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mrkurt 16 days ago | link | parent | on: Billions without Buzz

That's not where growth is, that's just the source of the largest volume of data. Mobile productivity apps (actually, most apps) don't need a huge volume of data, they need to do valuable things for a group of people.

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jchrisa 15 days ago | link

If you are in the middle of the ocean with a bunch of shipping containers, it'd be nice to browse their individual temperature readings on a tablet, without relying on the cloud.

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mrkurt 17 days ago | link | parent | on: Gmail API

You could label it "NSA access".

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I don't think it's either of the above, honestly. "The majority of risk" take is more of a rationalization about why it's ok for founders to get the bulk of the proceeds. "The unequal terms of silicon valley" is the flip side to that. Neither actually explains why this happens, because it's relatively mundane.

Founders hold the majority of the stock because they "created" the corporation. When it's time to hire employees, presumably they have some money as well. If a company wants to hire someone, they offer some combination of benefits, equity, and salary that the new employee finds reasonably compelling. Early employees at startups are typically (1) engineers and (2) relatively inexperienced, thus they don't negotiate very large compensation packages.

Employees are making the implicit decision to favor salary and a more certain (not very much more certain) over a disproportionate amount of equity. For every startup that actually hires multiple employees, there are probably 10 more where the equity is worthless.

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maaku 37 days ago | link

The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodian, or public face, is because of the non-perishable, non-inflationary nature of equity. It is the nature of equity, and the legal system surrounding it, which is the problem.

That's not to say that you can't design more equitable arrangement within the current system. For example, you can allocate an order of magnitude fewer shares than are issued, and each quarter do equity "bonuses" of an amount totaling 1% of the allocated shares so far. In other words, ownership percentage of the company for founders + employees would decay with a half-life of about 17 years. (You'd need protections of investor shares against this dilution to make it acceptable of course.)

You can play with the numbers of course, but the idea is to have long-term ownership reflect an employees honest contribution (determined by relative bonus size vs. the size of the company), and eventually over time even out disproportionate allocations from early on.

Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?

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nostrademons 37 days ago | link

What you describe is basically vesting and additional stock issuance, and it's common practice for most companies today. The actual numbers are usually 4 year vesting of founder shares, so they get about 6% of their allocated shares per quarter.

Employees also typically also get refresher equity grants, eg. my initial options package at Google was worth less than half the total equity I received in my 5 years there. And new stock is issued in fundraising events, so ownership percentage of the company does tend to decay with a half-life of a bit less than 17 years (eg. Bill Gates owned 66% of Microsoft at its founding, had about 26% IIRC in the late 90s, and now owns only about 3-4%).

I think you're completely ignoring the fact that there is a liquid and very competitive market in the founder/labor market. If employees were getting a raw deal at startups, they would quit to become founders, driving down the supply of employees and up the supply of startups until they start getting better equity grants. I've done that; I've been an employee at 2 startups and one big company, and am now founding my second startup. Anecdotally, I know many others who have also bounced between working for startups and founding startups.

I think a more likely explanation is that a massive number of startups die before ever getting their first employee. And so all of those early startup employees who try their hand at being a founder don't actually increase the pool of employing startups very much, and are re-absorbed back into the system as early employees at other startups. If you want a more equitable system, you'd want something where when people quit their jobs, they have a high chance of being able to make it on their own, and there's not a winner-take-all effect where most organizations fail to get traction and the winners absorb those that can't.

But then, that system already exists as well. It's called consulting, and is probably the truest indicator of what an employee's actual market value is.

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tptacek 37 days ago | link

Why haven't you started a company organized on some alternative set of terms?

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maaku 37 days ago | link

I am ;)

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tptacek 37 days ago | link

So, first, sincerely: good luck to you, and second: doesn't the fact that you can do this indicate that founder terms aren't a conspiracy against employees? If you don't want to accept employee equity, start a company.

I'm not arguing that employee equity valuation can't be abusive. It often is. Dishonesty is dishonesty regardless of who shoulders the risks. But if you're a founder and you're transparent and honest, the market does a pretty solid job of allocating upside.

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maaku 37 days ago | link

> I'm not arguing that employee equity valuation can't be abusive. It often is.

And that's all I'm arguing. It often is abusive, and it shouldn't be. Of course one of the problems is that young coders just out of college looking at the startup scene (typically the only people to make the sacrifices necessary to be first employees, because of a lack of other commitments) don't know that they are getting a raw deal.

So I make posts like this on HN, in the hopes they someone might read it and choose differently.

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tptacek 37 days ago | link

People who want to make careers in the startup sector need to be taught the skill of doing simple financial projections --- how to make 3 revenue forecasts, how to see what multiple of forward revenue results in in what final deal size, and how to work back from total deal size to employee outcome.

I agree that because almost all startup candidate employees don't do this, equity can be exploitative.

But by the same token, most engineers don't know how to negotiate salary, and will lose even more money as a result.

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hox 37 days ago | link

Even with revenue projections and being able to work back to personal gain, employees often aren't privy to liquidation preferences and the variety of classes of stock that has been handed out. If an employee has 1% of a company and the company sells for $100m, the employee rarely sees $1m.

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tptacek 37 days ago | link

Is there any good reason at all for an employer not to tell you about preferences? It's a simple question: "do I need to subtract more than 1x the amount of money you've taken from your sale price?"

If a company wouldn't tell me what the prefs were, I'd just assume 2-3x participating.

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rudimental 37 days ago | link

Can you point to any good resources for how to make the relevant financial projections for early employees?

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tptacek 37 days ago | link

It's not complicated.

Come up with "weak", "normal", and "blowout" revenue numbers for 1 year, 2 years, 4 years. You'll probably have to both ask your prospective employer and do a little research, but these aren't sensitive numbers. If the startup you're applying for can't tell you what "the number" is, they're doing it wrong, and you should be wary. You only really need one set of numbers; then discount (say 50%) for "weak", and premium (say 100%) for "blowout".

Now you have a spreadsheet with 3 columns for the years by 3 rows for the scenarios.

Do another grid below that for "deal size" (again by the three years). Instead of "weak", "normal", "blowout", do "2x", "5x", "10x" (crazy successful startups beat 10x, but it's in reality silly to do financial planning based even on a 5x return). Fill the cells in the grid with revenue x2, x5, x10; that's total deal size.

Subtract from each cell the amount the company has taken in funding (prefs might be even worse than that, but just assume 1x).

Now take the % of the company you're getting in equity and work out your take.

Divide each of those "take home" cells by 4, because that's how long you have to work to get all your shares.

If you want to get a little fancier:

If they haven't taken an A round, ding your equity by some % in year 1.

If they haven't taken a B round, ding your equity by some % in year 2.

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rudimental 37 days ago | link

Thanks! This will be helpful.

What about companies that have no or low revenue?

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tptacek 37 days ago | link

Most companies have low revenue in year zero, but if they're not building revenue in year one, they're a lottery ticket, not an investment.

That is what a prospective employee is being asked to do when they take equity in lieu of market salary: invest in company shares.

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thecage411 37 days ago | link

Do you think founders have a moral obligation to educate potential employees about financial projections?

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tptacek 37 days ago | link

To some extent, yes. If you acknowledge someone's market rate is X, and offer them X-k + Y shares, you're obliged to back up why Y is >= k.

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jasode 37 days ago | link

Y is also partially determined by the employee. There is uncertainty from both the employer and employee on what the potential upside of Y could be. If an employee (programmer) believes his unique skills will be instrumental in making the company succeed, he won't discount Y as much as another employee (e.g. a chef just cooking the lunch meals for the programmers).

The potential employee programmer knows more than the employer about how good his skills actually are and how dedicated he will be which can affect the value of Y.

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_delirium 37 days ago | link

Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?

Some of the more obvious other systems are also legally disfavored. For example American corporate law is really oriented towards equity-based corporations, not workers' cooperatives. This doesn't mean that an alternate legal climate would lead to everyone structuring tech businesses as workers' cooperatives, but the current American legal climate makes it difficult, so fewer are founded than might be the case in a more favorable environment.

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Yes. And how painful it is if you wait too long to transition.

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Like we've stopped doing for hackers, engineers, artists, rockstars, etc?

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austinz 63 days ago | link

Sorry, I missed my mouse target and clicked the wrong button, downvoting you.

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I got rejected back in 2010 as a solo founder (my cofounder bailed a few days before the interview), and feedback was all about the idea -- not my sudden solo founder status. The idea is really all they have to critique based on the app and interview. They consider founders heavily, but how do you give good feedback on "you guys just didn't blow us away as a founding team"?

Here was my rejection for something close to what Beacon does now (this was pre-startfund money):

> I'm sorry to say we decided not to fund you. There may well be something in the idea of commissioned stories, but it seemed to us that to get such a project rolling it would either have to be a spinoff of an existing site with lots of traffic or be quite highly capitalized (since otherwise there wouldn't be enough "donors" to cover costs). A YC size investment wouldn't be enough, and yet it would be hard to raise enough from post-YC investors, because they'd demand "traction."

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They don't really spend 0% on sales. They just don't have a traditional salesforce. They put a huge amount of resources and effort into pre-sales support (which is arguably sales with customer aligned incentives) and customer funnel progression.

It is a small but important distinction, what they don't do is scale sales by throwing salaries + commissions at a highly paid sales force.

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It depends on your funnel consistency. If you are selling a self service product with transparent pricing, fully realized ARPU can be a solid number. It will change as your customer base changes, and there still could be outliers, but it's decent and easy to reason about (and project with).

If, however, you are kind of self service, but do an Enterprise sales deal ... you have two funnels with two vastly different customer profiles. Not only is ARPU bad in this scenario, most numbers are.

The trick is narrowing the scope of a given metric enough that you can use it to make good decisions, and but not so much that it ignores important parts of a business.

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This is a little more difficult when knowledge moves faster than product delivery. "Snake oil salesmen" did their thing because they could move from community to community and stay ahead of the news about a fraud coming through.

I have no idea if this battery thingy is all it's cracked up to be, but the group won't last that long if they don't deliver.

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gvb 111 days ago | link

The graph doesn't diverge from the "standard" lithium battery pack for 3-4 years. The buyers won't know if they are "snake oil salesmen" for a relatively long time.

Even if you do accelerated cycles on the battery, it will be a while (1 year? 2 years?) before you can say "snake oil" and it will be around two times longer before you can confirm the claim.

It isn't a halting problem, but in terms of the pace of electronics, it's close in that by the time you can confirm it isn't snake oil, it may well be irrelevant.

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qbrass 111 days ago | link

Pre-ordering solves that problem. The product is delivered to everybody at once, before any knowledge can spread.

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gvb 111 days ago | link

...and two to four years before fraud can be detected.

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A conversation like that means there are other options:

<Gbatteries> Our patented technology extends the charge-cycle life of standard lithium-ion batteries by at least 200%, and we can prove it. <Investor> Great, we will invest, get a product to market and you can IPO in 2 years.

It's why saying "yes" to an acquisition is so hard. There are always other options.

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FooBarWidget 110 days ago | link

I think you missed a few steps.

<Gbatteries founder 1> We need to patent our technology before we can talk to to anyone, otherwise they can steal our tech.

<Gbatteries founder 2> Great, let me check our startup bank account. We have... uh... $3000.

<Gbatteries founder 1> What? Filling a patent in the US and EU cost $5000 each including agent fees. Even if I use all my personal savings, how do we eat in the 6 months that it takes to get the patent approved?

<Gbatteries founder 2> ...

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mrkurt 109 days ago | link

This is why "Patent Pending" exists. :)

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