
Join as a startup co-founder or the first employee? - czed
I&#x27;ve been given a chance to join a few people who are in the process of incorporating a new company. Once this is done these guys plan to hire employees. So far the plan has been for them to hire me as their first employee. I&#x27;ve already quit my job and I&#x27;m helping them with research and technical feasability of their ideas.<p>Now I&#x27;m trying to understand the advantages and disadvantages of being a first employee versus joining them as a co-founder. Here are my questions:<p>1. I&#x27;ve read that it&#x27;s easier to screw employees rather than co-founders. Why is that?<p>2. Is there any legal responsibility that comes with being a co-founder?<p>3. Assuming no malcontent is there any reason other founders might not want to increase the number of founders?<p>4. Usually are there conditions and&#x2F;or restrictions on who can join as a co-founder? If there are, what sort of conditions?<p>5. Why would I want to join as the first employee and not as a co-founder?<p>6. Why would I want to join as a co-founder and not the first employee?<p>Some more information about me:
I&#x27;ve saved enough money to not have to worry about things for a year or two. I&#x27;m 28, and this will be a Canadian company if it matters.<p>What are your opinions on this matter? Thanks in advance!
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redtexture
4\. It is smart to have founders have their stock vest over time, so if you
get into a founder dispute, and one or two leave...it is possible for the
founders that stay on to have their work continue to be recognized by
continued vesting of their stock, and that departed (and thus no longer
contributing via personal effort) founder/shareholders cannot be excessively
benefit from the remaining founder's activity by owning shares
disproportionate to their continuing activity and commitment.

More than a few startups fail, by neglecting to consider the changes that may
come in founder relationships. It is important to talk about departure
consequenses.

You may find it enlightening to review a few Venture Capital blogs. Here are a
few.

Sam Altman "Lessons Learned" \- [http://blog.samaltman.com/startup-
advice](http://blog.samaltman.com/startup-advice)

George Grellas - Startup Law 101 Series - Grellas Shah LLP -
[http://www.grellas.com/faq_business_startup.html](http://www.grellas.com/faq_business_startup.html)

Mark Suster - Both Sides of the Table - Raising Venture Capital -
[http://www.bothsidesofthetable.com/pitching-a-
vc/](http://www.bothsidesofthetable.com/pitching-a-vc/)

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matthewrhoden1
I'm already in the process of asking these types of questions myself.

1\. When I interviewed with a company in southern California, the CEO noted
that there are different types of stock that get issued to the employees that
are not as good. I don't know much about stocks, but it's an angle you will
have to consider.

2\. One thing I found is that if you're a founder, that makes you responsible
for both the wins _and_ losses for the company. So when it tanks, debt
collectors will come for your stuff too. Where an employee just needs to worry
about getting another job. This point alone means you'll have to carefully
consider who you're getting in bed with.

3\. The only reason I can find for not wanting to increase co-founders is for
two purposes. One, it's another person who can flake off and start writing
company checks. Two, you'll have to split profits again :)

4\. I don't think so, don't quote me.

5\. See 2. and 1. to weigh your options. Being a co-founder potentially has a
bigger pay off but comes with responsibility.

6\. See 5.

I say if you genuinely trust your future partners, to go for it. It's my
understanding that if you want to be able to afford that sports car and have
plenty of time off for those cool vacations; you either need to be at the top
of a company or have enough money to somehow live off interest.

~~~
czed
Thanks for your reply!

2\. Is the debt collector part actually true? I always thought debt collectors
go after the corporate account and they will only come after your personal
assets under very specific circumstances (such as if you haven't paid your
employees). Do you have more information about this?

~~~
fsk
Here is one nightmare scenario (which actually happens to some people). You
withhold from employee salaries for taxes, but someone takes the money and
disappears. Now, the other founders owe the tax bill AS A PERSONAL LIABILITY
(not corporate).

~~~
iends
What country/state are you in? Why would this be a personal liability?

~~~
redtexture
I believe New York state holds corporation officers liable for unpaid payroll
and payroll taxes. There may be other states with similar requirements.

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ig1
1) For a variety of reasons including that founders tend to have stock while
employees tend to have options. Also the more practical reason that founders
tend to be closer socially means that they're somewhat less likely to screw
each other over.

2) Depends on your jurisdiction. If your company engages in illegal activities
and you're a major shareholder/director you could be liable.

3) Share of equity, control.

4) Not really, it's just a matter of agreement.

5/6) Normally as a founder you trade-off pay for equity. If you're coming in
as an employee post-fundraising there's obviously less risk involved as well.

~~~
czed
Thanks for your reply!

As for 5/6, even if I join as the first employee I will still give up a big
fraction of my salary for equity. Assuming I want to do this for sure, is
there any other risks/differences you can think of?

~~~
RealGeek
If you are an employee, don't give up your salary for stock options. Stock
options should be bonus in addition to your salary. Pick either Co-founder
with less/no salary + equity or employee with full salary + stock options.

~~~
czed
Is that the norm? Last company I worked for offered me stock options in
exchange for giving up a part of my salary. What's normally offered to people
who join startups very early?

~~~
RealGeek
It's the norm. Most startups offer market salary + stock options. Most of my
friends who took significant salary cut for stock options got burned. I have
no idea how much salary and equity is being offered to you, but here is an
example.

Consider this, most likely the startup will fail and your equity will be worth
zero. You need to evaluate risk & sacrifice vs opportunity.

Let's assume that this startup will get acquired for $50 million after 5 years
and 3 rounds of funding. You take a 50% salary cut and 1% stock options; which
will be diluted to about 0.25% after 3 rounds of funding (depending upon
investment terms). You will get $125,000 (0.25% x $5 million) after 5 years.
Is it worth the salary cut and sacrifice you will make?

There is a very little chance that this startup may turn out to be a $1
billion exit. Let's assume this happens after 10 years and 8 rounds of
funding. At this point, your 1% equity is diluted to about 0.04%; so you will
get about $400,000.

If the startup is acquired for anything less than $50 million, you will
probably not get anything.

If I were to join a pre-funding startup and take significant salary cut, I
would expect at least 10% equity.

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JacobH
To put this simply, you could work for equity + salary or just equity. If you
are the one making things work and you believe in the vision, you should work
for a fair amount of equity. Calling yourself a co-founder is just a title.

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dfraser992
I was hired to build a website; I thought / was told it would serve as a
"calling card" in order to attract more funding and then the situation would
get re-evaluated from there. Due to my, I must admit, personal failings, I let
the boundaries between client/contractor slip, and somehow I turned into
employee #1 (but still a 'contractor') and the --only-- employee. I then ended
up building mostly by myself a small B2B business for these assholes while
they lied constantly about cash flow problems to me and the sales guys. Long
story short, because I wasn't legally a founder, though in all other senses I
was, when I got shoved out the airlock, there was no legal recourse I could
take to get back at these people. They even tried every tactic possible to
delay paying my and the other people's invoices at late as possible and as
little as possible when we all quit in the space of two months.

So for question 1. It's about power. The relationship between you and "the
company" is different if you are an employee versus a founder. As an employee,
you aren't legally deserving of access to financial information, like cash
flow. Or board meetings. At the end of the day, all that really matters is the
legal paperwork and that will be different if you are a founder and not an
employee (stock for employees, or options, are always mostly worthless). And
as a founder, you get access to any profit, but you wouldn't as an employee.
And as a founder, you would have far more of a say in how the company is run
than you ever would as even employee #1

So if you are --sure-- you have a good relationship with these other people,
and that they are not professional sociopaths like those I dealt with, then
I'd say you could have a case to be considered as an founder. You say you are
helping them with research etc - to what extent, how much, etc?

OTOH, how much responsibility do you want to have, in legal terms, and
otherwise? Being a founder would require more - more complex taxes, etc, and
more of a concern over how the company is run and where it is going. What do
you think your role in the organization might be? I was effectively the CTO,
but because I "wasn't", I didn't really have the power that comes with the
title. And I was so caught up in doing the actual work, and I didn't complain
enough about the overwork, that I left all these non-tangible non-technical
considerations slide - and at the end of the day, if you are intimately
connected to the founding of a company, these intangibles are a lot more
important than anything else, including money.

To be paranoid, what if you sign on as an employee, and things go south? Can
you walk away without any attachment to this company you've helped build? To
what extent are you willing to play dirty hardball if the relationship goes
bad? It'd be easier if you have the legal status that being a founder offers.
Run all contracts past a lawyer and play "what if" scenarios to make sure you
are not caught flatfooted.

I took the hard road; it was all a severe crash course in how business
actually is done, versus the blather about 'company values' and 'ethics' and
that nonsense. Some people are nothing but more than scoundrels and so make
sure you are sure you have evaluated the character of these people thoroughly
before getting into a relationship with them. I wish you luck and hope you
don't go down the road I did.

~~~
czed
Thanks for taking the time to share your experience.

I trust these guys since I've worked with them for a few years in another
company. I understand that being a founder means that I have to be more
involved in big decisions, but I don't see how being founders get access to
profits that are not available to employees. Are profits not shared amongst
shareholders equally?

Also, why do you believe shares and options are worthless? Isn't that what's
worth something when company grows later?

~~~
dfraser992
There are a lot of articles out there on why, if you are an employee, taking
shares/options in lieu of cash is a crap shoot. Somewhere there is a good blog
about the economic aspects of startups for the typical IT worker (not the
founders or VCs) and saying "shares are worthless" is a relatively concise
summary of those articles. Most startups fail in some fashion and so cash in
the bank is worth more than any percentage of the worthless company.

But I have been a contractor for too long, so my worldview is influenced by
that. If you really believe in the company, and want to save it money, then go
ahead. And it does depend on the company - I interviewed with a decent company
in Cambridge that had an interesting way of compensating the IT staff, in
terms of money versus options/equity and overall, it seemed like a well run
company with founders who were decent people. The company I worked for, and
others I ran into during the first Internet bubble, were run by horrible
people out to exploit everyone below them. So it depends on many factors, but
if I wasn't 110% sure of the success of the company, I'd prefer money.

