Venture-capital infusions shrank Box founders’ stakes, ignited strife
wsj.com
wsj.com
This illustrates very well the disparity between founder and non-founder equity. It's considered a negative that Levie and Smith got only $100 million combined. They're not Sergey-rich, but it's still fuck-you retire-early start-a-foundation become-an-investor money for each of them.
Meanwhile, given that the sum of non-founder equity (i.e., all employees combined) typically adds up to less than the founders', you've got at most $100 million to spread over 1200 employees. Employee number 1 might have a couple million dollars bonus from his 10 years, but it'll go down quickly from there for everyone after the first few. Where's the WSJ article on them, and the thousands of others who are never written about when silicon valley companies go public? The ones who joined a company early, or when it was in the red, or under pressure from all sides, and helped it grow and succeed... and they walk away still not being able to afford a house in Mountain View, while their founders pick out colors for their Ferraris?
There are upsides, but outside of a few rare cases, I can't imagine joining a company at this stage.
The lesson we can take from Google (which did make a lot of people a lot of money) is that once the company reaches many many billions in public valuation, then yes, a good number of employees will get rich despite the lopsided equity distribution.
But now that I'm a founder I'd take issue with the "marginally less risk" comment. Quitting a six-figure job, forgoing income for a year-plus, taking the risks of never getting liftoff or financing, taking another year or more at way-below-market angel-funded salary... this is not "marginally more risk" than someone who comes in with a salary from day one at a company that is in motion. The early employee has much less opportunity cost (and -- worth noting -- can also pull out much more easily if things seem to be moving sideways).
Furthermore the theory of "implied pot odds" applies. You're not just getting the returns on the deal, you're getting all of the career and relationship equity of having been a key player on a huge success.
I would argue that early-stage roles, if you can tolerate the opportunity cost over the near term, are one of the better deals going, and likely (though only arguably) better than being an under-ready founder with a high likelihood of failure.
But founders' equity usually totals the equity of all employees combined. Did the founders' risk --and their contributions-- equal the total of everyone else in the company, combined?
I'm arguing the numbers in today's equity distributions are wildly out of proportion.
It depends on how you define the founders' risk as well as their contributions. Both are highly subjective. In Box's case, they could've failed due to an infinite number of potential causes, leaving Levie penniless. We don't consider them because Box is now a huge company. As for a founder's contribution, a prescient business strategy and the ability to handle stress is worth its weight in gold. Who would have thought of starting a cloud storage company in 2005? Who could have raised funds for a tech company in 2005, especially someone as inexperienced as Levie? Additionally, founders have to deal with way more stress than an employee. Founders end up thinking about their startups 24/7, because that is their future. An employee can walk away at any time and just get another job.
2) "I'm arguing the numbers in today's equity distributions are wildly out of proportion."
This assumes there is some ideal proportion, one that leads to some optimal social outcome. High equity payouts for founders mean there will be more founders, as average long-term compensation will go up. High equity payouts for first-employees will mean there be more people who want to join semi-stable startups as employees #1 and #2. Which leads to a better social outcome? I don't really know. I would guess we would be better off trying to encourage people to become founders rather than employees. What I do know is that if you don't think equity is good enough for you, you can always try to start a negotiation or start your own company.
How many have you turned down that would have yielded zero?
> Quitting a six-figure job, forgoing income for a year-plus, taking the risks of never getting liftoff or financing, taking another year or more at way-below-market angel-funded salary...
Absent forgoing income entirely, most seed-stage employees take the same amount of risk.
> you're getting all of the career and relationship equity of having been a key player on a huge success.
The problem is that every founder is selling this vision to early hires, but joining a seed-stage company is almost always too early to determine whether you're joining a huge success or a company that will flame out in any of a hundred ways.
> I would argue that early-stage roles, if you can tolerate the opportunity cost over the near term, are one of the better deals going
I would argue that early-stage roles at companies that become successful are one of the better deals going.
> and likely (though only arguably) better than being an under-ready founder with a high likelihood of failure.
In my experience being a founder is a much better teacher than being an under-ready early-stage employee. Being responsible for the success of the company provides opportunities for growth like nothing else.
This is an important discussion, and my comments shouldn't be interpreted to mean I don't think joining an early-stage company is risky. It is! But it is easy to be too conservative with the OP's logic, and not everyone is ready to be a founder, so I think it's a great spot for people who have some risk tolerance but still want to build learnings and networks, and it has potential to turn out well financially too. And, you get a lot more opportunity to see data before you join, and to leave early, if it's not going anywhere.
To answer your question, I have turned down my share startup deals that would have had no stock upside, and accepted a few too. But I've also turned down a number of opportunities that clearly had breakout potential, and in aggregate, if measuring strictly by wealth creation potential, I believe I sub-optimized by not taking more of the startup gigs that were offered to me. (There were other personal reasons for these decisions too, which offset those outcomes.)
YMMV!
> I think it's a great spot for people who have some risk tolerance but still want to build learnings and networks
Agreed - I think that learning and networks are two major upsides of early-stage co's. My original point though was how, relative to other options, I still don't think it's a great deal.
But indeed, YMMV :)
But, from my observation of friends who have gone full-time on a startup project, and who tried to bootstrap it into a company, probably less than 1 out of 10 endeavors even makes it to a stage where it could pay anyone a partial market salary. So by joining a seed funded company that can pay you a bit of a money is already decreasing a lot of risk, the company has already made it through the first great filter.
The best positions in startup world are:
1) start a company if you have a good idea that you have a unique ability to execute on 2) join a company at seed stage, if you can get at least half market salary and 2-5% stock, and the founders seem top notch 3) join a company after its B round, when product market fit has been proved, and the company his hitting the mega growth part of its hockey stick
I don't think I could've gained that same level of responsibility anywhere short of founding my own company, which I considered but ultimately never came up with anything worth pursuing. I'm grateful that those founders were willing to take a risk on me, even though it didn't work out.
Also on the other side of the ledger, I could rewrite your comment to:
A founder at a tier 1 company might have millions of dollars in shares, but it'll go down quickly from there for everyone below the first tier. What about the founders at other companies who chose that route over safe, comfortable market-rate salaries and failed, or who received nothing after a down round with a high liquidation preference? Where's the WSJ article on them, and the thousands of others who are never written about when a handful of Silicon Valley companies a year go public? The ones who started a company, with their personal finances in the red, or under pressure from all sides, and helped it grow and succeed... and they walk away still not being able to afford a house in Mountain View, while early employees at Box or Facebook or Twitter pick out colors for their Ferraris?
Founders of failed business plans are not in the same boat as early employees of successful businesses who contributed unique work that helped build the company to its success.
The WSJ isn't about those people. Those people are just human resources.
There's certainly a difference between $100 million and $1 Billion, but not one that will change your level of happiness.
Box's market cap is approximately $2B. If the founders ended up with, say, $150M combined (the article says over $100M), it may be a relatively small slice -- but of a pretty big pie. I suspect 99.9999% of HN readers would be happy with the results that those two folks managed, and the fact that the company, in this post-Sarbox era, conducted a successful IPO. To put it in perspective, I'm not aware of a single YC-backed company that has had an IPO, though Dropbox seems a likely near-term candidate.
Why would someone give up a third of their company for $250k? That seems crazy to me.
You couldn't always get a $5 million valuation for your pre-revenue, pre-traction product. When it comes down to it, you have to take what you can get.
The only time it doesn't mean that is when we're talking about super unicorns (Facebook) or primarily self-funded early on along with early traction (Workday).
> Draper Fisher Jurvetson, of Menlo Park, Calif., pressured Messrs. Levie and Smith to think long and hard about selling. The venture-capital firm stood to get $9 for every Box share it bought for 29 cents.
One reason one should hesitate about taking big-name VC funding is that you can get stuck in the "home run" mentality.
[1] https://www.google.com/search?q=site%3Ahttp%3A%2F%2Fwww.wsj....
Ninja edit: that is, this is how my Firefox behaves. Not sure if it's caused by an add-on like HTTP Everywhere or something like that. But it seems like I read something from the DuckDuckGo blog describing this behavior.
Chrome sends a Referer of "https://www.google.com" (i.e. just the domain), so wsj.com lets you past the paywall.