Join as a startup co-founder or the first employee?

4. It is smart to have founders have their stock vest over time, so if you get into a founder dispute, and one or two leave...it is possible for the founders that stay on to have their work continue to be recognized by continued vesting of their stock, and that departed (and thus no longer contributing via personal effort) founder/shareholders cannot be excessively benefit from the remaining founder's activity by owning shares disproportionate to their continuing activity and commitment.

More than a few startups fail, by neglecting to consider the changes that may come in founder relationships. It is important to talk about departure consequenses.

You may find it enlightening to review a few Venture Capital blogs. Here are a few.

Sam Altman "Lessons Learned" - http://blog.samaltman.com/startup-advice

George Grellas - Startup Law 101 Series - Grellas Shah LLP - http://www.grellas.com/faq_business_startup.html

Mark Suster - Both Sides of the Table - Raising Venture Capital - http://www.bothsidesofthetable.com/pitching-a-vc/

I'm already in the process of asking these types of questions myself.

1. When I interviewed with a company in southern California, the CEO noted that there are different types of stock that get issued to the employees that are not as good. I don't know much about stocks, but it's an angle you will have to consider.

2. One thing I found is that if you're a founder, that makes you responsible for both the wins and losses for the company. So when it tanks, debt collectors will come for your stuff too. Where an employee just needs to worry about getting another job. This point alone means you'll have to carefully consider who you're getting in bed with.

3. The only reason I can find for not wanting to increase co-founders is for two purposes. One, it's another person who can flake off and start writing company checks. Two, you'll have to split profits again :)

4. I don't think so, don't quote me.

5. See 2. and 1. to weigh your options. Being a co-founder potentially has a bigger pay off but comes with responsibility.

6. See 5.

I say if you genuinely trust your future partners, to go for it. It's my understanding that if you want to be able to afford that sports car and have plenty of time off for those cool vacations; you either need to be at the top of a company or have enough money to somehow live off interest.

Thanks for your reply!

2. Is the debt collector part actually true? I always thought debt collectors go after the corporate account and they will only come after your personal assets under very specific circumstances (such as if you haven't paid your employees). Do you have more information about this?

Here is one nightmare scenario (which actually happens to some people). You withhold from employee salaries for taxes, but someone takes the money and disappears. Now, the other founders owe the tax bill AS A PERSONAL LIABILITY (not corporate).

What country/state are you in? Why would this be a personal liability?

I believe New York state holds corporation officers liable for unpaid payroll and payroll taxes. There may be other states with similar requirements.

One of the reasons for creating an LLC or corporation is so that #2 does not happen. As long as company is set up correctly and founders do not do something stupid like personally guarantee a loan then you should not have to worry about this.

That's true, it does depend on the company type, LLC, Sole Proprietorship, etc. Thanks for pointing that out as I completely forgot about the pros and cons that comes with each.

1) For a variety of reasons including that founders tend to have stock while employees tend to have options. Also the more practical reason that founders tend to be closer socially means that they're somewhat less likely to screw each other over.

2) Depends on your jurisdiction. If your company engages in illegal activities and you're a major shareholder/director you could be liable.

3) Share of equity, control.

4) Not really, it's just a matter of agreement.

5/6) Normally as a founder you trade-off pay for equity. If you're coming in as an employee post-fundraising there's obviously less risk involved as well.

Thanks for your reply!

As for 5/6, even if I join as the first employee I will still give up a big fraction of my salary for equity. Assuming I want to do this for sure, is there any other risks/differences you can think of?

If you are an employee, don't give up your salary for stock options. Stock options should be bonus in addition to your salary. Pick either Co-founder with less/no salary + equity or employee with full salary + stock options.

Is that the norm? Last company I worked for offered me stock options in exchange for giving up a part of my salary. What's normally offered to people who join startups very early?

It is usually stock options or shares for lower salary in the early stages. Normal salary + options is only typical for more established startups.

It's the norm. Most startups offer market salary + stock options. Most of my friends who took significant salary cut for stock options got burned. I have no idea how much salary and equity is being offered to you, but here is an example.

Consider this, most likely the startup will fail and your equity will be worth zero. You need to evaluate risk & sacrifice vs opportunity.

Let's assume that this startup will get acquired for $50 million after 5 years and 3 rounds of funding. You take a 50% salary cut and 1% stock options; which will be diluted to about 0.25% after 3 rounds of funding (depending upon investment terms). You will get $125,000 (0.25% x $5 million) after 5 years. Is it worth the salary cut and sacrifice you will make?

There is a very little chance that this startup may turn out to be a $1 billion exit. Let's assume this happens after 10 years and 8 rounds of funding. At this point, your 1% equity is diluted to about 0.04%; so you will get about $400,000.

If the startup is acquired for anything less than $50 million, you will probably not get anything.

If I were to join a pre-funding startup and take significant salary cut, I would expect at least 10% equity.

To put this simply, you could work for equity + salary or just equity. If you are the one making things work and you believe in the vision, you should work for a fair amount of equity. Calling yourself a co-founder is just a title.

I was hired to build a website; I thought / was told it would serve as a "calling card" in order to attract more funding and then the situation would get re-evaluated from there. Due to my, I must admit, personal failings, I let the boundaries between client/contractor slip, and somehow I turned into employee #1 (but still a 'contractor') and the --only-- employee. I then ended up building mostly by myself a small B2B business for these assholes while they lied constantly about cash flow problems to me and the sales guys. Long story short, because I wasn't legally a founder, though in all other senses I was, when I got shoved out the airlock, there was no legal recourse I could take to get back at these people. They even tried every tactic possible to delay paying my and the other people's invoices at late as possible and as little as possible when we all quit in the space of two months.

So for question 1. It's about power. The relationship between you and "the company" is different if you are an employee versus a founder. As an employee, you aren't legally deserving of access to financial information, like cash flow. Or board meetings. At the end of the day, all that really matters is the legal paperwork and that will be different if you are a founder and not an employee (stock for employees, or options, are always mostly worthless). And as a founder, you get access to any profit, but you wouldn't as an employee. And as a founder, you would have far more of a say in how the company is run than you ever would as even employee #1

So if you are --sure-- you have a good relationship with these other people, and that they are not professional sociopaths like those I dealt with, then I'd say you could have a case to be considered as an founder. You say you are helping them with research etc - to what extent, how much, etc?

OTOH, how much responsibility do you want to have, in legal terms, and otherwise? Being a founder would require more - more complex taxes, etc, and more of a concern over how the company is run and where it is going. What do you think your role in the organization might be? I was effectively the CTO, but because I "wasn't", I didn't really have the power that comes with the title. And I was so caught up in doing the actual work, and I didn't complain enough about the overwork, that I left all these non-tangible non-technical considerations slide - and at the end of the day, if you are intimately connected to the founding of a company, these intangibles are a lot more important than anything else, including money.

To be paranoid, what if you sign on as an employee, and things go south? Can you walk away without any attachment to this company you've helped build? To what extent are you willing to play dirty hardball if the relationship goes bad? It'd be easier if you have the legal status that being a founder offers. Run all contracts past a lawyer and play "what if" scenarios to make sure you are not caught flatfooted.

I took the hard road; it was all a severe crash course in how business actually is done, versus the blather about 'company values' and 'ethics' and that nonsense. Some people are nothing but more than scoundrels and so make sure you are sure you have evaluated the character of these people thoroughly before getting into a relationship with them. I wish you luck and hope you don't go down the road I did.

Thanks for taking the time to share your experience.

I trust these guys since I've worked with them for a few years in another company. I understand that being a founder means that I have to be more involved in big decisions, but I don't see how being founders get access to profits that are not available to employees. Are profits not shared amongst shareholders equally?

Also, why do you believe shares and options are worthless? Isn't that what's worth something when company grows later?

Are profits not shared amongst shareholders equally?

Of course not.

There are a lot of articles out there on why, if you are an employee, taking shares/options in lieu of cash is a crap shoot. Somewhere there is a good blog about the economic aspects of startups for the typical IT worker (not the founders or VCs) and saying "shares are worthless" is a relatively concise summary of those articles. Most startups fail in some fashion and so cash in the bank is worth more than any percentage of the worthless company.

But I have been a contractor for too long, so my worldview is influenced by that. If you really believe in the company, and want to save it money, then go ahead. And it does depend on the company - I interviewed with a decent company in Cambridge that had an interesting way of compensating the IT staff, in terms of money versus options/equity and overall, it seemed like a well run company with founders who were decent people. The company I worked for, and others I ran into during the first Internet bubble, were run by horrible people out to exploit everyone below them. So it depends on many factors, but if I wasn't 110% sure of the success of the company, I'd prefer money.

In all honesty, you're probably more likely to get complete scoundrels honour your salary than allow your options to vest and you to keep your fair share of the company if it's worth something a few years down the line...