Why you can't hire
startupboy.com
startupboy.com
Choice quote. I'm kind of amazed this isn't brought up more.
Of course, you can never be completely sure of the founder's character so trust is always required.
That's perhaps ~10x less than is typical.
I'm not saying your general intentions are wrong, but you should be able to get a much better deal from startups than you have seen to date if you want. I'm moderately surprised at your experience.
$250M valuations are quite an achievement already and $500k, while it will pay off a mortgage, is not life-changing. (not talking out of experience here :)) So, an early engineer who will most likely be very instrumental to bringing the company to such a valuation ends up with a(n admittedly very) nice bonus, while founders do end up with life-changing wealth.
The categorial difference is that if the company flops in a few months the founders are out a lot of money, whereas as first engineer you are merely in a similar position to before you took the job, but with some nice experience on your resume and a few months worth of pay in your bank account.
[1] http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html
That's the fully loaded cost of the employee, so the sum of salary, payroll taxes, health insurance, unemployment insurance, office rent, and whatever else I'm forgetting.
Edit: also called the fully burdened cost
Most founders I know would pay themselves a salary after the first funding round. A small one perhaps, but I don't think the difference is as big as you make it out to be. Especially when you consider that the first engineer in a startup gets at least the same workload as the founders.
Not at all. An Engineer can only have one job at a time so they most likely quit one to get this one. Now they have nothing, no income at all. Some founders will be in a similar position but many still won't have to get an office job if their startup fails.
If a startup hands me a picture of treasure in some place I can quickly get to (i.e. little investment on my part) and a shovel, I'll invest a couple of hours for the chance of getting rich. If they hand me a lottery ticket that they can void if it did happen to win, I'm not going to spend months or years slaving away for that.
This is especially true of non-tech companies looking to hire quality people for positions in their IT departments.
I currently work in such an IT department and we have a position for a J2EE developer to write portlets for our up-and-coming Liferay portal. Needless to say, we can't find anyone good (outside of recruiters, which we'd rather not use) to fill this position. My boss has asked each of us if we know anyone we can recommend for this position. As far as I know, no such luck.
Personally, I'm not the least surprised. None of the developers that I know would even touch a job like this. Most don't/won't do J2EE. Portals never really took off like corporate America hoped it would (and Gartner said it would). I have some things that I'm working on on the side, and if/when that becomes something, I'll be headed out the door too.
What my employer fails to understand is that they are hiring as if it was still 1998. Developers now have options and no longer have to settle for jobs like this. Their competition is no longer other IT departments, it's freedom of choice itself.
It may not have to be J2EE, but there are plenty of corporate jobs that have to get done to help build big company infrastructure, and if much of the talent that was available now has more attractive options, is the only answer to escalate salaries? Or to hire in shorter-term contract developers?
And, honestly, change the position so that the person hired isn't considered just a cog in management's plans, who's expected to be on call 24/7 and to put in 50 hours a week in a windowless room. I wouldn't go back to that shit even at double my current salary.
Corporate America IT jobs have all the soul crushing without the reward.
Depends what you mean by a portal, but Microsoft's SharePoint seems awfully popular from what I can see.
The biggest problem with them is that the "applications" or "portlets" that occupy its pages we're really meant for dashboard-like information. Just show the most relevant information in a small space on the page. If you want more detail and functionality, you should be able to click on something and be taken to a full-blown website.
In reality, IT managers here the word "applications", and they then try to cram the full web app into the portlet. So now you're stuck trying to provide web app functionality in an environment where the only programmatic links you can generate are to yourself, you have no ability to control what other things are going to be on the same page as your app. Forget being able to set HTTP caching headers, since you aren't in control of the page.
"The Best of WebSphere® and SharePoint® in One Solution"
From my perspective as a developer, I don't use the document sharing or publishing features of Liferay. My focus is on the portlet development. This means JSR-168 and JSR-286 portlet APIs.
I know nothing about SharePoint, so I can't really compare the two. I just know that I really dislike Java portlet development, and am ready to never have to do it again.
If one buys that set of facts, there is exactly one participant in the startup ecosystem who should be getting told "Sorry, your contributions are not worth what you think they are." It isn't founders or engineers.
P.S. That said, psst psst, being last cofounder beats first engineer 100% of the time.
The main thing is that there are relatively few opportunities outside startups to make a good return on investment -- the western world is still (again) in a recession, stocks are so and so and what you can get on US fed bonds is a joke.
So really there is too much money chasing the opportunities available.
So the good times will continue until the economy gets back in good shape.
Which I for one don't believe will happen for at least a decade.
If you have 150k in the bank it's because you have some seed money, or have bootstrapped your way to that position. If you've bootstrapped then you've achieved pretty good product/market fit and have good revenues. Conversely if you've raised 150k and haven't achieved product/market fit, then you probably shouldn't be hiring.
Now, if you look at companies that have raised 150-300K I don't think you'll find many of them hiring, at least not very aggressively. I feel that level of money is used to give the founders time to iterate until product/market fit and not be cash constrained when it comes to things like contracting a good designer or buying a domain. And once a seed funded company achieves some semblance of product/market fit they go and raise 1-2 million.
So is this article intended for the few companies that have raised in the 100-300K range that are starting to hire? If that's the case then ya, I agree such a company is going to have difficulty hiring. They have significant risk of not achieving product/market risk, and they don't have sufficient capital to give a fair market wage. So a potential employee is taking a huge chance on such a company, and should obviously be compensated for that (relative to the very attractive compensation packages are companies like Yammer, Square, etc). But I don't really think there are very many companies like that, but maybe I'm out of the loop.
Before: Founders put together a biz plan and raised a decent seed round and then started hiring the first few employees.
Now: Some person gets an idea, pitches it to another person, and they start building it, then they pitch it to a third person. They don't pay themselves salaries, live off their savings and their credit cards. An 'incubator' may give them some cash to pay for things like AWS instances and filing incorporation papers. They may be up to 5 or 6 people before they have a 'minimum viable product' (MVP) and are willing to pitch it to VCs for a real series A.
The author points out that all of the first 3, 4, 5, or 6 people who were working to get the company to the MVP point, they are founders. Not just the 'idea guy' or the 'wizard' that they snagged to help implement the idea. Everyone who came on board before series A has made it possible to get to that point is a founder.
And yet there are companies that treat person 2 - n as 'employees' and give them way less equity. Because of that people don't want to be employee 2-n, and thus hiring them is 'hard'.
I've noticed this as well, and have been puzzling around with the following thoughts.
Lets say you create a company and decide that prior to series A, 80% of the company will be owned by the founders and 20% to outside investors. You start with 10 shares, 2 for an angel, 8 for the founder.
Now you add a founder, you double the share pool and now you give 8 to the new founder and 2 to the angel (distribution is 4 + 8 + 8). Now you add another engineer/founder and you now add 80 shares to the pot and distribute them 27 + 27 + 26 for the founders and 20 for the angel. Add a new angel and you double the shares to 200 where each angel get (20 + 20) and founders get (54 + 53 + 53) shares.
The idea being to keep the ownership percentage of the company 20% angels, 80% workers.
Now you go for series A - my thought is you pick three ratios, investors/founders/employees. That may end up being 49/31/30. Allow your angel to either contribute their shares to the series A (cash out) or to participate. But at the end of the day the representation is 49,31,30. Same deal when you add more investors, add to the size of their pool so that works, add to the other pools to keep it balanced.
I am undecided if it would make managing the equity table easier or harder.
This is why I don't consider jobs with even exciting startups with early traction at this point in time. Why would I bother getting 50x less return for a similar investment and risk as a founder? We should at least be in the same order of magnitude. Especially if the startup is practicing "lean" and is going to completely change by the time it exits. Might as well just start my own company.
And, if you can't get into an incubator, you can just as easily bootstrap your way through the early stages.
In once sense the engineer is making the same kind of bet as the VC. They don't know the founders too well, not sure if the idea is any good, its a big gamble. Buy unlike a VC, the company will be the engineers whole life until the idea proves itself or fails.
A few extra percentage points of a deal that will probably never happen is not really all that attractive.
The only solution is to raise more money and pay them more.
I think that trivializes the process. There are now multiple incubators, but about two orders of magnitude more looking for spots. Y Combinator gets thousands of applications for a few dozen spots. Tech Stars Boulder got 600 apps IIRC, and only 10 get in the program. Early stage money gets trivially easy if you're in one (especially YC or TS), but getting further funding is still a time drain, and now you're competing with the 100+ incubator-based startups for VC/Angel money.
I do agree about cap tables. With less money needed to start a company, the equity normally given to investors can (and should) go to employees. It's an opportunity for many who have talent to get a bigger reward for their hard work.
I'd be interested to see the skew as well. Maybe a large part of those declined were unserious college students or similar.
Oh, and offer me as much salary as you can with the option for me to dial that back into equity. I can't pay a mortgage or buy pizza with options, and my market rate does not fluctuate based on how much buzz you have on twitter.
The founders' got Pauli as an engineer, any problems, he goes to Pauli, problems with EC2, he can go to pauli, troubles with rails, hard drives, Linux, he can go to Pauli, but now he's gotta come up with Pauli's money every week, no matter what.
Your tweet didn't go viral? Sorry to hear about that, fuck you pay me.
Your funding didn't come through? Fuck you, pay me.
People don't need more coupons? Fuck you, pay me.
Servers crashed in the middle of the night? Fuck you, pay me.
And then finally when there's nothing left and he can't raise another dime from the VC, or clear anymore paper on second market, you bust the joint out, take the code and release it as open source.
If founders actually believed their option bullshit it would be a no brainer to keep those valuable options and pay engineers 200K. There is no shortage of engineers, only a shortage of suckers.
When there is a scarcity of a product (engineers to hire), the cost naturally goes up. If you are having trouble hiring, raise your compensation. If you don't have cash to offer you need to raise the amount of equity you give (or perhaps other perks).
We paid our first engineer market rate and had actual benefits. Our cap tables are pretty traditional and we haven't had much trouble hiring all things considered (though we are extremely picky).
I have to say, if you have to give 20% of the company to your first engineer in order to get him/her on board, then I don't really see the benefit in going the incubator route over traditional funding.
Throwing equity around does not solve the fundamental issue, it just is a competitive tactic.
Investors want founders with meaningful ownership of the business, a syndicate that owns enough to care, and employees happy too. That is where the model is driven from, and would require a change at the investor level for this to work.
Assuming 2 investors (40%) 2 founders (40%) that leaves only 20% remaining which does not fit the proposed changes.
I really appreciate the comment about the surplus of founders (as opposed to a shortage of developers.) There's a context that's very important in that statement: that not all founders are really necessary, nor do they really come before other key team members (namely, engineering) in terms of foundership.
Great post.
On the other hand, even more than getting the top 2% unicorn squad, I want engineers who believe in the business. Taking equity in lieu of salary is a sort of screen for this, and I think that's why I've structured things that way in the past.
I agree with the article that it's not fair to the first N employees, though.
To clarify, perhaps people can post their thoughts on what equity percentages you'd offer to the following? (or something similar) :
1 - 5 Employees - Engineers
1 - 5 Employees - Sales
1 - 5 Employees - Community Manager/Support
6 - 20 Employees - Engineers
6 - 20 Employees - Sales
6 - 20 Employees - Community Manager/Support
Thanks in advance!
I firmly believe we just haven't churned out enough CS graduates nationwide over the past decade to meet the demand of both the startups and the established businesses that are all hiring right now.
I hear there's a gem for that...
You need to have a genuine interest in what you're doing. Otherwise, you're not likely going to do (let alone enjoy doing) what it takes to be good at this.
You always need to improve your current abilities and add new ones. That can be done by coding and reading (probably in that order). Github is great for this kind of thing.
You need to be aware of advancements and changes in your profession. Sites like HN are great for this.
Psychologically, I would also make sure those "early employee founders" really risk something; even if it's just securing $20K of their savings in a bank account to be used in a pre-approved way if the company needs to make payroll. $20K is, after all, just 2 months of gross salary for your self-determined great engineer applicant.
Doing something like this has 2 benefits: 1. Applicants self-select for risk tolerance. 2. You avoid the spoiled kid syndrom of "co-founders" making all types of employee requests ("I need $6K for a top notch working station", etcetera.)
Let's assume the prediction for valuation at the next round is $10M and there is 50% chance that the company gets there. This would make the value of the company about $5M at this point. This means that the engineer's discounted salary is worth about 0.6% equity (30K/5M=0.6%) for the company. Usually companies make the offer for 4 years worth of equity with a vesting plan. Again it is not correct to multiply 0.6 by 4 because the salary of engineer will reach to its market value after the next round of funding. It is fair to multiply it by 2x. This brings the total equity given to the engineer to be about 1.2%. I made a few assumptions here such as what the expected value of the startup would be in the next round of funding and how much the salary is lower than the market value. This calculation shows that the current amount of equity offered to the first employees is not that different from what it should be contrary to what the author of the blog post has suggested.
To offer a simple formula:
Y (expected equity of the first employee for the first year) = X (loss in income for the first year) / V (valuation at the next round of funding) * P (probability of the startup getting to the next round).
For our example:
Y = 30K / 10M * 0.5 = 0.6%
I know engineers often compare themselves to the founders and wonder why they should get so much less equity considering that they have similar skills and are putting equal effort into the company. One thing they ignore is that what founders have already put in. In most typical startups, the founders have been developing the idea at least for two years and have worked full-time on the startup for 6 to 12 months before receiving the seed funding. They have done this at the time that the possibility of getting to the seed funding round was less than 20%.
If we assume their market value was $120K/year, that means they each put in something about $120K at the time that there was less than 20% chance that the company would get to the point of $2.5M valuation. If there are two founders, this would be about $240K investment at the valuation of $500K (2.5M * 20%). That means the founders should get 48% in vested shares in the company. Instead they get all their share as unvested shares and have to work for the next 4 years in the company to earn them. Considering the remaining sacrifice they have to make, it is totally fair for them to receive 60% instead of 48%.