Join as a startup co-founder or the first employee?
Now I'm trying to understand the advantages and disadvantages of being a first employee versus joining them as a co-founder. Here are my questions:
1. I've read that it's easier to screw employees rather than co-founders. Why is that?
2. Is there any legal responsibility that comes with being a co-founder?
3. Assuming no malcontent is there any reason other founders might not want to increase the number of founders?
4. Usually are there conditions and/or restrictions on who can join as a co-founder? If there are, what sort of conditions?
5. Why would I want to join as the first employee and not as a co-founder?
6. Why would I want to join as a co-founder and not the first employee?
Some more information about me: I've saved enough money to not have to worry about things for a year or two. I'm 28, and this will be a Canadian company if it matters.
What are your opinions on this matter? Thanks in advance!
20 comments
[ 3.3 ms ] story [ 44.6 ms ] thread2) Depends on your jurisdiction. If your company engages in illegal activities and you're a major shareholder/director you could be liable.
3) Share of equity, control.
4) Not really, it's just a matter of agreement.
5/6) Normally as a founder you trade-off pay for equity. If you're coming in as an employee post-fundraising there's obviously less risk involved as well.
As for 5/6, even if I join as the first employee I will still give up a big fraction of my salary for equity. Assuming I want to do this for sure, is there any other risks/differences you can think of?
Consider this, most likely the startup will fail and your equity will be worth zero. You need to evaluate risk & sacrifice vs opportunity.
Let's assume that this startup will get acquired for $50 million after 5 years and 3 rounds of funding. You take a 50% salary cut and 1% stock options; which will be diluted to about 0.25% after 3 rounds of funding (depending upon investment terms). You will get $125,000 (0.25% x $5 million) after 5 years. Is it worth the salary cut and sacrifice you will make?
There is a very little chance that this startup may turn out to be a $1 billion exit. Let's assume this happens after 10 years and 8 rounds of funding. At this point, your 1% equity is diluted to about 0.04%; so you will get about $400,000.
If the startup is acquired for anything less than $50 million, you will probably not get anything.
If I were to join a pre-funding startup and take significant salary cut, I would expect at least 10% equity.
1. When I interviewed with a company in southern California, the CEO noted that there are different types of stock that get issued to the employees that are not as good. I don't know much about stocks, but it's an angle you will have to consider.
2. One thing I found is that if you're a founder, that makes you responsible for both the wins and losses for the company. So when it tanks, debt collectors will come for your stuff too. Where an employee just needs to worry about getting another job. This point alone means you'll have to carefully consider who you're getting in bed with.
3. The only reason I can find for not wanting to increase co-founders is for two purposes. One, it's another person who can flake off and start writing company checks. Two, you'll have to split profits again :)
4. I don't think so, don't quote me.
5. See 2. and 1. to weigh your options. Being a co-founder potentially has a bigger pay off but comes with responsibility.
6. See 5.
I say if you genuinely trust your future partners, to go for it. It's my understanding that if you want to be able to afford that sports car and have plenty of time off for those cool vacations; you either need to be at the top of a company or have enough money to somehow live off interest.
2. Is the debt collector part actually true? I always thought debt collectors go after the corporate account and they will only come after your personal assets under very specific circumstances (such as if you haven't paid your employees). Do you have more information about this?
More than a few startups fail, by neglecting to consider the changes that may come in founder relationships. It is important to talk about departure consequenses.
You may find it enlightening to review a few Venture Capital blogs. Here are a few.
Sam Altman "Lessons Learned" - http://blog.samaltman.com/startup-advice
George Grellas - Startup Law 101 Series - Grellas Shah LLP - http://www.grellas.com/faq_business_startup.html
Mark Suster - Both Sides of the Table - Raising Venture Capital - http://www.bothsidesofthetable.com/pitching-a-vc/
So for question 1. It's about power. The relationship between you and "the company" is different if you are an employee versus a founder. As an employee, you aren't legally deserving of access to financial information, like cash flow. Or board meetings. At the end of the day, all that really matters is the legal paperwork and that will be different if you are a founder and not an employee (stock for employees, or options, are always mostly worthless). And as a founder, you get access to any profit, but you wouldn't as an employee. And as a founder, you would have far more of a say in how the company is run than you ever would as even employee #1
So if you are --sure-- you have a good relationship with these other people, and that they are not professional sociopaths like those I dealt with, then I'd say you could have a case to be considered as an founder. You say you are helping them with research etc - to what extent, how much, etc?
OTOH, how much responsibility do you want to have, in legal terms, and otherwise? Being a founder would require more - more complex taxes, etc, and more of a concern over how the company is run and where it is going. What do you think your role in the organization might be? I was effectively the CTO, but because I "wasn't", I didn't really have the power that comes with the title. And I was so caught up in doing the actual work, and I didn't complain enough about the overwork, that I left all these non-tangible non-technical considerations slide - and at the end of the day, if you are intimately connected to the founding of a company, these intangibles are a lot more important than anything else, including money.
To be paranoid, what if you sign on as an employee, and things go south? Can you walk away without any attachment to this company you've helped build? To what extent are you willing to play dirty hardball if the relationship goes bad? It'd be easier if you have the legal status that being a founder offers. Run all contracts past a lawyer and play "what if" scenarios to make sure you are not caught flatfooted.
I took the hard road; it was all a severe crash course in how business actually is done, versus the blather about 'company values' and 'ethics' and that nonsense. Some people are nothing but more than scoundrels and so make sure you are sure you have evaluated the character of these people thoroughly before getting into a relationship with them. I wish you luck and hope you don't go down the road I did.
I trust these guys since I've worked with them for a few years in another company. I understand that being a founder means that I have to be more involved in big decisions, but I don't see how being founders get access to profits that are not available to employees. Are profits not shared amongst shareholders equally?
Also, why do you believe shares and options are worthless? Isn't that what's worth something when company grows later?
Of course not.
But I have been a contractor for too long, so my worldview is influenced by that. If you really believe in the company, and want to save it money, then go ahead. And it does depend on the company - I interviewed with a decent company in Cambridge that had an interesting way of compensating the IT staff, in terms of money versus options/equity and overall, it seemed like a well run company with founders who were decent people. The company I worked for, and others I ran into during the first Internet bubble, were run by horrible people out to exploit everyone below them. So it depends on many factors, but if I wasn't 110% sure of the success of the company, I'd prefer money.