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Comment by tptacek | Hacker News Reader

Why haven't you started a company organized on some alternative set of terms?

I am ;)

So, first, sincerely: good luck to you, and second: doesn't the fact that you can do this indicate that founder terms aren't a conspiracy against employees? If you don't want to accept employee equity, start a company.

I'm not arguing that employee equity valuation can't be abusive. It often is. Dishonesty is dishonesty regardless of who shoulders the risks. But if you're a founder and you're transparent and honest, the market does a pretty solid job of allocating upside.

> I'm not arguing that employee equity valuation can't be abusive. It often is.

And that's all I'm arguing. It often is abusive, and it shouldn't be. Of course one of the problems is that young coders just out of college looking at the startup scene (typically the only people to make the sacrifices necessary to be first employees, because of a lack of other commitments) don't know that they are getting a raw deal.

So I make posts like this on HN, in the hopes they someone might read it and choose differently.

People who want to make careers in the startup sector need to be taught the skill of doing simple financial projections --- how to make 3 revenue forecasts, how to see what multiple of forward revenue results in in what final deal size, and how to work back from total deal size to employee outcome.

I agree that because almost all startup candidate employees don't do this, equity can be exploitative.

But by the same token, most engineers don't know how to negotiate salary, and will lose even more money as a result.

Do you think founders have a moral obligation to educate potential employees about financial projections?

To some extent, yes. If you acknowledge someone's market rate is X, and offer them X-k + Y shares, you're obliged to back up why Y is >= k.

Y is also partially determined by the employee. There is uncertainty from both the employer and employee on what the potential upside of Y could be. If an employee (programmer) believes his unique skills will be instrumental in making the company succeed, he won't discount Y as much as another employee (e.g. a chef just cooking the lunch meals for the programmers).

The potential employee programmer knows more than the employer about how good his skills actually are and how dedicated he will be which can affect the value of Y.

Can you point to any good resources for how to make the relevant financial projections for early employees?

It's not complicated.

Come up with "weak", "normal", and "blowout" revenue numbers for 1 year, 2 years, 4 years. You'll probably have to both ask your prospective employer and do a little research, but these aren't sensitive numbers. If the startup you're applying for can't tell you what "the number" is, they're doing it wrong, and you should be wary. You only really need one set of numbers; then discount (say 50%) for "weak", and premium (say 100%) for "blowout".

Now you have a spreadsheet with 3 columns for the years by 3 rows for the scenarios.

Do another grid below that for "deal size" (again by the three years). Instead of "weak", "normal", "blowout", do "2x", "5x", "10x" (crazy successful startups beat 10x, but it's in reality silly to do financial planning based even on a 5x return). Fill the cells in the grid with revenue x2, x5, x10; that's total deal size.

Subtract from each cell the amount the company has taken in funding (prefs might be even worse than that, but just assume 1x).

Now take the % of the company you're getting in equity and work out your take.

Divide each of those "take home" cells by 4, because that's how long you have to work to get all your shares.

If you want to get a little fancier:

If they haven't taken an A round, ding your equity by some % in year 1.

If they haven't taken a B round, ding your equity by some % in year 2.

Thanks! This will be helpful.

What about companies that have no or low revenue?

Most companies have low revenue in year zero, but if they're not building revenue in year one, they're a lottery ticket, not an investment.

That is what a prospective employee is being asked to do when they take equity in lieu of market salary: invest in company shares.

Even with revenue projections and being able to work back to personal gain, employees often aren't privy to liquidation preferences and the variety of classes of stock that has been handed out. If an employee has 1% of a company and the company sells for $100m, the employee rarely sees $1m.

Is there any good reason at all for an employer not to tell you about preferences? It's a simple question: "do I need to subtract more than 1x the amount of money you've taken from your sale price?"

If a company wouldn't tell me what the prefs were, I'd just assume 2-3x participating.

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