This isn't about who is more valuable, this about who took the risk.
Employees take little or no risk in 99% of cases. You are not taking a risk making 75% of your max pay at Google/Facebook/Zynga/Twitter by going to a startup. You are taking a 25% haircut to be part of something new/small/etc.
However, starting something from scratch, incorporating and putting your reputation on the line is a major risk. If you are the creator you carry the lifetime risk/reward of your startup.
The founder(s) of Friendster, PointCast and Webvan will always be remembered a certain way. As will the founders of Twitter, Groupon, Yahoo and Google.
The employees that come after them do not carry this personal risk/reward issue. They can always say "I joined Freindster and it was a great learning experience."
The founder of Friendster will have to explain for all time why they were first and failed so horribly. How they missed the opportunity to be MySpace, LinkedIn or Facebook.
That's the real difference in my mind: personal reputation risk.
I really question this idea that (YC-style) startup founders are taking on more risk than employees. Few founders have a significant amount of personal capital invested in the business. If the startup fails, they're not out of much more than a job. In fact, early employees are in a far more precarious situation, since they're much more likely to lose their job than the founders. And if the company does go down, the founders have a much better entry on their resume than someone who took a job at a small company that no one has ever heard of.
At least in America, there is so little stigma associated with a failed startup that I don't see the reputation aspect of your argument. Short of flat-out malfeasance, a failed entrepreneur is far more fundable than someone who has never started a company.
We like to say there is no stigma associated with a failed startup. Quite frankly I think that's bullshit. It may not hurt your chances of getting hired again as an engineer because you will likely have great experience from it.
But you will have just spent months/years promising people you were going to improve an aspect of their life (through your business solving their problems, or maybe through getting more financial independence for your family etc.), and you were unable to do so. In many cases you've been trusted with extremely important things. You will have been trusted with a leadership role (in society, not just a company), and you will have failed, regardless of the value of the experience. Startups don't really get traction (outside of social) without serious contributions: being involved in solving hair on fire problems.
So, let's say you're starting a banking/commerce related startup like PayPal, and some fraud happens on your network which ultimately leads to it failing to gain trust (though it is relatively secure) and thus failing to gain traction and failing. Sure, you may handle the breach well, and go on to have a high paying job as a security analyst or something based on your specific experience.
But good luck trying to raise capital again. Good luck getting your friends and family to support you and take you seriously when you're going down your second "I'm quitting my job to give everything I have to a startup." Good luck recruiting engineers who know you as the ex-CEO of failed startup XYZ, etc.
I worked for a startup that failed. My impression is that the founders were never quite the same. It can take a huge emotional toll, especially if you're in the business with your friends.
Around here we take pains to emphasize the bright side of failure, but that's because nobody needs to be coached in how to mourn. Mourning comes naturally. It is carrying on
in the face of negative feedback from the world that takes practice and coaching and teamwork.
I was just about to reply something along those lines.
Failing at your own startup is a bit like burying a child. You start with all these dreams of a bright future, and one day you find yourself facing the stark reality that it just didn't work out, that there's nothing you can do anymore to change that, and that basically the last X years of your life, where you sacrificed anything, were pretty much for nothing. "Well, at least I learned a lot!" is very little consolation in that context.
It's a pretty fucking tough time to go through, burying your startup. I've been there, and hell, I'll probably get there again some day, but it's not the kind of thing that you go through without after-effects.
As a startup employee, you're a bit like that neighbour who watches the previously happy couple tear each other apart and finally divorce. My, ain't it tough for them, geez, I hope it never happens to me.
As the founder, you're right in the middle, ripping your dreams to bits.
And the best part is, after all that, people still expect you to pick yourself up and do it all again!
Edit: I suppose I'm being a bit melodramatic here, as pointed out by the two responses. That said, I do think that shutting down your failed startup that you poured your dreams into is a deeply demoralising experience. Character-building stuff, I think they call it, when trying to cheer you up.
Guys, I helped blow up a startup in '01 that I started in early '99. At our peak we had over 50 people. I'm also a father of two, and I absolutely assure you that startup detonation is going to be nothing whatsoever like "burying a child". The notion that company failures are "mourned" by founders is what prompts head-explodey threads about what "fair" is for founder equity comp.
The reality is a lot simpler. The market simply values a lot of stuff that geeks don't pay attention to, including:
* The initiative to start a company and deal with all the personal, financial, and (importantly) logistical drama that comes with doing that.
* The various forms of capital (financial, relationship, intellectual) founders bring to the critical first 12 months of the company.
* The ability to recruit people into an unproven company.
* The risk --- particularly, the opportunity cost --- of burning 2-4 years of career path on a startup (being the CEO of a failed startup is not a resume bonus for a subsequent engineering role).
* The increased degree of difficulty of --- and, thus, to the market, the smaller pool of people available to perform --- operating a company in its unproven riskiest first 12+N months.
Geeks also apparently don't see the value the market places on the flexibility required to find the best equity comp package. Being "worth 5%" (kind of a nonsense concept, but roll with it) doesn't mean you can get it at any particular company; it just means there's a class of company wherein you might find that role.
The notion that company failures are "mourned" by founders is what prompts head-explodey threads about what "fair" is for founder equity comp.
Interesting. I believe I have observed this very correlation.
(And, considering that I went away for a few hours and returned to find this thread haunted by the ghosts of metaphorical dead children, perhaps I should not have used the word "mourning". Obviously the overtones are too grim. Perhaps "brooding"?)
I agree that such brooding is not rational, and that it is not a good idea; perhaps I could even be persuaded that it's pathological. I'm not yet quite convinced that it's fictional, though. Maybe it really is. I've never been a founder myself, nor especially close friends with one, and all you can really know of other people is what you see from the outside.
I know I am being too literal, and I am sure you did not mean it, but... it is nothing like burying a child. I started a company 2.5 years ago and had twin girls a year ago. The thought of losing one of my kids makes me well up while the thought of losing my company just makes me sad. I have heard lots of people in the world of start-ups say that starting a company is like having a baby. It's nothing of the sort. (I know you did not say that, and again, I know I am being too literal, but I just read your first line and the thought of burying a child filled me dread.)
That's true, but the phrase "burying you child" is a pretty common metaphor. When my dog died, I said something to effect of its was like "burying my child", but obviously a child will be far more important than a dog. I think his larger point is still valid (that failing at a startup is traumatic) is fair.
I will buy that it can cause problems with personal relationships, though working 12-hour days as a startup employee will do that too. But the idea that failure hurts you as an entrepreneur is just factually incorrect. Unless personal incompetence was obviously the reason for failure, failed founders have a much easier time raising money and hiring for a new startup.
I think it depends on how you fail. I'm not talking about a 25 year old's Y-Combinator idea not working out. I'm also not talking about a hyper-technical, experimental startup. Those have high expectations and tolerance for failure. I'm talking about something more entrenched in our mainstream culture, years in, people employed and health insured, etc.
Most people who "succeed" have likely "failed" before (that's where they got the experience), but there are definitely levels at which failure hurts you, in many different ways. To say it is "factually incorrect" is over-simplifying the reality.
We don't have a culture that embraces failure nearly as much as we should, though the tech world certainly embraces what it would call the "right kind of failure."
This is why I restricted my original statement to YC-style startups. A capital intensive startup that someone invests their life savings into at age 45 is entirely different than a software startup founded on a shoestring budget by new college grads. I don't think the latter is particularly risky, which is why there are so many more of them than even 10-15 years ago.
> But most Japanese don’t want to take the risk of starting a business. Indeed, the social stigma and financial repercussion of failure are so great that the founders of failed businesses become social outcasts; no one will work with them again or fund them; and all too often they end up committing suicide.
While I wouldn't make the case that a serial failed entrepreneur is a good thing, I would make the case that practice makes perfect. A person who fails at startup #1 would ideally learn from their mistakes for startup #2.
Many founders invest their savings into the business at inception. They certainly invest a massive cut in salary (usually all the way down to $0). The opportunity cost for founders is much more than a "25% haircut".
Imho, for most, the financial risk and opportunity cost is why they deserve those shares, if you're going to do calculations.
But, even more fundamentally, the founders deserve the shares because if they didn't start the business the business wouldn't exist. Without the founders, the discussion is moot.
This seems a weak argument, it's only applicable once you've actually got a reputation to protect. The vast majority of founders aren't celebrities.
Given that many entrepreneurs just keep failing and then trying again and again and again it doesn't make much sense to me at all. There is no risk. Maybe it will be embarrassing if Malhalo fails, but I'm sure that won't stop you trying again.
Personally I think there's no good reason, founders aren't actually worth much more than the employees, it's just the way capitalism works. To the victor goes the spoils. Hence the occasional Marx being thrown into the mix to try and keep the worst excesses in check (overall I think capitalism's been a greater good for humanity). I think we're due a Marx soon if the earnings divide keeps growing as it is.
Don't try and rationalize it, it's just natural greed. But it has benefits too, all those jobs that wouldn't have existed.
It's a weird little backwater we're in if the only perceived risk in starting a company is reputational. Most companies fail. The risk is financial. The people you see founding companies "again and again and again" generally fall into two categories:
(1) people who have never founded anything successful and have nothing obvious to lose, and
(2) people who have already succeeded (like Calacanis) for whom the risk is any the myriad of other things they could have been doing to make money during that time period.
Given that many entrepreneurs just keep failing and then trying again and again and again it doesn't make much sense to me at all. There is no risk.
I used to work for a web design shop. My fellow programmers and I hated the fact that our bosses were making money on our backs. They would bill clients these huge fees for our hours and pay us 10% of that amount. What did we do about it? We complained to each other during lunch hours. Until one day when I threw in the idea, "lets start our own company". Then the truth came out, all those brave soldiers started backpedaling. I was in awe. I quit my job soon after, became a freelancer and 3 years later partnered up with another programmer to start a development company. We went through ups and downs at the beginning, not garnering much support, even from our own social circles. It's been a year and only now are some of our clients finally realizing the appeal of our offer. We have more work than we can handle and have had to moved into a larger office in a downtown area. I'm literally starting to hire next week. The same people we tried to get help from at the beginning, who were instead doing nothing but discourage us, are now more than willing volunteers.
I've had many similar experiences all throughout my life. I have once tried to organize a class action lawsuit against a company orchestrating an organized scam. I knew many of the clients personally. So I tried to gather them and the same thing happened, there was fud and people chose to wait and see what would happen as they left me to handle the initial steps on my own. I eventually reached an agreement with the company and got somewhat compensated. Later on when people heard, they tried to join in on the action, but by then it was too late, I had moved on with my life.
Another example, about 2 years ago, I had dealings with an agency that wanted to build this really ambitious website for one of their clients. I was hired as a developer along with other professionals from various fields (design, ux, marketing, etc). The agency ended up not paying any of us and while everybody were emailing each other trying to figure out what to do? I threw in a couple of bold ideas, such as bypassing the agency and dealing directly with the client, suing the agency. As expected the brave mouths didn't feel so tough anymore. I ended up hiring my own lawyer and a few months ago, I obtained a court decision. When people heard, I started receiving emails about "maybe ganging up to get our money".
All 3 stories have the same pattern. There is a problem, a risky proposal gets thrown in, people react to the idea, someone does something about it. I've come to the conclusion that being an entrepreneur is a character trait. You either have it or you don't.
Soon after I quit my job 4 years ago, I read or heard something somewhere, I don't remember the source, but it basically said, you get paid what you deserve. It's only now that I have a small and growing enterprise and that I have to explore the compensation question that I understand this. My coworkers from 4 years ago still work for the same boss. Maybe they got salary bumps, maybe they didn't, maybe they're still complaining during lunch, but one thing is sure we all got what we deserved.
I've always found that nothing ever happens unless I do it myself. That's generally how I treat problems, and it has left me in a better place because of it. On the rare occasion I meet someone else with the same drive I'm usually just thankful for their company. Thanks for doing what you do!
I've always found that nothing ever happens unless I do it myself.
I share this experience. Over and over again.
I've come to call it the 9-5 attitude. As a freelancer it's always a sobering experience to churn through a time-critical project (critical for them) and then have the remote guy drop out of skype at 6:00pm, every day, as if it wasn't their servers that are going to blow up if we don't get this done before the marketing-campaign on friday...
Of course not all companies are like this, but I've observed it even in (funded) startups where it's especially irritating.
I think it has a lot of do with a perception of ownership. As a freelancer I am my business and do my best to deliver high quality work.
As Employee #17 in someone else's company it seems to be more common to gravitate towards the path of least resistance; do just enough to keep those paychecks coming.
I argue that those first employees are taking more risk. If the company runs into trouble in 3-6 months time, it's going to be the employees who get turfed, not the founders.
And I'm sure the founder of Friendster has no trouble finding a job. Starting a company and failing has enourmous cachet in the States. And Friendster did quite well, relatively speaking, compared to most failed startups.
I call bullshit. For financial risk, this doesn't apply if the founder doesn't have much to lose, or has a stable family they can rely on, or is just starting their career, or doesn't care about money. For reputation risk, that's hardly an issue, because making mistakes in considered a legitimate (even honorable) form of learning in startup culture; it certainly does not ruin someone's reputation.
The real answer is way more simple: the founders hold most of the cards, and the engineers don't.
Edit: and if the engineers don't like this, they are free to try to start their own startups.
This is head-explodey. If the engineers don't like the deal they're getting, they can go work for other companies. If they should be getting a better deal, they will. There simply isn't a glut of dev talent right now. There is the opposite of that.
exactly. and founder vs employee isn't a species difference. it's a role difference, and only at a moment in time, and only with respect to one particular company. any employee could also (before|instead|after) be a founder for another business. Don't like the perks/negs of being a mere employee? Fine, be a founder. And vice versa.
This article is very timely. I've been employee #1 at a small company for about ten months, and I'm not only making just 50-60% of my pay potential, the recently proposed employee options plan grants me just 0.8% vesting over the next four years.
"This isn't about who is more valuable, this about who took the risk."
Risk? I joined less than a year after incorporation. I feel like I'm shouldering substantial risk by taking 50% of my overall compensation as options in a venture which I have no direct control over—I'm not on the board, I'm not a director. The options are worthless until 4-5 years down the road, and even then, I have no control or say into when we sell, to whom, and for how much.
Myself and the other employee are probably going to leave, because we feel that more like 2-3% minimum is appropriate for our position, and we doubt that the founders will see it that way.
That reflects on their future prospects of being a startup founder, though. I think the founder of a company like Friendster could still get a job working at Twitter or Zynga or whatever as an engineer, and the notoriety in their past would actually be a benefit.
Right, so in this case it wasn't some failed attempt that harmed his prospects. I think the real risk is that you'll fail and end up bankrupt, not that you'll sell the company for millions but carry the ignominy of not becoming Facebook.
Reputation? I have no idea who founded Webvan and I don't think I'd care if I did know. In modern America, there's little if any shame attached to having your business fail - less shame, really, than being fired or simply having a low prestige job.
I agree that the difference is that the founders risk something. What they risked was just money and time. And risking time can be risking more than you'd think because there's an opportunity cost to not creating a career.
It boils down to risk-amortized market for money and time; capital and human-capital.
This is just the market. There is no fairness guarantee mechanism. If I have a billion dollars to put at a very, very slight risk, it is still worth much more than your willingness to risk your time, your "reputation", your health and your $100K.
Seriously though, I agree that founders are taking the risk, but actually I think that is irrelevant as well.
The bottom line is that the founder started the damn company; the company would not exist without the founder. If you go and negotiate a contract with a company, you get what's in the contract. In a profitable business we can argue all day about who's creating the value, but it's subjective and irrelevant; the only thing that matters is that the founder went and started a company and offered you a job and you took it. If you weren't able to negotiate a deal for what you're "worth" then man up and start your own damn company, otherwise you're just whining.
The founder of Friendster is very likely to be capable of being hired for a job, so the risk he took to his reputation was the risk of lower probability of becoming something other than an employee. Therefore, in comparison to an employee, the founder of Friendster remains on equivalent ground. He lost little if anything compared to an employee (a group of which he now belongs), so the risk was little and of low value in regards to personal reputation.
In regards to money, that depends on the process. Did the startup function using the founders cash for a period of time that required a significant financial investment? If so, then there's significant risk on the part of the founder. If the startup functioned for a limited period of time on the founder's cash before receiving an investment that paid the founder as well as employees, then clearly there is little risk. Granted, the former scenario is the more likely.
People are over-moralizing this. Why do CEOs get paid so much? Why are salesmen often better paid than engineers? Does a ditch-digger deserve less money than a lawyer? The market is basically amoral. People get what they can get, not what they 'deserve'. Founders get more money because they have ownership, and in a capitalistic system profits accrue to capital. There's no point in constructing an elaborate moral architecture to justify how a social structure developed to maximize financial gain also somehow optimizes for socially-desirable outcomes.
Yet people support it and sleep at night. The world is not fair, people are unfair, and it's a damn good cause to try to make it fairer.
Sure I expect there's a serious correlation between putting effort in, but a huge part of how valuable your efforts are to your life is decided by where you were born, who your family are, who fucks you over and how you are parented.
I'm sure there are Muslim women in Saudi, or prostitutes in Liberia, or Chinese farm workers who'd (aside from cultural bias) work twice as hard and have just as many good ideas as Mark Zuckerberg or Bill Gates given the education and upbringing they have, but they simply don't have the opportunity.
Many socialists I talk to have it wrong in that they don't recognise that yes, effort is a factor in your life's success, but many of the capitalists I talk to fail to acknowledge that effort is simply one of many factors that influence it.
If you could choose your DNA, your parents, your upbringing, your interests, and your talents, the market would be the perfect arbiter. The problem is that people, for social signalling reasons, cannot internalize that they are not in control of these things, or that they matter. Thus, through the lens of our cognitive biases (hiding all these influencing factors from us), capitalism looks like the best system we've tried so far, and all the other systems don't "feel" right (because, for example, they force those of low social status to acknowledge that fact.)
I agree you get what you can get based on the market and it has nothing to do with anything else. It doesn't matter how "smart" you are, or how "hard" you work, that really doesn't correlate directly with what you get paid.
But I think your second point (Founder get more money because they have more ownership) is tautological. The article is really asking, should the founders get such a great proportion of ownership?
I think that equity % is just like normal income. You get what the market will let you get.
Founders get a lot because the right combination of qualities, risk taking, and luck are rare. Being an employee of any kind makes you more common than a founder, and thus the market will always pay less.
I basically agree with you. My response was more directed at the comments in this thread glorifying the intestinal fortitude of founders. Founders don't give much equity to employees because the successful ones don't have to, and the failures never have the chance. It doesn't have much to do with founders bravely trading risk for an equivalent measure of reward.
Another reason - 90% (my guess) of founders end up with nothing but a good story about the business they tried to launch.
90% of the guys who try to climb the corporate ladder to become CEO do distasteful work, and lots of it, and ends up a 50 year old middle to upper management type who gets made redundant the minute his company restructures, and hasn't got the skills to do anything else.
Also, moralising prigs (especially journalists and high school teachers) dissuade a lot of people from seeking a high paying job (unless it's in medicine), so the few people (many of whom are quite greedy) who do go for the top job get paid more money.
Word, it's all about bringing in the money. If you can convince people to give you more money, you get that money, and if you can't, you don't. Sales guys are well-respected in most corporate hierarchies because the sales guys are the people going out there and actually getting customers that bring in cash. It doesn't matter if you write the most beautiful program ever, the reality is there has to be a way to monetize that program if you want to run a business off of it (and obviously, your employer does). If an engineer can't do it and a sales guy can, the sales guy deserves a bigger cut of the pie.
You can see great examples of this by looking at basically any celebrity. Do Oprah and Brad Pitt really deserve billions of dollars for their contributions? Most people would say that morally their contribution to society is minor (or even negative), but the market doesn't seem to agree, and they are rewarded with money far exceeding the income of many business leaders. They get this money because they chose to do something people are willing to spend money on.
Why do thugs that play football, whose moral contributions are, again, minor or often negative, make millions of dollars each year? Because millions of average people pay $30/wk to watch them run into each other, $100/yr in team merchandise, etc. If you don't like that, convince people to stop spending money on football.
"I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all."
> It doesn't matter if you write the most beautiful program ever,
> the reality is there has to be a way to monetize that program if
> you want to run a business off of it (and obviously, your
> employer does)
On the other hand, you could have all the charisma in the world, but you'll have a hard time selling something that doesn't exist (unless you want to cross onto the wrong side of the law and dabble in fraud / being a conman).
Not really commenting on 'who deserves more,' but I just don't think that you're logic really stands up.
Exactly. Not everyone in a company can be focused on directly getting money from the customers. IMO, it's not a problem if sales people get paid somewhat more than engineers.
However, if the ratio of pay of a sales guy to an engineer gets distorted too much, no one will want to be engineer any more. If that was the case, technological advance will stagnate. Everyone will be fighting to get the biggest part of an ever decreasing pie, instead of actually creating value.
There's plenty of people willing to give you something to sell.
Programmers and salesmen deserve compensation proportionate with the value they provide. I am a programmer myself and believe that engineer-centric companies are usually better than companies with MBA management. The dynamics of each company vary -- my comment was merely in the vein of "why do people that provide little moral value make money?" They make money because they do things that generate money even if those things are of relatively little objective value.
Its actually easier to sell vaporware than a real product. Vaporware never has any bugs or problems. Or as one of my colleagues during my equipment selling days said "The brochure never fails to boot up". We were selling Pentium100 based equipment at the time.
At some point you do actually have to deliver something. You can pitch vaporware and get people interested. You might even get some people to give you money, but at some point you do have to deliver something. People pitching vaporware and never delivering can't be said to be a 'good' thing for the economy.
I don't think it's amoral. There are "world-shakers" in this life who aren't satisfied with how the world looks and they strive to change it. They develop an idea that provides value to others and they build a beast from nothing. With out people like this there would be no change, no progress. Founders create the world as we know it.
And, a slight adjustment to the original phrase will correct it. Founders, in general, are not 1,000 more valuable than their employees. Successful founders are 1,000,000 more valuable than their employees.
I'm of the opinion that no job worth doing is worth less than any other job...
Following this reason would end up with a world in which no job is worth doing. The value of a job is in how much value it provides to others. If one person's 8 hours produces 100 times as much value for others than another person's 8 hours (e.g. 100x time saved, 100x food produced, etc.) then the first person's job is worth 100x more than the second, and by your logic the second person's job isn't worth doing. But if there's nobody or no machine to replace the second person, then that job doesn't get done. If the second person's job was originally worth doing until the 100x person came along, why would it no longer be worth doing if it's now worth relatively less to others?
That doesn't follow, at all. Let me reformulate: any job whose existence isn't necessary (most of the financial sector, for example) can be terminated and the remaining jobs, all being necessary, are of equal value.
1. Who decides which jobs aren't necessary, and by what reasoning?
2. Why is a job (such as software development) that can multiply x hours of work across thousands or millions of users equally as valuable as a janitorial job that provides value to the dozen or so people who use the facilities?
I'm not saying either person is more or less valuable as a human being just by virtue of their job, but that their work itself can be more or less valuable to society as a whole. So how do you reconcile that fact with the binary idea that all jobs are either valueless or of equal value?
Couldn't agree more. If you think you're getting a crap deal as an employee, quit and start your own company. If you can't find 340 bucks (incorporation fees) to drastically change the rewards of your contributions then I don't have any problem with that person making 1/1000th of the returns.
I totally agree that people are paid what they can get. The problem is, a lot of the people who justify their enormous salaries by saying that the market is amoral then try to argue that they 'deserve' every last penny they made come tax time.
Well they're greedy. No two ways about it. Sure they probably do want to look after their employees and probably do give money to charity, but when you're making more money than most of us could conceivably ever dream of (and 700x more than their bottom rung employees) and shoving it in offshore account so the country they made it in can't tax it, they're fucking assholes.
When I was a kid my mom would complain about how the world was out to get her. She didn't frame it that way, but that's essentially what she was saying. One time she was complaining about lawyers because she was charged $300/hr or something like that. I asked her, "why don't you become a lawyer?"
It made sense to me as a 12 year old and still does.
I don't know your mom, and I don't know what she is or isn't capable of doing. I also don't think it's helpful to believe that the word is out to get you, regardless of personal situation.
But that said, you're absolutely delusional if you think that everyone in this country who wants to become a lawyer or a doctor or a better-paid whatever is capable of doing it. There are a million different reasons why most people will never become lawyers or doctors...or computer programmers. The reasons are all quite real, even if you've never had the misfortune of experiencing them: some people are born into grinding poverty. Others are never educated while young. Many people just aren't intellectually gifted. It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got.
Right now, there are thousands of people accumulating debt in third-tier law schools trying to do what you suggested to your mother -- but most will never get anywhere, no matter how hard they work. There are culinary schools full of aspiring chefs, vocational schools full of people trying to learn their way into a trade, and literally millions of other people who have been told that their lost factory job can be replaced with something better, if only they spend enough time in community college.
Just because you had the disproportionate good luck to be born into a situation where you can become whatever you desire, does not mean that everyone else in our society has been granted equivalent opportunity by the big genetic lottery.
Said another way: empathy is a useful skill, but you don't have much of it when you're 12.
I was born to a single drug addict, into a family in which no one had finished high school, and spent part of my childhood on food stampes. I understand empathy and that I lucked out in some ways, but I had anything but disproportionate good luck. I enlisted in the army at 17 and spent a year deployed. That's how I paid for college.
"It isn't their fault, and nearly everyone I've met is doing the best they can with whatever they've got."
While I agree with your general sentiment, most people are not doing the best they can. You know what I do 3 nights a week? I have a study regimen, right now I'm working my way through a probability book. A lot of people that could be doing the same thing are playing WoW or watching Big Brother. I have a 1 year old and a 3 year old, and I still make time to study on top of my job as an engineer, which pretty much means that I don't watch t.v., play video games, etc. Most people don't make that sacrifice.
"I was born to a single drug addict and into a family in which no one had finished high school. I understand empathy and that I lucked out in some ways, but I had anything but disproportionate good luck. I enlisted in the army at 17 and spent a year deployed. That's how I paid for college."
Fair enough. I'm not trying to take away from your accomplishments. But remember that there are kids born to single, drug-addicted parents all over the world. Most won't be able to overcome their situation, and it's hardly their fault.
"A lot of people that could be doing the same thing are playing WoW or watching Big Brother. I have a 1 year old and a 3 year old, and I still make time to study on top of my job as an engineer, which pretty much means that I don't watch t.v., play video games, etc. Most people don't make that sacrifice."
I don't think it's fair to make that kind of generalization. There are always people who squander their opportunity, but that's not a reason to slight the rest. Whatever you're doing tonight, there are hundreds of thousands of other people doing the same thing. Not all of them will be as successful as you will be, and some others will be more successful than you. How will you feel when you meet the more successful person, and she tells you that you didn't work hard enough?
I don't understand how someone who has overcome so much -- and knows how hard it was to do that -- can be so glib and flippant when talking about other people who have failed to rise above the same circumstances. You obviously care, since you're going out of your way to post comments dismissing those people.
The only thing hard about it was changing my mind set. This is a really hard thing because you don't get it until you've crossed over to the other side. There was one point in time when I was working full time and going to school at night that I almost quit. This was when there was a lot of talk about most programming jobs going to india and when I was really unsure if I was good enough to get a job when I finished. All these people on the Internet seemed so much smarter than me, etc. I doubted and almost quit, but I didn't.
Now that I've been hiring programmers for years I understand that most programmers are not that good and the smart people on the internet are probably the top 5%. growing up I didn't know someone that was successful that could tell me these things from experience.
So the two biggest challenges in my eyes are the mindset of the underprivileged, and I have no idea how to fix that. And, most people simply don't put in the effort and make the sacrifice. They'd rather play video games.
It takes much more than software engineering skills to start a startup. You need ambition and determination more than you need any particular engineering skills. And you need to be charismatic enough to convince other people that you are not one of the 90% of entrepreneurs who will fail, that you are exceptional.
It reminds me of a story my dad told me. His secretary complained to him that "garbagemen make more than me." He suggested that she quit and get a job hauling garbage. Her answer? "No way, that's a dirty, disgusting job."
I'm not a "founder" in the startup sense, but I did start my own indie development and consulting shop, and I think the startup founders can relate to my experience. For example, 16, 18, even 20 hour days are common. Keeping the business going becomes the major focus in your life. You think about it all day and dream about it if you manage to get some sleep at night. You hope and you dream and scratch and claw and fight and work your butt off every single day with no end in sight. It's your idea, your vision, your baby.
For an employee, it's a job. They do the work, they get paid. They may care, and they may care a lot, but they'll never have the kind of commitment you have as a founder. Someone recently asked me if when I hire my first employee, if I'll be able to double my productivity. I wish it were true, but I would never ask an employee to work the kind of hours I do.
So are founders always worth 1000x more than the employees? Maybe not always, but I can sure see the argument being made.
I was employee #1 at a company. I once clocked 210 hours in a 2 week period, and become super emotionally invested in the company. I spent time on the assembly line when we had orders that needed to go out. If it's just a job for your first employees, you hired the wrong employees.
Because it's super hard not to become that involved -- you're working so closely with the founders who are that involved. It's pretty hard to 9-5 it when nobody else is.
You're a founder in the startup sense - just because you started a service business doesn't make it any less of a business. You have customers, employees, revenues, profits, losses, capital equipment purchases, travel expenses, etc. You probably make more money than most 'product' startups.
IBM, KPMG, PwC, etc. are all service businesses that are massive and successful. There's a thousand other firms with middling market caps you've never heard of that also make billions.
Founders don't have the final say on compensation! The market does! If you think you're worth 5% of a company you're applying for, demand it. If you're worth it, you will get 5% --- maybe not from any specific company, but from some comparable company.
If you think you're worth 10-20% of a company, stop applying for jobs and go start your company.
It is absolutely a seller's market for talent right now. If you aren't getting what you think you're worth, you have nobody to blame but yourself. Your current company may not give it to you --- for the role you fill, they may believe you're replaceable for less cost --- but that doesn't mean you can't get it on the market somewhere. But you have to make the effort. People absolutely cannot in the real world whine that things "aren't fair" and expect improvement.
This is the key. For founders who are not intrinsically fundable, an incredible amount of risk is removed between the time of initial founding and when a third-party assigns a value to the company. 1000x seems reasonable.
Which is generally funded by VC money. In the formula of money -> jobs -> more money, the founder doesn't necessarily play such a meaningful role. If he hadn't taken VC money to create the company that contains the jobs, someone else would have.
I think the real issue isn't whether or not founders are "worth" 10x or 100x or 1000x the 10th employee (arguable, no real answer) but whether the extreme variance that exists in early startup employee equity is fair.
I once surveyed several friends who joined tech startups (at similar funding rounds, # of employees) out of school as very similar software engineers. They received between 0.05% and 0.3% of those startups. That's a 6x range.
That certainly wasn't a result of a transparent and perfectly fair market; equity compensation numbers are opaque to many startup employees, plus the comparative data just isn't widely available. (Ackwire is the best I've seen, and it's new and rudimentary.)
And it's not really in the startup's interest to make them more aware-- who wants their employees to have the thought "my boss will make 100x more than me when we exit" in their head? (Not everyone is as hyperrational or founder-aspirational as the HN crowd...)
For me it has been - who picks up the hat when something painful needs to get done? (getting tax info together, sales cold calling, doing a complex data migration, etc.) It is usually the founder, in order to shield employees from potentially morale destroying work. For this (and other reasons mentioned here) their value is more then that of their employees..
Obviously this is not the case all the time.. just my experience...
A better question might be, is a startup founder who achieves a lucrative exit 1000x more valuable than a founder who fails? Because the reality is that most founders don't get 1000x the compensation of their employees; in fact, such cases are exceedingly rare.
There is a lot of risk in starting a company if you're not independently wealthy. But I would question whether a 1000x payoff that is as rare as a lottery win is a more effective incentive than say a 10x payoff that happens more often. Maybe it would be healthier to invest smaller amounts in more companies, rather than investing enormous amounts in just a few as part of what Mark Cuban correctly identifies as a glorified Ponzi scheme (http://news.ycombinator.com/item?id=2231082).
Well, if the choice is nothing versus something, then there is a lot of value in the person who took nothing and turned it into something. Employees wouldn't have made anything from the venture without the founders.
The question isn't, "are founders more valuable than employees?". As you've pointed out, that's trivially true. The question is -- as it is with beachfront property -- "how much more valuable are they?"
The reason founders get more is because they are less willing to accept a bad deal, and more able to turn a bad deal into a good one. An employee who brings strategic assets to a company will make a lot of money, neither Eric Schmidt or Tim Cook are founders of their respective companies but they do VERY well for themselves.
The best explanation is found on Ribbon Farm in The Gervais Principle.
I see the 1000x as a reflection of the risk they undertake.
Employees, for 100% probability of receiving a specific amount of money exchange their time and effort while founders for a 10% probability of receiving a unspecified amount of money exchange their time and effort.
Essentially, for a lower chance of success they make it possible to receive unlimited rewards or go broke(losing years of work and to be despised by all and suitably fit for ridicule and to be made into a parable.).
Life is indeed fair, hence you can't have your cake and eat it. You can't have security and unbounded success, something has to give.
"Valuable" isn't the right word - because the article is being used for current compensation and equity comparisons but the justification is past events. In the present, it is quite possible that a founder could be detrimental to a company (negative value) while an employee could be nearly irreplaceable (I've even read rumors of such situations here on HN).
The question is one of compensation - which is a fool's game, e.g. are founders really 2000x more valuable than 3rd grade teachers?
A founder is just twice as valuable than a employee, and this just at the beginning. If you measure value by the actual profit a founder or an employee generates at a project, enterprise or whatever, you'll surely find that in long term is the employee that generates most of your earnings. That's a plain truth, if you have employees is because your business is growing and you can't deal with it just by yourself, so you need someone to work by your side at this point. Every earning from then now should be almost equally split on you and your employees. And I say almost, because your employees do owe you something, a place to work with less risk.
And that last part is the why I think a founder is 2x more valuable than employees. I love to see enterprises where they left a percentage of their actions to split that amount of earnings over their employees.
The article only deals with equity, which isn't the only way to compensate people. In equity terms, the founders are worth whatever they choose because they created the company: 100% of the equity is theirs to give away on the terms they decide.
I think it is true in certain cases. A successful founder has that 100% commitment to the idea / company. He or she will do anything it takes for it to succeed and will hustle it until it does. Sure, employees can write the code that makes the company run but they don't have that extra drive to have made it a success on their own. On the flip side, some founders are just super-well connected people that just get oodles of money and hire a team to make their idea come to life and have no real ability beyond that.
There is a huge risk in opportunity cost to join a startup.
Some founders such as serial entrepreneurs who have proven their value, I could see 100-1000x. However, first-time and inexperienced founders should not get more than 10x their employees given that they providing a lower expectation.
Also priced into it should be the difficulty for you to do it yourself. If the company truly does amplify your value by 1000x, then by all means it is a fantastic deal.
Seems like the premise of this argument is busted. How much stock you own is not the measure of how valuable you are to the company. That's ridiculous. Is Micky Arison, owner of the Heat, more valuable to the team than Lebron James or Dwayne Wade or Chris Bosh? How does this kind of garbage logic make it to the front page of Hacker News?
This question is more about positioning, less about risk per se. Founders are usually in a position of strength to negotiate higher valuations than subsequent employees. Likewise, future needs (funding rounds, key hires, etc) may also devalue their position of strength. Although unlikely, it is possible that founders have little risk.
You don't know the value of employee X until after he has agreed to compensation and joined the company. If he joins and never completes a single task he is assigned, then yes the founders were 1000x more valuable. If he joints and is able to find 10x more customers than you had before than no he is not 1000x less valuable.
> At some point your startup put a fair market value on its stock.
Assuming that his company went public, or took outside money. If it is, and will remain, a private company (with no outside investors), why worry about stock at all? Stock is unnecessary overhead, perceived value is unnecessary overhead.
Founders aren't usually given preferred stock. Preferred stock is for investors, and it gives them preference in liquidation events. It's to protect their investments, especially in the case of a bankruptcy where all assets are liquidated: the investors can pull out their money first.