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.
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.
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.
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.
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.
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.
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.
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."
> 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.
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.
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.
(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.
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 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.
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.
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 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.
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.
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.
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.
Nature is amoral too. That means it does not have any sense of morality, it functions based on a different set of rules. Immoral is against morality. Amoral is without morality.
The market isn't unfair, or fair - it's neither.
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.
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.
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)
Not really commenting on 'who deserves more,' but I just don't think that you're logic really stands up.
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.
See also http://news.ycombinator.com/item?id=2233736
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.
Personally, I'm of the opinion that no job worth doing is worth less than any other job, but I recognise there's “some” ways to go before that thought becomes in any way mainstream again…
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.
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?
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?
It made sense to me as a 12 year old and still does.
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.
"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.
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?
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.
So I believe the two biggest
However, any software engineers with the skill to be employee #1 at a startup has the ability to start a company (perhaps a more modest one than the one they are joining).
It's nice to have a simplistic 12 year old's attitude in thinking you can just do stuff if you want, but life is full of so many factors. Right wingers especially seem to have this child-like mindset.
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.
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.
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.
If employees were unwilling to work for anything less than 10% of the company than employees would have more stock.
If founders were able to get away with keeping 100% of the company, then they deserve to have it.
There is no fairness here. It's just the free market. If employees want founder economics, then start a company. It's that simple. Welcome to America.
I think this is a greater factor in the relatively high compensation than "value added" or "risk taken".
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.
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 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...)
Obviously this is not the case all the time.. just my experience...
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).
The best explanation is found on Ribbon Farm in The Gervais Principle.
And yes, Founders are 1000x more valuable to the market than their employees. They may not be more valuable according to any other logic but the market is the person who cuts the cheques.
Stop seeing compensation as a judgement of value and instead see it as a measure of scarcity. Most people prefer to be employees rather than founders, compensation reflects this.
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.
Fortune favors the bold - Virgil
If you go create something (a business) from nothing, it's yours. If you agree to do work for a business in return for cash, that's your decision.
The question is one of compensation - which is a fool's game, e.g. are founders really 2000x more valuable than 3rd grade teachers?
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.
Life isn't fair.
That's a lot of risk, so yes, for that class of startups founders should have higher ownership in the company and thus are worth more if the company is worth something.
On top of that, these boot strapped startups often pay their employees more than themselves, so on the income front, employees are worth more.
This article really underscores the weirdness of incentives that can crop up at venture backed companies. It almost makes no sense.
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.
Of course, founders also looked at it and decided being a founder is a better deal.
So, everybody's happy and all's right with the world.
Groucho: If I paid you wages, you'd be wage-slave, you wouldn't want to be a wage-slave, would you?
Bellhop: I quit
Yes. There's a big gap between working somewhere with the option to bail whenever you want and having your own financial resources at risk.
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.
In other cases, the best definition of the founder is if you joined when there was no company.