
Why you can't hire - csmajorfive
http://startupboy.com/2011/12/13/why-you-cant-hire/
======
bentlegen
> Throw out the old cap tables. A founder doesn’t get 30% and an early
> engineer shouldn’t get 0.25%. Those are old numbers from when you had to
> raise VC capital before you could build a product. Before everyone could and
> did start a company.

Choice quote. I'm kind of amazed this isn't brought up more.

~~~
webspiderus
completely agree. as someone that's just about to graduate, i have to say i
was a little shocked when i figured out this is the way things are. the
difference between the first engineer and one of the founders never seemed so
categorical to me, and this was one of the few things that made me feel it's
not really worth joining a startup as early as I'd like (to work on
interesting+useful things, have impact, etc.) unless I'm actually involved at
the founding stage.

~~~
tzs
> the difference between the first engineer and one of the founders never
> seemed so categorical to me

The categorial difference is that if the company flops in a few months the
founders are out a lot of money, whereas as first engineer you are merely in a
similar position to before you took the job, but with some nice experience on
your resume and a few months worth of pay in your bank account.

~~~
moe
Wait, what?

Most founders I know would pay themselves a salary after the first funding
round. A small one perhaps, but I don't think the difference is as big as you
make it out to be. Especially when you consider that the first engineer in a
startup gets at least the same workload as the founders.

~~~
tzs
That assumes there is a round of funding. Not all startups are in the kind of
sexy areas that cause VCs to throw money at them. Some are funded by the
savings of the founder (and sometimes a second or third mortgage on his
house). At that kind of startup, the founder often only gets paid his salary
if the company has profits.

------
umjames
> There isn’t a shortage of developers and designers. There’s a surplus of
> founders.

This is especially true of non-tech companies looking to hire quality people
for positions in their IT departments.

I currently work in such an IT department and we have a position for a J2EE
developer to write portlets for our up-and-coming Liferay portal. Needless to
say, we can't find anyone good (outside of recruiters, which we'd rather not
use) to fill this position. My boss has asked each of us if we know anyone we
can recommend for this position. As far as I know, no such luck.

Personally, I'm not the least surprised. None of the developers that I know
would even touch a job like this. Most don't/won't do J2EE. Portals never
really took off like corporate America hoped it would (and Gartner said it
would). I have some things that I'm working on on the side, and if/when that
becomes something, I'll be headed out the door too.

What my employer fails to understand is that they are hiring as if it was
still 1998. Developers now have options and no longer have to settle for jobs
like this. Their competition is no longer other IT departments, it's freedom
of choice itself.

~~~
mediaman
So what's the answer when jobs like this need to get done?

It may not have to be J2EE, but there are plenty of corporate jobs that have
to get done to help build big company infrastructure, and if much of the
talent that was available now has more attractive options, is the only answer
to escalate salaries? Or to hire in shorter-term contract developers?

~~~
scarmig
Well, if good engineers don't want anything to do with your opening at the
compensation you're offering... increase the compensation.

And, honestly, change the position so that the person hired isn't considered
just a cog in management's plans, who's expected to be on call 24/7 and to put
in 50 hours a week in a windowless room. I wouldn't go back to that shit even
at double my current salary.

~~~
polyfractal
Agreed. The reason people put up with soul crushing jobs like investment
banking is because the compensation makes up for it. Granted, most people in
those kind of jobs burn out after a few years, but you anticipate that when
taking the job. I have several friends doing the "make tons of cash while
young, move to easier job in 5 years" career choice.

Corporate America IT jobs have all the soul crushing without the reward.

~~~
codeonfire
It's not really burn out, it's the management cabal that likes to keep the
body count high. There's a lot of mildly desperate people who really forced
their way up into unstable career positions, and natural genocidal tendencies
peek out every now and then. It's innate human behavior. History's purges were
not by accident.

------
patio11
I feel the urge to point out that, if the cap table gets squeezed, there is no
a priori reason that any particular part of it should get squeezed. It is
entirely possible that, as he frequently argues, the productivity of money is
going down (because "startups are cheaper than ever to start") and the
productivity of product teams is up (because of huge amounts of leverage in
the system via OSS, platform companies, improved development technologies, The
Cloud, etc).

If one buys that set of facts, there is exactly one participant in the startup
ecosystem who should be getting told "Sorry, your contributions are not worth
what you think they are." It isn't founders or engineers.

P.S. That said, psst psst, being last cofounder beats first engineer 100% of
the time.

~~~
johnrob
One assumption being made here is that hiring is a critical task. It's
entirely possible that a company can achieve its objectives without hiring; if
that's the case then the argument doesn't apply.

------
OmarIsmail
I actually don't understand the author's point or numbers. A fully loaded
engineer costs 100-200k depending on where you're located in US/Canada. And
let's say you need 25-50k for 2 founders to live for a year. Giving yourself a
12 month runway you're at needing 150-300k in the bank to even be in the
position to hire.

If you have 150k in the bank it's because you have some seed money, or have
bootstrapped your way to that position. If you've bootstrapped then you've
achieved pretty good product/market fit and have good revenues. Conversely if
you've raised 150k and haven't achieved product/market fit, then you probably
shouldn't be hiring.

Now, if you look at companies that have raised 150-300K I don't think you'll
find many of them hiring, at least not very aggressively. I feel that level of
money is used to give the founders time to iterate until product/market fit
and not be cash constrained when it comes to things like contracting a good
designer or buying a domain. And once a seed funded company achieves some
semblance of product/market fit they go and raise 1-2 million.

So is this article intended for the few companies that have raised in the
100-300K range that are starting to hire? If that's the case then ya, I agree
such a company is going to have difficulty hiring. They have significant risk
of not achieving product/market risk, and they don't have sufficient capital
to give a fair market wage. So a potential employee is taking a huge chance on
such a company, and should obviously be compensated for that (relative to the
very attractive compensation packages are companies like Yammer, Square, etc).
But I don't really think there are very many companies like that, but maybe
I'm out of the loop.

~~~
ChuckMcM
The authors point is that the system has changed:

Before: Founders put together a biz plan and raised a decent seed round and
then started hiring the first few employees.

Now: Some person gets an idea, pitches it to another person, and they start
building it, then they pitch it to a third person. They don't pay themselves
salaries, live off their savings and their credit cards. An 'incubator' may
give them some cash to pay for things like AWS instances and filing
incorporation papers. They may be up to 5 or 6 people before they have a
'minimum viable product' (MVP) and are willing to pitch it to VCs for a real
series A.

The author points out that all of the first 3, 4, 5, or 6 people who were
working to get the company to the MVP point, _they are founders._ Not just the
'idea guy' or the 'wizard' that they snagged to help implement the idea.
Everyone who came on board before series A has made it possible to get to that
point is a founder.

And yet there are companies that treat person 2 - n as 'employees' and give
them way less equity. Because of that people don't want to be employee 2-n,
and thus hiring them is 'hard'.

I've noticed this as well, and have been puzzling around with the following
thoughts.

Lets say you create a company and decide that prior to series A, 80% of the
company will be owned by the founders and 20% to outside investors. You start
with 10 shares, 2 for an angel, 8 for the founder.

Now you add a founder, you double the share pool and now you give 8 to the new
founder and 2 to the angel (distribution is 4 + 8 + 8). Now you add another
engineer/founder and you now add 80 shares to the pot and distribute them 27 +
27 + 26 for the founders and 20 for the angel. Add a new angel and you double
the shares to 200 where each angel get (20 + 20) and founders get (54 + 53 +
53) shares.

The idea being to keep the ownership percentage of the company 20% angels, 80%
workers.

Now you go for series A - my thought is you pick three ratios,
investors/founders/employees. That may end up being 49/31/30. Allow your angel
to either contribute their shares to the series A (cash out) or to
participate. But at the end of the day the representation is 49,31,30. Same
deal when you add more investors, add to the size of their pool so that works,
add to the other pools to keep it balanced.

I am undecided if it would make managing the equity table easier or harder.

~~~
drbaskin
Just to nitpick a bit -- your final three numbers add to 110, not 100. Perhaps
you meant 49/31/20? I point it out only because 49/31/30 seemed too good to be
true.

~~~
ChuckMcM
Good catch, 49/31/20 would probably be the end result.

------
goodweeds
This rings very true. I've interviewed with and turned down 8 YCombinator
start-ups in the past three years. Of the 8, I would have been within the
first 5 employees of 6, within the first 10 of the remaining two. They all
offered below market salary in exchange for "huge equity". Thoe "huge equity"
offers ranged from 0.35% to 2% (the 2% one offered me 40% of market-rate). I
didn't mind, I was only interviewing to network and try to sell my $150/hour
consulting services to them. (3 of them are still customers). Being an
employee for a start-up is a sure-fire path to an early grave in potter's
field.

------
jconley
Amen, brother!

This is why I don't consider jobs with even exciting startups with early
traction at this point in time. Why would I bother getting 50x less return for
a similar investment and risk as a founder? We should at least be in the same
order of magnitude. Especially if the startup is practicing "lean" and is
going to completely change by the time it exits. Might as well just start my
own company.

And, if you can't get into an incubator, you can just as easily bootstrap your
way through the early stages.

------
jay_kyburz
I see a lot of positive comments for this post but I'd like to chime in and
suggest that upping the equity is not going to solve the problem.

In once sense the engineer is making the same kind of bet as the VC. They
don't know the founders too well, not sure if the idea is any good, its a big
gamble. Buy unlike a VC, the company will be the engineers whole life until
the idea proves itself or fails.

A few extra percentage points of a deal that will probably never happen is not
really all that attractive.

The only solution is to raise more money and pay them more.

------
dabent
"Raising the first $25K for product development is easy – join an incubator."

I think that trivializes the process. There are now multiple incubators, but
about two orders of magnitude more looking for spots. Y Combinator gets
thousands of applications for a few dozen spots. Tech Stars Boulder got 600
apps IIRC, and only 10 get in the program. Early stage money gets trivially
easy if you're in one (especially YC or TS), but getting further funding is
still a time drain, and now you're competing with the 100+ incubator-based
startups for VC/Angel money.

I do agree about cap tables. With less money needed to start a company, the
equity normally given to investors can (and should) go to employees. It's an
opportunity for many who have talent to get a bigger reward for their hard
work.

~~~
kevinpet
I suspect those numbers may be skewed by the same "we only hire the top 1%"
phenomenon. There could very well be a recurring group of people with not so
great ideas that repeatedly apply to incubators, and repeatedly get turned
down, whether with the same idea or a new one.

I'd be interested to see the skew as well. Maybe a large part of those
declined were unserious college students or similar.

~~~
dabent
Sure, at least half of the applications hit the trash bin. I recall a comment
from pg at startup school in 2010 correctly, he said a surprising number of
the applications to YC (I want to say 20%) were in ALL CAPS. That's an easy
way to self-select one's way into the bit bucket. But even at half the size,
there's still at least 1000 applications that are likely well-formed in one
way or another. PG has said that the hard part is finding something
exceptional in an application that would put it over the top.

------
Symbol
This. A thousand times this.

Oh, and offer me as much salary as you can with the option for me to dial that
back into equity. I can't pay a mortgage or buy pizza with options, and my
market rate does not fluctuate based on how much buzz you have on twitter.

~~~
fleitz
The Goodfellas school of startups.

The founders' got Pauli as an engineer, any problems, he goes to Pauli,
problems with EC2, he can go to pauli, troubles with rails, hard drives,
Linux, he can go to Pauli, but now he's gotta come up with Pauli's money every
week, no matter what.

Your tweet didn't go viral? Sorry to hear about that, fuck you pay me.

Your funding didn't come through? Fuck you, pay me.

People don't need more coupons? Fuck you, pay me.

Servers crashed in the middle of the night? Fuck you, pay me.

And then finally when there's nothing left and he can't raise another dime
from the VC, or clear anymore paper on second market, you bust the joint out,
take the code and release it as open source.

If founders actually believed their option bullshit it would be a no brainer
to keep those valuable options and pay engineers 200K. There is no shortage of
engineers, only a shortage of suckers.

~~~
9999
Your goodfellas analogy is pretty close to perfect (and I know quite a few
paulis myself, hell, I'm a Pauli). That being said, the author's suggestion of
a vastly larger amount of equity with the right founders in place might
convince me. But .25? Even 3? Fuck that, pay me.

------
InclinedPlane
This should be common sense.

When there is a scarcity of a product (engineers to hire), the cost naturally
goes up. If you are having trouble hiring, raise your compensation. If you
don't have cash to offer you need to raise the amount of equity you give (or
perhaps other perks).

------
Aloisius
Sometimes I feel like the last person left who raised traditional angel money
and then VC money.

We paid our first engineer market rate and had actual benefits. Our cap tables
are pretty traditional and we haven't had much trouble hiring all things
considered (though we are extremely picky).

I have to say, if you have to give 20% of the company to your first engineer
in order to get him/her on board, then I don't really see the benefit in going
the incubator route over traditional funding.

------
jpdoctor
I agree it's a supply and demand issue. But for comparison: We couldn't find
people to hire in Y2K either after having raised $20M.

Throwing equity around does not solve the fundamental issue, it just is a
competitive tactic.

------
EGF
The issue with this method is that it assumes that the investor model has to
change too. VC's will attempt to have the right ownership over the lifetime of
an investment eventually getting to around 20%. Some want 20% right away. The
problem with granting so much equity to employees makes the rounds of funding
required later difficult to match this ownership target.

Investors want founders with meaningful ownership of the business, a syndicate
that owns enough to care, and employees happy too. That is where the model is
driven from, and would require a change at the investor level for this to
work.

Assuming 2 investors (40%) 2 founders (40%) that leaves only 20% remaining
which does not fit the proposed changes.

------
jroseattle
Succinct and to the point. +1.

I really appreciate the comment about the surplus of founders (as opposed to a
shortage of developers.) There's a context that's very important in that
statement: that not all founders are really necessary, nor do they really come
before other key team members (namely, engineering) in terms of foundership.

Great post.

------
NHQ
Yes! This article just raised my market value by giving me new insight into
the market.

------
rfrey
This article helped me clarify an interesting contradiction in my own motives.
As a founder I'd much rather pay market rates and hold on to equity - 0.5%
incentive doesn't hurt me but my hackles raise at 10% or more. (The state of
my hackles is not correlated to how fair the compensation is, BTW - it's just
greed.)

On the other hand, even more than getting the top 2% unicorn squad, I want
_engineers who believe in the business_. Taking equity in lieu of salary is a
sort of screen for this, and I think that's why I've structured things that
way in the past.

I agree with the article that it's not fair to the first N employees, though.

------
throwaway3234
My question is, if not the traditional equity model, what would you offer to
get and retain key early engineers? How about sales people? Community manager?

To clarify, perhaps people can post their thoughts on what equity percentages
you'd offer to the following? (or something similar) :

1 - 5 Employees - Engineers

1 - 5 Employees - Sales

1 - 5 Employees - Community Manager/Support

6 - 20 Employees - Engineers

6 - 20 Employees - Sales

6 - 20 Employees - Community Manager/Support

Thanks in advance!

------
BrainInAJar
I don't want your fucking equity. Pay me, and when you inevitably can't pay me
anymore, I'll move on.

------
hkarthik
I think that this is true in Silicon Valley and possibly NYC, but not in other
areas.

I firmly believe we just haven't churned out enough CS graduates nationwide
over the past decade to meet the demand of both the startups and the
established businesses that are all hiring right now.

~~~
fleitz
Good thing you don't need to be a CS grad to churn out a mobile social coupon
CRUD app and website.

~~~
gscott
But the mobile social coupon CRUD owners only want to hire the top 2% and then
cry they can't find anyone. The job market is like taking a racing horse and
having it plow a field. The incubators have a similar problem, the candidates
are so good they don't even really need the incubator, I imagine the
incubators doing worse as time goes on because people are not so hungry for
success and will just combine with others when the going gets tough.

------
ebaysucks
I agree that something in the cap table has to give, but I don't think it's
founders. It's investors.

Psychologically, I would also make sure those "early employee founders" really
risk something; even if it's just securing $20K of their savings in a bank
account to be used in a pre-approved way if the company needs to make payroll.
$20K is, after all, just 2 months of gross salary for your self-determined
great engineer applicant.

Doing something like this has 2 benefits: 1\. Applicants self-select for risk
tolerance. 2\. You avoid the spoiled kid syndrom of "co-founders" making all
types of employee requests ("I need $6K for a top notch working station",
etcetera.)

------
pumainmotion
Thank you for showing and communicating a sense of clarity that many
colleagues around me (sometimes myself incl) seem to lack. People talk of
'founding' a startup and 'i'm an entrepreneur' as if its like a roadtrip to
tahoe. Its not. Period.

------
my137
Instead of comparing the equity of the first engineer with the founders, it is
easier to compare how much his lower salary can buy him if he takes another
job with full salary and invest the difference in the company as an angel
investor. If there is an engineer whose salary is $120k/year and is joining a
startup at $90K/year, he is taking a 30k/year loss. Let's say the startup has
received $500K investment at the valuation of $2.5M. Since the startup has
passed its valuation point already, its current value is somewhere between
2.5M and its future expected value.

Let's assume the prediction for valuation at the next round is $10M and there
is 50% chance that the company gets there. This would make the value of the
company about $5M at this point. This means that the engineer's discounted
salary is worth about 0.6% equity (30K/5M=0.6%) for the company. Usually
companies make the offer for 4 years worth of equity with a vesting plan.
Again it is not correct to multiply 0.6 by 4 because the salary of engineer
will reach to its market value after the next round of funding. It is fair to
multiply it by 2x. This brings the total equity given to the engineer to be
about 1.2%. I made a few assumptions here such as what the expected value of
the startup would be in the next round of funding and how much the salary is
lower than the market value. This calculation shows that the current amount of
equity offered to the first employees is not that different from what it
should be contrary to what the author of the blog post has suggested.

 _To offer a simple formula:_

Y (expected equity of the first employee for the first year) = X (loss in
income for the first year) / V (valuation at the next round of funding) * P
(probability of the startup getting to the next round).

 _For our example:_

Y = 30K / 10M * 0.5 = 0.6%

I know engineers often compare themselves to the founders and wonder why they
should get so much less equity considering that they have similar skills and
are putting equal effort into the company. One thing they ignore is that what
founders have already put in. In most typical startups, the founders have been
developing the idea at least for two years and have worked full-time on the
startup for 6 to 12 months before receiving the seed funding. They have done
this at the time that the possibility of getting to the seed funding round was
less than 20%.

If we assume their market value was $120K/year, that means they each put in
something about $120K at the time that there was less than 20% chance that the
company would get to the point of $2.5M valuation. If there are two founders,
this would be about $240K investment at the valuation of $500K (2.5M * 20%).
That means the founders should get 48% in vested shares in the company.
Instead they get all their share as unvested shares and have to work for the
next 4 years in the company to earn them. Considering the remaining sacrifice
they have to make, it is totally fair for them to receive 60% instead of 48%.

