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Comment by tptacek | Hacker News Reader

Yes, my first startup job got me into the high end of that range, as employee #5, with a relatively small acquisition.

I know several people who took home much more from employee roles (albeit in larger acquisitions) in the recent past.

A lot of it has to do with who you work with. In every case I can think of, windfall money for employees came from founders with a track record of accomplishing that (or, in my case, a founder who would soon develop that track record, and was, in the company I was at, extremely committed to making sure his team was well compensated at liquidity).

This is one of the reasons I don't love Paul Graham's hacker startup thesis, about working very hard for 5-10 years so you can take it easy for the rest of your life. There are a lot of problems with that idea, but one of them is that it generates a lot of loss aversion instinct for founders.

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Right, PG's advice is not useful for all founders, just the 1 out of every 10 that makes it big. The others are supposed to nut up and get over it.

His advice does, however, benefit every venture capitalist.

Critiques of Paul Graham and YC lose me the instant they suggest that they're rigging the system for venture capitalists. I've got friends in YC, I've worked closely with YC companies for years, I know several people at YC, and the evidence overwhelmingly suggests that their intentions are (a) good and (b) founder-aligned.

I'm pretty sure they're wrong about a couple things --- particularly the stuff that comes from some of the earlier PG essays. That's not the same as being corrupted. I'm wrong about a lot of stuff too.

So?

YC can have founder interests at heart and still give out VC biased advice because of the type of startup they encourage. The two aren't mutually exclusive.

PG's advice isn't geared primarily towards VC interests (beyond a successful startup), it's mainly biased because it's based on his own personal experience. There's no conspiracy.

Historically YC has given more power to entrepreneurs vs the VCs. JL & co. founded YC mainly because VCs sucked even more at the time. Given what YC has accomplished, I'm sure a lot of people can say that they've made things better.

Can the current VC environment be improved? Yes. Has it gotten much better ever since YC's influence has grown? Yes. Will Sam change one of YC's core missions of giving founders more equal footing? It's possible but I really I doubt it.

Perhaps you'd understand if people discounted your comment slightly because of your apparent close relationship with YC, then?

They have the best interests of founders in mind only insofar as their pocketbooks and reputation benefit from it. That's at best an intersection that doesn't contain all the elements in both sets.

Disclaimer: I'm a pretty cynical and skeptical person by nature. I'm especially suspicious when people with a lot of money at risk say, well, just about anything. My experiences have lead me to believe that it is an extremely rare individual who will not go to great lengths to protect and accumulate his wealth, even to an extent that many would consider sociopathic, and further that this trait is amplified geometrically as wealth is accumulated.

Hopefully a little less than they'd discount a comment from someone who'd casually impugn the integrity of a total stranger on the Internet solely to make a banal point-scoring argument.

Seems to me they're about equal in merit. Also, in case your comment was directed at me, I didn't impugn anybody's integrity.

A complete ad hominem. You did not address his point at all, which was quite valid.

Have a read over this [1], one of countless studies which supports the original commenter's assertion that wealth and status accumulation tend to the be prime directive of every individual who has even a modicum of either asset.

If PG and YC truly cared about entrepreneurship in spite of their own best interests, they would be working tirelessly for a worldwide basic income which frees talented individuals from the whims of VCs, incubators, and employers alike and allows said entrepreneurs to fully focus their energies on bootstrapping their ideas with maximum freedom over their time, equity, and strategic decisions.

1. https://news.ycombinator.com/item?id=9226268

I don't think we're working from the same definition of "ad hominem".

I don't think there are many who would seriously suggest that YC/PG have bad intentions but survivor bias can have exactly the same effect.

So can a "big picture" view: a 90% probability of failure might not seem nearly so bad to someone who can hedge by investing (not necessarily just $) in hundreds of companies. Expectation maximization is much more appealing when you have enough trials to get one of them off the ground. Whereas a founder "starting from 0" might reasonably prefer a ~maximin approach. Neither objective is wrong or corrupt, but advice that suits one and not the other might as well be.

PG and everyone in YC know this and I'm sure they all make honest efforts to work around the tension, but we should be realistic about the fact that tension exists.

It seems rational for entrants in a YC class to all invest in each other, to hedge the failure risk. Why doesn't everyone in a given YC class (say, of 100 people) agree to give 10% of their company to a holding company, in response for 1% ownership of that holding company?

Everyone might have to be an accredited investor, which the majority would not qualify for. Another potential problem is that companies want to keep their cap tables minimal for regulatory reasons. Also, how does the 10% vote in board decisions?

Also, what if some companies held out. So now 80% of the YC companies are in this hedge fund. Wouldn't the most successful companies disproportionately come from the 20%--the ones who had enough confidence to reject the deal? Would the smart people in the 80% then defect as well, bringing the cabal down to 60%?

Founder Institute has something like that model. I haven't heard of any breakout successes from them yet.

http://fi.co/

I agree with you on many levels. I think it's important to remember that founders looking to get into YC are seeking PG's advice and thus have specific goals in mind. I don't want to debate whether YC is biased towards VC's or not because I think that's irrelevant here. In my opinion, what matters is YC's track record. Remember, no one is forcing you to look to YC for startup advice...

What do you see wrong in PG's early essays?

>and the evidence overwhelmingly suggests that their intentions are (a) good and (b) founder-aligned.

But the characteristic we're looking for here is employee aligned. Founders can make out like bandits whilst the employees find out the hardway what their contracts really mean.

"1 out of every 10"? That sounds high to me. Is it based on YC-backed founders, founders in general, or totally made up?

It's a standard figure. Suspiciously round, basically unsupportable. It's really hard to measure what percentage of companies fail because so little of the data is public.

But the figure wasn't companies that didn't fail, it was companies that made it big. Surely that's an easier number to come up with, depending on your definition of "big".

tl;dr: 1 in 20 would be a better estimate than 1 in 10, but even this underestimates the skew.

Across all VC-funded startups which received first-round funding between 1985 and 2009, 55% were terminated at a loss, and only 6% returned more than 5 times the original investment. But this 6% group generated more than 50% of the gross return across all ventures.

At a "single large and successful" (but, for obvious reasons, anonymous) VC firm which invested about 1 billion over the last decade, about 5% of the total money invested generated a return of 10x or more; almost 60% of the money was invested into companies that terminated at loss.

Source for both assertions: Kerr et al., 2014 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2473226)

You may also want to take a look at Figure 2 in Hall and Woodward (2008), which shows the distribution of exit values over 22,000 VC-backed startups founded between 1987 and 2008. About 5% of these startups had exit values of $50 million or more. (http://www.nber.org/papers/w14219)

> Right, PG's advice is not useful for all founders, just the 1 out of every 10 that makes it big. The others are supposed to nut up and get over it.

Quite contrary, the opposite is true: the "1 out of every 10" companies you hear about are the companies where founders resisted opportunities to sell early, which grew to a size where millionaires continued to be minted even after the IPO.

Some VCs have even refused to permit early sales that would have made the founders comfortable (i.e., 1-5mm per founder): while top-tier VCs _won't_ do that (that would make founders who have their pick of VCs be reluctant about accepting their funding), it's probably not the best idea in the world to take substantial amount of VC funding without even considering the possibility of building a public company.

There's a lot that one can accuse pg of, but pushing founders to take long odds to make VCs rich is not one of them.

>Some VCs have even refused to permit early sales that would have made the founders comfortable (i.e., 1-5mm per founder): while top-tier VCs _won't_ do that (that would make founders who have their pick of VCs be reluctant about accepting their funding), it's probably not the best idea in the world to take substantial amount of VC funding without even considering the possibility of building a public company.

Why? If the odds really are 1 in 10 (I suspect they are lower than this) and you only have a couple of chances to do a start-up in your life then why risk it all on the chance of getting big? The hedonistic value of money has a pretty steep fall.

>nut up

It would be nice if people on Hacker News would not use phrases like this.

There's a button for that.

> A lot of it has to do with who you work with. In every case I can think of, windfall money for employees came from founders with a track record of accomplishing that (or, in my case, a founder who would soon develop that track record, and was, in the company I was at, extremely committed to making sure his team was well compensated at liquidity).

This.

I am the founder of OpenFeint which was acquired a few years ago for ~$100M. Many of my early employees there got into the range you mentioned. But I also had to work incredibly hard to make sure that every one of the 60 people at the company got compensated at some level. It's very easy for people at the table during a transaction to focus on themselves... most people do.

A good founder will constantly fight for his/her team.

So, did that founder make clear exactly how you were going to be taken care of, or was it something you had to take on faith, or was it a surprise altogether?

How'd you handle this sort of thing at Matasano?

A little of both. I have yet to handle a liquidity event as well as he did, but I got insulated from that a bit because consultancies pay market salary and don't do equity compensation.

Sorry to dig, but I'm basically trying to figure out how a founder can properly reassure employees that they've planned for this sort of thing--also its converse, that an employee has a straightforward way of telling if they are being misled by their founder.

It would be tough for me to distill it out, because he's also the best leader I've ever worked for. My two Matasano co-founders also worked with him, and one of our mottos was "WWxxD" (s/xx/his initials).

I think a lot of successful founders are successful once, and only plan on being successful once, and --- especially if it's their first company --- that changes the dynamics.

I'm new here. Can you summarize "Paul Graham's hacker startup thesis?" for me? (Or point me to an appropriate manifesto, whatever). Would like to read your last sentence in context... thanks

See generally: http://www.paulgraham.com/wealth.html

(My favorite pg essay, mostly because the bit about measurement and leverage is wildly instrumentally useful even if you agree with no other conclusion of the essay.)

And if you don't have time, just read the part about the Pie Fallacy :-)

excellent, thank you both.

http://paulgraham.com/growth.html

http://paulgraham.com/swan.html

I'm not really following.

What's the contradiction between the PG startup thesis and your experience with employee equity?

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