
First employee of startup? You are probably getting screwed - Murkin
http://blog.itlater.com/first-employee-of-startup-you-are-probably-getting-screwed/
======
patio11
Imagine three twenty-something guys working on a startup that has more lines
of code than dollars in the bank. They're working out of an apartment and
spend most evenings eating ramen noodles from the same MSG-laden box. They
work approximately equal hours (too many). They suffer approximately equal
stress (more than they ever expected). They bear approximately equal
responsibility for not tanking the company through poor performance. They each
accept dramatic pay-cuts relative to easier, better jobs which they could
sleepwalk their way into.

Next door, there are another three guys, eating ramen, etc etc.

Now, it seems to me like the three guys behind Door #1 are very similar to the
three guys behind Door #2. However, in one case they're all co-founders, and
in one case they are two co-founders and a first employee. Those are very,
very different statuses for the third guy. The third co-founder gets mentioned
in press hits about the company. The third co-founder can call himself a co-
founder, a status of value in an industry (and society) which is sometimes
obsessed with status. The third co-founder cannot get excised from the cap
table without that being mentioned as a subplot in the eventual movie.

The first employee will not usually get mentioned. The first employee gets no
social status of particular esteem. The first employee will not have a seat at
the table -- literally or figuratively -- when the eventual disposition of the
first employee's equity is decided. The first employee's equity stake is
approximately 1/6 to 1/40th (or less!) of what the third co-founder's was.
Well, theoretically. 0.5% is 1/40th of 20% in engineering math, not in
investor math, because investors can change the laws of mathematics
retroactively. 0.5% of millions of dollars is sometimes nothing at all. (This
is one of the least obvious and most important things I have learned from HN.)

If you're good enough to be a first employee, you're probably epsilon away
from being good enough to be a third co-founder. There may be good reasons to
prefer being an employee... but think _darn_ hard before you make that
decision.

~~~
amirmc
Herein lies the problem for early stage companies trying to hire. The people
they really need/want are probably capable of starting their own companies.

~~~
wpietri
Not necessarily. At my company, all our early dev hires are awesome people we
think will be capable of starting a company one day, but aren't yet. Our goal
is to teach them what they need to know so that in a few years they can do
that handily.

Some of the things we plan to help them learn: corporate equity, pitching VCs,
negotiating investments, dealing with investors, handling PR, user testing,
user context research, product management, UI design, A/B testing, running
production systems at scale, software processes, and engineering management.

We definitely can't offer them more money than Microsoft or Google can, but we
sure can teach them a lot more.

~~~
wanorris
That's... actually a really great pitch. Job as startup school. Nice!

~~~
wpietri
Thanks. I figure it will motivate us to keep the work interesting enough that
they won't flee. Which in turn will force us to build a much more robust
company. We'll see, though.

~~~
gamble
What are you doing to ensure that employees receive that broad an experience?
In the startups I've worked for, the founders were loathe to involve employees
in business development, let alone financing.

~~~
wpietri
Depends on the person and their interests, really. A lot of the day-to-day
stuff (product prioritization, feature design, user testing, operations,
development process) is easy to get people involved in if they want. We
definitely involve everybody with recruiting and hiring, which I think is
vital for startups.

Direct involvement in financing is, as you expected, hard. But we try to be
very open. Everybody knows the burn rate and the terms we took money under.
Everybody regularly gets updated on dealings with our investors. We also have
a regular brown bag series. A couple months back, my co-founder did one on
venture financing, covering both the basics and our specific fundraising
effort. He did another one recently on the competitive landscape. And he's an
awfully good presenter; you can see a 5-minute talk he did recently on our
approach to testing product ideas:

<http://vimeo.com/24749599>

~~~
gamble
Thanks for responding! Sounds like an interesting company. I wish more
founders took this attitude.

------
wheels
Another way of working things out is figuring out what the probable return on
the stake being given is, e.g. something like, say:

• Employee given 1%

• Two additional funding rounds at 30% dillution each bring that to 0.49%

• In a $30 million exit the employee will get $147,000

• Probability of an exit at $30m of 10% (somewhat generous, but let's assume
that the company has already raised an angel round and that's being used as a
filter)

• So the adjusted value, including probability of failure, of those options is
just $14,700

You can adjust the math to fit the startup at hand, but it's generally a
reasonable formula for evaluating the value of options vs. salary. In general
if you want to join a startup as a first employee you should either push for a
larger slice, a near-industry-standard salary or do it for the experience
(say, if you're interested in starting a startup of your own down the line).

~~~
fatalerrorx3
I hope I didn't just get screwed then..I've been given 1.5% equity as a first
employee, with an option to get additional 1.5% over the next 9 months (0.5%
every quarter). With a salary of 65,000. I'm the web programmer developing the
product from the ground up. We haven't yet raised any VC money, it's self
funded by the 2 co-founders, one of which is a doctor who is primarily the
finance arm. Did I just seal my fate? I'm 22 and have not dealt with being
part of a technology startup so I wasn't really sure what percent equity was
fair. I believe my shares won't get diluted with investment rounds based on
the paperwork that I signed though, they're preferred as opposed to common, if
that makes any difference?

~~~
rapind
Well you're building their product for 1.5% or potentially 3% and the product
hasn't even been validated by outside investment... I think you know the
answer.

You're only 22 though, so I'd make the most out of it (learning experience).

One thing to keep in mind, is if the 2 co-founders see you as just a code
monkey, chances are they don't understand how fundamental you will become to
the success of the product. This means if the product becomes wildly
successful you'll have an enormous amount of leverage down the road to
renegotiate your compensation. If that happens, try not to be a dick about it
(small world), but at the same time make sure you're appropriately compensated
for bringing a successful product to market.

~~~
georgemcbay
"One thing to keep in mind, is if the 2 co-founders see you as just a code
monkey, chances are they don't understand how fundamental you will become to
the success of the product. This means if the product becomes wildly
successful you'll have an enormous amount of leverage down the road to
renegotiate your compensation."

If they view this guy as a code monkey now, when he comes in to renegotiate
they'll tell him to take a flying leap on the assumption they can just hire
some random off craigslist to replace him. Assuming he's a good developer this
is of course not true, but they won't know it. Eventually they will realize
the terrible mistake they made when the replacement screws the pooch, but
that's like 6 months later after the original developer is long gone.

~~~
rapind
If they're just becoming successful they probably won't want to rock the boat
too much by firing their first employee. You could be right though if they're
real douches.

------
pg
You can write an article claiming that anyone doing x is probably getting
screwed, if you choose numbers that make it a bad deal. In my experience
(which at this point is pretty extensive) the numbers he uses here are extreme
outliers.

I'd expect a startup that was only able to raise money at $2m pre to be giving
the first employee way more than 1%. How much more depends on how good he is
(a factor that's not even considered in this article). Someone as good as the
founders could reasonably expect 15%.

~~~
amirmc
Interesting that your figure seems to be similar to the number another
commenter came up with (assuming this guy is as good as the founders).

What do you think of his reasoning? [edit: from 7th para at
<http://news.ycombinator.com/item?id=2949795>]

 _"What he should do if he actually wants to work on the startup: First, he
needs to value his contribution to the company over the next 4 years
appropriately and put a number on his "sweat equity". Let's say his market
salary is $100,000 and he's being paid $50,000. Now add to his base salary:
benefits (15% for health insurance, 401k matching), job-loss risk (25%, since
typical severance offers are 1/4 tenure at current salary), career risk and
opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work
week). That's $185,000 per year. Take that, less the $50,000 he's making, and
his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The
company's valuation is $2.5 million, "pre" to his contributions. He should be
getting about 16% of the company, assuming he remains for 4 years. This number
seems high, but if he's there after 4 years he will have been there almost as
long as the founders, so it's about right."_

------
blader
A more accurate title for this would be:

"Taking a pay cut that is more than the market value of your equity stake? You
are probably getting screwed."

------
OstiaAntica
The comparison math forgot the impact of taxes. The employee's $50K
"investment" is pretax money, whereas the investors are putting in after-tax
dollars. The marginal combined state, federal, and payroll tax rate on that
second $50,000 in earnings is probably over 40%, so maybe the actual take-home
salary given up for the deal is $29,000. Plus the equity earned is taxed at
much lower capital gains rates (15%).

~~~
pbreit
Also don't forget that if the employee is not accredited, it's unlikely he
could (legally) invest at all. So there's an opportunity that must be valued,
as well.

------
craigmc
Leaving aside that 1% is, in reality, too small a % for employee #1 of most
startups, there are two factors that might make it worth it:

1\. Route from employee #1 to v. senior position (with commensurately higher
salary) is shorter* irrespective of whether the employee stays with the
startup or moves on. (*Shorter than if the employee was working as a small cog
elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can
be made.

2\. Route from employee #1 to owning your own funded startup is again shorter.
As employee #1, if you do a good job, then you'll be considered a de facto
founder, and thus will have that to add to your pitch when it is your turn to
try and raise $500k.

A third factor is that money is not everything. Working for a startup can be
awesome, and might give you a whole range of professional and life experiences
that you would not get when sucking down at your $100k pa teat.

~~~
AlexeyMK
Agreed. One of the biggest intangibles of being an early employee is the
amount learned, which (I imagine) is better than the learning for an investor.

The path of early employee => founder is pretty well trodden. Aaron Patzer of
Mint and Drew Houston of Dropbox are two immediate examples that come to mind.
Who else am I missing?

~~~
2arrs2ells
Adam D'Angelo

------
pgroves
The founders are playing a dangerous game in this story. If key engineers
don't have much reason to stick around other than it being exciting, they are
likely to leave as soon as they get bored or tired. And yes, you can get bored
while working 80 hour weeks.

I was once in this exact position. I was the first employee and over the next
few years a bunch of senior managers came in and each got 5-10x the stock I'd
gotten.

When the whole thing got old, I looked around and saw that I didn't have much
upside potential (especially since there had been dilution), my salary was
below market, and I left.

What was incredible looking back is that something similar happened with a
truly key engineer... someone who was recruited out of a university because he
had more or less built the text mining library the company was using by
himself. A product line rested on his shoulders, so he had a ton of
responsibility, but when things got rough he didn't have enough reason to
stick around.

Added: The point is, there are good times and bad times in startups. In the
good times you should look around and decide who you really need to stick
around in the bad times and give out stock accordingly.

------
kabdib
Happened to me.

Years of effort . . . startup bought . . . eventually wound up with 17 shares
of Oracle.

I'm not bitter. It was a fun ride, I learned a lot, and after an initial pay
cut (when I first joined, and funding was tight) I got paid a decent salary.

~~~
rudiger
How much did the founders and investors get?

------
earlylinkedin
Some people are talking about the "expected value" of being an early employee,
which is a very valuable view. I'd like to focus more on the best case to give
a sense of what you can hope for if everything goes right.

I was fortunate enough to be an early engineer at LinkedIn after I graduated
college. I was one of the first few engineers hired. I'm not an amazing
company picker, and I barely knew what a startup was at the time -- I just got
lucky because I knew one of the cofounders.

I received a decent option grant (especially for a kid just out of college!)
and stayed at the company for two years. My options got diluted approximately
50% during the various funding rounds. Right now, LinkedIn is a top 20 website
in the world, and there's a consensus that its current stock price is "very
optimistic". My net worth on paper ends up being a couple of million. Needless
to say, I'm thrilled. However, I also want to point out that there are only
twenty "top 20 websites", and most of them aren't going to change anytime
soon. So if you're one of the first few engineers at one of the 10-20
companies that's going to go from nothing to huge in the next 5-10 years, then
you can view a few million -- perhaps 10-20 million -- as being the best that
you can expect. And there are literally a few dozen, or maybe 100 people that
will get this kind of success every decade. There is little skill involved
here. It's all about getting lucky.

Furthermore, people forget that it takes time for value to build. It might
take you 4 years to get most of your stock options and decide you want a more
stable job or a change of scenery, but it might take another 10 years for your
company to go public or get sold. You're giving up a big chunk of your 20s for
the potential of a few million in your mid-late 30s -- but you could probably
save close to that much anyway with good spending habits and better paying
jobs.

So if you want to be an early employee at a start-up, it's an awesome
experience. But you should do it because you love it, because you're
passionate about the product, or because you cherish the learning opportunity.
You shouldn't do it because you think it will make you a gazillionaire.

(just to be clear, I did love my time at LinkedIn -- I made some great
friends, learned a ton, understood that startups are the kind of places that I
like to work at, etc. I'm really happy I was there, and would be even if the
company hadn't become a big success)

------
localhost3000
My first gig out of school was with a startup. First employee. They paid 20%
below market wage and gave way less than 1% equity. I didnt know any better
(young/naive). I got screwed, big time.

------
roel_v
But comparing to the opportunity of somebody else is irrelevant. If the
employee has 500k to invest, they're free to get the same terms as the
investor. It's about scarcity: apparently the founders think that finding an
investor with 500k is harder than finding the tech guy. Ergo, the investor
gets paid more.

~~~
gaius
Read the article. He _is_ an investor, to all intents and purposes, and
getting significantly worse terms than all other investors.

~~~
roel_v
Uhm, I _did_ read the article, and no, 'putting in' 50k by getting a lower
salary is _not_ 'being an investor to all intents and purposes'. For one
because the investor brings cash, the guy just work and time. Now you can
argue that cash is 'fungible' and how the real value comes from the employees
- blah blah blah the market says otherwise.

~~~
earbitscom
The investors invests $500k NOW, usually with no ability to take their money
back. The employee invests $136 each day with the option to leave and cut
their losses anytime.

~~~
Silhouette
> The employee invests $136 each day with the option to leave and cut their
> losses anytime.

(a) That depends on where you are.

(b) You are ignoring the opportunity cost to the employee (though admittedly
this is consistent with the original article).

(c) You are ignoring the potential adverse consequences on the employee's
future career of being associated with a failed start-up, leaving a job early
to chase dreams, etc. (Please don't tell me that it's better to have a CV
showing you worked at several failed start-ups than it is to have a solid
track record of demonstrable good results at established companies. That is
the kind of fiction that only people in the start-up community manage to
believe.)

------
davidw
It'd be very interesting to look at real data from real companies and see how
early employees made out. And naturally you'd want to include a wide spectrum
of companies, both successful and unsuccessful. You could look at what rates
people were actually paid, how much stock/options they got, how much it turned
out to be worth and so on.

~~~
Silhouette
As one data point, following the recent sale to HP, Autonomy staff in
Cambridge split £30m between 175 people[1].

I'm in Cambridge and know various people who work/worked there, so I'm fairly
sure that those 175 include many of the remaining "early employee" group.
They'll be getting a nice windfall, obviously, but it's not never-work-again
money.

For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or
so for his share of the company.

For those not familiar with the numbers, Autonomy was basically the most
successful software company in the UK, and the sale valued its shares at
around a 60% premium give or take market fluctuations at the time of the
announcement. It was founded in 1996. HP is the currently the biggest IT
company in the world.

In other words, this exit is as big as anything in its generation is going to
get in my country, and if you weren't founder/investor/board level, you
weren't retiring from it.

[1] [http://www.businessweekly.co.uk/hi-tech/12571-autonomy-
cambr...](http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambridge-
staff-share-p30m-bonanza-after-multi-billion-sale-to-hp)

~~~
gamble
Exactly. And I'd bet that the employee pool is conditional on staying with HP
for 1-4 years, whereas Lynch will get most or all of his payout immediately.

------
cHalgan
I'm not sure, but if you want to build a world class team you need to pay more
than market rate + excellent team/work environment + more responsibility +
more impact on world + give equity. There is no free lunch. Really.

Did Facebook become successfully because they went cheap with hiring VP of
engineering early in their game? (answer not: they recruited the top)

Yes, you can get lucky and build a successful company by hiring people which
are fresh from college for less than market and dream about being rich.

The point is the following: DONT HIRE BAD DEVELOPERS.

Unfortunately, good developers are good in math and they were around so they
will not go with salary cut + questionable equity stake. Yes you can get lucky
but there are so many other unknowns when you run a business and you should
limit unknowns to the minimum.

------
Joakal
I didn't know the forgone loss of salary for equity could be compared with
investment that easily. That's brilliant!

~~~
praptak
Why not? The salary money is real, even if you discount for the fact that it
is not available immediately. The employee could as well stay at their current
job and actually invest half of their salary in whatever they please -
including a startup which pays its employees half of market salary.

------
par
If you give employee #1 only 1% of your startup, then there is something wrong
with you, or employee #1 is more of an intern and not a key hire.

------
jacques_chester
Alternative title: "Don't remember how to multiply, add, subtract and divide?
You are probably getting screwed".

There's so many things in life where party A gets away with soaking party B
because B didn't perform some simple arithmetic.

~~~
davidw
It's only simple if you can plug in accurate numbers.

~~~
jacques_chester
This is such a case.

But your offer of equity paid on a probabilistic basis intrigues me.

------
goldmab
There's a mistake in the math: one year of a salary cut is given as the amount
invested. Why one year?

~~~
Tichy
He mentioned assuming the optimistic scenario that after one year they can pay
him a full salary.

------
ayanb
Without having a bias towards the investor community, I think this comparison
is only done from a money standpoint. Its also important to note what other
value investor money and involvement brings to the organisation.

Investors bring contacts from their immediate and extended network, sometimes
a strong brand (think SV Angel/ YC), mentorship, experts in the given field,
and media attention.

~~~
gaius
Equally a good programmer brings much more than just programming ability.

~~~
ayanb
Being a programmer myself, I totally agree. I wanted to point out its not a
linear comparison based on a money:equity parameter.

------
HaloZero
Just wanted to point out (read a bit) you get equity at big companies too?
That's not a not negligible amount of cash. So the guy isn't just losing $50K
in salary, but the equity that the other company (bigger company) would be
giving him. Not sure what the equity grants at bigger companies end up being
though.

------
grimen
Depends on if the startup got production material and deals. Letting people in
more than a very small equity and salary is just plain stupid if you worked
hard for a year to get anywhere. Hardest thing is not to compe up with an
idea, hardest things are: start, execute, ship, and have models to get paid.
When these are almost done, new founders are not needed - they should have
joined earlier.

I've lately met people tryng to get onto the boat as if all we worked for was
air. If I take someone more in for more than a good salary he/she better be a
unshaped diamond.

Of course, the article mentions 50% of normal salary for 1% - that is just so
stupid. The people who wants to signed up on that cannot be unshaped diamonds.

------
rmorrison
This post is missing the most valuable part of working at a startup: the
experience.

Sure, you can go work at ________ (big company paying fresh developers
$120k+), but you're going to be pigeonholed into working on a small aspect of
the product/company.

If you join a promising small startup, you're going to learn about all aspects
of business, startups, selling, marketing, fundraising, etc. These skills will
be extremely helpful to you throughout the rest of your career, especially if
you plan to start your own company someday.

~~~
xyzzyz
Why pay for this experience, when you can get the same, with much better
financial situation, by actually starting a company?

~~~
rmorrison
If you can start one then great, but it's difficult to get your own startup to
the point where it is paying you and your cofounder's living expenses.

Most likely, starting your own company consists of working a full time job and
half-assing a startup on the side. A much better first step is to immerse
yourself in an existing startup, plus you'll have the added bonus of a large
financial upside.

Besides the financial risks of starting a company, it's _extremely_ helpful to
learn from existing entrepreneurs, which you also get working at a startup.

~~~
xyzzyz
Why work full time for startup for $50k when you can work half time for
established company for the same salary and more benefits, and have more time
to build your startup at the same time? If you're able to live off $50k/year,
why not work for established company full time for one year for $100k,
spending $50k and still having $50k to cover full year of searching for
customers and investors?

~~~
rmorrison
1) You need a cofounder, for all practical purposes. So that costs more.

2) It'll probably take you longer than 1 year to make $50k/year/cofounder, so
in your scenario you run the risk of running out of money after the second
year.

3) In your scenario you have to wait a year to start. Plus, you run the risk
of getting trapped in the job. Life happens, who knows what your circumstances
will be like in a year or two.

And most importantly of all:

4) You'll be 100x better prepared after working at a real startup for a few
years. All of the books and blogs are no replacement for real startup
experience.

~~~
xyzzyz
_1) You need a cofounder, for all practical purposes. So that costs more._

 _2) It'll probably take you longer than 1 year to make $50k/year/cofounder,
so in your scenario you run the risk of running out of money after the second
year._

Are you suggesting that _I_ am supposed to pay _cofounder's_ living expenses?

 _3) In your scenario you have to wait a year to start. Plus, you run the risk
of getting trapped in the job. Life happens, who knows what your circumstances
will be like in a year or two._

So I will not have to wait to start when I work for a startup?

 _4) You'll be 100x better prepared after working at a real startup for a few
years. All of the books and blogs are no replacement for real startup
experience._

Why are you still suggesting, that by working for a startup you will learn
more about them, than by _actually creating one_?

------
DodgyEggplant
Then open your own startup, and get 99% of the shares for 0% of your previous
salary

------
vineet
Having been employee one and started 2 companies - I strongly disagree.

It is hard to find employees/co-founders that (a) have the right skills, (b)
the right interests, (c) the right industry knowledge/contacts, and (d) are in
the same place in their life to make the same amount of commitments.

And even when you do you find such people, it is hard to give them 10% equity
in the beginning and then tell them that they are under-performing, and only
deserves 2.5% equity.

Now, I agree, that the definition of under-performing is very different for a
startup compared to a more established company. I have also found people are
willing to accept when they are under-performing, but contracts and equity
that is given is harder to change.

However, I would love to have the right cofounder, and even share the
equivalent equity with him if he can take over half my burden.

Perhaps the answer is to find people with a very good fit, start them with low
equity (~1%), and tell them how they can get more equity. And then doubling
equity multiple times as they are able to rise to a founder level
responsibility.

~~~
gamble
This is normally a problem solved by a four-year vesting schedule w/ a one-
year cliff.

IMO, companies offering minimal equity with a promise to increase it later is
a huge red flag, since those promises rarely come to fruition. Equity is given
to compensate for the risk and work involved in a startup. Once the company is
further along, the risk and work required are lower and there's no market
justification to increase someone's equity stake. The temptation to ignore
those promises is usually too great.

~~~
vineet
I do agree that the cliff and vesting schedules help here. But those force you
to fire someone even if they are good but not perfect. I have been in
situations where an early employee definitely believes that he/she can perform
better per plan.

Yes, there is also temptation to ignore rewarding someone when the company has
progressed. But, it is also a huge red flag when you have a company where
major early employees have left. IMO, one of the biggest responsibilities of
any startup CEO is in attracting and retaining good talent.

I am not suggesting giving lesser equity upfront, but more towards making a
serious decision based on where the person is. If he is a great coder give him
the equity that a great coder deserves. But a great coder is different from a
great early team member - and it is hard to impossible to make the distinction
early on.

As for the red flags that an employees might have when joining a company with
such promises - I am hoping that the rest of the team will be able to vouch
for it working with regards to them being in the company.

------
dlikhten
Differences between Co-Founter, Investor, First Coder:

Co-Founder: \- Starts the compamy, has the idea/initial impl \- Takes risk,
may work for a while with zero salary, investing personal time for nothing. \-
May wind up getting ZERO (total) for the investment. \- Company does not get
paid, co-found does not get paid. \- Big potential payout \- Health benefits?
Post funding, or from other job while building startup.

Investor: \- Puts money into company. \- May lose everything, that money is
just going to the founders for some food and servers or something of that
nature. \- Payout depends on investment size. However lets say compared to co-
founder, small payout. \- Minimal invested personal effort compared to co-
founder. \- Invested time assisting the company and connecting the company to
personal contacts to help it grow. \- Provides advice when needed (hopefully)

First Coder: \- Gets paid less than average coder \- Gets potential payout
less than investor \- Gets paid or laid off. There is no in-between. May agree
to not get paid this month and instead get paid later in hopes of assisting
the business during a tough month. \- Has to be pretty close to the business
since it's so volatile, so will see the lay-off coming. \- Probably coming in
with benefits provided to employee.

As you can see risks/benefits are quite different for everyone. So its not
just "you are getting screwed".

I think that getting a very small % is actually practical depending on how far
along the company is. The question is about how much risk is being taken, and
how much is being contributed. A smart co-founder will see the contribution of
a very valuable employee and offer more % to that employee especially if they
are so critical to the company. Its not about employee #1 its about the fact
that during the early phases, each individual person has the ability to make
big things for the company, and they should be rewarded for those big things.
Keeping life static is quite boring and no incentive. Yet having incentives
for employees transforming the business early on is quite good.

~~~
bugsy
The term "coder" is a demeaning one that is solely used to denigrate the
contributions of product developers.

If you are the only product developer at a company, you are not a "coder". The
correct title would be Director of Product Development, or VP of Software
Engineering.

~~~
wpietri
Assuming we're talking a typical Silicon Valley startup, then you're
incorrect.

VCs rarely fund a business person without a technical person as part of the
package. That person is CTO or VP Eng. They, having committed and worked
before money, will be a co-founder and receive a fair bit of equity.

A first employee is somebody who comes after funding. They are hired to help
build. They may have a variety of skills that will come in handy later. But
early on, they, like the technical cofounder, are their to code, code, code.

------
spinlock
Cash is king. You can demand more equity and priority in the debt stack
ordering when you write checks. Life's not fair but whining over how you're
getting screwed won't help you realize the opportunities that are available to
you.

------
ailon
The question is: would someone working on 100k salary invest _real_ 50k into a
startup? And the answer is 99.9% no. They'll just spend the 50k on fancier
food and other crap.

------
brudgers
If I were valuing the deal, I would give primary consideration to the
likelihood that the business is underfunded based upon their inability to
provide a competitive salary after receiving funding. I would also consider
the crap nature of the equity offer as evidence that their source of funding
does not bring a wealth of experience to the table...no smart tech investor is
going to tolerate the risk associated with screwing over critical hires.

------
rmrm
my history with startup options:

1st company: acquired 2nd: ipo 3rd: bankrupt 4th: acquired

Net value of all option shares : 0

Meaning, in toto, my strike price x shares is almost exactly what they ended
up being worth. The net present value of an option is the strike price. Even
the private options market is pretty efficient. Whereas a lottery ticket might
have a net present value of only 60%, so these are pretty good lottery
tickets. But that is essentially all they are.

------
nivertech
This guy can work for a year and invest his money on the same terms as angel
investors. The only technical problem how to do it tax free, b/c you obviously
owe income tax and in some countries like Israel also VAT.

There are some solutions, but they are not trivial. The employee actually buys
a convertible debt in the company on the similar terms as angel investor and
can cash out on later rounds.

~~~
Murkin
Or he can be a freelancer with his own company, investing from company's funds
(no tax) and after the exit pulling the money from the company as dividends
and getting to have only one (low) tax event.

~~~
nivertech
You can invest company funds, but you will still need to pay Corporate tax on
your profits.

Not relevant for freelancers without company, b/c they will need to pay
taxes+VAT on income.

------
nwatson
One more factor to consider, though: angel or Series A preferred shares often
cost much more per share than the employee's per-share Common strike price.
The option-exercising employee has a lower outlay and thus less risk. Of
course, in all but the most favorable exits the reward per share will also be
smaller.

------
caffeine5150
I was a co-founder of a startup (non-tech) that raised $60+ million over 10
years and in my experience, a dollar of sweat equity, particularly from a
person without some extraordinary personal value-add, is rarely as valuable as
a dollar of paid in capital, all things being equal.

------
sarcasmatron
Interesting responses: I've never worked with startups for the payout, but for
the experience of working with startups.

As to stock, I prefer shares to options from both sides of the transaction.

Finally, FASB 123 doesn't cover contractors or other non-employees - worth
keeping in mind.

------
robjohnson
Not entirely an accurate depiction of equity calculations, but it is nice to
see as many people as possible doing these back-of-the-napkin sketches to
educate. Mark Suster has some great posts about equity math.

------
toblender
At least he got offered equity. The first one I joined didn't even have that.

------
sl_
This covers the equity issue pretty well:

[http://www.bothsidesofthetable.com/2009/11/04/is-it-time-
for...](http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-
earn-or-to-learn)

~~~
sarcasmatron
Pretty well, indeed. Thanks for the link.

------
rudiger
This is just a special case of "Working on a startup? You are _probably_
getting screwed." The first employee doesn't have it too much worse than the
founders, the second employee, or the third.

------
slowpoison
He forgot to factor the risk into the equation here. Investors have risk. If
the company goes down they lose $500K. How much do you lose $50K?

1% may or may not be less. We definitely need deeper analysis here.

------
kelnos
Related question: when we're talking "equity" here for early employees, are we
talking stock or options? At my last startup, all employees (even #1) were
given options, not stock outright.

------
JoeAltmaier
Works the same way for contractors. Take a lower rate, delay payment, accept
warrants instead of grants...its all investment, and should be on the same
terms as any other early investor.

------
dfragnito
There is risk associated with hiring an employee. There is no risk associated
with a cash investment, There is investment risk, the risk associated with
making the wrong investment like hiring the wrong employee.

The investor with 50k in hand now vs the 100K per year employee willing to
work for 50k. The Investor wins. With the 50K the start up can hire the 100k
per year employee for 50k. If thing do not work out you can fire them and hire
another one.

The money is less risky giving it a higher value, plus its all upfront which
has already been discussed.

------
abalone
It's a market. If you think you can get >1% for "saving the company" with your
hax0r skilz, go right ahead and try to negotiate that.

------
marcin
Nice polarising title, but: 1\. You're not getting screwed, you are making a
choice, which is driven by market factors like your alternatives, expected
utility from the job etc. 2\. The numbers given are quite extreme - if the guy
is really worth 100k I find it hard to believe that he would be offered 50k
and only 1%. Also his option stake could raise with more responsibility given,
this is just the initial negotiation point as I see it. 3\. It only makes
sense in the Valley or US.

------
ailon
If you are going to work as an employee in a startup primarily for the money,
you are doing it wrong already.

------
amorphid
Youre not getting screwed if you walk into the job with your eyes wide open.

------
realschool
At a start-up I'm making a good rate for my first job.

------
michaelochurch
First, I disagree that early employees of startups are "probably" getting
screwed, but it definitely can happen, and often does to people who don't know
their real value.

The part of this that resonates with me isn't the mathematics. The math isn't
very relevant because there's a really large unknown: the eventual value of
the company. One percent could be a lot of money, or it could be nothing.
There's also the matter of dilution: is he protected against dilution from
investor and employee stock grants over the next N years? I would guess not.
His 1% could be 0.2% or less by the time an exit happens.

What is obvious is the emotional undercurrent to this very common anti-
pattern. It sounds like he's not a real co-founder, he's "just a coder". They
seem to be trying to sell him on a rotten deal because they think it's just
such a privilege to work on their golden idea that they don't need to
compensate properly. He's going to bust his ass to make the code work, for a
salary half of his market rate, and in return he gets a tiny sliver of the
company that gives him no real control, on a 4-year vesting cycle. I'm sorry,
but these two guys are not (after 4 years, after he's done some real work)
worth 79 times what he is just because they had the connections to raise
money.

Prospective employees tend to view equity grants in a pre-employment context,
when a 1% share seems extremely generous because the employee hasn't done
anything yet. But that's what vesting's for! Vesting allows companies to
compensate based on future contributions, with the knowledge that if the
employee quits or is fired before the 4-year period is up, they won't have to
pay for all 4 years of work.

At the least, if still thinks it's an "exciting" opportunity worth pursuing,
he should recognize that he _probably_ can't value the company better than the
market, that we are in frothy times, and that the equity is worth more to an
investor than to him (different risk profiles). So the value of 1% (post-
money) of a $2.5 million company is $25,000 at most. That's $6,250 per year,
far less than what he's giving up.

The first employee of a startup is not necessarily getting screwed. If that
employee gets appropriate respect for his skill set, and reasonable
compensation for the risks inherent in a startup, then it's a fair trade. A
lot of people go into startups as early employees knowing the risks and
upsides and that's fine.

What he should do if he actually wants to work on the startup: First, he needs
to value his contribution to the company over the next 4 years appropriately
and put a number on his "sweat equity". Let's say his market salary is
$100,000 and he's being paid $50,000. Now add to his base salary: benefits
(15% for health insurance, 401k matching), job-loss risk (25%, since typical
severance offers are 1/4 tenure at current salary), career risk and
opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work
week). That's $185,000 per year. Take that, less the $50,000 he's making, and
his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The
company's valuation is $2.5 million, "pre" to his contributions. He should be
getting about 16% of the company, assuming he remains for 4 years. This number
seems high, but if he's there after 4 years he will have been there almost as
long as the founders, so it's about right.

First action: he needs to ask for 20% and settle for no less than 12%. If they
say, "but you haven't done anything yet", he should point out that the equity
grant is subject to vesting and that he won't get anything if he doesn't do
any work.

Second action: he needs to demand the right to listen in on investor and
client meetings. Otherwise, the other two founders will hold all the power in
the organization because they, and they alone, hold that special knowledge of
what investors want. If they think he's "just a coder", they'll show it by
saying (in effect) that no, he's not "good enough" to be in the investor
meetings.

The most likely outcome of his making these two demands is that they'll tell
him to get lost. If that's the outcome, it's also the best outcome because it
means the startup's a tarpit.

~~~
ctide
I don't understand why all these people are responding to this post so
positively. Overage hours? Job-less risk? Career risk and opportunity cost?
What? You seem to be including those numbers as his 'cost', are you assuming
he's not getting benefits, or that he's going to work only 40 hours a week at
this mythical 100k / year job?

Also, the advice is just wrong. No startup is giving away a 20% equity slice
to their first employee after they've already raised a round. The chance of a
startup even creating a 20% options pool for employees hired after series A is
slim, and even slimmer is them giving their entire pool to the first employee.
You're essentially saying you expect nearly the same equity slice as the
people who invested their time to validate the market and build a prototype,
which is absurd.

I'd love for someone to prove me wrong by pointing out a startup that's given
20% to their first employee after raising a seed round.

EDIT : To clarify, the dude in the original post is definitely getting
screwed, but this is way too far in the other direction to be at all useful.

~~~
bermanoid
_Overage hours? Job-less risk? Career risk and opportunity cost? What? You
seem to be including those numbers as his 'cost', are you assuming he's not
getting benefits, or that he's going to work only 40 hours a week at this
mythical 100k / year job?_

There's nothing at all mythical about a 100k / year job where you work 40
hours a week. There are plenty of coders out there making at least that much
by pumping out enterprise Java 9 to 5 for insurance companies and banks. You
don't even have to be very good, you just need to not completely suck, stick
around for long enough, and know when and how to ask for more money...hell, if
you go the consulting route, you can make that much on a 20 hour work week at
$100 an hour, which is not very difficult to get to if you're good and pick
the right clients.

 _I'd love for someone to prove me wrong by pointing out a startup that's
given 20% to their first employee after raising a seed round._

You won't likely find that. But what you will find is startups that are
willing to offer their early employees wages fairly close to market rates
(though to be fair, we don't know in this situation whether the person in
question's salary was near typical market rates, we just know that he was
deciding whether to take a 50% cut in it), which is (if I'm reading correctly)
what the article is suggesting people look for rather than settling for shitty
wages and delusions of Facebook-level growth.

I can't think of many people in real life that have ever seen much more than a
nice bonus as the result of employee-level ownership in a company, and I think
that's the lesson to take away from this - equity should not usually be a
deciding factor in your employment decisions, nobody's typically going to
offer you enough for it to matter very much.

~~~
ctide
_There's nothing at all mythical about a 100k / year job where you work 40
hours a week. There are plenty of coders out there making at least that much
by pumping out enterprise Java 9 to 5 for insurance companies and banks. You
don't even have to be very good, you just need to not completely suck, stick
around for long enough, and know when and how to ask for more money...hell, if
you go the consulting route, you can make that much on a 20 hour work week at
$100 an hour, which is not very difficult to get to if you're good and pick
the right clients._

Those are not the people we're discussing. Those people aren't deciding
whether to work 9 to 5 writing java for an insurance company or go work for a
startup as employee #1. Yes, you can make lots of money consulting. I spent a
year doing nothing but consulting. It's mind-numbingly painful work. Apples to
oranges.

 _But what you will find is startups that are willing to offer their early
employees wages fairly close to market rates (though to be fair, we don't know
in this situation whether the person in question's salary was near typical
market rates, we just know that he was deciding whether to take a 50% cut in
it), which is (if I'm reading correctly) what the article is suggesting people
look for rather than settling for shitty wages and delusions of Facebook-level
growth._

I think you'll find this is much rarer than you think. Most startups,
especially YC companies for what it's worth, are offering exactly what's
mentioned in this article at that stage. While it's totally ridiculous, it's
currently the state of the world. Sure, it sucks, but asking for 20% is going
to get you laughed out the door.

~~~
michaelochurch
_While it's totally ridiculous, it's currently the state of the world. Sure,
it sucks, but asking for 20% is going to get you laughed out the door._

If getting laughed out the door is a problem for you, you're not cut out for
startups. Not getting a job when it's a lowball offer is nothing major to
worry about.

------
Hisoka
I think it depends on how much work was actually done before you joined. If
the 2 co-founders already completed the main app/product, and you joined, 1%
actually sounds fair. If you're gonna be the one creating almost the entire
product from scratch, 1% is pitiful.

------
Stravob
you got a mistake with your math 500K of 2 million is 25%

~~~
billswift
Actually:

 _They raised 500K at a high 2M (pre-money) valuation, giving away 20%_

The 2M is _before_ the 500K was added, so it is 500K of 2.5M total for 20%.

------
rglover
Honestly, going in as the first employee of a startup shouldn't be a decision
made by someone just looking for compensation. Rather, a first employee should
be someone who is so hooked on the idea of that startup, they focus on the
ability to build a company from the ground up. It's a risk, but if all else
fails, they can find a job working for an established business that can offer
those numbers. Joining a startup early on should be based on beliefs and
passion for the company, not a paycheck.

~~~
andrewcooke
sure, but you can have belief and passion and still not want to be screwed
over financially.

~~~
rglover
Yes, but is $50,000 all that bad? Sure, it may not be what your skill bracket
is worth, but I think you can live quite well (given that your frugal) on that
salary. What's more is that you'll be more motivated to do good work and
insure that the business grows so that your salary does as well. There are
benefits and setbacks but that's up to the individual to make the choice. If
you're going to work at a startup, you should understand the risks.

------
earbitscom
No offense, but this is horseshit and the math is embarrassing.

The number of people ready to invest $500k, for whom this is "a small part of
his capital," is about 1/1000th of the number of people who will enjoy working
and learning in a small, exciting company, and having more input into the
product, regardless of total potential for financial gain. So, the value of
$500k in cash from an accredited investor is already worth more than the time
investment of the average employee, for whom there are replacements lining up.
[Edit] This is to say nothing of the additional value that an investor adds.

Even if that were not the case, and this were strictly a math exercise, the
investor is putting in $500k NOW. You're putting in $50k spread out over the
next 365 days, during which a solid company's valuation may go up by ten fold.
Right now, your $50k is worth 1% of the company. But you're not putting in
$50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136
the next day. Good luck making an early stage investment in an exciting
startup for $136. I have never seen early stage stock available on lay away.

Ask the secretaries at Microsoft or Google if they got ripped off. This is a
joke.

~~~
amirmc
> " _... the average employee, for whom there are replacements lining up_ "

The article is talking about the _first_ employee. If a tech startup is happy
to accept 'average' employees at that stage it's probably doing it wrong.
Also, if there are really that many people lining up, then why offer equity at
all?

~~~
earbitscom
$100k is not the salary of a super star team member. Based on that salary, I
assume this person is a solid B+ team member.

~~~
darklajid
Unqualified like this your statement is wrong.

Please, for the sake of the global nature of the internet, state something
like

"based on the assumption that we're talking about this specific country/region
and based on my experience with..."

$100.000 seems to be the current salary of the friend in question for that
blog post. If you don't know where he's based and what his costs and standard
of living are, how can you judge the person as being 'B' level?

Also - what the hell is a 'super star team member'?

Edit: Just for fun I put the author's name into Google. According to
LinkedIn/Twitter he's from Israel. If we assume that the startup was local as
well (why not? And why should it be in the most expensive areas of the
States?) $100.000 is really good salary. High tech (i.e. programmers)
employees are already overpayed here compared to the everyone else and 100.000
USD / 30.000 NIS per month is a good salary even in that field.

~~~
earbitscom
Sorry, I did jump to conclusions. What I saw was this: Someone who usually
makes $100k is being offered $50k and 1% of the company. They were excited.

If you're in Kenya and $50k implies you're a C-level executive, then you're
not excited and boasting to your friends about 1%. The two figures combined,
_plus_ the excitement, implies that the person is being compensated at half a
reasonable rate, and being offered a stock % on par with a less than VP (and
maybe even Director) role. If it's not, then they're excited about an
noncompetitive pay package and the article should have mentioned that as well.

~~~
darklajid
I read it as

\- the guy was excited about the company/the job opportunity. This is, at
least in my world, first and foremost not connected to the money to be made.
'Yay, I could join a cool startup'

\- the guy got a safe/decent job (based on the assumption that he's in IL and
his salary is _good_) and probably never had any experience with the math
behind funding rounds.

You are, according to your profile, a startup founder. Therefor I assume

\- you did the math at least once (maybe before for other startups, how can I
tell..) and it's obvious. Now.

\- you still base your assumptions on experiences that you cannot expect to be
given

\- (tongue in cheek, not completely serious) you might be the guy on the other
side of the table (founder), asking for talent to accept a similar/related
offer

I for one liked the article. My startup experience is rather limited, but I
did join as a first employee once, with a big paycut and it didn't work out
for me. I think it makes sense to at least remind people that startups are a
risk not only for the founders.

~~~
earbitscom
Yes, to be clear, I'm a founder. All of my team whose salaries are in that
range have better stock arrangements. I didn't think the point of the argument
was whether the comp package was competitive. It was about comparing salary
investment to an investor's investment. I just think the argument is flawed.

Really, the driving point is that an investor puts in all money up front at
the immediate valuation. An employee puts minimal money in daily with the
option to leave anytime, while they have day to day knowledge (hopefully) of
the health of the company.

The author seemed to be arguing that the investment of salary wasn't being
valued at what an investor receives. But they ignored all kinds of factors,
such as the time over which the salary is "invested", and the fact that the
investor may invest time and other resources, while the employee is likely to
invest only time. Just having certain investors gets you other investors, gets
you press, gets you all kinds of things. Very few employees get you the same
things. They get you hard work. It's valuable. But the salary forfeited is
just one very small component. Trying to convince employees that they should
think of their $50k as the same as a $50k angel investment is leading them
astray.

[Edit] All of this being said, yes, everyone who takes stock in lieu of pay
takes risks. Employees should almost certainly treat options as icing on the
cake, and expect nothing from them. Then, be pleasantly surprised if they get
a return.

