Why not? The salary money is real, even if you discount for the fact that it is not available immediately. The employee could as well stay at their current job and actually invest half of their salary in whatever they please - including a startup which pays its employees half of market salary.
Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say:
• Employee given 1%
• Two additional funding rounds at 30% dillution each bring that to 0.49%
• In a $30 million exit the employee will get $147,000
• Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter)
• So the adjusted value, including probability of failure, of those options is just $14,700
You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).
You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.
Something to further emphasize here: time to exit.
Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.
That's partly true, but there are some subtleties not conveyed by such:
If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life.
And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset).
Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.
I hope I didn't just get screwed then..I've been given 1.5% equity as a first employee, with an option to get additional 1.5% over the next 9 months (0.5% every quarter). With a salary of 65,000. I'm the web programmer developing the product from the ground up. We haven't yet raised any VC money, it's self funded by the 2 co-founders, one of which is a doctor who is primarily the finance arm. Did I just seal my fate? I'm 22 and have not dealt with being part of a technology startup so I wasn't really sure what percent equity was fair. I believe my shares won't get diluted with investment rounds based on the paperwork that I signed though, they're preferred as opposed to common, if that makes any difference?
I am very wary of assuming too much from the limited details you've given.
However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now?
If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.
Well you're building their product for 1.5% or potentially 3% and the product hasn't even been validated by outside investment... I think you know the answer.
You're only 22 though, so I'd make the most out of it (learning experience).
One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.
"One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation."
If they view this guy as a code monkey now, when he comes in to renegotiate they'll tell him to take a flying leap on the assumption they can just hire some random off craigslist to replace him. Assuming he's a good developer this is of course not true, but they won't know it. Eventually they will realize the terrible mistake they made when the replacement screws the pooch, but that's like 6 months later after the original developer is long gone.
If they're just becoming successful they probably won't want to rock the boat too much by firing their first employee. You could be right though if they're real douches.
It hasn't yet been validated by outside investment, but it's somewhat being validated by user tester sessions -- 3 user sessions thus far which were pretty positive (albeit they're somewhat close to the co-founders so judgement/impressions might be skewed, which is what I'm afraid of..I think they feel the same way and are looking for several outsider testers)
My dad told me the same thing, to use it as a learning experience and see how things play out over the next year...if nothing else I made 65k and it could potentially be a hit of which I own a 3% stake, worst case scenario I now have 65k in my pocket that I can use to come up with and fund my own ideas (as I have several).
Curious what the co-founder does, is he the idea guy, or is he the dude that will start thinking about marketing and sales sometime after the product is done. Is he getting a salary from the primary investor or is your salary the only expense.
If your salary is the only expense, then you are investing $65k a year as well since you are working for half normal salary in order to design and build the entire product that is the basis of the company from scratch. Given this, I'd estimate your contribution as either 50% or 100% of the company value depending on whether or not you are getting this salary from the investor, aka founder man.
Not that you'll get this of course, unless you had previously chosen to go for 100% by simply developing it on your own after asking yourself what the other guys were contributing (not much).
But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job. Thinking you were screwed won't do anyone any good, but if a job appears that offers more than $65k, if it was me in your position I wouldn't feel all that bad about taking it.
"But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job."
No. Per your contract, you are an at-will employee. You are free to quit at any time, and if you're a valuable employee that gives you a constant source of bargaining leverage.
$65k for a 22 year old is not "half normal salary". In many places in the US, that is full salary. And you are way overvaluing the contribution. Sure, building the whole system is a big part of the company but lots of people could do it. You are also undervaluing sales which for many companies is harder and more valuable than the technology.
He is single handedly creating the product that is to be the source of their income from scratch. $65k is much less than half salary for this position.
But he's also been given a % equity stake as well. You can argue it's not enough, but he's got a % stake in this which is far beyond what most people have where they're working.
But that's not how it works. There are a lot of people who could do it. In fact, there are consultancies who could do it, probably better, for less than $65k.
The value of your equity depends. If the company never takes outside investment then a $35 million "dipshit" exit makes you a millionaire - a $10 million exit in three years would offer an ROI which would give you options (though not (Fuck You Money").
On the other hand, how much of a track record do the cofounders have in building and selling companies - as opposed to building and running lifestyle businesses?
The issue regarding preferred shares is a potential lack of voting rights. The other issue is what particular preferences those shares get.
Finally, at 22 just see what happens and learn something - the difference between serial entrepreneurs and serial failures is largely a matter of semantics and persistence.
With a salary of 65,000, you aren't making that much below market for a 22 y/o developer. The CS grads I know got offers in the range of 40-85k, so you are square in the middle. It's not like you are making $30k.
Typical 22 yr old developer making market rate isn't in charge of creating the foundational product of a company single-handedly. So those numbers are irrelevant. For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary. He's not a code monkey, he's the main guy in charge of, and doing, it all.
A typical 22 year old developer is not capable of creating a foundational product. Sounds like he's getting what he's worth. Doesn't matter what the developer they should have hired would be worth.
People always want to skimp on developers. Would you hire a new college grad to design a $100 million building? No? Then why hire one to build the foundation for a $100 million company? It's certainly not simpler.
I was in a similar situation to the OP about ten years ago - 21 years old, very little experience, first technical employee at a company founded by two doctors, low pay, meagre equity given my responsibilities - and honestly, in retrospect I think they should have taken on a full-fledged technical co-founder with more experience and full equity instead of me. I did pretty well on the technical side, all things considered, but I didn't have the knowledge, confidence, and authority to assert myself when the founders pushed the product in unmarketable and technically unrealistic directions. We wasted far too much time writing code that did more to resolve disputes between the founders than to address the needs of potential customers.
As a result of that experience, I'm extremely skeptical of companies with older non-technical founders that hire inexperienced programmers as their first technical employees. It usually means they just want a code monkey to implement their brilliant ideas, and don't understand the engineering and financial challenges inherent in any startup.
I do find that some of the co-founders "ideas" are technically not feasible and this is causing some distress, when trying to explain it to them how things work. Both of the 2 co-founders are mid-to-late 30s, one is a doctor and one had successfully built and sold a company (although in an entirely different industry, a consultant recruiting company actually). Both of the founders have limited technical knowledge and I don't think they understand the iterative process that programming is, they don't understand about refactoring code and rewriting/etc...and so as soon as I create a new feature, they already want to move onto creating another feature without refining what we have
They basically have a time-line of launching in March 2012, and we only started in May of this year. One thing that's worrying me is that I haven't yet done a second iteration of the code and they keep wanting more things added..and I feel that we're not focusing on solving one problem but many (too many). Products that are successful start off as being simple and then more gets added over time...
One of the issues is that one of the co-founders is my Dad's former co-worker's Son, and even though I have some say now that I have equity, it won't necessarily be heard because what does a 22 year old know anyway, right? My suggestions might seem too radical to them, and that is to drop a bunch of what we have, and now that we've had some testers, to focus on what the testers liked, and remove what they didn't.
Several of the testing sessions that we had, the people using this new service had mentioned that because of the relatively private nature of this service, that they feel uncomfortable with a linkedin/facebook login button on registration because they feel like the private information available on the service will be shared with other more public networks. My vote is to drop these "features" but the cofounders seem insistant that we keep them and feel that it "adds legitimacy" even though the testing sessions seem to show otherwise. There are other examples of this based on tester feedback, this is just one of them
"A typical 22 year old developer is not capable of creating a foundational product."
Yes that is what I said. I'm not sure if you're restating my point as a rebuttal or if you are agreeing with me though.
If you can create a foundational product, you are worth what I say. If you can't, then it appears the founders don't know what they are doing and the equity is worth absolutely nothing because the business has no chance of success.
> For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary.
This is delusional. $500k isn't the going rate for senior software architects even at major companies. It's certainly not the going rate for a junior engineer building a product that may not even have a market.
That is a perfectly fine deal for you. $65k plus 1.5-3% equity is generous compensation for a 22 year old at a pre-funded company. Don't get too hung up on the fact that you are "developing the product from the ground up". The going rate for that is perhaps $10k-100k.
On my To Do list is to invent a time machine and send a decent lawyer 15 years back in time to teach the younger me some sense about early stage companies.
1.5% - 3.0% is fair for a first employee if you are also earning a decent salary, it's comparable to the deals I've seen around the Valley.
If you weren't making a salary, you should have a conversation about being a cofounder instead. It would be reasonable for you to ask for a lower salary and more equity, or no salary and a cofounder title.
You would probably be making $20,000 - $30,000 more at a non-startup job but getting no equity (and have a more boring job). The tradeoff is probably worth it depending on your risk preferences.
You should make sure that your stock is the same kind as the founders stock. If not, you should understand the difference. As long as everybody gets diluted equally in case of stock issuance and the guys aren't super shady, you are probably safe. Also, make sure that your stock grant has an acceleration clause and that it all vests in case of an exit. Otherwise you are definitely a chump.
But comparing to the opportunity of somebody else is irrelevant. If the employee has 500k to invest, they're free to get the same terms as the investor. It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy. Ergo, the investor gets paid more.
Uhm, I did read the article, and no, 'putting in' 50k by getting a lower salary is not 'being an investor to all intents and purposes'. For one because the investor brings cash, the guy just work and time. Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.
The investors invests $500k NOW, usually with no ability to take their money back. The employee invests $136 each day with the option to leave and cut their losses anytime.
^^ This. Plus, the employee is coming on AFTER a substantial fund raising round, and should not expect the same terms since the company is already validated (and capitalized); thus, the "investment" risk is reduced.
I also agree with the other posters: "paycheck" employees are not good hires early on in a startup.
> The employee invests $136 each day with the option to leave and cut their losses anytime.
(a) That depends on where you are.
(b) You are ignoring the opportunity cost to the employee (though admittedly this is consistent with the original article).
(c) You are ignoring the potential adverse consequences on the employee's future career of being associated with a failed start-up, leaving a job early to chase dreams, etc. (Please don't tell me that it's better to have a CV showing you worked at several failed start-ups than it is to have a solid track record of demonstrable good results at established companies. That is the kind of fiction that only people in the start-up community manage to believe.)
Fair point - the value invested by the employee should be discounted, but:
"usually with no ability to take their money back"
Actually, the investors have more ability to take their money back than the employee. The investors can at least sell what's left of the company, while the investment by the employee is unrecoverable.
> Now you can argue that cash is 'fungible' and how the real value comes from the employees - blah blah blah the market says otherwise.
"The market says x so it must be true" is a lousy argument. Markets get distorted all the time by unequal bargaining positions, one side having better information than the other, etc.
If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve. And if you're hiring employee #1 to join a small team of founders, you want someone who is at least at the top of that range.
What? I'm not saying 'the market says x so it must be true' - I'm saying 'the market sets the price and it has set at in such a way that one can deduce that it values cash over labor'. In other words, coming by cash is harder than coming by somebody who does whatever it is that the guy in the article would be doing (presumably programming). Which is a statement that is entirely reasonable, objective and morally neutral.
> In other words, coming by cash is harder than coming by somebody who does whatever it is that the guy in the article would be doing (presumably programming). Which is a statement that is entirely reasonable, objective and morally neutral.
Sure, and all I'm saying is that it won't necessarily remain the case if the obvious distortion in the market today is fixed by better informing software developers (or early employees generally, for that matter) of their true worth. That seems to be exactly what this article is trying to do.
"If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve."
That's ludicrous, because you're taking a narrow (and objectively wrong) definition of 'market' and 'market value'. The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference, and hence there is less room in willingness to pay (well that's talking from assumptions that are favorable to your argument - I think the much more rational explanation is that the '10 times difference' myth is a programmer circle jerk) (I'm a programmer myself)
> That's ludicrous, because you're taking a narrow (and objectively wrong) definition of 'market' and 'market value'.
No, I'm just suggesting that 'market value' has little relevance to 'actual value of contributions'.
> The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference
The thing is, if that were true, employers wouldn't be willing to spring for huge pay rises when they realise they are otherwise sure to lose a key developer. However, in my experience, they often are willing to go to those lengths.
I think there is a much simpler explanation for the discrepancy between performance and compensation for programmers: too many good programmers don't realise how much more productive they are than the bad ones, and they often don't have the kind of mindset and/or training to fight for better compensation alone, and in the absence of professional bodies/unions/whatever they will just accept what they are given. This doesn't mean they aren't worth more, it just means that as a profession software developers tend to be lousy negotiators compared to the people who do it for a living.
As for the 10x thing, it's actually much worse than that, because there are a lot of programmers out there who are clearly (to the rest of the programmers on their team) making a net negative contribution. They drain more from other positive contributors than they contribute themselves. In short, you would be better off firing them. This often doesn't happen, whether because employment laws make it prohibitively difficult in your jursdiction or just because management are too incompetent to measure and understand the problem so they can deal with it.
(I always find it odd that managers in software development groups seem convinced of their own worth and that it is higher than most people working under them, yet they rather consistently fail to measure and control even basic productivity and progress within their groups. If managers can't figure out which developers are the 10x guys and who to fire, maybe the managers need to take a pay cut to their own true and very small value until they can.)
>It's about scarcity: apparently the founders think that finding an investor with 500k is harder than finding the tech guy
Sure, and this article looks like an attempt to educate the tech guy, thus making "tech guys who don't properly valuate their contribution" more scarce.
One more factor to consider, though: angel or Series A preferred shares often cost much more per share than the employee's per-share Common strike price. The option-exercising employee has a lower outlay and thus less risk. Of course, in all but the most favorable exits the reward per share will also be smaller.
...and party A didn't encourage them to do so (or give them enough information to do so). That's the part I dislike about all the ads for early hires. 'Meaningful equity' is rarely put into context.
Without having a bias towards the investor community, I think this comparison is only done from a money standpoint. Its also important to note what other value investor money and involvement brings to the organisation.
Investors bring contacts from their immediate and extended network, sometimes a strong brand (think SV Angel/ YC), mentorship, experts in the given field, and media attention.
This guy can work for a year and invest his money on the same terms as angel investors.
The only technical problem how to do it tax free, b/c you obviously owe income tax and in some countries like Israel also VAT.
There are some solutions, but they are not trivial. The employee actually buys a convertible debt in the company on the similar terms as angel investor and can cash out on later rounds.
Or he can be a freelancer with his own company, investing from company's funds (no tax) and after the exit pulling the money from the company as dividends and getting to have only one (low) tax event.
Depends on if the startup got production material and deals. Letting people in more than a very small equity and salary is just plain stupid if you worked hard for a year to get anywhere. Hardest thing is not to compe up with an idea, hardest things are: start, execute, ship, and have models to get paid. When these are almost done, new founders are not needed - they should have joined earlier.
I've lately met people tryng to get onto the boat as if all we worked for was air. If I take someone more in for more than a good salary he/she better be a unshaped diamond.
Of course, the article mentions 50% of normal salary for 1% - that is just so stupid. The people who wants to signed up on that cannot be unshaped diamonds.
No offense, but this is horseshit and the math is embarrassing.
The number of people ready to invest $500k, for whom this is "a small part of his capital," is about 1/1000th of the number of people who will enjoy working and learning in a small, exciting company, and having more input into the product, regardless of total potential for financial gain. So, the value of $500k in cash from an accredited investor is already worth more than the time investment of the average employee, for whom there are replacements lining up. [Edit] This is to say nothing of the additional value that an investor adds.
Even if that were not the case, and this were strictly a math exercise, the investor is putting in $500k NOW. You're putting in $50k spread out over the next 365 days, during which a solid company's valuation may go up by ten fold. Right now, your $50k is worth 1% of the company. But you're not putting in $50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136 the next day. Good luck making an early stage investment in an exciting startup for $136. I have never seen early stage stock available on lay away.
Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.
> "... the average employee, for whom there are replacements lining up"
The article is talking about the first employee. If a tech startup is happy to accept 'average' employees at that stage it's probably doing it wrong. Also, if there are really that many people lining up, then why offer equity at all?
Please, for the sake of the global nature of the internet, state something like
"based on the assumption that we're talking about this specific country/region and based on my experience with..."
$100.000 seems to be the current salary of the friend in question for that blog post. If you don't know where he's based and what his costs and standard of living are, how can you judge the person as being 'B' level?
Also - what the hell is a 'super star team member'?
Edit: Just for fun I put the author's name into Google. According to LinkedIn/Twitter he's from Israel. If we assume that the startup was local as well (why not? And why should it be in the most expensive areas of the States?) $100.000 is really good salary. High tech (i.e. programmers) employees are already overpayed here compared to the everyone else and 100.000 USD / 30.000 NIS per month is a good salary even in that field.
Sorry, I did jump to conclusions. What I saw was this: Someone who usually makes $100k is being offered $50k and 1% of the company. They were excited.
If you're in Kenya and $50k implies you're a C-level executive, then you're not excited and boasting to your friends about 1%. The two figures combined, plus the excitement, implies that the person is being compensated at half a reasonable rate, and being offered a stock % on par with a less than VP (and maybe even Director) role. If it's not, then they're excited about an noncompetitive pay package and the article should have mentioned that as well.
- the guy was excited about the company/the job opportunity. This is, at least in my world, first and foremost not connected to the money to be made. 'Yay, I could join a cool startup'
- the guy got a safe/decent job (based on the assumption that he's in IL and his salary is _good_) and probably never had any experience with the math behind funding rounds.
You are, according to your profile, a startup founder. Therefor I assume
- you did the math at least once (maybe before for other startups, how can I tell..) and it's obvious. Now.
- you still base your assumptions on experiences that you cannot expect to be given
- (tongue in cheek, not completely serious) you might be the guy on the other side of the table (founder), asking for talent to accept a similar/related offer
I for one liked the article. My startup experience is rather limited, but I did join as a first employee once, with a big paycut and it didn't work out for me. I think it makes sense to at least remind people that startups are a risk not only for the founders.
Yes, to be clear, I'm a founder. All of my team whose salaries are in that range have better stock arrangements. I didn't think the point of the argument was whether the comp package was competitive. It was about comparing salary investment to an investor's investment. I just think the argument is flawed.
Really, the driving point is that an investor puts in all money up front at the immediate valuation. An employee puts minimal money in daily with the option to leave anytime, while they have day to day knowledge (hopefully) of the health of the company.
The author seemed to be arguing that the investment of salary wasn't being valued at what an investor receives. But they ignored all kinds of factors, such as the time over which the salary is "invested", and the fact that the investor may invest time and other resources, while the employee is likely to invest only time. Just having certain investors gets you other investors, gets you press, gets you all kinds of things. Very few employees get you the same things. They get you hard work. It's valuable. But the salary forfeited is just one very small component. Trying to convince employees that they should think of their $50k as the same as a $50k angel investment is leading them astray.
[Edit] All of this being said, yes, everyone who takes stock in lieu of pay takes risks. Employees should almost certainly treat options as icing on the cake, and expect nothing from them. Then, be pleasantly surprised if they get a return.
Ask Marla Wood, the "administrative assistant and bookkeeper" of Microsoft, who reputably got screamed at by Bill Gates when she had the gall to file an overtime pay dispute. I don't think she had any options.
We're comparing the value of an early employee to that of an investor. The article does it by comparing investment dollars and salaries. I tried to keep it in that framework. But since you brought it up, do you know what my investors do when I call them after hours with an emergency? They get to work, tirelessly. They don't file pay disputes.
I'm not arguing against employee rights. I'm letting you point out the difference between an early employee who complains about overtime and a good investor. It's about more than money.
How many startups end up being the next Microsoft or Google? With this kind of reasoning, buying lottery tickets would be a sound investment: Look at those guys who won 100 millions!
With the reasoning in the article, "you're probably getting screwed." I guess we both took it to extremes. Either way, the math in this article is pointless. The value of an employee and an investor's contribution should almost always be more than the sum of their financial contributions. In fact, in many cases, those should be the least important. That's all.
Someone making a normal salary at a normal job will probably keep making roughly this amount.
An early employee making a low salary plus options at a startup will learn the skills to create a bigger piece of wealth on their own. Why do I believe this to be true? Several of the people who worked for my startups previously have. Also, the ride is rather fun especially for someone shielded from most of the downsides and this has value.
Why the disparity between founders and early employees you ask? There is a huge (order of magnitude+) difference in risk and, frankly, a differential in skills which we don't talk about for reasons of politeness.
It'd be very interesting to look at real data from real companies and see how early employees made out. And naturally you'd want to include a wide spectrum of companies, both successful and unsuccessful. You could look at what rates people were actually paid, how much stock/options they got, how much it turned out to be worth and so on.
If only there were someone around here with access to a lot of data about startups...
I guess they're a bit conflicted though: YC startups need employees, and if their results showed that the early employees were getting screwed, they might not want to release them.
As one data point, following the recent sale to HP, Autonomy staff in Cambridge split £30m between 175 people[1].
I'm in Cambridge and know various people who work/worked there, so I'm fairly sure that those 175 include many of the remaining "early employee" group. They'll be getting a nice windfall, obviously, but it's not never-work-again money.
For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or so for his share of the company.
For those not familiar with the numbers, Autonomy was basically the most successful software company in the UK, and the sale valued its shares at around a 60% premium give or take market fluctuations at the time of the announcement. It was founded in 1996. HP is the currently the biggest IT company in the world.
In other words, this exit is as big as anything in its generation is going to get in my country, and if you weren't founder/investor/board level, you weren't retiring from it.
Exactly. And I'd bet that the employee pool is conditional on staying with HP for 1-4 years, whereas Lynch will get most or all of his payout immediately.
I wonder if the Startup Genome guys would be interested in tackling that? They seem more focused on "what makes a startup successful," but they seem to work by doing surveys like what you're talking about.
Works the same way for contractors. Take a lower rate, delay payment, accept warrants instead of grants...its all investment, and should be on the same terms as any other early investor.
The comparison math forgot the impact of taxes. The employee's $50K "investment" is pretax money, whereas the investors are putting in after-tax dollars. The marginal combined state, federal, and payroll tax rate on that second $50,000 in earnings is probably over 40%, so maybe the actual take-home salary given up for the deal is $29,000. Plus the equity earned is taxed at much lower capital gains rates (15%).
Also don't forget that if the employee is not accredited, it's unlikely he could (legally) invest at all. So there's an opportunity that must be valued, as well.
There is risk associated with hiring an employee. There is no risk associated with a cash investment, There is investment risk, the risk associated with making the wrong investment like hiring the wrong employee.
The investor with 50k in hand now vs the 100K per year employee willing to work for 50k. The Investor wins. With the 50K the start up can hire the 100k per year employee for 50k. If thing do not work out you can fire them and hire another one.
The money is less risky giving it a higher value, plus its all upfront which has already been discussed.
Nice polarising title, but:
1. You're not getting screwed, you are making a choice, which is driven by market factors like your alternatives, expected utility from the job etc.
2. The numbers given are quite extreme - if the guy is really worth 100k I find it hard to believe that he would be offered 50k and only 1%. Also his option stake could raise with more responsibility given, this is just the initial negotiation point as I see it.
3. It only makes sense in the Valley or US.
Honestly, going in as the first employee of a startup shouldn't be a decision made by someone just looking for compensation. Rather, a first employee should be someone who is so hooked on the idea of that startup, they focus on the ability to build a company from the ground up. It's a risk, but if all else fails, they can find a job working for an established business that can offer those numbers. Joining a startup early on should be based on beliefs and passion for the company, not a paycheck.
Yes, but is $50,000 all that bad? Sure, it may not be what your skill bracket is worth, but I think you can live quite well (given that your frugal) on that salary. What's more is that you'll be more motivated to do good work and insure that the business grows so that your salary does as well. There are benefits and setbacks but that's up to the individual to make the choice. If you're going to work at a startup, you should understand the risks.
If the startup isn't considering their first employee a crucial hire then they're doing it wrong.
And if you, as a job seeker, are dependent to land a potentially low-paying job at a startup to get a "real" job, then you probably aren't that "crucial hire" the startup is looking for.
Leaving aside that 1% is, in reality, too small a % for employee #1 of most startups, there are two factors that might make it worth it:
1. Route from employee #1 to v. senior position (with commensurately higher salary) is shorter* irrespective of whether the employee stays with the startup or moves on. (*Shorter than if the employee was working as a small cog elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can be made.
2. Route from employee #1 to owning your own funded startup is again shorter. As employee #1, if you do a good job, then you'll be considered a de facto founder, and thus will have that to add to your pitch when it is your turn to try and raise $500k.
A third factor is that money is not everything. Working for a startup can be awesome, and might give you a whole range of professional and life experiences that you would not get when sucking down at your $100k pa teat.
Agreed. One of the biggest intangibles of being an early employee is the amount learned, which (I imagine) is better than the learning for an investor.
The path of early employee => founder is pretty well trodden. Aaron Patzer of Mint and Drew Houston of Dropbox are two immediate examples that come to mind. Who else am I missing?
Not entirely an accurate depiction of equity calculations, but it is nice to see as many people as possible doing these back-of-the-napkin sketches to educate. Mark Suster has some great posts about equity math.
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[ 3.6 ms ] story [ 186 ms ] threadThey raised 500K at a high 2M (pre-money) valuation, giving away 20%
The 2M is before the 500K was added, so it is 500K of 2.5M total for 20%.
"Taking a pay cut that is more than the market value of your equity stake? You are probably getting screwed."
• Employee given 1%
• Two additional funding rounds at 30% dillution each bring that to 0.49%
• In a $30 million exit the employee will get $147,000
• Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter)
• So the adjusted value, including probability of failure, of those options is just $14,700
You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).
Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.
Seed numbers should tell you what other (professional) investors consider to be a 'good deal'.
If you are willing to get in and worse conditions, you are either brilliant or..
If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life.
And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset).
Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.
However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now?
If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.
You're only 22 though, so I'd make the most out of it (learning experience).
One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.
If they view this guy as a code monkey now, when he comes in to renegotiate they'll tell him to take a flying leap on the assumption they can just hire some random off craigslist to replace him. Assuming he's a good developer this is of course not true, but they won't know it. Eventually they will realize the terrible mistake they made when the replacement screws the pooch, but that's like 6 months later after the original developer is long gone.
My dad told me the same thing, to use it as a learning experience and see how things play out over the next year...if nothing else I made 65k and it could potentially be a hit of which I own a 3% stake, worst case scenario I now have 65k in my pocket that I can use to come up with and fund my own ideas (as I have several).
If your salary is the only expense, then you are investing $65k a year as well since you are working for half normal salary in order to design and build the entire product that is the basis of the company from scratch. Given this, I'd estimate your contribution as either 50% or 100% of the company value depending on whether or not you are getting this salary from the investor, aka founder man.
Not that you'll get this of course, unless you had previously chosen to go for 100% by simply developing it on your own after asking yourself what the other guys were contributing (not much).
But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job. Thinking you were screwed won't do anyone any good, but if a job appears that offers more than $65k, if it was me in your position I wouldn't feel all that bad about taking it.
No. Per your contract, you are an at-will employee. You are free to quit at any time, and if you're a valuable employee that gives you a constant source of bargaining leverage.
On the other hand, how much of a track record do the cofounders have in building and selling companies - as opposed to building and running lifestyle businesses?
The issue regarding preferred shares is a potential lack of voting rights. The other issue is what particular preferences those shares get.
Finally, at 22 just see what happens and learn something - the difference between serial entrepreneurs and serial failures is largely a matter of semantics and persistence.
People always want to skimp on developers. Would you hire a new college grad to design a $100 million building? No? Then why hire one to build the foundation for a $100 million company? It's certainly not simpler.
As a result of that experience, I'm extremely skeptical of companies with older non-technical founders that hire inexperienced programmers as their first technical employees. It usually means they just want a code monkey to implement their brilliant ideas, and don't understand the engineering and financial challenges inherent in any startup.
They basically have a time-line of launching in March 2012, and we only started in May of this year. One thing that's worrying me is that I haven't yet done a second iteration of the code and they keep wanting more things added..and I feel that we're not focusing on solving one problem but many (too many). Products that are successful start off as being simple and then more gets added over time...
One of the issues is that one of the co-founders is my Dad's former co-worker's Son, and even though I have some say now that I have equity, it won't necessarily be heard because what does a 22 year old know anyway, right? My suggestions might seem too radical to them, and that is to drop a bunch of what we have, and now that we've had some testers, to focus on what the testers liked, and remove what they didn't.
Several of the testing sessions that we had, the people using this new service had mentioned that because of the relatively private nature of this service, that they feel uncomfortable with a linkedin/facebook login button on registration because they feel like the private information available on the service will be shared with other more public networks. My vote is to drop these "features" but the cofounders seem insistant that we keep them and feel that it "adds legitimacy" even though the testing sessions seem to show otherwise. There are other examples of this based on tester feedback, this is just one of them
Yes that is what I said. I'm not sure if you're restating my point as a rebuttal or if you are agreeing with me though.
If you can create a foundational product, you are worth what I say. If you can't, then it appears the founders don't know what they are doing and the equity is worth absolutely nothing because the business has no chance of success.
This is delusional. $500k isn't the going rate for senior software architects even at major companies. It's certainly not the going rate for a junior engineer building a product that may not even have a market.
Edit: Trolling successful!
If you weren't making a salary, you should have a conversation about being a cofounder instead. It would be reasonable for you to ask for a lower salary and more equity, or no salary and a cofounder title.
You would probably be making $20,000 - $30,000 more at a non-startup job but getting no equity (and have a more boring job). The tradeoff is probably worth it depending on your risk preferences.
You should make sure that your stock is the same kind as the founders stock. If not, you should understand the difference. As long as everybody gets diluted equally in case of stock issuance and the guys aren't super shady, you are probably safe. Also, make sure that your stock grant has an acceleration clause and that it all vests in case of an exit. Otherwise you are definitely a chump.
I also agree with the other posters: "paycheck" employees are not good hires early on in a startup.
(a) That depends on where you are.
(b) You are ignoring the opportunity cost to the employee (though admittedly this is consistent with the original article).
(c) You are ignoring the potential adverse consequences on the employee's future career of being associated with a failed start-up, leaving a job early to chase dreams, etc. (Please don't tell me that it's better to have a CV showing you worked at several failed start-ups than it is to have a solid track record of demonstrable good results at established companies. That is the kind of fiction that only people in the start-up community manage to believe.)
Fair point - the value invested by the employee should be discounted, but:
"usually with no ability to take their money back"
Actually, the investors have more ability to take their money back than the employee. The investors can at least sell what's left of the company, while the investment by the employee is unrecoverable.
"The market says x so it must be true" is a lousy argument. Markets get distorted all the time by unequal bargaining positions, one side having better information than the other, etc.
If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve. And if you're hiring employee #1 to join a small team of founders, you want someone who is at least at the top of that range.
Sure, and all I'm saying is that it won't necessarily remain the case if the obvious distortion in the market today is fixed by better informing software developers (or early employees generally, for that matter) of their true worth. That seems to be exactly what this article is trying to do.
"If markets were even close to accurate, consider that the range of pay for professional software developers would vary by at least a factor of 10 just around the middle of the bell curve."
That's ludicrous, because you're taking a narrow (and objectively wrong) definition of 'market' and 'market value'. The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference, and hence there is less room in willingness to pay (well that's talking from assumptions that are favorable to your argument - I think the much more rational explanation is that the '10 times difference' myth is a programmer circle jerk) (I'm a programmer myself)
No, I'm just suggesting that 'market value' has little relevance to 'actual value of contributions'.
> The spread in pay is much lower than you suggest it should be because the market discounts for the difficulty in quantifying the marginal added value between programmers that you suggest exists - in other words, it's too hard for employers to find out about this difference
The thing is, if that were true, employers wouldn't be willing to spring for huge pay rises when they realise they are otherwise sure to lose a key developer. However, in my experience, they often are willing to go to those lengths.
I think there is a much simpler explanation for the discrepancy between performance and compensation for programmers: too many good programmers don't realise how much more productive they are than the bad ones, and they often don't have the kind of mindset and/or training to fight for better compensation alone, and in the absence of professional bodies/unions/whatever they will just accept what they are given. This doesn't mean they aren't worth more, it just means that as a profession software developers tend to be lousy negotiators compared to the people who do it for a living.
As for the 10x thing, it's actually much worse than that, because there are a lot of programmers out there who are clearly (to the rest of the programmers on their team) making a net negative contribution. They drain more from other positive contributors than they contribute themselves. In short, you would be better off firing them. This often doesn't happen, whether because employment laws make it prohibitively difficult in your jursdiction or just because management are too incompetent to measure and understand the problem so they can deal with it.
(I always find it odd that managers in software development groups seem convinced of their own worth and that it is higher than most people working under them, yet they rather consistently fail to measure and control even basic productivity and progress within their groups. If managers can't figure out which developers are the 10x guys and who to fire, maybe the managers need to take a pay cut to their own true and very small value until they can.)
The market says the employee could make twice as much elsewhere. Just sayin.
Sure, and this article looks like an attempt to educate the tech guy, thus making "tech guys who don't properly valuate their contribution" more scarce.
There's so many things in life where party A gets away with soaking party B because B didn't perform some simple arithmetic.
But your offer of equity paid on a probabilistic basis intrigues me.
Investors bring contacts from their immediate and extended network, sometimes a strong brand (think SV Angel/ YC), mentorship, experts in the given field, and media attention.
There are some solutions, but they are not trivial. The employee actually buys a convertible debt in the company on the similar terms as angel investor and can cash out on later rounds.
Not relevant for freelancers without company, b/c they will need to pay taxes+VAT on income.
I've lately met people tryng to get onto the boat as if all we worked for was air. If I take someone more in for more than a good salary he/she better be a unshaped diamond.
Of course, the article mentions 50% of normal salary for 1% - that is just so stupid. The people who wants to signed up on that cannot be unshaped diamonds.
The number of people ready to invest $500k, for whom this is "a small part of his capital," is about 1/1000th of the number of people who will enjoy working and learning in a small, exciting company, and having more input into the product, regardless of total potential for financial gain. So, the value of $500k in cash from an accredited investor is already worth more than the time investment of the average employee, for whom there are replacements lining up. [Edit] This is to say nothing of the additional value that an investor adds.
Even if that were not the case, and this were strictly a math exercise, the investor is putting in $500k NOW. You're putting in $50k spread out over the next 365 days, during which a solid company's valuation may go up by ten fold. Right now, your $50k is worth 1% of the company. But you're not putting in $50k NOW. You're putting in $0 NOW. You're putting in $136 tomorrow, and $136 the next day. Good luck making an early stage investment in an exciting startup for $136. I have never seen early stage stock available on lay away.
Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.
The article is talking about the first employee. If a tech startup is happy to accept 'average' employees at that stage it's probably doing it wrong. Also, if there are really that many people lining up, then why offer equity at all?
Please, for the sake of the global nature of the internet, state something like
"based on the assumption that we're talking about this specific country/region and based on my experience with..."
$100.000 seems to be the current salary of the friend in question for that blog post. If you don't know where he's based and what his costs and standard of living are, how can you judge the person as being 'B' level?
Also - what the hell is a 'super star team member'?
Edit: Just for fun I put the author's name into Google. According to LinkedIn/Twitter he's from Israel. If we assume that the startup was local as well (why not? And why should it be in the most expensive areas of the States?) $100.000 is really good salary. High tech (i.e. programmers) employees are already overpayed here compared to the everyone else and 100.000 USD / 30.000 NIS per month is a good salary even in that field.
If you're in Kenya and $50k implies you're a C-level executive, then you're not excited and boasting to your friends about 1%. The two figures combined, plus the excitement, implies that the person is being compensated at half a reasonable rate, and being offered a stock % on par with a less than VP (and maybe even Director) role. If it's not, then they're excited about an noncompetitive pay package and the article should have mentioned that as well.
- the guy was excited about the company/the job opportunity. This is, at least in my world, first and foremost not connected to the money to be made. 'Yay, I could join a cool startup'
- the guy got a safe/decent job (based on the assumption that he's in IL and his salary is _good_) and probably never had any experience with the math behind funding rounds.
You are, according to your profile, a startup founder. Therefor I assume
- you did the math at least once (maybe before for other startups, how can I tell..) and it's obvious. Now.
- you still base your assumptions on experiences that you cannot expect to be given
- (tongue in cheek, not completely serious) you might be the guy on the other side of the table (founder), asking for talent to accept a similar/related offer
I for one liked the article. My startup experience is rather limited, but I did join as a first employee once, with a big paycut and it didn't work out for me. I think it makes sense to at least remind people that startups are a risk not only for the founders.
Really, the driving point is that an investor puts in all money up front at the immediate valuation. An employee puts minimal money in daily with the option to leave anytime, while they have day to day knowledge (hopefully) of the health of the company.
The author seemed to be arguing that the investment of salary wasn't being valued at what an investor receives. But they ignored all kinds of factors, such as the time over which the salary is "invested", and the fact that the investor may invest time and other resources, while the employee is likely to invest only time. Just having certain investors gets you other investors, gets you press, gets you all kinds of things. Very few employees get you the same things. They get you hard work. It's valuable. But the salary forfeited is just one very small component. Trying to convince employees that they should think of their $50k as the same as a $50k angel investment is leading them astray.
[Edit] All of this being said, yes, everyone who takes stock in lieu of pay takes risks. Employees should almost certainly treat options as icing on the cake, and expect nothing from them. Then, be pleasantly surprised if they get a return.
I'm not arguing against employee rights. I'm letting you point out the difference between an early employee who complains about overtime and a good investor. It's about more than money.
An early employee making a low salary plus options at a startup will learn the skills to create a bigger piece of wealth on their own. Why do I believe this to be true? Several of the people who worked for my startups previously have. Also, the ride is rather fun especially for someone shielded from most of the downsides and this has value.
Why the disparity between founders and early employees you ask? There is a huge (order of magnitude+) difference in risk and, frankly, a differential in skills which we don't talk about for reasons of politeness.
I guess they're a bit conflicted though: YC startups need employees, and if their results showed that the early employees were getting screwed, they might not want to release them.
I'm in Cambridge and know various people who work/worked there, so I'm fairly sure that those 175 include many of the remaining "early employee" group. They'll be getting a nice windfall, obviously, but it's not never-work-again money.
For contrast, founder and CEO Mike Lynch has reportedly netted a tidy £500m or so for his share of the company.
For those not familiar with the numbers, Autonomy was basically the most successful software company in the UK, and the sale valued its shares at around a 60% premium give or take market fluctuations at the time of the announcement. It was founded in 1996. HP is the currently the biggest IT company in the world.
In other words, this exit is as big as anything in its generation is going to get in my country, and if you weren't founder/investor/board level, you weren't retiring from it.
[1] http://www.businessweekly.co.uk/hi-tech/12571-autonomy-cambr...
The investor with 50k in hand now vs the 100K per year employee willing to work for 50k. The Investor wins. With the 50K the start up can hire the 100k per year employee for 50k. If thing do not work out you can fire them and hire another one.
The money is less risky giving it a higher value, plus its all upfront which has already been discussed.
And if you, as a job seeker, are dependent to land a potentially low-paying job at a startup to get a "real" job, then you probably aren't that "crucial hire" the startup is looking for.
This ain't no charity business.
http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
1. Route from employee #1 to v. senior position (with commensurately higher salary) is shorter* irrespective of whether the employee stays with the startup or moves on. (*Shorter than if the employee was working as a small cog elsewhere), and thus there is a fairly strong "jam tomorrow" argument that can be made.
2. Route from employee #1 to owning your own funded startup is again shorter. As employee #1, if you do a good job, then you'll be considered a de facto founder, and thus will have that to add to your pitch when it is your turn to try and raise $500k.
A third factor is that money is not everything. Working for a startup can be awesome, and might give you a whole range of professional and life experiences that you would not get when sucking down at your $100k pa teat.
The path of early employee => founder is pretty well trodden. Aaron Patzer of Mint and Drew Houston of Dropbox are two immediate examples that come to mind. Who else am I missing?