Ask YC: Should I work for a startup?
Here's the problem: equity. The offer is just too low: a fraction of a percent. For me to make decent money from this startup (by decent I don't even mean enough to retire, certainly not in the Valley, which would require a few millions) it would have to have an exit of hundreds of millions if not over a billion dollars. These days, very few companies achieve this. I doubt this startup will.
It seems like although the attitudes towards funding and operating startups have changed significantly since the .com bust, the attitude towards equity distribution to employees is still rooted in the delusional .com days. It's just not worth it for a good hacker to join someone else's startup for such little ownership stake. As much as I would like to join them, it just makes much more sense for me to start my own company so I'll have a better chance at cashing out with a reasonable amount of money.
This brings me to the startup risk paradox: working at a startup is riskier for employees than for founders. A founder will do well for himself even if the startup has a modest exit. An employee will only do well at the much less likely event of a fantastic (hunderds of millions) exit. If you're a talented hacker, it's less risky to found a startup than to join one. Sure, you may fail, but if that happens you can always get a job and then try again.
Your thoughts are appreciated.
27 comments
[ 3.0 ms ] story [ 65.7 ms ] threadFirst, for startups which take VC, a "modest exit" can mean that the founders get nothing. The range of outcomes where founders become fabulously wealthy but early employees do not is fairly narrow.
Second, most founders start off by not taking a salary. Deciding to be an employee instead of founding your own startup means implicitly deciding to take more salary up-front and less of a chance of holding valuable stock at the end -- put another way, reducing your risk.
That all said, whether "a fraction of a percent" equity is reasonable is an open question -- it depends on how large the company already is, how large your salary is, et cetera. You can always negotiate.
Here is an extreme example to prove a point: I write a business plan and successfully raise money from investors. Then I hire people to do all the work, pay them salary, and give them much less stock than I take. I have the largest employee stake, but haven't done any of the 'real' work (unless you consider fund raising to be the real work).
This example is absurd, but it's useful to my argument: the founders get their stock by working for free, not necessarily for creating the critical foundation of the business. For some reason, this has been bothering me lately. It seems more reasonable to have a system where ownership is determined by contribution... otherwise there will always be the risk of the opposite: contribution being determined by ownership.
Since I've actually done both "founding engineering" and "fundraising", I think that I'm qualified to claim that fundraising is real work.
Note that the fundraising created a structure for the engineering to take place. If the engineers feel that the structure is of no value, why did they show up?
Besides, the most likely outcome for fundraising is 0. Founding engineering is almost always compensated. The extra payoff is, in part, compensation for the extra risk.
Don't confuse effort or time with value. Or rather, if you do, make sure that the janitor makes more than you do.
that said, no one's stopping you from starting something and dishing out equity however you want :)
Nothing is stopping you from determining ownership any way you want for your biz.
Owners contribute disproportionately also by their willingness to absorb risk. It is the combination of ownership, risk and work that allow owners to take a greater share.
Do you know how the equity is currently divided? Is it 40-40 for the two founders (assuming only 2) and 20% left over? Have they taken any equity funding yet? Is it just starting out, or would you be employee number 13?
Knowing what they have available to offer, where they are along the start-exit line, and their current equity position will give you a good idea of how to negotiate.
Another angle, will you be taking a salary? If you're making a modest salary then it is perfectly acceptable to be offered only a small fraction of equity. You may very well be making more than the founders are.
If you want more equity in the company, offer to forgo a salary or take only what the founders are taking.
working at a startup is riskier for employees than for founders.
I disagree. The founders take the most risk, and get the most reward because of this. Founders typically make millions or $0. Employees don't typically make millions, but it's against the law for them to make 0. They earn a regular salary, which is less than the millions the founders might make, but they earn it consistently. There's a trade off.
I should have said that founders are exposed to greater risk in the very early days of the company, but afterwards the chance of meaningful financial payoff for employees becomes much smaller. Most startups won't be the next Google or Ebay, and I think they should take that into consideration when incenting their employees with stock options.
This is just a starting point, You have to assume that the founders have the lion's share of the equity, and that the amount of equity per additional employee trends downward the later the employee joined. It could be that the company only has 5% equity left for future employees, and so they have to offer only a small percentage of the equity. In any case, try to see what they have available, and again, offer to take only a token salary if anything in return for a greater equity share.
Good luck!
If the difference between a founder and an employee were, say, 5x to 10x the equity, being an employee may make sense, but if it's 100x-400x range it just makes the employee stock options look pathetic.
Equity is rarely going to pay off for you unless you are fortunate enough to hit the Microsoft or Google jackpot. You might be able to buy a nice car, but don't expect a place in the Bahamas.
Work there if you really love the people or the idea. Enjoy your monthly paycheck. But if you are in the game for the big payoff, you'll have to strike out on your own.
Remember: early employees never get rich, except for the really exceptional cases in which even the dock workers get a huge windfall.
How many employees does it have, and what's a recent valuation? If it has something like more than 10 employees, a valuation in the 10+ millions, and it's in a great market, it could be reasonable.
Another thing to consider is the overall experience. Would you be learning technologies that are unique, and valuable in the future? Who is involved in this startup, and how valuable are the connections you could make? For instance, if the startup makes ROR apps, you could probably spend your time moonlighting and become competent in the technology yourself.
Consider that the startup you are applying to already has funding (I'm assuming it does, since it sounds like there is already a team). The founders started with nothing but an idea, probably invested their free time to implement v0 and then sold it well enough to attract funding. They could have failed at any time, and would have had nothing except experience and pissed off investors to show for it, not to mention the loss of any personal investment in the firm.
You on the other hand will draw a salary from day 1, and you already have a better idea of the company's trajectory than the founders did when they conceived of the idea. Even if the company goes under, you will have earned $X in addition to the experience gained.
And you have the luxury of not having to worry about how to get funding, sign deals, etc.
If you don't like the risk/reward, the best way to change the equation is to become a founder, or build/lead something so amazing that your rep alone compels startups to offer you a significant percentage.
That (honestly) is ridiculous. If the founder is taking the standard path, they are going months or years without salaries, oftentimes accumulating debt to do so. When they get a little slice of angel funding, they usually pay themselves pennies so their early hires can get non-insulting salaries.
You seem to assume that a "cash-out" is a foregone conclusion. 99% of startups go belly up. No payout for the founders, "modest" or otherwise.
A fraction of a percent for an engineer is not uncommon. I'd need to know the company size, how far along they are, what sort of salary they are offering, and how senior YOU are to know if it's unreasonable. But for a funded startup offering a non-insulting salary to a relatively junior person, it's common. And (honestly) plenty fair.
What, exactly, are YOU risking as an employee? The 10 minutes it'll take you to go find a new job if the startup flops? Do you know what the founders have on the table? If not, you could probably ask them.
If you want more equity, offer to work for free or ridiculously cheap. Many smart founders will happily trade a little more equity to avoid a monster salary.
A founder can also get a job in 10 minutes if the startup flops. The additional sacrifice (not necessarily risk) the founders take is living a few months without salary. This sacrifice obviously merits a higher portion of the equity than an employee -- maybe even much higher -- but as an employee you have to wonder whether the tiny equity you'll get is worth it.
I thought/think much the same as you, which is why I'm founding my own startup after working for 3 years at 2 other ones. I had similar equity offers as you - 0.1% at one startup, none at the second (and an offer of 0.02% at a third that I turned down). I used to think that employees were insane for taking a straight salary instead of a shot at a big payout. After 5 months working full-time on my own startup with no salary, I'm not entirely sure. Obviously I think that on-balance the startup bargain is more appealing, else I'd go get a job, but I also think the scales are much more even than I'd initial thought.
If you do take a job at the startup, take it to learn, not to get rich. You won't get rich. 80-90% of startups fail outright and nobody gets anything, other than whatever venture money was paid out in salaries. If it does succeed, you won't get rich with an employee's option grant, unless the startup really hits it big (like, Google or Microsoft-sized). One of my coworkers worked at a startup that was bought for $42M - he ended up with $3000. I do know someone else that ended up with a multi-million-$ payout as employee #35, but she was a VP and the company in question was Stratus, which momentarily had a billion-$ market cap. She ended up losing much of it when Stratus stock crashed anyway.
If you do go the founder route, do it for meaning and not for money. It has to be something you'd want to do anyways, regardless of whether there's a huge payout attached. Because from 5 months in, that huge payout looks pretty remote. (I wish I'd paid more attention to webwright's advice on tractability, in another comment thread.)
On a side note, I always wondered why some startups are so stingy with equity. If you give out big-company equity awards, you get big-company effort. And if the people who are actually doing the work are putting in big-company effort levels, how do you expect to catch the big companies? The conclusion I reached is that the startup should have product-market fit before hiring people, so that success is just a matter of crossing Ts and dotting Is, but neither of the startups I've worked at were at that point. (And sure enough, one failed outright and the other is sorta walking-dead: profitable but not growing, with a pretty narrow customer base.)
* great people, unique culture
* influence a wide range of issues from tech to office location
* great experience for founding a company later
Note that I didn't include "huge potential financial gain" in that list. A non-founder at a startup really has to value the experience because most likely there won't be a huge financial win. That doesn't mean that you shouldn't try to negotiate a fair compensation package, but really you are using the opportunity to gain skills and experience to use when founding your own company where you will have more ownership and potential financial gain. If you don't believe that the founders take more risk than the employees now, you will once you found your own company :)
If financial gain is your main goal, you may want to take a serious look at getting into the financing side. This will take a different approach, but good analytical skills plus good networking skills are in high demand. Alternatively, you could go down a more corporate path and aim for senior management at a good firm. I'm not necessarily recommending these paths, but it's worth exploring the alternatives so that you can really appreciate the (in my opinion) extraordinary benefits and privileges of working at a startup.
Really, its all about selling. You have some goods or services. They want/need it. Is the current deal fair in both parties' eyes? Founders will say all sorts of things like "I bear all the risk", "I've been here since the beginning", and "I've contributed the most work", and many of these things will be true. However, you have cards to play like, "employees need compensation for their efforts", "good hackers are rare" and "I can add value to your company" (we assume you can). There's an argument to be had here about how much employee should get, but really, its all about how you negotiate. You have to show them why you think the deal is unfair to you, and offer up one that you think is more fair to both parties. If you like the deal, just take it. If you don't like the deal enough to take it, offer up your own, and if they reject it, you weren't going to take the original deal anyways.
But I will admit that like everyone else here has said, the negotiation here is skewed heavily towards the founders favor - still try to get what you can.
There are times when an "employee" is really a founder, but the founders don't want to admit this. Even if there is a salary, the financial situation may be very unstable (ie., making payroll may be an issue). This is often the case for very early employees, and seems to happen most when non-technical founders are hiring their first progammer. In this case, I think the founders should really be either bringing on a technical person as a founder or paying a contractor. It's a sign of a pretty clueless bunch of managers, either way.
The other situation (which I am in right now) is when you have a fully functioning "startup". The business may not be cash flow positive, but it's been around for a while, has a stable funding base, a product, and probably some customers. In this case, a very small bit of equity is reasonable, because the employee is really working for a salary, plus a chance at a nice payout (maybe up to a mil, but no more than that).
My advice is that you evaluate the company - they need to be in category 2 for this offer to make sense.
By the way, I agree with you that the risk can be "greater" in some situations for the employee than for the founders. The founders have more control over the exit than the employees do, and they'll see trouble coming from much further out.
I understand your conundrum. I was in the very same position. I would suggest doing your own startup. Also, on the same topic, I would like to discuss with you the potential for a possible partnership between you and I on a venture. brent.griffith AT gmail [.] com if you're interested. Let's see if our skills are complementary.