This is one of the most interesting comments I've seen on the issue of early hires and equity. Thank you.
However, from the founders' perspective they can't have these kinds of negotiations with many early employees. How much equity could they realistically give up to get the key hires (and leave enough for an option pool for later employees)? This is obviously a complicated issue and it would be good to hear a founder talk about how they dealt with it.
Either give up real equity, give up real money, or give up on hiring employees smart enough to realize what's going on. There's no fourth option. Having a startup doesn't entitle you to free labor.
You can still manipulate smart employees via their psychological/emotional weaknesses to get them to work for a poor-mediocre deal. In fact I think this is the most common path.
"Geeksploitation The act of taking advantage of twentysomething digital workers who are flushed with pioneer enthusiasm and willing to work very long hours if bolstered by junk food, flexible work schedules, and no dress code. Gareth Branwyn, "Jargon Watch," Wired Magazine, February, 1997"
This is really just an extension or a new way to exploit the fact that a lot of nerds are doormats, and are completely unable to negotiate market salary. Happily, there are some who see the shenanigans for what it is.
I tried to phrase my third clause carefully. That would be hiring employees not "smart" enough to realize what's going on. (In hindsight, that's a leading term, but I can't edit it now.)
In my view they should be paid market rate. That's the real issue here. Even with that magical "first hire" you're now a company who is hiring employees. It's PRECISELY this problem that angel investing is designed to solve (and why pure boot-strapping is so incredibly difficult).
Equity for an employee should be viewed as a bonus and nothing more. Equity is a powerful tool for a company, and it shouldn't be parted with so easily. What if you need to raise some (non-dilution) bridge financing? You've limited your options if you've already committed huge equity to employees. It just doesn't make a ton of sense.
Pay market rate and benefits. Hold on to your equity for dear life.
I agree a lot with this, I think the very first employees may get high percentage of shares for half salaries, but very fast employees should just get regular salaries (& benefits if possible)
I'm not a founder so can't talk from experience, but my gut feeling is that there are not many key hires (in an early startup there are not many hires altogether, but this just reinforces my point if true.)
The best strategy is to realize which employees are key to the success of the company and give them proportionately higher equities. Not every early employee deserves a 12-20% even if they're "not just coders".
However, from the founders' perspective they can't have these kinds of negotiations with many early employees. How much equity could they realistically give up to get the key hires (and leave enough for an option pool for later employees)? This is obviously a complicated issue and it would be good to hear a founder talk about how they dealt with it.