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What you need to know before you join a startup (reading.supply)
147 points by eriktrautman 20 days ago | hide | past | web | favorite | 63 comments

> Most importantly, you will learn significantly faster than if you worked at a large company.

Having worked in two early stage startups and at big tech early in my career, this depends entirely on your experience level and on the engineering team’s. At a big tech company you are far more likely to work with highly experienced engineers and learn from the best then at a startup. That being said, it depends completely on who they have hired before you or on your own experience level (especially if you are employee #1). My advice is to meet the engineering team and make sure that you have a good opportunity to interact with them during or after the interview process.

Having worked in 2 startups, almost all I've learned I did myself.

Finding people more talented/experienced than you is hard in startups, and there's this really bad tendency to build everything as a prototype, while very rarely you get to convert something to a stable product.

So while you get to practice on possibly a broad array of topics, you rarely get to get beyond the beginner level / learn the best practices for it.

In the long run, this can be really disruptive for your career if you don't take the time to practice on your own.

I agree with your sentiment. At university, I learned computer science. At my first big-tech job, I learned software development. In my startup, I learned how to run a business. All along, you're learning, but the skills you learn are not the same. Having a strong base of software development methodology was a huge boon in a startup where you have to make compromises.

I've worked at both, as a general rule I find you learn more at a startup because most learning happens by doing, and in a startup you are the one that will have to be doing whatever, even if it is outside your comfort zone. In a big tech scenario they generally only want you to be doing what is in your comfort zone, that is what you are there for - you are the best at making X widgets, make X midgets all day long - don't dare to look over at the Y Widgets code MR!

In really big tech this can be mitigated sometimes because projects may be split out of the company at large, and these little moonshot projects might function as a startup within the larger ecosystem.

Since there's no barrier to start a startup, there will always be companies at which the growth will be slow.

A good startup with strong engineering team and fast shipping cycle will provide with way more learning opportunities than FAANG.

Personally, I think for a fresh grad going to an early stage startup or to FAANG is a close call in terms of value. 1.5-2 years at FAANG gives a good boost to the resume to pursue better opportunities later, while 1.5-2 years at a startup can provide more learning and potentially some upside already. At that stage there's time to take chances either way. A close-to-IPO company is also a viable option.

My goal in the article was not to say startups are bad (or good), but rather to provide insights so that people can make more informed decisions.

> So if you consider an offer from a seed stage company, and try to estimate your upside, divide the shares amount offered to you by at least 1.5 right away.

No, multiply by 0 right away.

This comment is probably to be downvoted as off topic, but in case anyone missed this gem.

Here Comes Another Bubble: https://youtu.be/I6IQ_FOCE6I

The delta between first employee and founders is wildly underplayed in this article.

In our case: one founder worked unpaid for almost a year. After incorporating, we both continue to work much longer hours than our first eng hire. In addition, our first hire walked on to a market salary, health insurance, and a company with paying customers and $3m in the bank. ie at least an order of magnitude risk reduction. Both founders continue to take much less salary than the first employee.

If the first employee had left their college, family, or country to join the startup - would they have gotten as much stock as the founder? How much risk must the first employee take on in order to be compensated at the same level?

On the same note - the lack of a paycheck says nothing about the risk of a founder. A founder may very well start with more money, more opportunity, or a bigger safety net than any future employees.

The lack of a paycheck also doesn't tell us anything about how much the founder's skills and creative input contributed to the success of the company VS the first employees.

If they both have been there since the beginning, it is very possible that the company would similarly not exist if the first employees hadn't joined. So "The company couldn't exist without the founder" could also hold true for "The company couldn't exist without the first employees".

I think it's an interesting question - should you be compensated for your contributions to the success of the company or should you be compensated for the risk you took on in working for it.

I feel as though most founders would agree with being compensated for your contributions to success. Though most founders also wouldn't give their first employee's a similar cut of the reward, to themselves.

Yes I think here we have to understand risk as meaning opportunity cost. If employ 1 is getting paid less than he would at google, then the opportunity to earn that money is weighed against the opportunity to own part of this startup.

Exactly. There may be some overgeneralization or maybe exageration sometimes about the first employee doing all the work while the founders get to enjoy the fame and the money.

Let me add my case: 3 founders, I am one of them, we all worked for more than 1 year, not being paid, not taking a single day of vacation, not even weekends, to understand our market, build our product, and launch. Our first employee came after that, and while we started paying ourselves, on minimum wages, our first employee (developper) was paid slightly above market level and working normal hours. We have 5 employees today, they all get paid at market level or above, we recently raised funds (at seed level), less than 1M, and we (founders) still work 7/7 most of the time.

I understand how first employees may have the feeling they do not have what they deserve, and in some startups that may be true, but can we say this feeling is _sometimes_ a cognitive bias due to the employee not perceiving the financial risks involved in creating a company, and the amount of work done by founders?

I think that your evaluation of the employee not entirely understanding the toll it has taken on you, is fair. Sympathy and empathy only go so far.

One thing I'd suggest is - In this description, you've emphasized the hours put in.

That's fair. You work hard and feel that this deserves compensation. But - if you were following that logic - your first 2 employees SHOULD combine to have more stock than you. You certainly don't put in more man hours than 2 employees put together.

Nor are you likely paid for the risk you take. You could hire an employee that drops out of college or otherwise risks their future opportunities. They will likely not get as much stock as you.

The thing that you could probably emphasize is how core to the success of your company your contributions are.

It is not a given that your contributions are worth your compensation (compared to the developer).

On a similar vein, one could argue that parents are the people who contributed the most to the success of their children. While you could argue that this is logistically true - in practical, the conception is a very small part of what makes the child successful. What's important is what comes afterwards.

So - It might be true that you work hard. But I'd recommend you fall back on to the value you bring to the table, when justifying your compensation.

From the article: "Many engineers drop out of college or leave comfortable jobs at Google to join startups as early employees dreaming about huge upsides, fame, and romance of working for a startup."

I don't know many folks that drop out of college to work at a startup, that could be a sacrifice. But I do know plenty who dropped out of Big-Tech. If the startup fails, they can almost certainly get their cosy big-tech job back. So all their are giving up is a year or two salary differential for a few years in exchange for a lotto ticket. That isn't much of a sacrifice, it's more of a trade.

I see it as if it was any other investment and makes total sense.

Be very cautious about accepting any position at a startup as the technical founder but they treat you like employee #1. You will quickly find that you are (seemingly) doing most of the work but not receiving anywhere near your fair share. Ideas are easy, building them is hard. Don't be fooled by a higher salary at the expense of more equity.

If you're in this position, also be aware of whether you're being offered stock options or stock.

It's a little heartbreaking to watch years of equity disappear, in the company you built, because you don't have a year's paycheck worth of savings lying around to buy your options before they expire.

People should be more aware of this, especially if you go to work for a couple years at a high-value Unicorn company where your strike price might be something crazy like $25. If you don't ride it through to exit, you may very well either be trapped, or gamble that they will have an exit in the future. You may easily be spending $60K or 150K to exercise your options and have no market to liquidity them.

Naturally, this is counter-balanced by you not giving up on your base compensation when you go to work at such a company and you mentally treat the stock perk as an incentive to get you through the rough work patches.

I'd be really curious about people's experience who worked at some of the more famous unicorns and left already. Maybe at a company like Uber or AirBnb?

Edit: I don't know if Uber issues RSUs or anything. I'm only basing on my knowledge that I know there's Unicorn valued companies out there with late stage round raises that offer options at what seems like grossly high prices.

This almost seems like its a problem with the tax system. Depending on the potential upside, it might be better to exercise the options without the means to pay the taxes and then take out a loan to settle your debt with the IRS possibly at a discounted amount.

When I was (much) younger I was employee #1 at a startup and was basically the technical founder. The (solo) founder was non-technical, just very wealthy. Never got any options or stock, and I got relatively poor remuneration and left after a year. That was an interesting period...

I don't really understand why dilution is such a common thing. Why not just issue a fixed number of shares at the beginning and plan for future funding rounds? If I was a founder of a VC-backed startup, I think it would be much more fair to sell my own shares to investors, instead of diluting all of my early employees.

If you offer your first employee 1% of the company, but everyone knows that they're going to end up with ~0.3% after all the dilution, then just give them 0.3% and promise that there will be no dilution.

EDIT: I just got to the end of the article: "Finally, we structured our company in such a way that our tokens never dilute." That sounds like a great idea to me.

>I don't really understand why dilution is such a common thing.

It's because the dilution mechanism is the easiest way to sell partial ownership without tax penalties and it also a minimizes the # of transactions among previous owners.

Reducing everybody's ownership by a percentage amount ("dilution") is way more straightforward than having all owners coordinate to sell a fraction of their shares to an investor.

>, I think it would be much more fair to sell my own shares to investors, instead of diluting all of my early employees. [...] , then just give them 0.3% and promise that there will be no dilution.

Let's say an investor wants to invest $1 million. If you sell your shares, it will be a taxable event. You'll pay ~$350k in taxes to the government and keep $650k. On the other hand, if you dilute everybody, that $350k can be used by the company to pay salaries for 2 more programmers for another year.

To simplify all this, what you, as a founder, really want to achieve when looking out for the welfare of employees is to increase their total wealth. Dilution isn't the real issue; instead, it's ultimately increasing their total wealth by making the company more valuable.

(If you want to somewhat approximate the idea that "0.3% that never dilutes", the company could issue extra refresh grants to that employee. But mathematically, that still requires diluting somebody else because all owners still have to add up to 100%.)

>EDIT: I just got to the end of the article: "Finally, we structured our company in such a way that our tokens never dilute." That sounds like a great idea to me.

It's only a great idea of future investors buy into it. If Near's previous tokens "never dilute", then the author doesn't make it clear what the future investors are buying. The investors can't be buying equity since they just said existing tokens don't dilute. So are new investors providing a loan? Or buying bonds? Or buying warrants? Or if they're buying "utility tokens" instead of "ownership tokens", how do their investors make a multiple of their investment back?

> Let's say an investor wants to invest $1 million. If you sell your shares, it will be a taxable event. You'll pay ~$350k in taxes to the government and keep $650k. On the other hand, if you dilute everybody, that $350k can be used by the company to pay salaries for 2 more programmers for another year.

I'm a solo founder who owns 100% of the company, and I forgot how Stripe Atlas set it up for me. My company has a total of 10 million shares, and I purchased 8 million shares at the beginning, and left 2 million shares in the option pool for employees. So if I wanted to raise money, I'd need to issue more shares, instead of selling some of my own (which would be personal income.)

I'm not 100% sure how it works, but I still own those 2 million shares, even if I didn't purchase them. So I don't really know why I purchased 8 million shares, instead of 1 million, or even just 100 shares.

Then if someone wanted to invest $1M, the company could just give them some of the ~unissued~ authorized shares. So I wouldn't need to sell any of my own shares or issue new ones.

Is there any reason why that wouldn't work?

EDIT: Ohhhhhhhh that's exactly how it works already. I got confused between authorized and issued shares. This quora answer helped me understand it: https://qr.ae/TUfj33

Also this Stripe Atlas guide: https://stripe.com/atlas/guides/equity#why-dont-companies-im...

I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future.

>I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future.

The 'some legal work' in question is trivial if you're the sole owner and stakeholder, so don't be too concerned. :)

Startups don't tend to be fans of tying their own hands in terms of what they can do with stock.

To be fair - investors are also not fans of that. Potential investors will look at how shares and stock options are distributed and determine if it will allow them the flexibility they need in future fundraising/buyout efforts.

To go against this (investor interest and personal flexibility) founders would both have to have strong conviction and KNOW they won't need to rely on pleasing VCs in the future, for the company to survive.

This goes against how startups are currently built.

Yes it is sort of odd that the status quo is to offer a sliding amount of equity (due to dilution).

I'm not immediately sure why a fixed amount of shares, whose value simply increases over time, is not the status quo. The only trouble I can see with this is that shares are non-divisible, so you have to give out at least 1 share, even if it is priced at $10,000.

The shares given to investors often have dilution protection and guarantees as to when the company can sell and what minimum compensation will be given to them if that happens.

They also have protections such as "If the company dies, we will have first claim to any assets of the company"

The reason this is not offered to employees is a combination of fear (if we're being generous) and lack of incentive (the employee often has little leverage and no legal representation to look over contracts).

The end result being - if you have the capital, you have the leverage.

You don't know what future funding rounds there'll be. Maybe you raise a seed investment and then decide to sell the company two years later. Maybe you'll raise 5 more rounds and IPO.

Also, if you sell your own shares the money goes to you, not the company. I guess you could then loan the money to the company, but you'd still be liable for tax.

Going from owning 1% of a 1M company to owning 0.5% of a 2M company isn't unfair. The extra value comes directly from the new shareholders investing their money.

Employees believing their ownership percentage will not change is a problem though, and founders should not suggest that to be the case.

> Going from owning 1% of a 1M company to owning 0.5% of a 2M company isn't unfair. The extra value comes directly from the new shareholders investing their money.

If this we're true, investors wouldn't be adding things like dilution protection to their contracts and special stocks that have further liquidation protections (and potentially voting rights) wouldn't be the norm for non-employees.

Investments are not one-to-one exchanges and employees take up most of the personal risk in the exchange due to lack of any protections as well as lack of a (personal financial) safety net if things go wrong.

Though I agree with you in that whether this is fair or not has nothing to do with what modern companies will do.

The reason that employees do not get these protections and rights is because they lack the leverage to demand them from the people who make those decisions within the company.

> Also, if you sell your own shares the money goes to you, not the company.

I'm a bit confused about the distinction. I'm a solo founder, so I own 100% of my company with no vesting schedule. Although I did set aside a pool of shares for employees. But even if those shares are just sitting there in the company, I still technically own them until I give them to someone else (because I own 100% of the company.)

So that's just what I mean. I guess it becomes a lot more complicated when you have some cofounders and a vesting schedule.

If you're good enough to get into Google/Facebook/etc, you should demand more money to work at a startup. The risk is higher.

Sure, the risk is higher. But so is the potential reward. And that shouldn't go unnoticed.

As the original poster points out, if you're not in the first few employees, the potential reward is smaller than what you'd make at a big company.

They mean the risk is higher quantitatively because the money you're giving up from Google, etc. is higher than average for a software engineer. OTOH, nothing about the reward changes depending on what other places you could be working at.

Despite popular opinion, risk and reward are not cosmically related.

Ask for and actually read the company stock agreement line by line before agreeing to join. The article does not mention clawback which is another thing to look for:


yeah, but even without a clawback, couldn't the company just ask for the shares back or threaten to fire the person? that's what Zynga did.

This is simply a detailed argument to consider opportunity costs. One concerning thing, to me, is that it mostly centers around money. There are so many "pivots" and re-orgs to become the next 10x grower that kills morale. If it's VC-backed I would stay far, far away.

Anyways here are my takeaways.

Pros: Had a bit more freedom to push my solutions and learn quickly. For example, at one point when we needed scaling I was able to be a decision maker on which technology to use (landed on Spark). Faster-pace, and there is a sense of ownership of the product.

Cons: The product itself can change if an investor freaks out. Founders often feel entitled to your time and effort in a very unhealthy way. Possible long hours and high stress.

The author has a great point about expectation value. What is the probability of punching that lottery ticket times an employee's payoff? This should be the calculation. If it is higher than your sweet job at Google, go for it, if that's what matters to you.

Being able to "only" work 40 hours a week and make 350k sounds like the lottery ticket to me. I hate to be so preachy about it but working 7 days a week, 60+ hours a week, giving up family, friends, social life and hobbies, for years on end, to be millionaire instead of a super comfortable hundred-thousandaire sounds a bit over-the-top.

Generally true, but the upside of a bigcorp is higher than indicated, which significantly dilutes the financial upside of startupland.

The quote: "after accounting for dilution you will get around $600K, which is more than what Google would have paid you on top of the base salary"

Here the answer is.. maybe. Senior Software Engineers @ Google earn $350k or so, so over 5 years thats about $170k/year RSUs, or $850k over 5 years.

A disproportionate amount of this company's employees are ICPC winners/finalists. I am getting Imposter Syndrome just by looking at that page. oof.

Not really applicable in the real world and to many of that sort of person would be a huge read flag for me.

A bit like the one company I interviewed at that had some odd stuff on their site about your reading level.

It never came up in interview but I would have loved to have said of course I new all those words drum roll at age ten doesn't every one :-)

Russia and China have a huge tradition in preparing and participating in those competitions, while in US, I found it's more like of a hobby, so I'm not surprised given both founders are Russians.

While P(Russian|ICPC Winner) is high, P(ICPC Winner|Russian) is still pretty low :) Also, Illia is Ukrainian, not Russian, but it's nitpicking.

ICPC is a great way to start your career if you were unfortunate enough to get born in a noname city somewhere in ex-Soviet Union, thus people are pretty motivated to do well. In US by the time you graduate you already have few internships in your resume, and are pretty figured career wise, so naturally the benefits of ICPC are less attractive.

Don't get me wrong, I have great respect for people with high prizes in ICPC, which is way more difficult than IOI in high school. I was just stating the fact.

I think it's worth keeping in mind that most people don't live in SF and most people wouldn't get a job at FAANG. People work at startups often because their reasonable alternative is working at a dev shop or the back office of SomeBigCo. Startups offer more energy, learning, and often even pay (thanks to investor capital) than these alternatives. Yes, the amount of equity offered may not be justified from an ethical point of view, but it does seem to be a market-clearing rate.

> I think it's worth keeping in mind that most people don't live in SF and most people wouldn't get a job at FAANG. People work at startups often because their reasonable alternative is working at a dev shop or the back office of SomeBigCo.

Even outside of SF there are a whole gulf of positions out there that fall somewhere between a dev shop / "back office of SomeBigCo" and starts ups. Plus sometimes "back offices" can be pretty rewarding too if the person in charge of that office has fostered the right kind of work environment.

Very good counter point. I worked at a back office for a large transportation company, and the work was much more rewarding than anything I've experienced at a startup.

The article doesn't seem to mention the concept of a liquidation preference. Your 1% could be worth $0, even in a $50M exit.

> And (again, just a personal advice) you should only accept an offer if you plan to immediately forward exercise all the offered options

horrible advice

Additionally, the vast majority of startups I've worked for, and am aware of, will not file the paperwork to let you 83b. AND, if you bring it up, they will probably tell you politely they're not going to bring up your request to the board and go through all that hassle just to hire you.

That doesn't sound right. I thought an 83b election is always strongly encouraged, because the tax consequences are horrendous if you forget to file it. And I don't think the startup has to do anything? You just fill out the form and send it to the IRS.

Why's that? (Not trying to be snarky, generally want to know more)

You have to pay for the privilege of owning the stock (exercise price) plus whatever gains the valuation has increased it to. So, if you got options at $1/share and bought them when they were privately valued at $10/share... You have to pay $1 per share plus $9/share in whatever your marginal tax rate is. The upside here is that if the company goes public later at $20/share... You only pay $10/share in capital gains tax rates than $19/share in marginal income tax rate. (Assuming you hold them for a year after purchase)

Downside? You just paid tens of thousands of dollars in hard cash and taxes for lottery tickets. The company could still go under, you'll never sell unless they get acquired or ipo, and you'll be out all that money you spent.

In general, I think it's horrendous advice to forward exercise. Great way to lose money.

If you early-exercise there should be no spread at all between the strike price and taxable quasi-value.

Early exercise is a solid choice, provided the strike price is low enough such that exercising is not a major expense / unreasonable qty eggs in one basket.

Better yet, if you’re trying to be employee #1, have the founders frontload some of your year 1 salary as a cash bonus to cover early-exercise.

By joining the startup with its startup salary, you've already thrown away tens if not hundreds of thousands of dollars of hard cash you could have earned by taking that Google offer instead. So if you feel that this is a rational decision, spending another $10k to minimize a lot of tax pain down the road is also entirely rational.

It's also an interesting quirk of human psychology that we value the loss of something we have (here $10k in cash) so much more than the cost of not having something in the first place.

Sure but not everyone can make it into Google. I'd be there myself but I can't pass the interviews.

It's not like Google is some magical unicorn place though. It's boring soul-crushing big corp job with overwhelming politics.

Seeing smartest people waste their time on this was very depressing for me during 3 years spent there.

Sure but it pays very handsomely to make up for the boringness. I'm already bored/soul-crushed at startups - so I'd be much happier to be bored and getting paid a lot more for it. Politics still seem ridiculous even at the startups I've been at.

Some companies have started to offer extended exercise windows [1], which means there's no pressure to exercise your stock options early.

If your exercise window is only 90 days, then you need to exercise at least some of your options and file an 83b. Otherwise you'll be stuck at the company until a liquidity event, which can take 10+ years. If the company is successful and you need to leave early for any reason, you're potentially throwing away millions of dollars.

[1] https://github.com/holman/extended-exercise-windows

>> A $10M acquihire brings $3M to the founders, so they are likely to accept the offer, leaving them significantly richer, and you with $100K that are unlikely to cover what you would have made if you joined Google instead.

This doesn't sound like a very bad scenario at all. 100K is a lot of money. Also, back then there was a risk that maybe Google would not have grown as much as it did.

>> But if you join as employee #10, and are offered 0.1% of shares, the story is completely different. If the company exits for $100M, you only get $60K, which is a completely meaningless number if you invested few years of your life into the company.

That's almost one year of an average person's salary in the US. It could pay for someone one year to work on their own project.

"unlikely to cover what you would have made if you joined Google instead." refers to what you would have made if you joined Google few years ago, not at its early days

Google stock price almost doubled in the last 3 years. That's a lot for a company that size.

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