagree.

It is hard to find employees/co-founders that (a) have the right skills, (b) the right interests, (c) the right industry knowledge/contacts, and (d) are in the same place in their life to make the same amount of commitments.

And even when you do you find such people, it is hard to give them 10% equity in the beginning and then tell them that they are under-performing, and only deserves 2.5% equity.

Now, I agree, that the definition of under-performing is very different for a startup compared to a more established company. I have also found people are willing to accept when they are under-performing, but contracts and equity that is given is harder to change.

However, I would love to have the right cofounder, and even share the equivalent equity with him if he can take over half my burden.

Perhaps the answer is to find people with a very good fit, start them with low equity (~1%), and tell them how they can get more equity. And then doubling equity multiple times as they are able to rise to a founder level responsibility.

This is normally a problem solved by a four-year vesting schedule w/ a one-year cliff.

IMO, companies offering minimal equity with a promise to increase it later is a huge red flag, since those promises rarely come to fruition. Equity is given to compensate for the risk and work involved in a startup. Once the company is further along, the risk and work required are lower and there's no market justification to increase someone's equity stake. The temptation to ignore those promises is usually too great.

I do agree that the cliff and vesting schedules help here. But those force you to fire someone even if they are good but not perfect. I have been in situations where an early employee definitely believes that he/she can perform better per plan.

Yes, there is also temptation to ignore rewarding someone when the company has progressed. But, it is also a huge red flag when you have a company where major early employees have left. IMO, one of the biggest responsibilities of any startup CEO is in attracting and retaining good talent.

I am not suggesting giving lesser equity upfront, but more towards making a serious decision based on where the person is. If he is a great coder give him the equity that a great coder deserves. But a great coder is different from a great early team member - and it is hard to impossible to make the distinction early on.

As for the red flags that an employees might have when joining a company with such promises - I am hoping that the rest of the team will be able to vouch for it working with regards to them being in the company.

Differences between Co-Founter, Investor, First Coder:

Co-Founder: - Starts the compamy, has the idea/initial impl - Takes risk, may work for a while with zero salary, investing personal time for nothing. - May wind up getting ZERO (total) for the investment. - Company does not get paid, co-found does not get paid. - Big potential payout - Health benefits? Post funding, or from other job while building startup.

Investor: - Puts money into company. - May lose everything, that money is just going to the founders for some food and servers or something of that nature. - Payout depends on investment size. However lets say compared to co-founder, small payout. - Minimal invested personal effort compared to co-founder. - Invested time assisting the company and connecting the company to personal contacts to help it grow. - Provides advice when needed (hopefully)

First Coder: - Gets paid less than average coder - Gets potential payout less than investor - Gets paid or laid off. There is no in-between. May agree to not get paid this month and instead get paid later in hopes of assisting the business during a tough month. - Has to be pretty close to the business since it's so volatile, so will see the lay-off coming. - Probably coming in with benefits provided to employee.

As you can see risks/benefits are quite different for everyone. So its not just "you are getting screwed".

I think that getting a very small % is actually practical depending on how far along the company is. The question is about how much risk is being taken, and how much is being contributed. A smart co-founder will see the contribution of a very valuable employee and offer more % to that employee especially if they are so critical to the company. Its not about employee #1 its about the fact that during the early phases, each individual person has the ability to make big things for the company, and they should be rewarded for those big things. Keeping life static is quite boring and no incentive. Yet having incentives for employees transforming the business early on is quite good.

The term "coder" is a demeaning one that is solely used to denigrate the contributions of product developers.

If you are the only product developer at a company, you are not a "coder". The correct title would be Director of Product Development, or VP of Software Engineering.

Assuming we're talking a typical Silicon Valley startup, then you're incorrect.

VCs rarely fund a business person without a technical person as part of the package. That person is CTO or VP Eng. They, having committed and worked before money, will be a co-founder and receive a fair bit of equity.

A first employee is somebody who comes after funding. They are hired to help build. They may have a variety of skills that will come in handy later. But early on, they, like the technical cofounder, are their to code, code, code.

Cash is king. You can demand more equity and priority in the debt stack ordering when you write checks. Life's not fair but whining over how you're getting screwed won't help you realize the opportunities that are available to you.

The question is: would someone working on 100k salary invest real 50k into a startup? And the answer is 99.9% no. They'll just spend the 50k on fancier food and other crap.

If I were valuing the deal, I would give primary consideration to the likelihood that the business is underfunded based upon their inability to provide a competitive salary after receiving funding. I would also consider the crap nature of the equity offer as evidence that their source of funding does not bring a wealth of experience to the table...no smart tech investor is going to tolerate the risk associated with screwing over critical hires.

my history with startup options:

1st company: acquired 2nd: ipo 3rd: bankrupt 4th: acquired

Net value of all option shares : 0

Meaning, in toto, my strike price x shares is almost exactly what they ended up being worth. The net present value of an option is the strike price. Even the private options market is pretty efficient. Whereas a lottery ticket might have a net present value of only 60%, so these are pretty good lottery tickets. But that is essentially all they are.

This guy can work for a year and invest his money on the same terms as angel investors. The only technical problem how to do it tax free, b/c you obviously owe income tax and in some countries like Israel also VAT.

There are some solutions, but they are not trivial. The employee actually buys a convertible debt in the company on the similar terms as angel investor and can cash out on later rounds.

Or he can be a freelancer with his own company, investing from company's funds (no tax) and after the exit pulling the money from the company as dividends and getting to have only one (low) tax event.

You can invest company funds, but you will still need to pay Corporate tax on your profits.

Not relevant for freelancers without company, b/c they will need to pay taxes+VAT on income.

One more factor to consider, though: angel or Series A preferred shares often cost much more per share than the employee's per-share Common strike price. The option-exercising employee has a lower outlay and thus less risk. Of course, in all but the most favorable exits the reward per share will also be smaller.

I was a co-founder of a startup (non-tech) that raised $60+ million over 10 years and in my experience, a dollar of sweat equity, particularly from a person without some extraordinary personal value-add, is rarely as valuable as a dollar of paid in capital, all things being equal.

Interesting responses: I've never worked with startups for the payout, but for the experience of working with startups.

As to stock, I prefer shares to options from both sides of the transaction.

Finally, FASB 123 doesn't cover contractors or other non-employees - worth keeping in mind.

Not entirely an accurate depiction of equity calculations, but it is nice to see as many people as possible doing these back-of-the-napkin sketches to educate. Mark Suster has some great posts about equity math.

At least he got offered equity. The first one I joined didn't even have that.

This covers the equity issue pretty well:

http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

Pretty well, indeed. Thanks for the link.

This is just a special case of "Working on a startup? You are probably getting screwed." The first employee doesn't have it too much worse than the founders, the second employee, or the third.

He forgot to factor the risk into the equation here. Investors have risk. If the company goes down they lose $500K. How much do you lose $50K?

1% may or may not be less. We definitely need deeper analysis here.

Related question: when we're talking "equity" here for early employees, are we talking stock or options? At my last startup, all employees (even #1) were given options, not stock outright.

Works the same way for contractors. Take a lower rate, delay payment, accept warrants instead of grants...its all investment, and should be on the same terms as any other early investor.

There is risk associated with hiring an employee. There is no risk associated with a cash investment, There is investment risk, the risk associated with making the wrong investment like hiring the wrong employee.

The investor with 50k in hand now vs the 100K per year employee willing to work for 50k. The Investor wins. With the 50K the start up can hire the 100k per year employee for 50k. If thing do not work out you can fire them and hire another one.

The money is less risky giving it a higher value, plus its all upfront which has already been discussed.

It's a market. If you think you can get >1% for "saving the company" with your hax0r skilz, go right ahead and try to negotiate that.

Nice polarising title, but: 1. You're not getting screwed, you are making a choice, which is driven by market factors like your alternatives, expected utility from the job etc. 2. The numbers given are quite extreme - if the guy is really worth 100k I find it hard to believe that he would be offered 50k and only 1%. Also his option stake could raise with more responsibility given, this is just the initial negotiation point as I see it. 3. It only makes sense in the Valley or US.

If you are going to work as an employee in a startup primarily for the money, you are doing it wrong already.

Youre not getting screwed if you walk into the job with your eyes wide open.

At a start-up I'm making a good rate for my first job.

First, I disagree that early employees of startups are "probably" getting screwed, but it definitely can happen, and often does to people who don't know their real value.

The part of this that resonates with me isn't the mathematics. The math isn't very relevant because there's a really large unknown: the eventual value of the company. One percent could be a lot of money, or it could be nothing. There's also the matter of dilution: is he protected against dilution from investor and employee stock grants over the next N years? I would guess not. His 1% could be 0.2% or less by the time an exit happens.

What is obvious is the emotional undercurrent to this very common anti-pattern. It sounds like he's not a real co-founder, he's "just a coder". They seem to be trying to sell him on a rotten deal because they think it's just such a privilege to work on their golden idea that they don't need to compensate properly. He's going to bust his ass to make the code work, for a salary half of his market rate, and in return he gets a tiny sliver of the company that gives him no real control, on a 4-year vesting cycle. I'm sorry, but these two guys are not (after 4 years, after he's done some real work) worth 79 times what he is just because they had the connections to raise money.

Prospective employees tend to view equity grants in a pre-employment context, when a 1% share seems extremely generous because the employee hasn't done anything yet. But that's what vesting's for! Vesting allows companies to compensate based on future contributions, with the knowledge that if the employee quits or is fired before the 4-year period is up, they won't have to pay for all 4 years of work.

At the least, if still thinks it's an "exciting" opportunity worth pursuing, he should recognize that he probably can't value the company better than the market, that we are in frothy times, and that the equity is worth more to an investor than to him (different risk profiles). So the value of 1% (post-money) of a $2.5 million company is $25,000 at most. That's $6,250 per year, far less than what he's giving up.

The first employee of a startup is not necessarily getting screwed. If that employee gets appropriate respect for his skill set, and reasonable compensation for the risks inherent in a startup, then it's a fair trade. A lot of people go into startups as early employees knowing the risks and upsides and that's fine.

What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right.

First action: he needs to ask for 20% and settle for no less than 12%. If they say, "but you haven't done anything yet", he should point out that the equity grant is subject to vesting and that he won't get anything if he doesn't do any work.

Second action: he needs to demand the right to listen in on investor and client meetings. Otherwise, the other two founders will hold all the power in the organization because they, and they alone, hold that special knowledge of what investors want. If they think he's "just a coder", they'll show it by saying (in effect) that no, he's not "good enough" to be in the investor meetings.

The most likely outcome of his making these two demands is that they'll tell him to get lost. If that's the outcome, it's also the best outcome because it means the startup's a tarpit.

Where were you and this post two years ago? I'd have saved so much time and effort.

Where were you and this post two years ago?

Making the mistake that led to the post.

Great post, thanks for sharing. This gives me a much more actionable set of criteria to evaluate with the next time around.

This is one of the most interesting comments I've seen on the issue of early hires and equity. Thank you.

However, from the founders' perspective they can't have these kinds of negotiations with many early employees. How much equity could they realistically give up to get the key hires (and leave enough for an option pool for later employees)? This is obviously a complicated issue and it would be good to hear a founder talk about how they dealt with it.

I agree a lot with this, I think the very first employees may get high percentage of shares for half salaries, but very fast employees should just get regular salaries (& benefits if possible)

I'm not a founder so can't talk from experience, but my gut feeling is that there are not many key hires (in an early startup there are not many hires altogether, but this just reinforces my point if true.)

The best strategy is to realize which employees are key to the success of the company and give them proportionately higher equities. Not every early employee deserves a 12-20% even if they're "not just coders".

Either give up real equity, give up real money, or give up on hiring employees smart enough to realize what's going on. There's no fourth option. Having a startup doesn't entitle you to free labor.

You can still manipulate smart employees via their psychological/emotional weaknesses to get them to work for a poor-mediocre deal. In fact I think this is the most common path.

"Geeksploitation The act of taking advantage of twentysomething digital workers who are flushed with pioneer enthusiasm and willing to work very long hours if bolstered by junk food, flexible work schedules, and no dress code. Gareth Branwyn, "Jargon Watch," Wired Magazine, February, 1997"

http://www.wordspy.com/words/geeksploitation.asp

This is really just an extension or a new way to exploit the fact that a lot of nerds are doormats, and are completely unable to negotiate market salary. Happily, there are some who see the shenanigans for what it is.

I tried to phrase my third clause carefully. That would be hiring employees not "smart" enough to realize what's going on. (In hindsight, that's a leading term, but I can't edit it now.)

In my view they should be paid market rate. That's the real issue here. Even with that magical "first hire" you're now a company who is hiring employees. It's PRECISELY this problem that angel investing is designed to solve (and why pure boot-strapping is so incredibly difficult).

Equity for an employee should be viewed as a bonus and nothing more. Equity is a powerful tool for a company, and it shouldn't be parted with so easily. What if you need to raise some (non-dilution) bridge financing? You've limited your options if you've already committed huge equity to employees. It just doesn't make a ton of sense.

Pay market rate and benefits. Hold on to your equity for dear life.

Thank you very much for this post. It was all I need to read at this moment and probably saved me a lot of time and money.

If you consider risk-adjusted returns (the payoff for an employee working at a startup is much riskier than the payoff at a large corporation), the employee should demand more equity from the startup.

Great post, one of the better I've read here. What you have written makes sense if the founders actually view employee one as a truly "key" hire, in it for the long haul. In my experience, the early employees are key hires only in the sense that they are the best people the founders could hire right now. They are only key in getting the company to the first round of funding, when they can be replaced by better, more expensive key hires.

I don't understand why all these people are responding to this post so positively. Overage hours? Job-less risk? Career risk and opportunity cost? What? You seem to be including those numbers as his 'cost', are you assuming he's not getting benefits, or that he's going to work only 40 hours a week at this mythical 100k / year job?

Also, the advice is just wrong. No startup is giving away a 20% equity slice to their first employee after they've already raised a round. The chance of a startup even creating a 20% options pool for employees hired after series A is slim, and even slimmer is them giving their entire pool to the first employee. You're essentially saying you expect nearly the same equity slice as the people who invested their time to validate the market and build a prototype, which is absurd.

I'd love for someone to prove me wrong by pointing out a startup that's given 20% to their first employee after raising a seed round.

EDIT : To clarify, the dude in the original post is definitely getting screwed, but this is way too far in the other direction to be at all useful.

That's a very good point. But I think the problem is that we're blurring the distinction between founder and employee.

I remember an old quote "founders get rich, early employees get screwed, and late employees get paid." I've worked for startups where I received a miniscule percentage of the company. But they paid me market rate and provided me with a health plan. The equity was nice, but this was really just a job... ok, it was more than "just a job", I did pursue it with more passion, and there was less stability (and one of them did tank leaving everyone scrambling), but the equity was really a bonus in exchange for the lack of stability and perhaps a more passionate workforce, but it wasn't a stand-in for a substantially below market rate paycheck.

So I agree, 20% equity is a massive amount to give to an "employee" who is not a founder. But a 50% pay cut is a massive amount to ask of an "employee" who will not be treated as a founder. That sounds more like the kind of arrangement that might normally be worked out between a couple of founders, where one needs an income and agrees to lower the equity share in exchange, whereas the other goes without income at all.

In this case, it does sound like the early employee may be getting a little screwed, because his deal is the worst of both worlds - working for "free" (well half the time) like a founder, but receiving miniscule equity, like an employee.

But a 50% pay cut is a massive amount to ask of an "employee" who will not be treated as a founder.

The term "employee" is not a good way to look at this. The employee is not a subordinate; he's a free economic entity, the startup is another economic entity, either it makes sense for these two entities to collaborate for mutual benefit, or it doesn't. Make it symmetric not asymmetric and what you should do becomes crystal clear.

>No startup is giving away a 20% equity slice to their first employee after they've already raised a round

Then pay your first employee a market wage. On the other hand if you want him to take a 50% haircut you better compensate him.

I advised him to start the negotiation at 20%, not demand it. Going as low as 10-12% makes sense if he really likes the concept. If he's getting single digits, he should expect to be paid.

And yes, he will most likely be rejected when he asks for this much.

If they give him 10% out of an options pool of 20%, he just cut the options pool in half for future employees. This will make it harder to attract future staff, who will be needed to grow the company enough to make the equity worthwhile. Isn't taking too much post-financing risky too?

Not sure why somebody downvoted you; that is definitely correct. VCs have some very clear notions about the correct size for employee equity pools. They insist on creating one as part of the initial funding, so it doesn't come out of their share. For similar reasons, they will resist increasing it later.

Overage hours? Job-less risk? Career risk and opportunity cost? What? You seem to be including those numbers as his 'cost', are you assuming he's not getting benefits, or that he's going to work only 40 hours a week at this mythical 100k / year job?

There's nothing at all mythical about a 100k / year job where you work 40 hours a week. There are plenty of coders out there making at least that much by pumping out enterprise Java 9 to 5 for insurance companies and banks. You don't even have to be very good, you just need to not completely suck, stick around for long enough, and know when and how to ask for more money...hell, if you go the consulting route, you can make that much on a 20 hour work week at $100 an hour, which is not very difficult to get to if you're good and pick the right clients.

I'd love for someone to prove me wrong by pointing out a startup that's given 20% to their first employee after raising a seed round.

You won't likely find that. But what you will find is startups that are willing to offer their early employees wages fairly close to market rates (though to be fair, we don't know in this situation whether the person in question's salary was near typical market rates, we just know that he was deciding whether to take a 50% cut in it), which is (if I'm reading correctly) what the article is suggesting people look for rather than settling for shitty wages and delusions of Facebook-level growth.

I can't think of many people in real life that have ever seen much more than a nice bonus as the result of employee-level ownership in a company, and I think that's the lesson to take away from this - equity should not usually be a deciding factor in your employment decisions, nobody's typically going to offer you enough for it to matter very much.

Those are not the people we're discussing. Those people aren't deciding whether to work 9 to 5 writing java for an insurance company or go work for a startup as employee #1. Yes, you can make lots of money consulting. I spent a year doing nothing but consulting. It's mind-numbingly painful work. Apples to oranges.

But what you will find is startups that are willing to offer their early employees wages fairly close to market rates (though to be fair, we don't know in this situation whether the person in question's salary was near typical market rates, we just know that he was deciding whether to take a 50% cut in it), which is (if I'm reading correctly) what the article is suggesting people look for rather than settling for shitty wages and delusions of Facebook-level growth.

I think you'll find this is much rarer than you think. Most startups, especially YC companies for what it's worth, are offering exactly what's mentioned in this article at that stage. While it's totally ridiculous, it's currently the state of the world. Sure, it sucks, but asking for 20% is going to get you laughed out the door.

While it's totally ridiculous, it's currently the state of the world. Sure, it sucks, but asking for 20% is going to get you laughed out the door.

If getting laughed out the door is a problem for you, you're not cut out for startups. Not getting a job when it's a lowball offer is nothing major to worry about.

> pumping out enterprise Java 9 to 5 for insurance companies

This is true, but it's also true that startup founders can make a lot more money working some equally shitty job.

No reasonable person should join a startup based purely on financial comparison with other jobs. For me, I'm doing it because I learn more, have more control, put up with less bullshit, and have more chance of making a difference in the world.

>work only 40 hours a week at this mythical 100k / year job?

Mythical? I'm one of two engineers at my startup and I get $120k, bennies, and equity.

Edit: And I'm 23 years old and have been a professional for ~4-5 years.

Yes, so this 100k / year job with no benefits and no equity for exactly 40 hours / week is mythical.

Look, if I'm going to work somewhere, it needs to have a expected ROI that's equal to or greater than my current job. That can be done via equity, bennies, cost of living, salary, and a few other knobs.

I'm a pretty cynical guy, so if you were hiring me as an early employee, you'll have to work on a better presentation than expecting your company to be warm, fuzzy, and grow faster than Facebook. That probably means you load me down with cash or equity. If you don't have the cash, then I expect equity or bennies.

I don't expect more than market rate, mind you... just... fair treatment.

If you want your employee to take a pay cut they'd best get rewarded as much as an investor who put in the same amount. Look at the numbers, if you want a dedicated tech genius on call, and loyal, in his market, $700k for four years is very reasonable.

The hypothetical founders want someone to pass up being an employee for $100k/y, and costing the company at least $50k more, to work as a contractor for $50k per year - something that saves the company $400k, more than $200k of which comes out of the employee's pocket. If you think anyone should keep their mouth shut so as to not jinx that deal you need to go back and read the article again. Taking that deal is horrible. Especially because when you show yourself to be dumb enough to take it the company will really start treating you like crap.

At that, how is the founder really worth $500k in your average startup? The idea? I find it a little ridiculous that people who have no clue how to implement their idea think they deserve so much for it. Why wouldn't the key employee be worth as much as that?

For the record, I'm currently turning down a $150k 2y offer. On the face of it it's not too bad ($75k/y) but it has an optional buyout of my stake after two years at that $150k price, so that's the best it could ever get even if the company got huge. And that's instead of a wage, so I'd be doing the work free until, hopefully, it got big. So I'd have been, after all that, making a regular wage for someone doing this sort of work at a regular company, someone who has benefits, decent hours, etc, but I'd have taken all the risk.

Anyways, long story short, I agree with the article. Years ago they'd have had me at "So we'll be valuing your shares at $150K!"

A startup is also an opportunity for a guy who hasn't yet had CTO experience but would be a great CTO to jump into the role and prove himself/herself.

The next time around he/she is taken seriously as a CTO in the startup world or in the corporate world.

And that opportunity is worth a lot of money in my book.

This is a great point. The general approach of thinking of the job-after-next that you want to get, and looking at how your potential next job does (or doesn't) position you for it, is extremely useful.

I've seen a lot of recent college graduates work at a startup for a year or two as a cto. I would still hire them as junior developers. Working with engineers with a lot more experience and tech stacks is an invaluable experience.

I agree with you. Not that there's any way to control this, but I think it's always best to be the 3rd or 4th most advanced programmer on a team. You want to be good enough to get decent projects, but it's always good to have at least two people better than you. I say two because if there's only one "mentor", you'll absorb her biases.

Startup and large company programming jobs are very different. In large companies, being a good programmer is about knowing the tech stack and knowing how to maintain and leverage the code. In startups, new development is more important. I think the better way to go is the reverse of what you described: start at a big company for the learning experience (and seeing, in legacy horrors, what not to do) and then do a startup having learned those lessons. There certainly are lessons about engineering that are hard to learn except in a mature, already-scaled company.

Right on with your logic though I am not sure if anyone is willing to give up even 12%.

6 to 8% seems to be the high numbers I have seen or heard.

I hope your post will show the people who are not experienced with the startup equity world a way of thinking what their offer is worth.

There is another missing piece from your comment that the employees need to consider, it is dilution.

It is ignorance on how startup equity works that causes most mistakes.

Well, Guys, learn from some of us who have been there and got screwed before you.

If you draw your line at 12%, you will simply never get a job at a post-funding startup as a non-executive. Even as an executive, it's unlikely. (reference: http://venturehacks.com/articles/option-pool-shuffle - see the chart 2/3 of the way down).

I agree this isn't a stellar deal. He's giving up $50k for one year. His vested options after that 1 year of risk should be at least $50k in value at the current valuation (though it's possible they've made considerable progress since the valuation was established). I'm not going to touch the fact that you've tossed in severance and "career risk" into your formula. And adding 30% for overtime?! Most 6-figure jobs are >40h/week. /boggle

Of course, a lot of startups can't match BigCo dollar for dollar and don't try-- because they win on other fronts (work environment, autonomy, etc).

An early hire at a startup has enough impact to be considered an executive, regardless of role. If someone's not executive material, no hire.

I think he's talking about someone who would literally be an executive at a larger company, and has had experience being such at another company.

This is an excellent post, and I'll use it as a guideline when it comes time to hunt for jobs. That said, I'd like to disagree with a few of your assumptions:

1. You've overvalued overtime, as 30% is probably too high for overtime relative to a bigco job, which is what he would arguably take instead of this.

2. Drop career risk (which is beyond immeasurable) and opportunity cost (this is captured by his foregone market rate).

I also have a question about the expected value of the company's valuation. We've got that down at $2.5 million, and base our equity calculations off of that. However, is the valuation the expected value of all outcomes, as calculated by investors? I assume so, but if not then he will need to consider the average value of all possible scenarios (or, more simply, the likelihood that the company sells for $2.5 million).

There's a high probability the company fails or does not sell for $2.5 million, and he needs to factor that risk into equity valuation (if the company valuation does not already incorporate that risk).

EDIT: funny that I was downvoted--I don't believe I said a single disagreeable thing here (maybe the overtime?)

The $2.5mm valuation is already accounting for all potential outcomes, in theory

Figured as much, thanks for clarifying.

'Smart' startup founders would then let these 12% coders go by the end of their vesting period. Problem solved...

Early hires should rather be focusing on career perspectives given the chance of the growth of the company they're working for.

Vesting is usually quarterly. If someone gets fired at 4 years minus a day, that's still 15 quarters.

An equity "cliff" that is more than 6 months is an unfair and unreasonable term.

Are you talking in general, or for very early employees? My understanding is that a 1-year cliff is standard (with monthly vesting after that). That's what everyone (including employee #1) got at a startup I worked for. (Of course I'd never consider that company a good example to follow wrt to treating employees with respect.)

If it's customary at least for early employees to get better terms, that'd be (awesome) news to me.

I think your broad point is good: startup employees should definitely negotiate for a fair share. But your math is loony tunes.

First off, he won't be on reduced salary for 4 years. Seed-round startups may pay below-market salaries, but with later rounds they typically bump people to market rates. The same applies to things like health insurance, 401k, and the like. He's betting maybe a year of reduced income.

Second, the notion of 3 months severance is... very generous. And unnecessary. At least here in San Francisco, the time between jobs for startup-loving engineers is approximately zero. (Or negative. We just hired somebody from a failed startup and would have been happy to bring her on board early if she needed to work part time to responsibly close out her last gig.)

Third, I'd call the career risk negative. In recruiting, I look for people with past startup experience, failed or not. And one shouldn't account for opportunity cost here. If he has a better opportunity, he should take it. If one comes up, he might; he's not chained to the desk or anything.

You're also ignoring time. It's not like the developer is putting in cash early on as founders and investors do; his contribution comes gradually, and he can quit at any time. Seed money buys much more equity than A or B round money, and for good reason: the risk declines over time.

Developers should definitely negotiate, but only with a clear idea of the negotiating landscape, including how the funding structure of typical startups looks. The should also some notion of the marketplace. If a developer wants 20% of the company when somebody as good will do it for 2%, then they're going to be out no matter what math they use to justify their demands.

I think it depends on how much work was actually done before you joined. If the 2 co-founders already completed the main app/product, and you joined, 1% actually sounds fair. If you're gonna be the one creating almost the entire product from scratch, 1% is pitiful.

you got a mistake with your math 500K of 2 million is 25%

Actually:

They raised 500K at a high 2M (pre-money) valuation, giving away 20%

The 2M is before the 500K was added, so it is 500K of 2.5M total for 20%.

Honestly, going in as the first employee of a startup shouldn't be a decision made by someone just looking for compensation. Rather, a first employee should be someone who is so hooked on the idea of that startup, they focus on the ability to build a company from the ground up. It's a risk, but if all else fails, they can find a job working for an established business that can offer those numbers. Joining a startup early on should be based on beliefs and passion for the company, not a paycheck.

sure, but you can have belief and passion and still not want to be screwed over financially.

Yes, but is $50,000 all that bad? Sure, it may not be what your skill bracket is worth, but I think you can live quite well (given that your frugal) on that salary. What's more is that you'll be more motivated to do good work and insure that the business grows so that your salary does as well. There are benefits and setbacks but that's up to the individual to make the choice. If you're going to work at a startup, you should understand the risks.

If the startup isn't considering their first employee a crucial hire then they're doing it wrong.

And if you, as a job seeker, are dependent to land a potentially low-paying job at a startup to get a "real" job, then you probably aren't that "crucial hire" the startup is looking for.

This ain't no charity business.

No offense, but this is horseshit and the math is embarrassing.

The number of people ready to invest $500k, for whom this is "a small part of his capital," is about 1/1000th of the number of people who will enjoy working and learning in a small, exciting company, and having more input into the product, regardless of total potential for financial gain. So, the value of $500k in cash from an accredited investor is already worth more than the time investment of the average employee, for whom there are replacements lining up. [Edit] This is to say nothing of the additional value that an investor adds.

Even if that were not the case, and this were strictly a math exercise, the investor is putting in $500k NOW. You're putting in $50k spread out over the next 365 days, during which a solid company's valuation may go up by ten fold. Right now, your $50k is worth 1% of the company. But you're not putting in $50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136 the next day. Good luck making an early stage investment in an exciting startup for $136. I have never seen early stage stock available on lay away.

Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.

> "... the average employee, for whom there are replacements lining up"

The article is talking about the first employee. If a tech startup is happy to accept 'average' employees at that stage it's probably doing it wrong. Also, if there are really that many people lining up, then why offer equity at all?

$100k is not the salary of a super star team member. Based on that salary, I assume this person is a solid B+ team member.

Unqualified like this your statement is wrong.

Please, for the sake of the global nature of the internet, state something like

"based on the assumption that we're talking about this specific country/region and based on my experience with..."

$100.000 seems to be the current salary of the friend in question for that blog post. If you don't know where he's based and what his costs and standard of living are, how can you judge the person as being 'B' level?

Also - what the hell is a 'super star team member'?

Edit: Just for fun I put the author's name into Google. According to LinkedIn/Twitter he's from Israel. If we assume that the startup was local as well (why not? And why should it be in the most expensive areas of the States?) $100.000 is really good salary. High tech (i.e. programmers) employees are already overpayed here compared to the everyone else and 100.000 USD / 30.000 NIS per month is a good salary even in that field.

Sorry, I did jump to conclusions. What I saw was this: Someone who usually makes $100k is being offered $50k and 1% of the company. They were excited.

If you're in Kenya and $50k implies you're a C-level executive, then you're not excited and boasting to your friends about 1%. The two figures combined, plus the excitement, implies that the person is being compensated at half a reasonable rate, and being offered a stock % on par with a less than VP (and maybe even Director) role. If it's not, then they're excited about an noncompetitive pay package and the article should have mentioned that as well.

I read it as

- the guy was excited about the company/the job opportunity. This is, at least in my world, first and foremost not connected to the money to be made. 'Yay, I could join a cool startup'

- the guy got a safe/decent job (based on the assumption that he's in IL and his salary is _good_) and probably never had any experience with the math behind funding rounds.

You are, according to your profile, a startup founder. Therefor I assume

- you did the math at least once (maybe before for other startups, how can I tell..) and it's obvious. Now.

- you still base your assumptions on experiences that you cannot expect to be given

- (tongue in cheek, not completely serious) you might be the guy on the other side of the table (founder), asking for talent to accept a similar/related offer

I for one liked the article. My startup experience is rather limited, but I did join as a first employee once, with a big paycut and it didn't work out for me. I think it makes sense to at least remind people that startups are a risk not only for the founders.

Yes, to be clear, I'm a founder. All of my team whose salaries are in that range have better stock arrangements. I didn't think the point of the argument was whether the comp package was competitive. It was about comparing salary investment to an investor's investment. I just think the argument is flawed.

Really, the driving point is that an investor puts in all money up front at the immediate valuation. An employee puts minimal money in daily with the option to leave anytime, while they have day to day knowledge (hopefully) of the health of the company.

The author seemed to be arguing that the investment of salary wasn't being valued at what an investor receives. But they ignored all kinds of factors, such as the time over which the salary is "invested", and the fact that the investor may invest time and other resources, while the employee is likely to invest only time. Just having certain investors gets you other investors, gets you press, gets you all kinds of things. Very few employees get you the same things. They get you hard work. It's valuable. But the salary forfeited is just one very small component. Trying to convince employees that they should think of their $50k as the same as a $50k angel investment is leading them astray.

[Edit] All of this being said, yes, everyone who takes stock in lieu of pay takes risks. Employees should almost certainly treat options as icing on the cake, and expect nothing from them. Then, be pleasantly surprised if they get a return.

Ask Marla Wood, the "administrative assistant and bookkeeper" of Microsoft, who reputably got screamed at by Bill Gates when she had the gall to file an overtime pay dispute. I don't think she had any options.

We're comparing the value of an early employee to that of an investor. The article does it by comparing investment dollars and salaries. I tried to keep it in that framework. But since you brought it up, do you know what my investors do when I call them after hours with an emergency? They get to work, tirelessly. They don't file pay disputes.

I'm not arguing against employee rights. I'm letting you point out the difference between an early employee who complains about overtime and a good investor. It's about more than money.

How many startups end up being the next Microsoft or Google? With this kind of reasoning, buying lottery tickets would be a sound investment: Look at those guys who won 100 millions!

With the reasoning in the article, "you're probably getting screwed." I guess we both took it to extremes. Either way, the math in this article is pointless. The value of an employee and an investor's contribution should almost always be more than the sum of their financial contributions. In fact, in many cases, those should be the least important. That's all.

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