How YC Companies Found Employee #1 | Hacker News Reader

How YC Companies Found Employee #1

blog.yesgraph.com

54 pointsivankirigin35 comments

One thing to be careful of when hiring is treating equity as a replacement for salary. I've had a few offers in the last year where they offered me X amount of money and Y amount of equity, and then got pissed off when I turned down the salary. One guy even told me I was an idiot for disregarding equity. But the truth of the matter is that, like this article says, you could fire me in a month, and in the mean time, I've taken a significant pay cut in favor of equity that will never pay out.

And even if I do wind up working for you for a year, your equity is worth $0 (regardless of your company's valuation) until you get acquired or otherwise exit. You can sit there and tell me your company is worth $1B, but your equity is worth $0 until you can actually pay out on the stock.

I understand that founders have to work under the assumption that equity is money, but your salaried employees do not.

Anyway, just wanted to mention that. Like codex said, you have to find someone good but also naive -- good enough to do a good job, but naive enough to accept that low salary in favor of equity and the risk that goes with that.

For a very experienced senior developer, that's generally not going to be enough, unless they're founder-level or really, really, really, really, really, really believe in the company. Or if they hate their current job enough.

Have any founders tried recruiting with an equity + salary offer where for the first year, the equity offer is translated into salary? Not like Buffer's offer of equity instead of salary, but as something like "we acknowledge you could be working hard for something that never vests. Your fair value is X. We've offered you .5X + equity. For the first year, we are willing to offer you .8X, which then drops to .5X." Any raises could be translated into a percentage raise, or could just be added to the changing basis.

It's a weird idea to have your salary drop after a year, but it might be an interesting avenue to pursue.

However, successful startups usually don't have the salary issues outside of the beginning, so it may not work just because of that. I'm just really interested in trying to perfectly align incentives, and the founder vs. first employee one is the toughest nut to crack for me.

I know of some companies that do this. The drop isn't quite as large as you describe, but it's the same idea.

I have heard of some companies offering the employee a couple of options along the salary/equity continuum i.e.:

  a. Salary A , Equity E
  b. Salary B > A, Equity F < E
  c. Salary C > B, Equity G < F

That way the employee can decide what works best for them.

>You can sit there and tell me your company is worth $1B, but your equity is worth $0 until you can actually pay out on the stock.

Right, just like you're worth $0 the minute you don't have a job, and not, say, some value that is tied to how much you will be earning momentarily. Since you are worth $0, it only stands to reason that unless you can sign your next software engineering job within 2 hours, it is better to immediately accept any job in the city where you can start the same day, for example maybe a McDonald's will hire you for $6/hr. Since you are worth $0, of course you should accept $6, since it's infinite times what you're worth. It's like someone making $60K being offered a $10M job. Jump on it! /s

Meanwhile, here in the real world worth isn't "$0 until you can actually pay out". If you can't judge a team and startup, then by all means, this job might not be for you. But the idea that equity is worth $0 until it's paid out, is akin to saying that the next version of some product is 0% finished until you can buy it in stores, at which point it's 100% finished.

That might be useful to an outsider, but it's rather silly to someone who knows the situation more closely and is trying to establish whether it's worth something or whether they can meaningfully contribute.

Why did John Carmack join Oculus Rift, even though it's "0% finished" in the sense that you still can't buy a retail version in stores?

Because he takes the time to come to a much more reasonable valuation of company status and where it's going.

Your comment is no better than saying your exact worth is just your next paycheck, or that products are 0% complete until they're shipped, or that companies are worth $0 until an exit. Pure silliness.

It IS worth $0 of real money. Future money / as risk? Sure, it's worth whatever the founder says. But in the end, equity doesn't pay the bills until I can cash out, so if you offer me 30K less than what I tell you my current salary is, I'm very, very, very unlikely to take it, because at the end of the day, I still have to pay my rent. My landlord won't except "Well, in a year, I get 25% of my stock options, and I can pay you then" as a rent check.

Your equity is worth $0 cash right now. It's not a replacement for salary, it's an incentive to do well. If we do well and if we successfully exit or get to the point where this sheet of monopoly money is exchanged for $X, then it can be a replacement for salary. Until that time, it's a risk and not a salary.

When it comes to salary, I need enough to be assured that I can pay my bills on time each month. Once you meet that minimum threshold, then we can start talking about equity. What you cannot do is say "Well, instead of 30K salary, we'll give you 0.5% of what we imagine our company is worth," which is only slightly better than saying "Instead of 30K salary, we'll give you monopoly money."

Furthermore, in some cases (including my own), people are already at jobs where stock has vested or the company has been acquired or IPO'd or is otherwise successful from an equity standpoint, and in those cases, your equity is worth even less, because I'd have to give up X percentage of my current salary AND my currently vesting stock (that may be worth real money) to work for your company where you may or may not get to the point where you're successful enough to pay out on stock.

The above is part of the reason why I said as a senior developer, you have to be either a founder (or C-level employee) or really, really, really, really, really believe in the product. Both are true in John Carmack's case, by the way. He fits my exceptions, so you kinda picked a poor example, there. :)

I get your point, though. I just happen to disagree with you.

It can't be as bad as the place that offered me $55k and zero equity as engineer #3. I was given only a verbal suggestion that "if in six months or a year we find you've become an invaluable member of the team we can talk about some equity."

Yes, that's bullshit. They should have their equity setup in a way that makes it easy for them to recoup it, should you end up leaving the company.

If you're at a startup as employee like 1-5, you're going to need to believe the equity is worth something.

Otherwise why would you want to work at a startup?

The company doesn't have money to pay you market rate, and if they did, they shouldn't be spending it hiring one person.

Lets say you're market rate is $120k, but they offer you $65k, and 3.5% equity. Yes that might be insulting, but with that $55k difference, they could conceivably hire a 2nd (perhaps less senior) engineer, which will make your life a lot better, and increase the chances of the company succeeding.

So we founders offer you equity (in a pretty sizable chunk actually), in exchange for your hardwork and talents, recognizing that you should be paid more, but you're taking a big cut to help us build something cool.

If your goal is to make market salary, and wealth maximization, dont work at a startup (prior to say Series-C). You will be underpaid, and overworked, but you will get a good equity chunk, so that if the company is successful (it wont), you will be well rewarded.

Now if you've gotten fired after a month, chances are you're not the right fit, or worse, you were a detractor. But being worried about being fired, is generally an irrational worry, because it's hard to hire someone, let alone someone willing to work a lot, and for little pay.

Sure, but now at 65K, I can barely afford my rent. You're asking me to live paycheck-to-paycheck for the idea that you MIGHT make it, and we all know the statistics for startups: most of them don't make it. So now you're asking me to take a 55K salary cut, promising me imaginary money that will be (I'll give you the benefit of the doubt) worth the difference in 4 years, and in the meantime, I can barely pay my bills, barely have a social life (because I'm working so hard to make your company successful AND because I have no money).

I don't mind working at a startup, but like OP said and like I've said before, I would really have to believe in the company, and it would have to be a C-level position or better. In my experience, I get that 55K cut and 0.5% equity, which just isn't quite worth it.

But again, like OP said, the goal is to "pay market rate as soon as you can," and I'm merely pointing out that equity is not a replacement for salary -- my landlord won't accept equity as rent. You still have to pay me enough to not feel like I'm drowning -- and the equity has to be enough to make me want to work my ass off to make your company succeed.

Hiring #1 is tricky: you need to find someone good, but also naive. In this era of the ray startup, it makes little sense for a great engineer to work for someone else: the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company. In the age of the acqhire founders' risk is very small.

But they also get a salary: money the founders raised. That difference is huge.

That said, I completely agree. It takes a great match. Equity percentage can't be the only dimension considered.

Also, if you're struggling with hiring, giving more equity can be a solution. There are plenty of "cofounders" that came on as employees after money was raised but needed a sweeter deal to join.

It depends.

Practically by definition, employee #1 is shouldering less opportunity cost than the founding team. The founding team was able to start a company and raise money sufficient to pay the employee. The employee is accepting full-time employment. Why would they do that unless they didn't believe they could be successful (whatever that might mean) starting something themselves?

I think there's a whole lot of taking-advantage happening in startup hiring, but there's also an industrywide lack of understanding of how risk and basic economics work, too. Equity isn't a merit badge.

  > I think there's a whole lot of taking-advantage happening 
  > in startup hiring...

One warning sign of this is when the salary is below market rates. Founding members take low salaries and lots of preferred equity (and lots of risk), while employees take a market salary and a few incentive stock options.

One quick correction is that founders typically have common stock, not preferred.

They get common stock but without a cliff or vesting period

not true if they are taking on money. any investor will require a vesting period over 4 yr w/ usually a 1 yr cliff (which resets every time you take money)

No, founders vest. For the love of all that is holy, don't join a founding team with no vesting. Funding or no funding, vesting is non-optional. Get vesting worked out from the jump.

It sounds like there's a bit of a trend towards passing some of that risk on to the employee early-on though, by not really considering the job a real job with a presumption of continuation. The 2nd story here recommends only "trial-hiring" people for 1 or 2 months at a time, and even companies that don't go that extreme have been trending towards quick-to-fire for vague reasons like "poor fit" (more than bigger companies). Of course, you can always be fired in a regular job (in at-will states), but the understanding is that you normally won't be fired one month in, unless either you totally screw up or the company's situation changes significantly. Hence you have a bit less risk because you have normal job + salary, while founders have more risk, but that's not as true if you don't really have normal-job anymore. Of course, if you have a pile of contract work you can transition to at a moment's notice even this arrangement might not be a huge risk, but depends on the person. And in that case you might prefer to just stay a contractor and bill your regular rates, rather than shouldering the opportunity risk of committing to a possibly-evaporating job.

Looking for someone who is naive is the problem. I've walked away from countless opportunities because I got the sense that I was being handled.

"...but also naive."

That's silly. You need someone who values the startup experience in some way to balance out the salary hit. That's all. They may love small teams, might be seeking early experience, might want to build cred so they can raise money someday themselves, etc.

"the first employees work almost as hard as the founders, but receive 1/50 the ownership of the company."

The founders take considerably more risk working for free, raising money (time consuming for 99% of startups), and greater opportunity cost... Working 6-9 months or more on an unproven/unfunded startup is WAY RISKIER than joining a funded startup for a slightly reduced salary.

"In the age of the acqhire founders' risk is very small."

This is just plain wrong. What % of failing teams are acqhirable? Stanford grads will have no problems, but many/most teams are too small or too weak from a resume point of view to get a deal done. I've watched very solid teams fail to find a suitor a LOT (including MOST failing YC companies).

What is a ray startup?

"It’s when we hired full time employees immediately without that trial period where I’ve really regretted things. You go through so much extra work to figure out insurance and stock plans, only to want to fire the person in a couple months."

It's very very hard to get people to move from one contract to another without some sort of permanence, I'm a contractor now, why would I change to another contract even for slightly more pay? I'm content here, more or less, offer me a fulltime job, sure, I'd move - but not for another contract.

I agree strongly. Contract-to-perm hiring seems like a great way to filter out the best candidates, who will tend to have better options.

It's a pretty big issue because you don't really know what working with them will be like. Weebly does a trial week, which is a good balance of time and commitment. http://www.sequoiacap.com/grove/posts/akzj/trial-week-our-hi...

Aside: let's be careful not to pretend that temp-to-perm hiring is any kind of norm. The overwhelming majority of hires are hired conventionally, after an interview, with an immediate full-time offer. That includes "employee #1" hires.

You're right

I'm also a crusader on this issue, as you know, so don't let me steamroll the thread.

You've made this point before and it seems like a good one, but it raises a question. If you don't have a trial period, does that not make it harder to correct mistakes? The barrier to quickly firing someone who (perhaps through no fault of their own) turns out to have been a bad choice is surely higher than allowing a trial to expire or whatnot.

Since bad hires are one of the worst things that can happen and no one is perfect at hiring, I'm curious what you do about this problem. Do you just work harder at getting closer to perfect?

It seems to me that there's always an implicit trial period anyway—the question is how you encode it. The best people, who have many options, won't want to stick around if they made a mistake either, right?

Apart from adverse selection and basic fairness, which I think are the big issues with temp-to-perm hiring, I also don't believe the practice does much to mitigate risk. Think about the kinds of things that demonstrate a teammate's unsuitability for the team; how many of them are consistently apparent in a 1 week sprint? Anyone can be productive for a week. Anyone can avoid teamicidal petulance for a week. Anyone can avoid making catastrophic design choices that won't be apparent until after you ship for... well, &c &c.

But if I'm really good i don't have a problem with short-term contracts & trial periods. I will be confident that there will be other good opportunities if the startup turns out to not be a good fit.

I used to have the "trial period" mentality even though I didn't have an answer for the "that's starting out on the wrong foot" skepticism.

But recently, a smarter-than-me CEO shared his hiring practice and he has won me over. He proposes: hire the candidate as a full-time employee and offer the candidate the salary/equity package as if the candidate has achieved his full potential. Then, if the candidate works out as expected, then everything is well. But on the other hand, if the new hire turns out to be sub-par, it would be a lot easier for you to let him or her go. Because it'll simply be too expansive to keep a sub-par employee around at the compensation package you offered.

I think this is a great implementation of the hire fast and fire fast philosophy.

What if a good potential #1 asking for founder position?

The difference would be from about 5% to perhaps 15%. There should be a damn good reason to make this happen (you wanted the person as a founder at the start, but external forces kept it from happening). A bad first hire can sink your company, so be careful.

You have to ask yourself:

1. Are you a single founder, would a 2nd founder help? 2. Do you already have a 2nd founder who is technical/business? 3. How far along are you? 4. How much salary are they willing to give up? 5. Are you a first-time founder?

I was brought on as a co-founder, even though the business had a few months head start. However I was the only dev, I was going to make the same "salary"--20k/yr, and that the company didn't really have much more than a simple proof of concept.

Employees should expect a "reasonable" percentage of market salary. Founder's should not.

Reply on news.ycombinator.com