Agreed. This shift hasn't taken root yet and I think you're going to see a lot of startups that succeed caught on to the fact that the extra early-stage equity they can retain (due to less onerous funding) is best given to the first N employees than held onto by the founders. Taking the equity the VC's normally would have gotten and giving it to your first several employees now opens the door for you to hire people who are at the top of their field as your first employees, if they are not totally risk averse. I think it might turn out we end up inventing a new term for these "post founder, pre employee" folks since they are going to be a big differentiators for this generation of startups.

Exactly. Hiring 2 top engineers for 5% each is way less dilutive than taking 300k at the powerpoint stage.

If we are talking powerpoint stage, there is no revenue coming in. Would top engineers settle for 5% with no salary?

There are definitely stages in the life of a startup that are pre-salary but less risky than ground zero. For example, some initial market validation, users, or even paying customers could be there. Or, there could have been a significant engineering breakthrough or two. Or, simply the fact that the startup has survived its first pivot is evidence the team has staying power.

especially if you've had an ethical bypass and are willing to go Zynga on them later. Engineers are a lot easier to push around than angels (or VC's) are.

I'm starting my second startup and in it for the long haul. It would be incredibly short sighted of me to do this to early employees.

Of course, you can never be completely sure of the founder's character so trust is always required.

completely agree. as someone that's just about to graduate, i have to say i was a little shocked when i figured out this is the way things are. the difference between the first engineer and one of the founders never seemed so categorical to me, and this was one of the few things that made me feel it's not really worth joining a startup as early as I'd like (to work on interesting+useful things, have impact, etc.) unless I'm actually involved at the founding stage.

Yes this is one of the main reasons why I am not working for a startup currently even after running my own startup for 2 years and having loved the experience. Over the course of interviewing with multiple startups and getting offers the amount of equity being offered was so little that the companies would have to hit ~250 Million valuations for the options to be worth in the mid 5 digits. From my perpective the risk-reward ratio for the first 10 engineers is much much worse than that for the founders. I do intend to go back to founding something again in a couple of years.

mid 5 digits is 50k? 50k / 250M = 0.02%

That's perhaps ~10x less than is typical.

I'm not saying your general intentions are wrong, but you should be able to get a much better deal from startups than you have seen to date if you want. I'm moderately surprised at your experience.

I cant name and shame the companies but I was surprised about the offers. EDIT: fwiw - for the purposes of the original post I am not including offers that I got where I was offered a higher stake but where I did not have a high conviction about the startup.

That might be true but I find 0.2%, thus $500k for a $250M valuation, still very low.

$250M valuations are quite an achievement already and $500k, while it will pay off a mortgage, is not life-changing. (not talking out of experience here :)) So, an early engineer who will most likely be very instrumental to bringing the company to such a valuation ends up with a(n admittedly very) nice bonus, while founders do end up with life-changing wealth.

Ya, I was just saying that is sounds like dman wasn't even getting "standard" offers. I wasn't really weighing in on whether the "standard" offer makes sense or not. It's a challenging question.

Typical to what? What is offered? I'm not sure why we're even still talking about what is offered since it should be clear by now that early employees won't be getting that anyway.

> the difference between the first engineer and one of the founders never seemed so categorical to me

The categorial difference is that if the company flops in a few months the founders are out a lot of money, whereas as first engineer you are merely in a similar position to before you took the job, but with some nice experience on your resume and a few months worth of pay in your bank account.

Wait, what?

Most founders I know would pay themselves a salary after the first funding round. A small one perhaps, but I don't think the difference is as big as you make it out to be. Especially when you consider that the first engineer in a startup gets at least the same workload as the founders.

That assumes there is a round of funding. Not all startups are in the kind of sexy areas that cause VCs to throw money at them. Some are funded by the savings of the founder (and sometimes a second or third mortgage on his house). At that kind of startup, the founder often only gets paid his salary if the company has profits.

Of course, less the quite possibly considerable difference between market rate and the reduced rate the engineer is being paid. If you go by Fred Wilson's numbers [1]: $10k per month per engineer, the engineers are probably accepting a $60K/year salary. That's an enormous pay cut for me at least, and well below market for virtually all engineers. So certainly the founders are taking very little money, but the engineer may well be making a $4k/mo investment as well...

[1] http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

$10k/month x 12 months/year. Isn't that $120k/year? How did you come up with $60k? This is a serious question, because I assume there's an unspoken assumption in your post.

David -

That's the fully loaded cost of the employee, so the sum of salary, payroll taxes, health insurance, unemployment insurance, office rent, and whatever else I'm forgetting.

Edit: also called the fully burdened cost

I'm curious what Paul Graham and other top VCs think about this. This would be a pretty big shift in how companies expand early on, and it could potentially change the personality of the first employee.

Hiring a good person for cheap plus mucho equity is easier than raising money, at least when smart + learn in the job is a possibility.

After the demonstrations that money not in-hand is likely to evaporate before you can get it, is that still the case? Personally I ignore equity completely when deciding if a position is well paid or not. Equity is like a lottery ticket a friend buys me: I'll keep it around and when the time comes I'll see if I won, but I'm sure it's actually worthless.

I suspect that just means you don't want to help someone start a business where it is hard to measure how effort in generates money out. If a buddy shows you a picture of pirates burying treasure in your backyard and then hands you a shovel, it isn't a big stretch to imagine you digging a hole for a few hours for no pay :). On the other hand, an idea scribbled onto a napkin by a non-expert isn't so compelling without cash to go with it.

Your comment hints at the issue. It isn't measuring effort in vs money out, it's likelihood of reward for effort. At this stage it's clear that if you count options and even equity as zero you'll often be right.

If a startup hands me a picture of treasure in some place I can quickly get to (i.e. little investment on my part) and a shovel, I'll invest a couple of hours for the chance of getting rich. If they hand me a lottery ticket that they can void if it did happen to win, I'm not going to spend months or years slaving away for that.