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Comment by pg | Hacker News Reader

"I have never seen a startup regret being generous with equity for their early employees."

Same here. I always advise startups to err on the side of generosity with equity.

The generosity strategy Sam Altman outlines is coupled to a "fire fast" (here, "before cliff") strategy that is hard to execute in practice; it takes a degree of ruthlessness to fire someone not because they're incompetent but because they're not performing at the level required for their equity grant, and it's not the same ruthlessness required to succeed in business. It seems especially risky for the kind of startup team where all the engineers are hired by being referred in by their friends.

It doesn't need to be coupled to "fire fast". It is only the first quarter (or even 6th in some vesting schemes) that vests after the cliff.

In my vastly more limited anecdotal experience than both of you guys', companies are not just stingy with equity, but they are also overly stingy with salaries.

Another way I could say the same thing that sidesteps your argument is that the more generous you are with equity grants, the more ruthless you need to be about firing.

So then why take options at all? Statistically and economically there's little incentive to at that point, especially if management is going to create this toxic ruthless "fire fast" environment.

The fact that employees and company principles value startup equity very differently is another reason why some companies are stingy about granting equity.

That's especially true about the ongoing startup myth of underpaying because the equity is supposed to make up for it - and then being stingy with equity. Sheesh. 0.1% of a $50M buyout is $50k... how many years of salary loss is that worth at the risk? And that's assuming that 0.1% doesn't get diluted down to more like 0.05% by later funding rounds.

Another way to do this is to start off with a base grant, and then give performance bonuses as equity.

I haven't heard of early hires being fired because their performance didn't match the amount of equity they got. All Sam's really saying is that if someone turns out to be so bad that you have to fire them, vesting means they won't have cost you any equity.

I think we read Altman two different ways. I read him as saying that engineers should be issued drastically more equity, and that firing before cliff should be used to ensure that middle-of-the-road developers don't end up eating too much of the equity.

To me this is crazy - it's the most obvious choice to be generous with equity, with so little downside and such immense upside. Who cares how much of the company you own if it's worth nothing? And surely there's nothing more risky to an early-stage startup than unhappiness; if the founders and early employees have disagreements, or harbour any resentment that will cascade out of control.

Generosity begets generosity; treat your team better than they expect and the rewards will come naturally.

I agree completely, but I'll add that equity feels weird to spend. You've got a fixed quantity of it, it has to last you forever, you're spending it on things with hard-to-predict values, everybody wants some, and an important aspect of the fundraising game is protecting equity from predators. At least for me, these things activated my scarcity-related cognitive biases. Suddenly the obvious choice gets a lot harder to see.

Don't think of it it as a % amount but a $ amount - this better matches the reality equity (as dollars) grows as the company grows, and thus isn't finite. Obviously i'm not saying equity is cash, but it IS a high risk investment worth a quantifiable amount of cash.

Can you put a number (or range) on what is generous for the first engineering hire? 2%? 3%? 5%?

I think the answer is all of the above. Are they pre funding? More risk = closer to 5%. Are they on their third startup with two successful exits and raised $1.5 - $3 mil in Angel already? 1 - 2%. But you're in the right range for sure. (this is the first true outside hire)

Play out the numbers (assumptions completely speculative):

- How much more would this person make at a big company? ($50k?)

- What's the time frame for success? (4 years vesting?)

- What's the distribution of possible exits? (5% chance of $100M, 30% chance of $10M acquihire, 0.1% chance of $1B)

Under these assumptions, you hit about 2.3% to make the expected values match assuming absolutely no investor preferences (which is itself silly).

It would be interesting to use real seed fund data to generate the distribution and proper salary comparisons.

This is a great post by Fred Wilson about this subject.

http://www.avc.com/a_vc/2011/04/how-to-allocate-founder-and-...

Essentially, figure out what market rate is for their salary. Since you'll likely pay a discount rate, the equity should bring them at or above market.

So if Market is 105k, and I'm going to pay 55k, I will give you 50k in equity (based on a reasonable valuation--assuming you don't have an actual valuation).

Using a flat rate percent can get tricky, and you can easily end up unnecessarily diluting yourself.

I also think it's important to think of your first 1-3 hires as Key hires, the same way a new CEO or VP of Sales would be a key hire post Series-B. You want them to get a big chunk of money if there is a positive liquidation event.

A bird in the hand is worth two in the bush.

If market rate is $105k and you're paying me $55k in cash, then I'd want $100k in equity, not $50k. This is something many startups get wrong. It isn't a one-to-one swap.

Even if you have some sort of reasonable valuation, equity is worthless until there's someone to sell it to. There needs to be an uncertainty/illiquidity multiple applied. Otherwise, I'll take the cash. That has literally always worked out to my benefit throughout my 15 year career in software development (even working for companies that got acquired for 9 digits).

I think another way to put it is you need to pay them for the risk they are taking. That's why you can't do a one-to-one swap. If they get the same total amount of money that they would in a more stable position, they have no reason to take the risk.

Fair enough. I was paraphrasing the actual formula.

That said, if you think equity is worthless, why are you considering being employee 1 at a startup?

I never said I thought equity is worthless. I said I would choose cash over equity if the equity is not weighted heavier than cash to account for the risk and illiquidity inherent in startup equity.

I am engineer #1 at a startup right now. The equity was very generous and weighted appropriately vs cash.

Sorry, I mistook your earlier statement to believe that you thought equity is worthless, when you were just saying there is no cash value for equity.

And yes, you're correct, the equity should be setup in a way that offers early hires significant upside.

Curious, did your founders use a flat %, or did they figure out some weighted amount?

> So if Market is 105k, and I'm going to pay 55k, I will give you 50k in equity

Is that 50k in equity every year? Because otherwise, this seems like a terrible deal. Why would any engineer take an offer like that?

50k is pretty low--I should have used a better number. Probably more like ~200k in equity.

From a pure wealth maximization standpoint, you should never work at an early stage start-up. The company will probably fail, and your equity won't be worth squat.

A couple reasons you would consider that deal:

1. Hopefully within 18 months you raise a sizable round and get bumped up closer to market rate.

2. In a year, thanks to your hard effort, your equity is increasing in value, in sizable amounts.

I guess that makes sense. It still seems like buying an (expensive) lotto ticket. Unless the company was doing something uniquely exciting, it doesn't seem attractive to me.

Aside from where the startup is, it is also hugely dependent on who that first engineering hire is. If it's a junior developer with a lot of potential but not much experience that they are taking a chance on because one or more of the founders are quite advanced technically themselves and are willing to mentor, train, etc, even 1% is quite generous. If the hire is either on par with the founders in terms of technical skills and experience or even the sole technical employee expected to be lead the effort and eventually build the team, even 5% can be considered quite low, depending on what the founders bring to the table.

Depends on the situation. If you're a single founder and you've only been working on the company for a couple months and the person you're hiring is as competent and dedicated as you are, 50% could be reasonable.

Isn't the problem more that the investors are against this rather than the startup founders?

Yup, otherwise have fun with 100% turnover in a year's time. People are jumping companies at a rate I have never ever seen before right now.

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