But I have a very simple rule: Either I'm a cofounder, or I'm a freelancer[1]. If I really really like your idea, I will lower my rate.
When you do the calculations, by the time there is an exit event even starting with 30% equity is barely worth it considering the exit size of most startups. For 1% equity ... few things under a google-sized exit will make you well off, most wont even come up to getting a market-rate salary.
[1] I actually specialize in freelancing for startups and small businesses.
This. When founders bemoan the "talent crisis", they are really complaining about the shortage of people who are excellent coders/marketeers/whatever but have naively optimistic expectations of what their equity will be worth. It normally only takes one startup job for people to fall out of that Venn intersection.
There's a third option if you can code and want to be involved in/profit from the startup scene: contract for big day rates somewhere like NYC or London, and angel invest your spare cash and tech mentor a basket of N startups. You will probably make better picks (and give saner advice) than most VCs.
For US or Canadian companies, you are correct. Happily in Europe we treat adults like, well, adults, and it's pretty common for non-1% people to angel invest in early stage companies. Foreign investors are welcome too - and I don't think even the SEC can stop you investing your money overseas.
This strikes me as a mature approach to the issue. It's so common to be enchanted by the idea of working for a startup - especially if you're young - that you'll accept any type of deal, even if it sometimes means making so little money that you can't make ends meet.
"Either I'm a cofounder, or I'm a freelancer" - +1 . I've started following this recently, it really keeps things simple and weeds off any chances of misbalance between 'your perception about your role' and 'their perception of your role' in the company.
>"When you do the calculations, by the time there is an exit event even starting with 30% equity is barely worth it considering the exit size of most startups."
The article motivated me to go ahead and release my crude fuck you money calculator:
I joined my company as the first employee. I was the co-founder of other start-ups before joining my latest company and had hired "first employees" myself. So I understood the difference and knew what I was getting myself into. IMO, the choice depends on your personality, what you like to do, and where you are in your life.
There are two key factors that made me accept the first employee offer.
1. As a co-founder you will need to take part in some of the administrative part of the company. Even if another one of the founders is taking care of the operations, there will always be things like board meetings, financing, taxes, etc. As a co-founder it has always been my opinion that you need to be interested in the operations. It's your duty to be informed as a co-founder.
2. Family. When I accepted my position I was a point in my life where I had two small children and a wife that wanted to pursue her own career. As a first employee I had the opportunity to "request" that my office hours were 9 to 5. It's not that I worked only 8 hours but that I didn't feel obliged to be in the office first and be the last to leave. My family was more important to me then being a co-founder.
I'm currently the CTO of the company (360pi.com) I joined as the first employee. For me it was a great decision at the time. I spent more time with my wife and children, leaned a ton of new technologies, made lots of great friends and still got to live the life of a start-up.
I think each individual has to make their own decision and that there's no one clear answer...
I'm the technical co-founder of my own startup (http://carmivore.com) and I can't say I agree with this one. See, developers are easy to find (yes, probably not the best ones, but since I'm a developer myself I know a good one when I see their code), and to get an MVP going, you don't really need a highly qualified expert, just someone that can build a relatively simple and stable app (or whatever), hell, even in PHP.
And usually, first employees just don't share the passion for a startup in the same amount founders do, which means there's probably less self-initiative and less contributive to the product itself.
So why should I offer equity to someone who I can easily replace (yes, everyone is replacable, but since it's my company I call the shots :)? At the end of the day, their job will only be transforming my thoughts into code.
EDIT: On the other hand I agree that if I'm not sharing equity, the first employee should get proper salary.
> And usually, first employees just don't share the passion for a startup in the same amount founders do, which means there's probably less self-initiative and less contribution to the product itself.
As someone once put it:
Give me 1%, and you get 1% of me.
Give me 10%, and I will be motivated.
Give me 30%, and I will ask for 20 and work harder than you ever thought it was possible for a human being to work.
PS: "At the end of the day, their job will only be transforming my thoughts into code." is a really really really bad signal to be giving. With that mindset you've probably made it onto the blacklist of most developers. The only ones you'll be able to get are the ones who can't get a job anywhere else.
I'd really work on that attitude if I were you. Friendly advice as a Slovenian to a fellow Slovenian.
I think you got me wrong there, I didn't want to underestimate the value of developers' skills - I merely tried to point out that equity shouldn't be given lightly. What if I had 2 or 3 first employees? Should I give 20 to each one of them?
Since you're a freelancer, you should understand this - if I needed your services, I'd hire you for an agreed amount and I would expect you to deliver what we would agree upon. I trust your expertise, get the product developed and still have all the equity. If I wouldn't be satisfied, I'd find another freelancer, loose some money, and still not loose any equity.
Thanx for the tip though :)
EDIT: Let me try with numbers: I can get an investor to invest, let's say $50k for 10%. Now a first employee demands 20% so the value they bring in must be $100k worth, right? But if I instead hire a freelancer, I pay him $10k or $20k for what the first employee would have done, have the working product, and own 90% of the company instead of 70% and still have some cash from the investment left.
Yes, everyone should value their skills highly, but at the same time realize that everyone is replacable too. Including you and me.
Yes. Now considering you were wise enough to put in a 4 year vesting with a 1 year cliff that means the employee is going to work 4 years to get that $100k. That amounts to just $25k per year.
Congratulations, you just got a very devoted developer for a measly $25k/year bonus that there's an 80% chance you'll never have to pay up.
And if they don't turn out well in that first year, you don't owe them anything.
After the cliff, let's say they get 0.5% per month. The time they leave decides how much you have to buy them out.
Vesting is a wonderful thing ;)
EDIT: You also have to consider this - "If they're that good that they can singlehandedly build your MVP. What are you offering that they would rather take 20% of yours, than 90% of their own?"
How? Vesting doesn't have to be noted in the books immediately, just make a contract which specifies all the details of the vesting without actual transfer of shares, which happens under specific circumstances (e.g. an exit, expiry of the vesting term etc.)
You should probably know that before you start dealing with a prospective employee. If you are hiring quality people then it is definitely worth it. If you don't know for sure then you should not be hiring anyone.
Just wanted to note I get its an analogy. I also remember that being said somewhere too. But funny enough, most won't take 20. They'll do the full 30 or more. LOL
"So why should I offer equity to someone who I can easily replace (yes, everyone is replacable, but since it's my company I call the shots :)? At the end of the day, their job will only be transforming my thoughts into code."
To be fair the author of the post is asking skilled tech folk to avoid this "transform other people's ideas into code" role without either getting significant equity or a market salary.
You are saying that 'converting your thoughts into code" can be done by (relatively) unskilled, (relatively) low caliber, (relatively) easily replaceable devs.
You seem to be agreeing with the author more than disagreeing.
Jacques says (in effect) 'don't be this easily replaceable dev. be a really good dev and be a (co) founder".
"At the end of the day, their job will only be transforming my thoughts into code."
Having joined a startup and worked with an outsourced team of Indian developers I can tell you this is an inefficient way to look at things.
You'll eventually end up paying higher rates for good devs to write good code and waste valuable time and money on those transforming your thoughts into code.
> At the end of the day, their job will only be transforming my thoughts into code.
Technically, part of their job is transforming your thoughts into requirements, presenting options and recommendations about how to resolve problems (or even a different problem to solve), determining what's even possible (and what other possibilities are), and determining what code actually needs to be written.
Someone who is good at those parts is no more easily replaceable than a brilliant business mind with tons of contacts and much more difficult to replace than the vast majority of "ideas and thoughts" that they're working with.
For a high level software developer, "coding" is the least of the responsibilities; it's the easy part.
There are indeed millions of average developers out there, but they aren't going to be capable of taking ideas, independently realizing them, and delivering a superior quality product that will disrupt an industry.
Delivery is at least as important as the ideas if not more so and the person in that role should be well compensated if you do want those skills + that level of commitment.
I did this as a first employee(software engineer). Crashed out in 4 months. One of my worst mistakes ever. Reasons:
1. It felt like most of the times, I am the only one building the product while the CEO(non-technical) was reading blogs and plotting strategy for a yet non-existent product.
2. The success and failure of the product somehow shifted to me, as I was the only guy actually building the product. Wouldn't have felt bad about it, if I was a co-founder.
3. Since, the other guy is now the boss, he would come up with strategic personal inputs to magically transform the product into a unicorn, without backing it with any arguments. This was the most frustrating thing.
Now, I don't see how anyone can validate being a first employee for a start-up.
"...while the CEO(non-technical) was reading blogs and plotting strategy for a yet non-existent product."
"...he would come up with strategic personal inputs to magically transform the product into a unicorn, without backing it with any arguments."
This is exactly why I will never again join a startup founded by a business guy with no technical background or willingness to learn.
I am in a very similar situation right now. Near graduation in the spring I joined a start-up I was really excited about as a sort of unpaid intern - I basically offered to help them out free of charge. Unlike the article though, I was not friends with the founders beforehand, I found out about them online. I was their first "employee" however. The two founders and I worked hard towards our product launch in July and it was a great success. Everyone loved the product, and it was obvious that I was now a vital part of the company, even though my title at that point was unpaid intern. Afterwards I brought up compensation for the first time. Knowing they wouldn't be able to afford a salary, I pitched 2% a month of equity for a year, ending with 24%. The problem thus far is that our product is a small airplane (gasp not tech!), which costs $55,000. Despite the tremendous positive feedback we've gotten on the plane, no one has pulled the trigger in the month since our launch (not a huge surprise since our financials have us starting out at 1 sale a month for our first year). It is enough however to make the two founders wary of how much equity to give as they have absolutely no clue what the current value of the company is.
Our current deal is that I'm given a monthly stipend for a few months while we process some sales and get a better idea of what the company is worth, so that I can be compensated accordingly.
I've been wary so far of considering myself a Co-Founder, since I took no part in the original idea or the funding for the company. From what this article is telling me though, I should absolutely be considering myself a co-founder.
If this is the case, how much should I push for in terms of compensation? Is 24% a reasonable number to go after considering the facts? I'm trying to look out for my best interests but honestly just have no idea what I'm doing. Any advice from HN would be greatly appreciated.
Ouch. I hate to say this, but your co-founders are scr~~ing you. They're putting you in a holding pattern waiting for the company value to inflate, and starting to give you a pseudo-salary to muddy the water, so that they can claim that you're just an intern-turned-employee whose salary is lagging given the slow sales.
Why did you pitch a 2% equity per month deal? You clearly don't have anything left to prove - you've already demonstrated your value and commitment to the project, not least by working unpaid.
I would negotiate hard for 33%. It's on your co-founders to give reasons why your share should be less - and here I would only accept hard contributions from them (e.g. cash they contributed to the business, additional months they spent on the concept), not soft contributions like "ideas" or "contacts".
Given he started later - only in the Spring (he found them when they already existed and they launched in July so they must have made it quite a long way before he arrived) a lesser share seems reasonable especially as to make something someone will have needed to put up real cash in addition to free effort.
But you are right that he should push for a response.
The other thing that seems to be missing from all these founder/first employee discussions is the level of influence over business direction and strategy. Some people may not want these responsibilities but others would relish the involvement.
http://www.skycraftairplanes.com - we're just selling kits now but we're pushing on being certified to sell ready to fly by this winter.
What does a late-coming co-founder expect then in terms of equity in a typical company? Clearly I don't deserve 1/3, but I'll be my salary will be restricted to whatever minimal amount the other founders and I can survive off of until the company grows up.
CEO's join companies after they've been around for years to earn valuable sums of money for the skilled work and long hours they put in. It motivates them to turn around the company. It's not about the % they earn it's about the return they get.
You deserve just as much motivation as they do for the sacrifice you're making and asking less than 1/3 is wasting your time. The worst they can do is fire you so you can make more money. That's when you start your own clone if you didn't sign a non-compete contract. And if you did, work for what you deserve elsewhere until it ends and then invest all your newly earned savings into building the better product.
I don't think you know nearly enough to make that claim. You don't know what value each party is bringing, or their roles, and you don't know how much was done before OP joined. You don't know if the business has any particular strengths.
Assuming significant work was done before OP joined, equal equity is not realistic (or fair). Also, are the others taking any money out (i'm guessing not?). There can of course be some value in ideas and traction (although AFAICT there isn't a lot unique nor is there a lot of traction). Moreover, i'm guessing most big decisions are not made by OP since he seems to be relegated to employee. Only if OP feels they are crucial and replaceable should he go for 1/3 (or more). From the little i know, 20%+ would be a good aim. If you think you can do better elsewhere (that is, you don't believe the business has unique strengths) then consider that.
No offense but I'm not sure posting this on HN under your own name is the best approach. You are, after all, discussing intimate business details. Maybe you could get it anonymized?
From my experience no amount of equity can make someone feel like a "owner." Either they are dedicated to making it work and sacrificing similarly like the person who developed the original concept, in which case they should be treated as a co-founder. Or they are in a holding pattern to "wait and see" in which case they should clearly be treated and paid like a contractor. Anything else just causes problems.
I've lived recently through a experience in which I failed to convince the founders into making me a co-founder. Two very successful entrepreneurs (with many successful exits, one of which worth hundreds of millions of dollars) invited me a couple months ago to join them to work in their idea. I started working part-time at first, getting to know them, and from day one, I stated I wanted to be their co-founder, not employee. I tried to stay part-time until I was more sure of how working with them would be like.
We assembled a team, refined the vision and were then negotiating how everyone would join it, so we could build the MVP. I was ready to work full-time, but suddenly, they were trying to reason with me that % of equity doesn't matter, what matters is the number of shares you own, and tried to offer me a regular salary + options (not even a decent salary). I tried to convince them about why % matters, and why it was fair for me to get equity, but then they told me that this model doesn't work when they are the investors who are going to put millions of dollars into the company, having effectively the control of dilution over me.
I proposed ideas that would take care of the dilution problem, but it was no good, they weren't really listening to me, using the same arguments over and over. This was the first red flag that raised in my head, and later, we started disagreeing on how to build the company (I was showing them how the Customer Development Model works, showed them the canvas from business model generation and all). I noticed they had very strong beliefs on how to do it, and weren't willing to discuss it with me. That's when the illusion popped and I noticed, I wasn't a co-founder, and ended up getting a call a week ago with them saying that "maybe I wasn't ready to face the risks of starting up" and that I shouldn't participate in the meeting later that day... It's a shame, I liked the team, and the idea was quite interesting, but no way I would put 4-6 years of my life into this without being a co-founder.
In retrospect, I think that what caused our issues was mostly the fact that they never had another co-founder and all of their previous startups were bootstrapped. So when I asked equity, they likely saw it as too risky, even though we worked together and they saw my determination and skills.
One of the biggest differences between cofounder and employee is the direction of money flow. If you're putting money in and working, you're a cofounder. If you're taking money out as a salary you're an employee.
One of the biggest differences between cofounder and employee is the direction of money flow. If you're putting money in and working, you're a cofounder.
Yes, this is certainly true, and I was putting money in as well, but the amount I could afford to. Remember that these founders are worth hundreds of millions of dollars, while I just graduated last December. The best way I could contribute to them was with dedication, effort and work. I wasn't asking for a salary (I got enough to sustain myself for a couple years), just equity, which is another way of putting money in. I was putting in all the money I could afford to, if it went bust, I would need a job after a couple years.
I find most startup guys to be complete douchebags that just want to profit off the hard work of more competent and talented individuals. That or have the fancy title.
This is based on two experiences of being the nice guy whose skills/connections were wanted. Shame on me for being trusting, I know.
I'm on the 'founder' side of this. I'm a lone founder and would dearly love to bring in a 'co-founder' or employee to work with.[1] The problem is that i have worked for a long time, progressed a lot, and have a strong vision of what i want to end up with[2], there is no way on this earth i would give up 50% of that to someone because they were a great programmer/EE (and i don't know anyone personally who i feel would be able to add significant value, or i would have brought them in earlier). I also have the vision of what the business could become, far beyond the first product, so i value it a lot higher than any outsider would[3].
So what choice does that leave me? I can't imagine anyone willing to work 1-on-1 for a significantly minor steak. Opinions here consistently make it clear that a small stake is considered almost worthless[4].. so it seems to me the only option is struggle on alone, and eventually give a salary[5] by whatever means possible, perhaps preceded by an intern if i find someone interested. What does HN think?
1. there is a reason 'co-founder' almost supersedes the word founder around here.. working on a big project on your own is an absolute bitch.
2. working on a product, with HW and SW components, not 'just a website'.
3. which is also why i haven't sought any investment yet.
4. you may be thinking '99% of startups fail', but i am thinking 'i know i will suceed'.
5. i need a competent programmer to free up my time for other things and bounce ideas off, not a 'superstar'
The risk that you are taking is that you will end up with 100% of nothing. If you are already in 'struggle on' mode I would re-evaluate the plan to achieve the goal. This comment also assumes that you don't have cash to bring to the table otherwise you would have hired someone already.
It really sounds like you need some help so either you need to offer sufficient equity (less than 50% as you have already come a long way although probably more than 20% [over time] unless you are already near launch) to a co-founder OR seek investment which would enable you to hire a contractor. Either way you would need to convince someone of your concept (investor or co-founder) and your personal value to the business. If hardware is required you will need investment at some stage.
Kickstarter may also be an option for you if the project is likely to be sufficiently popular but you really need to work out what you are promising first and be prepared to make it public.
This is all ego. I know VCs that love giving away "co-founder" titles because they can often get away with giving less equity in exchange for the title.
I'd sooner be called "janitor" and receive fair share than have a title and less.
But your point is depressingly common, especially with the Rocket Internet CEOs/co-founders who receive less than 5% for anything the Samwer Brothers try cloning.
The problem with most of these "business guys" is that they think their connections deserve to trade at a ridiculous level relative to talent, skill, and effort. Technical skill, to them, makes you a JAP (Just A Programmer) but not "founder material". It's the country-club mentality. I'll admit that there's room for negotiation in an exchange rate (I'd prefer pure meritocracy, but sadly that's not how the world actually works) between connections and talent, but the people who think their connections (usually inherited on account of having a prominent father and going to the right MBA school) entitle them to a ridiculous share of the profits are just exhausting to deal with and, in my experience, most of them aren't nearly as well-connected as they claim to be. If you're so well-connected, then why aren't you funded already?
If you honestly believe that your connections merit 10+ times the share that my talent and skill do, then you better prove it by getting me in a room with the likes of top venture capitalists, CEOs at target clients, and heads of state on a weekly basis (and then, after a year or two, unless you treat me extremely well, I'll be independent and start my own show).
The problem with most of these "rockstar programmers" is that they think their skills deserve to trade at a ridiculous level relative to planning, negotiation and people management skills. Marketing and negotiation skills, to them, makes you a JAMBA (Just A MBA) but not "founder material". It's the chess-club mentality. I'll admit that there's room for negotiation in an exchange rate (I'd prefer pure meritocracy, but sadly that's not how the world actually works) between skills, connections and talent, but the people who think their technical skills and talent entitle them to a ridiculous share of the profits are just exhausting to deal with and, in my experience, most of them aren't nearly as skilled as they claim to be. If you're so technically skilled, then why haven't you started your own company yet with your very own MVP?
If you honestly believe that your programming skills merit 10+ times the share that my connections and skills do, then you better prove it by getting me a decent MVP with new releases on a weekly basis (and then, after a year or two, unless you understand that companies grow after finding the right business model and change yourself, I will have to make you stop running the show).
Stop making generalizations, they don't work. You look like you had a bad experience, that happens, we all do, just don't make the generalization that every business guy is like that, that's a fallacy.
There are some great business people out there, don't get me wrong. You just need to be very cautious if you don't already know the people. And yes, those skills (negotiation, marketing, management) are extremely important. But there are a lot of business with mediocre skill using "connections" to justify their disproportionate split.
I've never heard of an engineer getting 90% of the equity (prior to future dilutions) while the well-connected MBA gets 10%, but the reverse isn't uncommon.
Unfortunately your attitude is the reason why most startups fail to get off the ground.
If you are going to start a company with someone you shouldn't even take a step unless you feel like this person could be your brother or sister. That means you have to be honest with each other about your weaknesses and strengths and accept them for what they are.
You should also have partnership agreements that allow you to buy the other one out if they are not pulling their weight.
From what you have written you are going to discount anyone that is non-technical but worse, you will constantly focus on what other team members are delivering to earn a seat at your table. It only takes on person on the team like that to ruin the whole thing.
There are a lot of "entrepreneurs" out there who have mediocre ideas, mediocre skill at the parts of business that actually matter (such as negotiation, marketing, and leadership), and minimal technical knowledge, but who justify disproportionate equity and authority splits based on "connections".
It can be an attractive proposition, when you're just starting out, to work for them. It's hard to tell a mediocre idea from a good one (Twitter seems mediocre on paper, but it worked) but connections obviously matter. If someone's genuinely well-connected, he'll be funded no matter what the idea is.
My advice is: don't work for them. If they were legitimately well-connected, they wouldn't need you to work for them on a low or zero salary.
The number of people in the world who are "well-connected" enough to be funded regardless of the idea are smaller than you think.
It would seem this way, but if you ever try to rent (much less buy) a place in the Bay Area or New York, you learn that there are a lot of rich fuckers kicking around.
Look at it this way: A good "business guy" is going to be a shrewd negotiator, using every trick in the book to maximize the value of your company in every deal. S/he will go to great lengths to make your company look bigger, more capable, and like an excellent fit in every introduction, meeting, and potential sale.
However, every one of those negotiating skills is going to also be put to use when negotiating salary and equity split with your company. It's a double-edged sword.
I don't buy into the notion that business-minded people undervalue engineering talent in general. Sure, there are plenty of anecdotes otherwise, but the savvy business people know exactly what engineering talent is worth. However, that doesn't mean they won't still try to maximize their own share of the company's equity and payroll. Meanwhile, they have every incentive to minimize the amount of equity and salary handed out to engineering talent so they can hire as many people as possible without spending a dollar more than necessary.
It's not personal, it's just business. I'm not suggesting it's right, of course. Learning good negotiation skills and how to sell yourself well will go a long way to leveling the playing field.
As a programmer, I've also dealt with the programmer ninja rockstar gurus who think anything less than 90% equity for building on top of someone else's platform is a personal insult to them.
There are just as many jerks with over-inflated egos on the programming side as there are on the business side.
But I have a very simple rule: Either I'm a cofounder, or I'm a freelancer[1]. If I really really like your idea, I will lower my rate.
When you do the calculations, by the time there is an exit event even starting with 30% equity is barely worth it considering the exit size of most startups. For 1% equity ... few things under a google-sized exit will make you well off, most wont even come up to getting a market-rate salary.
[1] I actually specialize in freelancing for startups and small businesses.