Comment by PragmaticPulp | Hacker News Reader

Comment by PragmaticPulp | Hacker News Reader

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The missing piece of this scenario is your current take-home. If you're pulling in $600K at a BigCo then it's not really reasonable to expect an early founder role to match that compensation and give you substantial (10-20% or more) equity in a new startup. Giving a founder $200K in the early days should be enough to let them focus on the startup and not worry about finances. If someone is in a personal position where something like $200K/year would cause great financial stress, they're probably not a good fit for a high-risk startup founding position anyway.

OTOH, if you were making $200K and the startup insisted you drop to $70K/year, that's just short-sighted on their part. Especially in this generous funding environment it doesn't make any sense to squeeze founders with tiny salaries.

The life stage and family differences are indeed a big gap, but I think the career stage differences would have also been insurmountable. Once you're a decade or two into a career and you have a comfortable position at a big company, it's really difficult to shift back into scrappy startup founder mode.

To be clear: There's absolutely nothing wrong with taking well-paid roles at big companies. It's actually a great option, and it's fantastic that we can get paid so much without taking on the risks of a startup. There's not really a right or wrong answer in this job decision.

I suspect most founders do not account for their opportunity cost correctly.

For example: two founders, one innovator at $150k current wages, and one tech at $350k. They work earning $0 each, spending their savings for one year, and then get a seed round of $1 million. Even though they have invested $500k equivalent at the highest risk they will only get common shares in their first round, so their cash-equivalent investment is usually highly undervalued. The standard VC return is looking for 30x return over 10 years (from their one successful investment out of 10 companies). The standard VC returns represent the best approximation to investment risk. However founders have higher variance (one company) and they don’t get preferential shares, so founders need far more than 30x return (much greater than $15 million) to even break even on their risk because they are highly leveraged due to common shares. Only 5% of VC funds even achieve fair returns, so founders are even more fucked than you might think.

Edit: although wages are less in most countries, I expect the risk for founders is actually higher. Investment amounts are smaller, less chance of outstanding company success, and investors seem to really screw up the companies they invest in (from my experience in NZ watching other companies that took VC or seed investment).

Even with $10-$100 million range exits, typical founders are doing more than okay.

Assuming founders are still in charge, they’re often given substantial bonuses ($1-2mm or more) if an acquisition would make their equity worthless. This is done to align their incentives with getting the acquisition done, otherwise they’ll hold out.

Also, founders tend to pay themselves market rate once the company has grown significantly. In your scenario they wouldn’t take the reduced $150K salary forever.

The bigger risk is to employees of startups. They don’t get the generous acquisition bonuses of other companies.

That said, founders of any startup that makes a mark are usually in high demand. Even if they fail, they can point to a lot of experience that few others have.

> Even with $10-$100 million range exits, typical founders are doing more than okay.

Survivorship bias. The big unknown is how many founders didn’t make enough money?

I would be very interested to see some stats on YC company failures (didn’t exit, or common shares returned zero). We hear a lot about the big successes, but we don’t hear about the legions of failures.

A founder needs to return somewhere between 20x[1] and 50x investment to cover risk e.g. $150k opportunity cost in first year needs 3 million to 7.5 million returns to cover risks (power distribution, so return is dominated by unicorn outcomes).

> they’re often given substantial bonuses ($1-2mm or more)

That is the successful startups - again what matters is the dominant number of unsuccessful startups, which most likely are not giving out big bonuses.

[1] https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... (a) only 5% of VC funds achieve an acceptable return*, and (b) “realistic” scenario for that 5% result is: “Five startups fail and do $0, three exit at $25 million, one exits at $200 million and our superstar does $1 billion, (c) founders get common shares, (d) many founders won’t get paid by their company much more than their opportunity cost (especially because founders of unsuccessful startups are most likely to get underperforming pay).

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