
How to avoid start-up success?  Not offering equity! - gyro_robo

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gyro_robo
How many start-ups sabotage their chances by being too stingy when it comes to
equity?

I thought I'd save everyone the trouble of going to a blog by ranting here
directly.

A while back I was interviewing at a small company that really needed another
developer or three. They wanted to hire and made an offer -- a 20k pay cut,
_but_ they were going to give me equity -- the magic word! Except the
president/founder of the company wanted to keep 99%+ of the equity for
himself, so anyone else let in on the deal had to share a fraction of the
remaining 1%. I calculated that if the company was successful to the tune of
$10 million, my share would still be worth less than my initial pay cut. I
pointed this out to the senior developer who was trying to convince me to
join, but his blind loyalty to the company seemed to preclude arithmetic.

Prior to that I worked at another smallish company where the president/owner
kept around 95% of the stock. A few top people got 1% or less. Other companies
say they want to hire "top talent", but they pay "market rates" -- which
usually means the average according to some salary survey, or less, and no
equity.

It seems like some founders are so attached to ownership that they can't part
with it, even if it means greater success for themselves! It's like they have
visions of dollars from owning the entire company instead of a vision of
what's needed to get there. While a fraction of a percent of Google is worth a
lot now, in order to get to that point, the founders had to part with the
majority of the equity.

Some start-ups work with two founders, but some have half a dozen (like
Excite) or more. Even reddit got more "founders" after the fact. If it turns
out you need a new band member, are you prepared to redo the original
founders' percentages, or do you have other plans?

~~~
jonmc12
I think its a dangerous generalization. I feel its more about knowing the
market rate for your employees and making sure they are compensated for what
they contribute. Equity is only one piece.

In your example, it sounds like a pretty weak deal. However, thats not to say
that the lesson to learn is to attract employees through equity.

Owning equity is about risk. Employment is about security. If your really a
savvy investor and think that equity in a given company is the best return on
your investment, you should offer to put as much cash and man-hours into the
company as you can for the greatest return. Then you are on par with the
founders.

For interesting reading, look at Warren Buffett's philosophy on employee and
management stock options. In earlier days he attracted key management with a
fair salary, a good work environment, and an absolute lock out of equity.. he
figured he was the only one taking the risk.

~~~
gyro_robo
> look at Warren Buffett's philosophy on employee and management stock
> options. In earlier days he attracted key management with a fair salary

Today's environment is much, _much_ different. ALL key manangement will
require equity.

That example is kind of like saying Apple attracted people with a 1 MHz 6502
system. Different time, different standards.

~~~
jonmc12
I'd agree, environment is different. Risk of being on a management team is
different. As is the culture of compensation and employee marketplace.

What has not changed is that company ownership is about investment risk.

------
webwright
I actually agree with this.

I'm a 35 year-old entrepreneur and enjoy following the YCombinator stuff. Like
clockwork, when I mention the idea of YCombinator to other elder entrepreneurs
like myself, they say, "Pish Posh. $5k per founder for 5% of equity?!"

The reality is that you have a pretty low chance of success. If you can eek
out a few more percentage points by giving away a small slice of your company,
it's worth it. Whether it's to YCombinator or a key employee.

And, I'd also point out this-- Willingness to give away equity for increased
chance at success shows that you are committed to the idea of business success
(rather than the idea of personal wealth).

~~~
mes
I'm puzzled by the reaction of "$5k per founder for 5% of equity?!"

I've been eagerly reading about YCombinator and it seems to me that they are
offering a great deal more than money. It appears that the value of their
consultation, connections and the other founders you end up spending time with
are probably worth _far_ more than the 20k-ish they invest in your company.

I can't imagine not taking their deal if I had an appropriate startup. 5% of
equity in something that is currently completely speculative in return for
what appear to be world class consulting and networking services? If they
maintain their current success rate, I think it's safe to say that far from
being expensive, YC is spectacularly cheap and leaves a lot of money on the
table. Which is probably why they are getting 1400 applications for 10 slots.

~~~
gyro_robo
IIRC this time they had about 500 applications and no fixed number of slots.
In a previous round they had 30 interviewees and I think 13 were picked...

