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Comment by balls187 | Hacker News Reader

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.

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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.

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