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Why not bring on the early engineers as cofounders with sizeable equity in lieu of market-clearing wages?

Most engineers don't want to be co-founders, and this does not scale well in any case. That role comes with responsibilities that can't be executed by committee and drama/stress that many engineers would just as soon avoid. There is nothing stopping anyone from giving engineers a decent chunk of equity but it doesn't address the core issue of scaling reasonable comp.

A "founder" is not just another name for a very early employee. It is a wildly different experience. I've been both, multiple times.

That’s a title. I’ve never seen an accepted definition of cofounder but mine is anyone pre-money. Someone pre-money is taking a 100% pay cut and often invests their own money.

Cofounders typically get double digit or at least mid-high single digit grants in equity. Whereas employees typically have 1% or less in equity.

If they're this vital to the success of the startup, they should receive equity accordingly.

Cofounders do get equity but don't get paid until funding. Employees get equity and pay. If it's a startup, the employee will get value = equity + (K * market wage) + benefits where K is less than 1. That value should be competitive with the market and key contributors should get more equity but NOT in the range of cofounder because otherwise something doesn't add up.

There is an implicit startup social contract and the OP points out that maybe startups can't outbid the FAANGs for talent now. That may be but I think startups (and the VCs+lawyers who are guiding them) are absolutely pathetic at managing this social contract.

You want equity? Fine. Here's some equity in the form of an RSU (fuck you, Bill Gates) which won't qualify for either 83b or QSBS tax protection. Sure, it may crush the employee with AMT taxes. Yeah, the startup gets a minor tax benefit from this but then expects its employees to bleed for them. This is beyond stupid. This is beyond stupid by the founders, the employee (who knows nothing) and the VC+lawyers (aka the institutional memory of the Valley) who do know something.

It should be part of the startup social contract and best practices to inform and help manage the employees tax situation. Don't use RSUs. Put a gun their head and make them sign and file the 83b. Etc.

How exactly should they do it?

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