
Early employees take the most risk today - gyre007
https://medium.com/@tikhon/founders-it-s-not-1990-stop-treating-your-employees-like-it-is-523f48fe90cb#.c6u481pwn
======
jalopy
Great, great article.

I'd like to add: This, I think, is one of the big reasons why startups prefer
hiring young people (ie, recent grads) - young people just don't know any
better. They have the barest idea (if any) what dilution, ratchets, preferred
participations, etc does to their already minuscule equity package.

"OMG I'm getting 70,000 shares!" is what I thought about my first startup.
Wasn't even offered (and didn't bother to think about) anything else.

Perhaps I'm projecting too much of my ignorance back then on newly minted
grads now, but it's safe to say that lack of experience in the myriad of
different ways things can (and most likely, 99% chance) will devalue the work
I'm willing to put into a company at 80+ hour weeks.

The most inane argument I hear from founders nowadays is "we just got funding,
so we're de-risked". Nice try. Just cause you sold someone with money to burn
(VCs have a bias to action - "gotta get that IRR to our LPs in 10 years!")
does _not_ mean you've de-risked anything. Proper de-risking comes from
finding a real product-market fit, with achievable financials metrics that
pave the way to real profitability. Anything else is just greater fool theory
- hoping a greater fool comes around and buys the company's story.

EDIT: Member notacoward has a great comment about rank and file employees also
not appreciating the back-end commitment usually required at an acquirer. In
the highly "fortunate" event where the startup is acquired, there's usually at
least a 2-3 year commitment after that fact to get liquidity. This is
_assuming_ liquidity is even available! With the ever-telescoping horizon to
an IPO for even the "unicorns", I wouldn't be surprised if most rank and file
employees are committed to 6, 7, even 8 years to achieve full (diluted) value
of their option packages.

~~~
oldmanjay
It's fair to note there's a significant amount of risk in hiring recent grads,
because largely they aren't great at actual engineering, just coding.

~~~
myth_buster
Isn't the armed forces model relevant here, which also happens to fan out:

    
    
      "Experienced" soldiers work on the strategy while 
      new recruits work in the trenches.

~~~
crdoconnor
If you're developing software and there's a lot of "trench work" that usually
means you're doing it quite badly.

~~~
manigandham
How so? Doesn't this completely depend on the actual product being built?

------
notacoward
Nice piece. Many good points, but my favorite was this one.

"they need to spend years at the acquirer for whatever the founders and m&a
department decide behind closed doors."

That's an under-appreciated risk. Of the ten startups I worked at, two went
this route. For one, I'm pretty sure I was the last person to leave
voluntarily; I had trouble finding someone to take my resignation letter
because they were all in negotiations. Some of my coworkers ended up working
for Symantec. At the other one, a bunch of us ended up working for EMC. At
least that worked out OK financially, but it was _not not not_ a choice any of
us would have made for ourselves. Not a one. We'd all had that option before,
and not taken it. Since acquisition is a far more common kind of outcome than
IPO, even for "successful" exits, that's worth thinking about.

Employees have always shared more of the risk than founders and investors
would like to admit. That's part of the package, and I was OK with that for a
long time. Nowadays, it seems like the share of risk is even larger and the
share of success even smaller. I guess it's still worth it as a career-
building move, if you're that way inclined (Google doesn't look bad on a
resume either), but as a way to make good money it's becoming kind of a bad
deal.

~~~
jerguismi
I dunno about the amount of risk, but at least the risk is quite well-defined
for the employees from the start. You get your salary each month, and maybe
something on top of that. You might learn something in your job, or maybe not.

Founders have to start with their own savings/debt and salary in the beginning
is usually zero. Of course situation changes if they get investors etc. But I
would say that the risks are really not that easily comprehensible for
founders.

~~~
rphlx
In my experience _talented_ early employees tend to take a tremendous amount
of insufficiently-compensated risk. The founders can of course lay them off at
any time, dilute them, give them paychecks that bounce, outsource their jobs
after a year or two, sell so much equity that employees stay underwater or
barely in the money, etc. The founders take a lot of risk themselves, but they
are in control, and they usually reward themselves for it. Whereas volumes
could be written about early employees at successful companies who maybe got a
solid bay area house downpayment out of their stock options, after working 60+
hours a week for ten years.

------
twostorytower
I have to respectfully disagree with this article. While it may be spot on in
some scenarios, it couldn't be further away in others.

As a co-founder, I didn't take a salary until a year into the startup (same
with my other two co-founders). Even when we received our accelerator funding,
all of it went towards our first hire's (an engineer) salary and operating
expenses. At this point, our risk was significantly higher, not slightly. If
the company didn't succeed, I can tell you our first hire was next in line for
a cushy market job, and he was being actively poached, not us.

After we graduated the accelerator we raised a ~$1M seed round. We hired more
two early team members at market salaries. Each of the co-founders were taking
$33K salaries. Why? We wanted the budget to hire great people. So no, they
definitely not a similar pay cut. In fact, it's increasingly hard for early
stage startups to hire good talent at less than market rates because there are
plenty of amazing startups hiring above market. Our risk at this stage was
even higher, because failing would burn most of our bridges with our new
investors (maybe a couple wouldn't hold it against us), where as if our
engineers went on to start something, no investor would think twice about
their history working at a failed VC-funded startup.

We didn't increase our salaries again until we were generating revenue. Even
now, ~four years in, I'm taking $20K less than the starting salary for a
junior person in the role I have. While I want to increase that a little more
as our revenue grows, I don't think it's fair to take a market salary at our
stage.

I'm not complaining, but to say being an early employee is a rotten deal is
unfair. If our startup goes under, I definitely have the more rotten deal. It
only looks like I had the better deal if we succeed.

And if you want to start a startup, I encourage it, that's the only way you'll
know how truly hard it is.

NOTE: This comment is a rehash of a comment I made on a similar statement. I
am reposting it because I feel like it addresses this and sheds a little light
on the other side of things.

~~~
rubicon33
I think your situation differs significantly from the one the author is
depicting. You sound like you treat your employees correctly, offering them
market rate compensation instead of a carrot on a stick.

~~~
twostorytower
It's honestly an engineer's market. Nobody is forcing them to take these
below-market jobs for crappy options. If they keep taking them, nothing will
change. If you would rather have market salary and little to no equity, most
founders are willing to accommodate. But I guarantee that years later when the
startup is worth something or exits they complain that they got a shitty deal
(when they weren't willing to take on the risk).

------
Osiris
I agree with this. I work at a well-funded startup, but despite the funding,
most of us are working for below market wages. I'm employee 22 and my options
are about 0.02% of outstanding shares.

It's disappointing to me to see so much disparity between the compensation for
C-level and VP-level versus engineering. Without engineering, there would be
no product to sell and nothing for investors to invest in. Ideas are nice, but
implementation is hard.

~~~
copsarebastards
> It's disappointing to me to see so much disparity between the compensation
> for C-level and VP-level versus engineering. Without engineering, there
> would be no product to sell and nothing for investors to invest in. Ideas
> are nice, but implementation is hard.

It's exactly what you'd expect when programmers are willing to sell their
birthright for lentil stew.

Frankly, most C-level executives at a small startups are glorified secretaries
taking care of the paperwork for the people who provide most of the actual
value. They get paid more because they've played the social game well enough
to persuade engineers to work for them instead of the other way around.

~~~
anindyabd
I work at a big company, and I also consider most C-level executives here to
be glorified secretaries. All they ever do is write emails, stare at some
charts, and yell at engineers to write code faster. What's most annoying is
that sometimes they pretend to understand engineering challenges -- they learn
some jargon and start throwing it around. That makes things worse; a little
knowledge is a dangerous thing.

We engineers are nothing but servants to these people.

~~~
mbesto
> _We engineers are nothing but servants to these people._

Which is funny you say that because apparently the "SV elite" think quite the
opposite:
[https://twitter.com/sama/status/641281287660007424](https://twitter.com/sama/status/641281287660007424)

~~~
gaius
Career advice from a VC is given with the VC's interest in mind, not yours.

~~~
mbesto
Exactly my point :)

------
mbesto
One thing that's not discussed enough in the context of employees compensation
(especially early ones) is prestige. Many people join startups because of the
promise that that company will become the next Google. They see peers who
follow the same logic (Marissa Mayer, the PayPal Mafia, any PM at Google in
the early 2000's, etc) and see what fame, riches and following those people
gain as a result of being part of the early days of a massively successful
company. This is also why YC companies categorically can attract better
talent, because even if the company fails, you can still tell your next
potential employer you worked at a "YC backed startup". It's almost the
equivalent of a Stanford degree. So, if you're an employee of a company that
is already vetted by a number (i.e. amount of funding) of well-known backer
(i.e. YC), you're risk is massively reduced given the insane amount of
recruiting opportunities available.

~~~
birken
Just as a quick aside of the prestige thing. It is a lot easier to get
"prestige" by being a founder of a barely successful startup than it would be
to be an early employee of an extremely successful one. The whole startup
ecosystem is very friendly to founders in this respect.

And when it comes to recruiting, you are much better off getting a job at a
large prestigious company like Google, Facebook, Amazon than you would be at a
random startup. The quality of engineering at a random startup, even YC
startups, is extremely low when compared to large prestigious companies. This
is due to the fact that the engineering talent at startups is generally below
that of employees at (Google|Facebok|Amazon|etc), and startups are
incentivized to ship stuff quickly and not necessarily work on engineering
quality software. If your goal is to found a startup, then maybe you are
better off working at another startup to pick up a more diverse set of skills.
But if your goal is to get hired as an engineer, a big prestigious company is
way way better than a random startup to have on your resume.

------
cubano
> Back in the day, founders would go into debt to buy a hard drive. Some even
> mortgaged their homes to keep things afloat.

I can remember my first company, Magicomm, in 1988 bought two 25Mhz 386's
after we released our first BBS-based search engine and we literally went into
pretty severe debt IE no paychecks for a month/living off raman, so this isn't
just bullshit.

It really was that.

I still remember our first "partnership" offer (not sure what its called
now)...."free" office space and $5k for 51% of the company from a local guy
who owned a shady call center. I had to beg my partner not to take it, too.

My dad ended up letting us borrow a few $k and gave us a closet to work out of
at his medical office.

------
sbov
Note that the major risk for an employee isn't that the startup fails in 2, 3,
or even 6 months. The risk is that 5 years down the line their stock ends up
being worth 0-249k, but they gave up 250k in salary in the same time period.

We're also in the situation that we likely have no way to asses whether the
risk we're taking is a good one. Especially if the company takes on investors.
Especially as the years go by - it can be difficult to figure out when it's
best for us to cut our losses.

An individual employee might not be taking on more risk than a founder. But in
aggregate they might be.

~~~
shostack
Outside of evaluating the risk, are there an good calculators out there for
doing the math on this with various exit scenarios?

~~~
sbov
Not that I know of. As a regular employee you probably don't even have access
to enough information to do the calculation yourself.

------
austenallred
> Employees take the most risk today. Not the investors or the founders — it’s
> the employees.

I agree that in many places employees should be given more options and better
compensation. I also agree that many founders don't realize how large the
opportunity cost for talented people can be. But I also think that statement
is categorically false.

Most founders I know work for several months (or years) for zero pay, and then
pay themselves the minimum amount possible while the company is growing. The
founders have opportunity cost too, and if the company fails they get nothing,
too. Using the superlative that employees are taking the _most_ risk is often
simply not true.

~~~
geebee
But is this true relative to the reward? It of course depends greatly on the
individual. A senior SE who walks away from an offer at Google or Netflix to
work for a startup could be forgoing as much as 100k a year in salary. Five
years in that dev might have banked a half mil.

Yes the founders are giving up a lot too bit the equity they receive may be
vastly higher.

It all depends on the numbers but adjusted for reward and equity? Yeah by that
measurement I'd say its certainly possible that an early engineer is taking on
the worst risk to reward ratio.

Lastly keep in mind that a founder who does not have strong tech skills may
not be giving up as much in potential salary even if he or she works for
"free". Again this all depends on the individual.

------
sixtypoundhound
Or said differently, what do you bring to the table as a founder that I (as a
highly talented employee) cannot immediately replicate on my own?

This gap has been getting very narrow lately.

\- Money? Not really; if we assume I'm coder #1, the cash cost of launching a
product/service is <$100,000, well within the range of many mid-career folks
with savings. \- Relationships? eh, Linkedin and Google can connect me with
many people - most of whom would like an alternative source. \- Business model
idea? Oh please, it's most likely been done before in an adjacent segment and
well documented; actually, I'm not interested in a model that hasn't been. \-
Technical / Process knowledge? um, that's why we're talking...

So yeah, if your goal is to take my contribution, give me 1% equity and keep
20%, it gonna be a difficult conversation...

------
Alex3917
The typical founders spend maybe 6 months building a prototype on nights and
weekends, then another six months full time without any pay, and then another
six months at least at minimum wage. And then they usually never get beyond
that, and are just out all those hundreds of thousands of dollars they would
have otherwise earned.

As an early startup employee you might only get 1% as much equity as the
founders, but you're also only taking 1% as much risk unless you're working
for vastly less than market rates.

~~~
ryanSrich
Source? Most startup founders pay themselves a market rate salary after
funding[1] (even if it's seed).

1\.
[https://docs.google.com/spreadsheet/ccc?key=0AgrWVeoG5divdE8...](https://docs.google.com/spreadsheet/ccc?key=0AgrWVeoG5divdE81a2wzcHYxV1pacWE1UjM3V0w0MUE&usp=drive_web#gid=1)

~~~
lmeyerov
Data is the plural of anecdote:

"The founders whose companies die usually only earn small salaries. Before
being admitted to Y Combinator, founders usually live off savings or taking
loans. During the Y Combinator program, they use a one-off seed investment
from Y Combinator of US$120,000 to pay living and business expenses15. If they
go on to receive angel investment, they can pay themselves about $50,000 per
year. With venture capital funding, this tends to increase to about US$100,000
per year"

(From the section on "What about the companies that died", namely, the case
for most founders.)

------
kzhahou
In the recent Square IPO, it showed that Jack Dorsey has an ownership stake
worth $1.5 billion, while the (estimated) 1000 employees have an average stake
of roughly $300K.

Think about what you can do with one and a half BILLION dollars. Now think how
far $300K will get you in the bay area.

This is completely typical and representative of the disparity between founder
and employee equity.

~~~
harryh
The math that you did in the Square IPO thread was completely and totally
wrong. Any conclusions you drew from your results are based on a false
understanding of reality.

1\.
[https://news.ycombinator.com/item?id=10389397](https://news.ycombinator.com/item?id=10389397)

~~~
kzhahou
Ok, please post the correct math, then we can compare and see who got closer.
Jack's percentage is spelled out in the S-1, along with the top execs,
directors, and investors.

If you have any better data, including median equity and other percentiles for
non-founders, that'd be very useful. Thanks.

~~~
harryh
The "13 people" you thought owned 61.5% of the company were VCs who did not
own those shares as individuals but as managers of their VC funds.

~~~
kzhahou
I didn't mention exec/directors in my original comment above, only Jack at
$1.5B and average employee at $300K. Which of those is totally and completely
wrong, and why?

Are you saying that employees retained the full remaining 38.5% ?

~~~
harryh
Yes, you have massively miscalculated the % of the company owned by employees.

On a further note, even once you get that number right, it silly to talk about
the average employee stake from that number. You're dealing with a power law
here where talking about an average makes very little sense.

------
dpeck
no, we don't.

There are plenty of reasons to argue for more equity but risk is not one of
them. If you're good at what you do you can get a job tomorrow anywhere and
there is near zero stigma about being associated with a failed startup unless
you're on the founding side AND you've failed multiple times.

~~~
davidw
The salient point in the article is about opportunity cost. When you take a
100K startup job, and could have been making 200K somewhere else, that's a
very real loss. Now, those are made up numbers, and you need to plug in real
ones to make an accurate assessment, but that's his point.

~~~
dpeck
right, and that is completely valid to discuss.

I think it does a disservice to the other problems and discussion points to
toss everything under "risk".

~~~
x0x0
But what would you call it besides risk? ie you're gambling (risk) that your
opportunity cost will be made whole (and hopefully even exceeded!) via a
liquidity event.

~~~
dpeck
I'm not denying that it is risk, I argue that it doesn't allow for the
subtleties and nuances (opportunity cost vs responsibility increase vs
positive/negative association after exit/failure).

There are a lot of different variables involved and a great many of them boil
down to calculated gambles on the part of the employee and employers. Those
are worthy of discussion and there are plenty of discussions to be had around
those. But simply calling it "risk" and saying you need more of the upside is
so simplified its nearly meaningless and impossible to have a conversation
about with everyone involved having the same idea about what is being
discussed.

~~~
davidw
There are certainly non-monetary benefits to working at startups, as well as
costs. It certainly makes sense to include those as part of the calculation,
but money is not a small part of that, either.

------
rbranson
Founders probably aren't able to hire because they can't get enough money from
investors to pay market salaries or because their company just plain sucks.
Maybe they think that because they've convinced investors that they're onto
something that it means prospective hires won't know better?

Put yourself in these people's shoes. Even if your company has a chance to be
worth a billion dollars, you're going to have to do better than a quarter
point. After several rounds of dilutions, a seed-stage employee with a quarter
point of even a $1B company would end up with ~$1.5M. You've got to be
offering people a 10-100X opportunity of what they'd get working at BigCos to
get good talent, not 50% more.

Corollary: if you are giving engineers at your pre-series-A company less than
a point and 50% of market salary, you are probably not hiring great talent.

~~~
walshemj
And 1.5 isn't that much at poptel in the UK at one point all the employees
where worth around $1m each.

No if only .coop had taken off (and we hadn't been screwed by ICAN) and the
coop had brought us out ;-)

I know some on just retired from BT that has over $.5 million in stock from
his various share saves

------
MattRogish
I think it depends a lot on the market you're in, how you've funded your
company, and where you live.

A founder of a bootstrapped, remote company in Iowa has far more risk than
almost any engineer in NYC or SF. Relatively speaking, if you are a not-
terrible engineer in SF/NYC you can have multiple jobs competing for you
within a day of your company going out of business.

A non-well-off or not-well-connected founder has comparatively little
opportunities to "fail up" when their company goes out of business. I'm a
founder of a bootstrapped, remote company, in a non tier-1 tech city. I'm the
lowest paid person in our company (of all engineers). If we go out of
business, our folks will have jobs in days. I won't. Does that mean I have
more risk? In a certain dimension, yes. In others, definitely not.

Of course, nothing in my post suggests that early engineers shouldn't be paid
reasonable salaries or have reasonable options. They should. But I don't think
risk has anything to do with it - common decency does.

------
draw_down
Makes sense to me. I have no clue why people take shit salaries in exchange
for a tiny slice of a company that will probably fail and if it succeeds,
still not give them a down payment on a house.

------
mrkurt
What's especially troubling is the difference between early engineers and
early exec type hires. Engineers tend to get marginal salaries and not enough
options. Early marketing, sales, ops hires tend to get more than _all_ the
engineers, even if they join post series A as person number 40.

------
mrdrozdov
So what you're saying is that more people should start companies? Maybe you're
on to something...

~~~
kzhahou
He is calling something out as unfair, and your response is that more people
should be unfair?

~~~
mrdrozdov
I don't think that what the article describes is a balance of fairness, rather
an observation that employees are taking a lot of risk! The message to me is
that you should probably think twice before joining a company. This is not a
one-sided battle. Employees clearly have the power to start their own company,
avoid risk, and reap the same rewards that so many founders are achieving.

Over time, if enough people are starting companies, then risk will have to be
shifted back in the direction of founders and becoming an employee will become
more appealing.

~~~
kzhahou
The opening paragraph:

> Why are we still using old 1990’s cap tables and the same tiny option grants
> for employees as we did back then? Is that fair? To whom? Is it the right
> thing to do? I don’t think so.

We're talking about fairness. Not the abstract elementary-school concept, but
simply that employee equity compensation should not be wildly disproportionate
to their risk (and, this is not counter-balanced by their salary or perks).

------
msoad
I joined a startup that went IPO and experienced how those options are
worthless, funny enough my options are negative with current stock price!. Now
if I decide to join a startup company I would just value the options precisely
$0.00

------
awicklander
Everything written about here is in relation to VC funded companies. For
people building companies without outside investment, and who pay employees
with money, none of this is true at all and in fact sounds nonsensical.

------
cryoshon
Have you considered forming a tech workers union? Collective bargaining would
be very strong.

~~~
ThrustVectoring
A professional guild - like lawyers, accountants, or actuaries - is a much
better structure, IMO.

~~~
bpicolo
Plus nerdy folk love guilds.

------
seansmccullough
Unless you're a founder, joining a startup is a terrible deal. There's no two
ways about it.

~~~
harryh
Because everyone should have the exact same risk tolerance as you. And if they
don't, they're wrong. There's no two ways about it.

~~~
seansmccullough
Both the odds and rewards are much smaller than most people assume. You can
take all the risks you want - if the rewards don't justify it, it's a bad
deal.

~~~
harryh
I agree with you that some people probably overestimate those two things.

But I also think that other people tend to lump all startups together with the
assumption that the risk is more or less the same across all of them. In
reality risk/reward ratio certainly varies by at least 10x across
opportunities. Consider the difference between a seed stage company with no
users and a product that doesn't even work yet vs a Series B company with
significant traction and 10s of millions in the bank. These can be hugely
different situations.

But, even if you ignore this, I come back to the concept of risk tolerance. No
matter what #s you choose, there are certainly people out there who by dint of
personality, age, or financial situation are perfectly willing to take on a
lot of risk.

------
blizkreeg
All fair points and something that should change, especially (imo) the clause
around options expiry as well as %age.

I have just one honest (not coming from a place of sneer) question: did the OP
follow his own advice in the startup he founded (Parse and/or Scribd)?

------
JonFish85
If that were true, wouldn't you expect real estate prices around San Francisco
not to be rising as fast as they are? Something is driving up wages around the
startup hot-spots, isn't that a sign that there really isn't that much risk?

~~~
sundaeofshock
Nope.

The Bay Area is home to some major tech employers (Google, Apple, Oracle,
Cisco, Salesforce, Intel, etc), and is also a major outpost for other big
names (Microsoft, Samsung, Sony, etc). There are also a number of major
employers in high-compensation jobs (finance, bio-tech, law). Even among
startups, there is a big difference between a scrappy little company of three
folks and a company like Uber.

Bottom line: there is lots of money floating around the Bay Area. As much as
we might like to believe otherwise, the amount in small start-ups is just not
that much.

~~~
deegles
There's also a lot of overseas money being invested in real estate, driving up
the prices. The same is happening in Seattle.

------
jerguismi
> if adding a particular engineer to the team increases the company’s value by
> 10% overnight

Btw, how do you prove that? For me hiring seems more difficult than that, you
start to grasp the value of an employee after 6 months or so.

~~~
dannyr
Take the case of Instagram, they hired several Android Engineers. They added 1
million new users on the 1st day the app was released.

~~~
jerguismi
Yeah, take this one company and generalize it, makes perfect sense. There are
bazillion of companies and only one instagram.

~~~
dannyr
Wow. Pretty hostile.

Where did I generalize?

I was just giving an example that you can consider.

------
oldmanjay
I think I get the point, but I really had to work to keep reading it. The tone
is relatively difficult to want to absorb without already being wholeheartedly
on board with the premise.

The main problem I have is that it troubles me to feel a sense of agreement
when the rhetoric is so emotionally manipulative, because parsimoniously, _I
've been manipulated_ into the agreement.

------
kzhahou
Ok, let's see some numbers!

Founders, post how much % you have.

Employees, post your employee # and your %.

Let's see if this disparity exists.

------
alpb
Reminds me of a post by Sam Altman: [http://blog.samaltman.com/employee-
equity](http://blog.samaltman.com/employee-equity)

------
mcnamaratw
Huh. Well written. I've been a founder and not a startup employee, and I found
myself paying attention.

------
rco8786
A lot of hyperbole in this article. The overarching message might be true but
the article basically reads as one sarcastic complaint to me.

