

First employee of startup? You are probably getting screwed  - pajju
http://blog.dinkevich.com/first-employee-of-startup-you-are-probably-getting-screwed/

======
cdibona
There are so many variables that go into valuing an offer from a startup that
any general article like this can not ring true. Here's some questions I'd ask
myself if I were considering an offer from a startup.

(wow, this is a lot longer than I expected it to be)

1) Who are the investors?

Before I joined VA Linux in 1998, I knew they were super close to closing the
Intel Capital deal, so I knew (to a certain degree of accuracy) that they were
close to having money in the bank. I agreed to take less salary for equity and
a promise from the CEO that salary would improve as the company got more solid
funding. The CEO was good to his word, too. I might have taken the job without
the vc funding, but knowing what was up there was really helpful.

There is more knowledge now about the equity picture of a private technology
company today than ever before in history. It's very easy to get an idea of a
companies valuations and then if you agree with those values and if you think
they'll increase.

Some VCs also have a reputation for screwing early employees and pancaking out
those that might leave before an exit. This is very important to know if
you're going to be valuing a potential equity stake. So, your equity could
disappear without any regard for your feelings on the matter.

2) How far along are they towards going public/another exit.

I joined Google the week before it went public (in 2004), meaning my initial
strike was the ipo opening price. Considering that made Google more stable
than competing offers from younger startups, and more fun than some of the
other companies I had offers from. The former was important as I had just come
out of a failed startup and some time consulting, and I wanted stable more
than I wanted fun. I got both, but that's pretty rare in companies of Google's
vintage (I still have it, which is one of the reasons why I stay).

The point of this is to understand what the future of a company looks like. I
knew what Google looked like, and for other companies when considering/working
with them, I asked myself what do similar 'exits' look like. That leads to
understanding of what an equity position means.

You can look at an offer and ask yourself: Will the company actually increase
in value before an exit that makes this equity worth it?

3) Is there an established bonus system?

A lot of companies have no bonus and weaker benefits/salaries pre-ipo. They
have the equity stake offer and so these other considerations are sidelined
until they become larger and those equity offers stop attracting good people
by themselves. These differences can mean 70 to 80k less per year for a senior
employee. So, know what you're worth and decide if it is worth the risk.

4) Are the people running the company any good? Are they ethical?

This is actually hard to answer, but I've seen plenty of acquisitions become
less lucrative than a similar job in an established company. I won't mention
the company, but I've seen large companies (not Google that I know of) end up
giving less in financial terms to acquired employess than they give a new hire
wrt equity participation. It's kind of sad how little people know about the
companies they join.

I'll say it again: I often see companies on HN get acquired, but for many of
the employees, and not a few founders , of startups, this is a much worse deal
financially than taking a job with an established firm. Your mileage may vary,
and take it with a grain of salt, but remember you are trading money now for
the chance of much more money later.

There's so much more I'd like to tell people here about considering offers,
but I've already blathered on a bit much on this. I also readily admit I have
a different approach to risk as a husband and father (2004) than I did as a
single developer (1998)...

------
emmett
Yes, if you take a $50k/year paycut for $25k/year in equity, you're getting
screwed.

But mess with the numbers just slightly - a $4M premoney valuation, and 2% of
the company - and suddenly you're getting $100k/year in equity for a $50k/year
paycut.

Now of course that equity is risky. It still might not be a good deal, unless
you think you have at least a 1 in 2 chance of success.

But the point is: you can obviously get a very good deal as a first employee
without taking on the risk of quitting your job with no paycheck. Make sure
that it IS a good deal first though!

The first employees of all the startups I know personally have gotten very
good deals.

~~~
tptacek
Two things:

If there's a 50% chance of a positive outcome (which, obviously, is an
_extraordinarily_ high chance), aren't you getting a ($100k _50%) / ($50k_
yrs) risk-adjusted payout? If so, you should just take the $100k.

And, this analysis assumes the company doesn't go back to the VC market for
capital; when it does (most will), you have to factor in the (strong) risk of
dilution. We're also glossing over other risks, like participating preferred
stock for investors.

I got a great deal from one startup, watched people get a reasonable ("worked
out to the equivalent of years of good-but-not-amazing bonuses") from another,
had a positive outcome from one that was still under what I would have gotten
from salary, and nothing from 2 more. Equity is a decidedly mixed bag.

If you have the choice (and in this market, developers do), opt for money over
equity. If you can mentally partition the "extra" money into "investment" and
invest it for a return in something more liquid than startup equity, so much
the better.

~~~
emmett
Unless you think you're a better judge of company valuation than the market,
the current risk-adjusted value of the company is approximately the valuation
set by the recent round of funding.

The fact of future dilution is irrelevant, since this impacts the investors as
much as the employee.

This analysis does ignore liquidation preferences. It also ignores the fact
that the options have a non-zero strike price (though probably substantially
below the preferred stock with those liquidation preferences). But in the end,
startup outcomes tend to be binary: very high or nearly zero. In both of those
cases, liquidation preferences and strike prices wash out in the noise.

I agree though: equity is almost the definition of a mixed bag. That's why, as
an employee taking substantial compensation in equity, you need to take an
investor mindset in choosing where to work.

~~~
tptacek
I don't understand either of your first two sentences.

The 50% risk thing came from you: you suggested calculating based on a 1 in 2
chance of successful outcome. If you're forecasting based on a 1 in 2 chance,
you divide by two, right?

Second: as an employee, what do I care whether investors take a haircut? We're
computing _my_ outcome, not some notion of fairness.

~~~
emmett
The point is, if investors are in at $2M, we are assuming $2M is market price.
The point of market price is that includes things like "google will compete
with us" or "my share will be diluted when the company raises again" as well
as "the company might fail".

Now, since you personally are investing in the company (albiet with your labor
rather than capital, but it's still an investment since you're paid in
equity), you have to decide if it's worth investing in this particular
startup. You do that by thinking about whether the startup is going to succeed
or fail, since outcomes are pretty much binary.

~~~
tptacek
I think I understand what you're saying.

I disagree, though, that startups have binary outcomes. In fact, one of the
big problems in "investing" in startups (cash or labor) is the misalignment of
incentives. It's common for the founding team to pursue outcomes that will
enrich them but zero out common stock holders, and it's common for investors
to push back on exits that would enrich everybody but not satisfy fund goals.

------
gyardley
This article should probably be retitled 'Working for half your market salary?
You are probably getting screwed' - but then the whole thing sounds a little
obvious, no?

If the company is strong, paying you appropriately won't make or break it. If
the company really can't afford to pay you appropriately, you should be a
cofounder.

~~~
slantyyz
Agree. You're only getting screwed because you're willing to get screwed.

You should always make sure you're getting what you're worth when entering any
business relationship, and make sure that any gravy (stock options, bonuses,
etc.) is exactly that. Gravy.

------
brandonb
His numbers are way off. 2M is not a "high" pre-money valuation--most startups
nowadays raise a seed round at a 5-10M pre-money valuation. So for $50k, an
investor will get 0.47-0.91%, whereas the employee in this example gets a
strictly better deal at 1%.

That said, I agree that $50k/1% is a low offer. Lots of startups (at least in
the SF bay area) are offering 50-100% higher than that, and these are good
startups with experienced founding teams, funding from top investors, paying
customers or traffic already, etc. So definitely explore your options! There
are great deals out there.

~~~
zmoazeni
_His numbers are way off. 2M is not a "high" pre-money valuation--most
startups nowadays raise a seed round at a 5-10M pre-money valuation._

I'm not saying your statement is wrong, but am I the only one who thinks
_something_ is wrong here? Are most startups worth 5-10M right after seed? I
would say no.

Conservatively, I would tend to agree with the author. 2M is high for a
company that only has seed money.

~~~
emmett
Why is it "wrong" for something to be priced high?

Try this thought experiment: Mark Zuckerberg (or whoever your favorite
entrepreneur is) comes to you and says he's quitting Facebook. He's going to
start a new company, and he'll let you invest at a $20M valuation. Do you
accept?

~~~
SeoxyS
No...? What makes you think Facebook is a success Zuck can just repeat at
will? Having been lucky once already does not make him a better entrepreneur;
though the brand will surely help promoting his new startup, and a billionaire
has certain connections mere mortals don't have. But neither of those fact are
tied to him being a good entrepreneur... look at Bill Nguyen to see where this
line of thinking leads you. Color is doing great, isn't it?

~~~
emmett
Don't focus on Zuckerberg. If you think Facebook was just luck, pick someone
who you think succeeded by skill. Would you invest in their next company at a
$20M valuation?

------
jeremyarussell
It would seem to me that there are many more factors that go into making a
decision like this worthwhile versus getting screwed.

-Type of company(do you like the product, is it something you can see yourself wanting to wake up for?)

-Type of founders (like-minded, fun having, professional but not bureaucratic - comes to mind as possible wanted features)

-Equity(literal percentage wise and decision making-wise, are you going to be leading a team in a year? or still grinding away all day?)

-Perks(Gym in workplace? What about sports area? Video game room? Movie theater spot?)

-Location(Where will you get to work, a nice second story office overlooking the bay? a park?)

-etc...

These are just off the top of my head. I'm sure there's more.

Edit: Fixed my line spacing.

~~~
loxs
Yeah, they are paying half, but they can afford a Gym, or an office
overlooking the bay? That sounds like an even bigger screw up...

------
carterschonwald
That's the thing, working as one of the first people at the startup is a
pretty intimate close team (or at least should be). There's a lot of "safer"
and or more compelling ways to pull folks in. a) Offer a moderately
accelerated vesting schedule for early employees. b) have the initial work be
as a sort of moonlighting in terms of time commitment (more suitable /
appropriate when either taking a bootstrapping approach and or building out
the MVP.) c) seriously, it's your first hire, you folks will likely (and
perhaps unfortunately)spend more time together than you will with your
respective significant others.

Point being, yes it's "just business", but if you're not setting things up to
be awesome for that first hire, are they going to be sufficiently awesome do
as to be worth spending so much time together? And if they're that great, how
much do you wish to ensure that you guys are likely to choose to work together
again?

I'm likely way over reacting, but still, it's a matter of some importance,
exercising choice over who you spend time with, so why settle for less than
awesome or treating them awesomely?!

------
cjrp
Yep, fell for this too. Joined as their second hire, working under a senior
developer... who promptly left. I assumed his role (and responsibilities), but
not his pay. Not to worry I thought, stock options are coming. 11 months later
I got papers for less than 1/4 percent with no vesting schedule (must stay
until exit). Handed in my notice soon after.

That said, the experience I gained in the year helped me land better paid
contracting gigs after, so... swings and roundabouts.

------
Too
Discussion from a year ago: <http://news.ycombinator.com/item?id=2949323>

~~~
gaius
Patio11 nails it: <http://news.ycombinator.com/item?id=2950077>

------
SeoxyS
Sure I got screwed and the investors got a way better deal.

But then again, every other startup would have given me the same deal or
worse, and the alternative would have involved me still being in college
taking out student loans. I think I'll stick to my mediocre salary and
nonfounder equity[1].

[1]: Since day one, the company has done quite well and my pay is no longer
mediocre, and my equity would be a nice 6-7 figures bonus if the company sold
today.

Quit focusing on the injustice of an employee share versus a founder or
investor share. Quit comparing yourself to others, and instead focus on
whether the numbers offered to you make sense for you, personally.

~~~
varelse
"every other startup would have given me the same deal or worse"

Not true. I talked to a bunch of my entrepreneurial friends about this when I
encountered this situation again and again. Their own hirees were treated more
like I'd expect - a clear advantage to taking the offer - lower pay meant
higher equity although it was _never_ as bad as this case.

Glad things worked out for you though. There are winners in the industry and
it's nice to see it when it happens!

------
TelmoMenezes
50K$ worth of work and 50K$ in cash are not the same thing. The former has a
higher risk associated with it than the latter. For example, there are the
risks that the employee becomes unable to work for health reasons, disappears
or just isn't suited for the job. Also, the full value of the latter is only
delivered, if everything goes well, after one year.

------
varelse
I used to fall for this trap.

But now I just calculate my expected return based on a 10% chance of a buyout
for $100M or so (cockily I'm assuming I can screen the obvious losers out with
common sense alone though that is of course debatable) and if it's not a net
uptick from the current gig, I pass on it. And up to now, I've _always_ passed
on it, and none of them succeeded.

Other than that, the only startups I'm interested in are ones where I have one
of those nifty 3 letter titles and 5% of the company in my pocket.

~~~
scarmig
How many have you passed on?

Have you tried to characterize how likely it is that your filter is actually
good enough that 10% of the companies that pass it are successful?

Just seems to me that 10% could be something of an overestimation and needs
some validation.

~~~
rhnoble
10% might be a good rule of thumb if the old adage that "9/10 startups fail"
is somewhat accurate. Is $100M the average exit though? Anyone have that data?

------
bceagle
Yeah...this depresses me. I am one of those guys that is going to get screwed.
The only thing I guess I would say in response is that I would be an investor
instead of a first employee if I could, but I can't. I don't have the capital
sitting around to play with and there is a difference between differing salary
and having cold hard cash to inject into a company. In other words, an
investor giving $50K is more valuable than an employee deferring $50K in
salary.

Also, in many cases, the employee is getting value that the investor is not.
Specifically, the employee (i.e. me) likely doesn't have a ton of start up
experience and is able to leverage the work as employee #1 to then start his
or her own start up later. The investor on the other hand has likely been
involved with many start ups and isn't as much interested in learning or
experience. They just want a return on their investment. So, from that sense,
this article is sort of comparing apples to oranges.

~~~
zacharyvoase
> In other words, an investor giving $50K is more valuable than an employee
> deferring $50K in salary.

You couldn't be more wrong. $50K saved is the same as $50K invested. They have
the same impact on revenue, profitability and life expectancy of the company.
Sorry to get personal, but the fact that you don't understand that is probably
why you're ‘employee #1’ and not ‘co-founder’.

Another point: companies are generally disinterested if you tell them that you
have eventual plans to leave. As much as both parties know it's unrealistic,
hiring managers generally prefer a long-term commitment without a hint of an
'exit plan'.

> The employee [...] is able to leverage the work as employee #1 to then start
> his or her own start up later.

Not if they/you don't get access to the company financials, or investor
meetings, or insights into the decision-making process (let alone a part in
it).

~~~
JoeAltmaier
Saved and invested are definitely NOT the same thing. They have very, very
different impact on life expectancy etc. You can't buy a copying machine with
virtual dollars.

Cash is king.

~~~
zacharyvoase
"Virtual dollars"? I never mentioned 'virtual' anything.

You should familiarize yourself with the concept of opportunity cost[1]. As an
employer, every dollar I save on a developer salary is a dollar I can put
towards a copying machine. As a developer, every dollar I forgo by accepting a
sub-market rate is a dollar I can't spend on something else.

'Saved' and 'invested' are both changes in bank balance. One is just a lot
more visible than the other.

[1]: <http://en.wikipedia.org/wiki/Opportunity_cost>

~~~
jaredsohn
Funding from investors is more valuable moneywise than funding via developer
equity because it gives you cashflow.

In the real world, you can't spend a negative balance even if it is higher
than an alternative negative balance.

I agree, though, that once you do have sufficient cashflow, then the two are
equivalent.

------
lectrick
I did this for a bit although I got 3% of the company. The resume bullets and
name recognition since I left have more than made up for the low salary, at
later jobs.

------
rdl
If you're an early employee of a startup, you have better de facto information
rights than any investor, even a board member. If not, you're seriously
incompetent, or the company is totally dysfunctional. i.e. if things are going
really badly, you'll know before the investors do, and could jump ship.

The only thing you might not see is acquisition offers, but you can assume
those are constant noise and meaningless until a certain point.

------
tlear
All depends on that first employee, for some that would be an amazing deal for
others it is laughable. If I was out of the school but with some skills and
liked the company in general I would jump on it. Now the idea, founders,
investors would have to absolutely blow me away (order of magnitude higher
then anything I experienced). I like to get payed in cold hard cash and now
not later.

------
crusso
That looks like a post from someone who fundamentally misunderstands the
dynamics involved in evaluating value in a startup environment (and likely in
business period).

There are too many variables to consider in order to make a generalization
like that. Even if you have a firm handle on the financial variables (how much
you're earning, what your opportunity costs are, what the company will be
worth, etc.), it doesn't at all consider the intangible value. So your friend
is going to get 1/2 pay for 1%... maybe the experience alone in being able to
evaluate his self-worth in the future or in being able to start up his own
company will more than make up for a couple of years at 1/2 salary? Who knows.
I'd be willing to bet that this blogger doesn't.

------
phillmv
People don't know how to negotiate. Equity is the founder's only payoff, so
they're going to be incredibly stingy about it, while playing up the intrinsic
benefits.

Also, people don't know how to measure opportunity cost.

~~~
webwright
"Equity is the founder's only payoff, so they're going to be incredibly stingy
about it, while playing up the intrinsic benefits"

There's also a lot of weight behind the "this is how it's done". 1% used to be
very generous when founders had to roll the dice with 12+ months of their life
to get seed funding and take big dilution when they did. Nowadays, it's
cheaper/easier/faster to start a company, easier to get early stage funding,
etc. It might make sense to reward employee #1 with a bit more equity... IF
you can't pay them market rate (you buy equity by taking risk-- if you aren't
underpaid, you aren't risking much beyond opportunity cost).

See: <http://startupboy.com/2011/12/13/why-you-cant-hire/>

~~~
base698
What is a bit more? 1% more? 5%? 10%?

------
anonymousq
When joining a startup company that is anywhere from 5 to 50 people, what are
some things I can/should ask for in a contract negotiation?

Can I ask for acceleration of my options if the company gets acquired before
my cliff? Can I ask for a guaranteed contract with a buyout, in case they want
to let me go before my options vest?

~~~
bri3d
You _can_ ask for these things, and I think a company's ability to have an
informed conversation with you about your options will tell you a lot about
the founders (both in terms of their expertise and their character).

Keep in mind, though, that founders have a _lot_ more discretion with respect
to how much they pay you than with respect to your options contracts. Garbage
options contracts (no triggers, no guaranteed contract, huge cliff, etc.) are
generally insisted on by VCs, in order to prevent employees (read: you) from
negotiating an agreement which makes the company a less appealing acquisition
target. Pay is generally more flexible.

So I'd suggest asking those questions, having an informed conversation with
the company about the way options are structured, and then insisting on a
good, solid salary and treating the options as gravy. By the time you get
diluted, you end up in a locked up IPO gone south, or the acquirer comes up
with some creative stock-and-cash acquisition with employee pool conversion
that scams you, there's a very low chance of your options being worth anything
anyway.

------
chasing
I wrote up a similar sort of article last year:

<http://auscillate.com/post/238>

Curious what the HN community's take on that is. The conclusion is basically
the same, but I attempted to be a bit more rigorous with the numbers.

------
Vitaly
this part about 50% of the market salary to work at the startup in US was
always quite weird to me. Here in Israel I was working at startups my entire
career, expect for the first 3 years spent at NetManage. Through out all those
years I got above average salary. No established company ever offered me more
then I could get at some hot startup needing my skills.

different markets different rules I guess.

~~~
slantyyz
Or perhaps, different markets, different willingness to gamble?

If people take a step back from the situation and compare the "ground floor
startup opportunity" against a full salary job, they might realize the 50%
salary reduction is more complicated than the absolute dollars foregone.
Startups tend to demand more overtime than established companies, and quickly,
the already reduced effective hourly rate starts dwindling down into fast-food
employee territory.

Sure, the startup work might be fun, but you could get the same or more money
from another job and do fun things after work.

Also, be prepared to add some risk to account for the chance that the
currently well-intentioned startup owners will screw you over if things get
bad.

Once you factor in the failure rates of startups, standard vesting times,
etc., all that money you're giving up translates into one very expensive
lottery ticket.

So if you go in with your eyes open, i.e., you're willing to forego that
salary difference with a possibility of a zero return, then yeah, knock
yourself out, because if you do win the lottery, it's a huge pay day. If you
don't win the lottery, you knew it was a gamble, so no big deal.

Before jumping into bed with a startup for a huge salary cut though, a person
might do well to ask him/herself if they'd be better off at a job with full
pay and using half the salary to play the stock market.

------
its_so_on
(Please read this comment carefully.) The author's comparison at the end of
the article is correct.

It is obvious that it is much better to get the package "2% of company shares,
Priority on exit, Invest small part of his capital" for the same $50k (i.e.
the programmer's guaranteed lost income) when you are paying the money
directly.

Further, investing $50k directly does not even involve working full-time or
part-time (except on financials related to the round), and has an equal chance
of both lost money (company doesn't get on sure footing), and returns on the
money, that the programmer faces.

So bottom line. If you have identified a company that you think has good
chance of success, you should simply decline to work for them for equity and a
lowered wage: instead, find a source of great personal wealth, and invest a
small part of it directly in the company.

Working for your equity means you're getting screwed. Being very rich gives
you a lot better deal.

~~~
JoachimSchipper
The alternative is not "be born rich"; it sounds more like "save the extra
50K, then start your own company". Yes, this is harder than it sounds - but
it's still easier than choosing your parents.

~~~
pyre
If you can afford to take a $50K/year paycut, then you can afford to just
invest $50K/year of your current earnings.

~~~
tptacek
If you are making $50k/yr, or even $100k/yr, you cannot invest in startups;
professionally-managed startups won't take investments from people who aren't
Reg D accredited.

Even if you were accredited, virtually all startups are closely held and
selective about who they'll take capital from.

Private company equity vehicles are one of the least attractive asset classes
you can hold; they're among the most illiquid and volatile places you can put
your money. Startup investing works almost exclusively for people who can (a)
afford to spread money around lots of startups _and_ (b) have startup
investments be a small part of their portfolio. That's a description that
matches very few professional developers.

Your exposure to the upside of startups is going to come from starting or
working at startups, not from investing in them yourself.

~~~
slantyyz
You don't have to invest in startups. You could just invest in tech companies
in the stock market.

~~~
tptacek
Sure, but exposure to technology industry != exposure to startups.

A good thread:

<http://news.ycombinator.com/item?id=3814407>

~~~
slantyyz
Fair enough, but having been through the boom and bust of the late 90s,
exposure to startups can also be overrated.

Yes, the upside potential can be huge, and you get to play with some bleeding
edge technology, but you're also dealing with a lot of inexperienced
owners/managers, VC's with their own agendas, overworked employees, and an
unhealthy amount of greed.

Yes, there are startups that manage to avoid this, but like in any industry,
good companies are the exception rather than the rule.

------
moron
I've decided that I am too stupid to figure out such schemes. I just figure
out how much my work is worth to a company and then ask for that. As I see it,
working for equity is essentially begging to get screwed by someone who
understands the finance game better than me.

