> Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.
Choice quote. I'm kind of amazed this isn't brought up more.
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.
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.
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.
> There isn’t a shortage of developers and designers. There’s a surplus of founders.
This is especially true of non-tech companies looking to hire quality people for positions in their IT departments.
I currently work in such an IT department and we have a position for a J2EE developer to write portlets for our up-and-coming Liferay portal. Needless to say, we can't find anyone good (outside of recruiters, which we'd rather not use) to fill this position. My boss has asked each of us if we know anyone we can recommend for this position. As far as I know, no such luck.
Personally, I'm not the least surprised. None of the developers that I know would even touch a job like this. Most don't/won't do J2EE. Portals never really took off like corporate America hoped it would (and Gartner said it would). I have some things that I'm working on on the side, and if/when that becomes something, I'll be headed out the door too.
What my employer fails to understand is that they are hiring as if it was still 1998. Developers now have options and no longer have to settle for jobs like this. Their competition is no longer other IT departments, it's freedom of choice itself.
So what's the answer when jobs like this need to get done?
It may not have to be J2EE, but there are plenty of corporate jobs that have to get done to help build big company infrastructure, and if much of the talent that was available now has more attractive options, is the only answer to escalate salaries? Or to hire in shorter-term contract developers?
I feel the urge to point out that, if the cap table gets squeezed, there is no a priori reason that any particular part of it should get squeezed. It is entirely possible that, as he frequently argues, the productivity of money is going down (because "startups are cheaper than ever to start") and the productivity of product teams is up (because of huge amounts of leverage in the system via OSS, platform companies, improved development technologies, The Cloud, etc).
If one buys that set of facts, there is exactly one participant in the startup ecosystem who should be getting told "Sorry, your contributions are not worth what you think they are." It isn't founders or engineers.
P.S. That said, psst psst, being last cofounder beats first engineer 100% of the time.
The productivity of money may be going down but I don't think it has much to do with the prices of startups.
The main thing is that there are relatively few opportunities outside startups to make a good return on investment -- the western world is still (again) in a recession, stocks are so and so and what you can get on US fed bonds is a joke.
So really there is too much money chasing the opportunities available.
So the good times will continue until the economy gets back in good shape.
Which I for one don't believe will happen for at least a decade.
One assumption being made here is that hiring is a critical task. It's entirely possible that a company can achieve its objectives without hiring; if that's the case then the argument doesn't apply.
I actually don't understand the author's point or numbers. A fully loaded engineer costs 100-200k depending on where you're located in US/Canada. And let's say you need 25-50k for 2 founders to live for a year. Giving yourself a 12 month runway you're at needing 150-300k in the bank to even be in the position to hire.
If you have 150k in the bank it's because you have some seed money, or have bootstrapped your way to that position. If you've bootstrapped then you've achieved pretty good product/market fit and have good revenues. Conversely if you've raised 150k and haven't achieved product/market fit, then you probably shouldn't be hiring.
Now, if you look at companies that have raised 150-300K I don't think you'll find many of them hiring, at least not very aggressively. I feel that level of money is used to give the founders time to iterate until product/market fit and not be cash constrained when it comes to things like contracting a good designer or buying a domain. And once a seed funded company achieves some semblance of product/market fit they go and raise 1-2 million.
So is this article intended for the few companies that have raised in the 100-300K range that are starting to hire? If that's the case then ya, I agree such a company is going to have difficulty hiring. They have significant risk of not achieving product/market risk, and they don't have sufficient capital to give a fair market wage. So a potential employee is taking a huge chance on such a company, and should obviously be compensated for that (relative to the very attractive compensation packages are companies like Yammer, Square, etc). But I don't really think there are very many companies like that, but maybe I'm out of the loop.
Before: Founders put together a biz plan and raised a decent seed round and then started hiring the first few employees.
Now: Some person gets an idea, pitches it to another person, and they start building it, then they pitch it to a third person. They don't pay themselves salaries, live off their savings and their credit cards. An 'incubator' may give them some cash to pay for things like AWS instances and filing incorporation papers. They may be up to 5 or 6 people before they have a 'minimum viable product' (MVP) and are willing to pitch it to VCs for a real series A.
The author points out that all of the first 3, 4, 5, or 6 people who were working to get the company to the MVP point, they are founders. Not just the 'idea guy' or the 'wizard' that they snagged to help implement the idea. Everyone who came on board before series A has made it possible to get to that point is a founder.
And yet there are companies that treat person 2 - n as 'employees' and give them way less equity. Because of that people don't want to be employee 2-n, and thus hiring them is 'hard'.
I've noticed this as well, and have been puzzling around with the following thoughts.
Lets say you create a company and decide that prior to series A, 80% of the company will be owned by the founders and 20% to outside investors. You start with 10 shares, 2 for an angel, 8 for the founder.
Now you add a founder, you double the share pool and now you give 8 to the new founder and 2 to the angel (distribution is 4 + 8 + 8). Now you add another engineer/founder and you now add 80 shares to the pot and distribute them 27 + 27 + 26 for the founders and 20 for the angel. Add a new angel and you double the shares to 200 where each angel get (20 + 20) and founders get (54 + 53 + 53) shares.
The idea being to keep the ownership percentage of the company 20% angels, 80% workers.
Now you go for series A - my thought is you pick three ratios, investors/founders/employees. That may end up being 49/31/30. Allow your angel to either contribute their shares to the series A (cash out) or to participate. But at the end of the day the representation is 49,31,30. Same deal when you add more investors, add to the size of their pool so that works, add to the other pools to keep it balanced.
I am undecided if it would make managing the equity table easier or harder.
This rings very true. I've interviewed with and turned down 8 YCombinator start-ups in the past three years. Of the 8, I would have been within the first 5 employees of 6, within the first 10 of the remaining two. They all offered below market salary in exchange for "huge equity". Thoe "huge equity" offers ranged from 0.35% to 2% (the 2% one offered me 40% of market-rate). I didn't mind, I was only interviewing to network and try to sell my $150/hour consulting services to them. (3 of them are still customers). Being an employee for a start-up is a sure-fire path to an early grave in potter's field.
This is why I don't consider jobs with even exciting startups with early traction at this point in time. Why would I bother getting 50x less return for a similar investment and risk as a founder? We should at least be in the same order of magnitude. Especially if the startup is practicing "lean" and is going to completely change by the time it exits. Might as well just start my own company.
And, if you can't get into an incubator, you can just as easily bootstrap your way through the early stages.
I see a lot of positive comments for this post but I'd like to chime in and suggest that upping the equity is not going to solve the problem.
In once sense the engineer is making the same kind of bet as the VC. They don't know the founders too well, not sure if the idea is any good, its a big gamble. Buy unlike a VC, the company will be the engineers whole life until the idea proves itself or fails.
A few extra percentage points of a deal that will probably never happen is not really all that attractive.
The only solution is to raise more money and pay them more.
"Raising the first $25K for product development is easy – join an incubator."
I think that trivializes the process. There are now multiple incubators, but about two orders of magnitude more looking for spots. Y Combinator gets thousands of applications for a few dozen spots. Tech Stars Boulder got 600 apps IIRC, and only 10 get in the program. Early stage money gets trivially easy if you're in one (especially YC or TS), but getting further funding is still a time drain, and now you're competing with the 100+ incubator-based startups for VC/Angel money.
I do agree about cap tables. With less money needed to start a company, the equity normally given to investors can (and should) go to employees. It's an opportunity for many who have talent to get a bigger reward for their hard work.
I suspect those numbers may be skewed by the same "we only hire the top 1%" phenomenon. There could very well be a recurring group of people with not so great ideas that repeatedly apply to incubators, and repeatedly get turned down, whether with the same idea or a new one.
I'd be interested to see the skew as well. Maybe a large part of those declined were unserious college students or similar.
I couldn't raise 10K to build a prototype. Had to earn the cash the ol' fashioned way. Unless a handshake and a smile can get money from someone you know, raising cash is frikkin' hard.
Oh, and offer me as much salary as you can with the option for me to dial that back into equity. I can't pay a mortgage or buy pizza with options, and my market rate does not fluctuate based on how much buzz you have on twitter.
The founders' got Pauli as an engineer, any problems, he goes to Pauli, problems with EC2, he can go to pauli, troubles with rails, hard drives, Linux, he can go to Pauli, but now he's gotta come up with Pauli's money every week, no matter what.
Your tweet didn't go viral?
Sorry to hear about that, fuck you pay me.
Your funding didn't come through?
Fuck you, pay me.
People don't need more coupons?
Fuck you, pay me.
Servers crashed in the middle of the night?
Fuck you, pay me.
And then finally when there's nothing left and he can't raise another dime from the VC, or clear anymore paper on second market, you bust the joint out, take the code and release it as open source.
If founders actually believed their option bullshit it would be a no brainer to keep those valuable options and pay engineers 200K. There is no shortage of engineers, only a shortage of suckers.
When there is a scarcity of a product (engineers to hire), the cost naturally goes up. If you are having trouble hiring, raise your compensation. If you don't have cash to offer you need to raise the amount of equity you give (or perhaps other perks).
Sometimes I feel like the last person left who raised traditional angel money and then VC money.
We paid our first engineer market rate and had actual benefits. Our cap tables are pretty traditional and we haven't had much trouble hiring all things considered (though we are extremely picky).
I have to say, if you have to give 20% of the company to your first engineer in order to get him/her on board, then I don't really see the benefit in going the incubator route over traditional funding.
The issue with this method is that it assumes that the investor model has to change too. VC's will attempt to have the right ownership over the lifetime of an investment eventually getting to around 20%. Some want 20% right away. The problem with granting so much equity to employees makes the rounds of funding required later difficult to match this ownership target.
Investors want founders with meaningful ownership of the business, a syndicate that owns enough to care, and employees happy too. That is where the model is driven from, and would require a change at the investor level for this to work.
Assuming 2 investors (40%) 2 founders (40%) that leaves only 20% remaining which does not fit the proposed changes.
I really appreciate the comment about the surplus of founders (as opposed to a shortage of developers.) There's a context that's very important in that statement: that not all founders are really necessary, nor do they really come before other key team members (namely, engineering) in terms of foundership.
This article helped me clarify an interesting contradiction in my own motives. As a founder I'd much rather pay market rates and hold on to equity - 0.5% incentive doesn't hurt me but my hackles raise at 10% or more. (The state of my hackles is not correlated to how fair the compensation is, BTW - it's just greed.)
On the other hand, even more than getting the top 2% unicorn squad, I want engineers who believe in the business. Taking equity in lieu of salary is a sort of screen for this, and I think that's why I've structured things that way in the past.
I agree with the article that it's not fair to the first N employees, though.
My question is, if not the traditional equity model, what would you offer to get and retain key early engineers? How about sales people? Community manager?
To clarify, perhaps people can post their thoughts on what equity percentages you'd offer to the following? (or something similar) :
I think that this is true in Silicon Valley and possibly NYC, but not in other areas.
I firmly believe we just haven't churned out enough CS graduates nationwide over the past decade to meet the demand of both the startups and the established businesses that are all hiring right now.
Or, just maybe, many of the startups synergizing twitterscapes and being the X-but-social-networked might not need high-caliber bleeding-edge CS grads, and could probably get by with coffee-fueled hacks?
You don't have to be a CS graduate to be good at programming.
You need to have a genuine interest in what you're doing. Otherwise, you're not likely going to do (let alone enjoy doing) what it takes to be good at this.
You always need to improve your current abilities and add new ones. That can be done by coding and reading (probably in that order). Github is great for this kind of thing.
You need to be aware of advancements and changes in your profession. Sites like HN are great for this.
I agree that something in the cap table has to give, but I don't think it's founders. It's investors.
Psychologically, I would also make sure those "early employee founders" really risk something; even if it's just securing $20K of their savings in a bank account to be used in a pre-approved way if the company needs to make payroll. $20K is, after all, just 2 months of gross salary for your self-determined great engineer applicant.
Doing something like this has 2 benefits:
1. Applicants self-select for risk tolerance.
2. You avoid the spoiled kid syndrom of "co-founders" making all types of employee requests ("I need $6K for a top notch working station", etcetera.)
[+] [-] bentlegen|14 years ago|reply
Choice quote. I'm kind of amazed this isn't brought up more.
[+] [-] gfodor|14 years ago|reply
[+] [-] webspiderus|14 years ago|reply
[+] [-] eykanal|14 years ago|reply
[+] [-] umjames|14 years ago|reply
This is especially true of non-tech companies looking to hire quality people for positions in their IT departments.
I currently work in such an IT department and we have a position for a J2EE developer to write portlets for our up-and-coming Liferay portal. Needless to say, we can't find anyone good (outside of recruiters, which we'd rather not use) to fill this position. My boss has asked each of us if we know anyone we can recommend for this position. As far as I know, no such luck.
Personally, I'm not the least surprised. None of the developers that I know would even touch a job like this. Most don't/won't do J2EE. Portals never really took off like corporate America hoped it would (and Gartner said it would). I have some things that I'm working on on the side, and if/when that becomes something, I'll be headed out the door too.
What my employer fails to understand is that they are hiring as if it was still 1998. Developers now have options and no longer have to settle for jobs like this. Their competition is no longer other IT departments, it's freedom of choice itself.
[+] [-] mediaman|14 years ago|reply
It may not have to be J2EE, but there are plenty of corporate jobs that have to get done to help build big company infrastructure, and if much of the talent that was available now has more attractive options, is the only answer to escalate salaries? Or to hire in shorter-term contract developers?
[+] [-] arethuza|14 years ago|reply
Depends what you mean by a portal, but Microsoft's SharePoint seems awfully popular from what I can see.
[+] [-] patio11|14 years ago|reply
If one buys that set of facts, there is exactly one participant in the startup ecosystem who should be getting told "Sorry, your contributions are not worth what you think they are." It isn't founders or engineers.
P.S. That said, psst psst, being last cofounder beats first engineer 100% of the time.
[+] [-] tomjen3|14 years ago|reply
The main thing is that there are relatively few opportunities outside startups to make a good return on investment -- the western world is still (again) in a recession, stocks are so and so and what you can get on US fed bonds is a joke.
So really there is too much money chasing the opportunities available.
So the good times will continue until the economy gets back in good shape.
Which I for one don't believe will happen for at least a decade.
[+] [-] johnrob|14 years ago|reply
[+] [-] OmarIsmail|14 years ago|reply
If you have 150k in the bank it's because you have some seed money, or have bootstrapped your way to that position. If you've bootstrapped then you've achieved pretty good product/market fit and have good revenues. Conversely if you've raised 150k and haven't achieved product/market fit, then you probably shouldn't be hiring.
Now, if you look at companies that have raised 150-300K I don't think you'll find many of them hiring, at least not very aggressively. I feel that level of money is used to give the founders time to iterate until product/market fit and not be cash constrained when it comes to things like contracting a good designer or buying a domain. And once a seed funded company achieves some semblance of product/market fit they go and raise 1-2 million.
So is this article intended for the few companies that have raised in the 100-300K range that are starting to hire? If that's the case then ya, I agree such a company is going to have difficulty hiring. They have significant risk of not achieving product/market risk, and they don't have sufficient capital to give a fair market wage. So a potential employee is taking a huge chance on such a company, and should obviously be compensated for that (relative to the very attractive compensation packages are companies like Yammer, Square, etc). But I don't really think there are very many companies like that, but maybe I'm out of the loop.
[+] [-] ChuckMcM|14 years ago|reply
Before: Founders put together a biz plan and raised a decent seed round and then started hiring the first few employees.
Now: Some person gets an idea, pitches it to another person, and they start building it, then they pitch it to a third person. They don't pay themselves salaries, live off their savings and their credit cards. An 'incubator' may give them some cash to pay for things like AWS instances and filing incorporation papers. They may be up to 5 or 6 people before they have a 'minimum viable product' (MVP) and are willing to pitch it to VCs for a real series A.
The author points out that all of the first 3, 4, 5, or 6 people who were working to get the company to the MVP point, they are founders. Not just the 'idea guy' or the 'wizard' that they snagged to help implement the idea. Everyone who came on board before series A has made it possible to get to that point is a founder.
And yet there are companies that treat person 2 - n as 'employees' and give them way less equity. Because of that people don't want to be employee 2-n, and thus hiring them is 'hard'.
I've noticed this as well, and have been puzzling around with the following thoughts.
Lets say you create a company and decide that prior to series A, 80% of the company will be owned by the founders and 20% to outside investors. You start with 10 shares, 2 for an angel, 8 for the founder.
Now you add a founder, you double the share pool and now you give 8 to the new founder and 2 to the angel (distribution is 4 + 8 + 8). Now you add another engineer/founder and you now add 80 shares to the pot and distribute them 27 + 27 + 26 for the founders and 20 for the angel. Add a new angel and you double the shares to 200 where each angel get (20 + 20) and founders get (54 + 53 + 53) shares.
The idea being to keep the ownership percentage of the company 20% angels, 80% workers.
Now you go for series A - my thought is you pick three ratios, investors/founders/employees. That may end up being 49/31/30. Allow your angel to either contribute their shares to the series A (cash out) or to participate. But at the end of the day the representation is 49,31,30. Same deal when you add more investors, add to the size of their pool so that works, add to the other pools to keep it balanced.
I am undecided if it would make managing the equity table easier or harder.
[+] [-] goodweeds|14 years ago|reply
[+] [-] jconley|14 years ago|reply
This is why I don't consider jobs with even exciting startups with early traction at this point in time. Why would I bother getting 50x less return for a similar investment and risk as a founder? We should at least be in the same order of magnitude. Especially if the startup is practicing "lean" and is going to completely change by the time it exits. Might as well just start my own company.
And, if you can't get into an incubator, you can just as easily bootstrap your way through the early stages.
[+] [-] jay_kyburz|14 years ago|reply
In once sense the engineer is making the same kind of bet as the VC. They don't know the founders too well, not sure if the idea is any good, its a big gamble. Buy unlike a VC, the company will be the engineers whole life until the idea proves itself or fails.
A few extra percentage points of a deal that will probably never happen is not really all that attractive.
The only solution is to raise more money and pay them more.
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] dabent|14 years ago|reply
I think that trivializes the process. There are now multiple incubators, but about two orders of magnitude more looking for spots. Y Combinator gets thousands of applications for a few dozen spots. Tech Stars Boulder got 600 apps IIRC, and only 10 get in the program. Early stage money gets trivially easy if you're in one (especially YC or TS), but getting further funding is still a time drain, and now you're competing with the 100+ incubator-based startups for VC/Angel money.
I do agree about cap tables. With less money needed to start a company, the equity normally given to investors can (and should) go to employees. It's an opportunity for many who have talent to get a bigger reward for their hard work.
[+] [-] kevinpet|14 years ago|reply
I'd be interested to see the skew as well. Maybe a large part of those declined were unserious college students or similar.
[+] [-] MicahWedemeyer|14 years ago|reply
https://twitter.com/#!/paulg/status/123509842412445696
[+] [-] amorphid|14 years ago|reply
[+] [-] Symbol|14 years ago|reply
Oh, and offer me as much salary as you can with the option for me to dial that back into equity. I can't pay a mortgage or buy pizza with options, and my market rate does not fluctuate based on how much buzz you have on twitter.
[+] [-] fleitz|14 years ago|reply
The founders' got Pauli as an engineer, any problems, he goes to Pauli, problems with EC2, he can go to pauli, troubles with rails, hard drives, Linux, he can go to Pauli, but now he's gotta come up with Pauli's money every week, no matter what.
Your tweet didn't go viral? Sorry to hear about that, fuck you pay me.
Your funding didn't come through? Fuck you, pay me.
People don't need more coupons? Fuck you, pay me.
Servers crashed in the middle of the night? Fuck you, pay me.
And then finally when there's nothing left and he can't raise another dime from the VC, or clear anymore paper on second market, you bust the joint out, take the code and release it as open source.
If founders actually believed their option bullshit it would be a no brainer to keep those valuable options and pay engineers 200K. There is no shortage of engineers, only a shortage of suckers.
[+] [-] InclinedPlane|14 years ago|reply
When there is a scarcity of a product (engineers to hire), the cost naturally goes up. If you are having trouble hiring, raise your compensation. If you don't have cash to offer you need to raise the amount of equity you give (or perhaps other perks).
[+] [-] Aloisius|14 years ago|reply
We paid our first engineer market rate and had actual benefits. Our cap tables are pretty traditional and we haven't had much trouble hiring all things considered (though we are extremely picky).
I have to say, if you have to give 20% of the company to your first engineer in order to get him/her on board, then I don't really see the benefit in going the incubator route over traditional funding.
[+] [-] jpdoctor|14 years ago|reply
Throwing equity around does not solve the fundamental issue, it just is a competitive tactic.
[+] [-] EGF|14 years ago|reply
Investors want founders with meaningful ownership of the business, a syndicate that owns enough to care, and employees happy too. That is where the model is driven from, and would require a change at the investor level for this to work.
Assuming 2 investors (40%) 2 founders (40%) that leaves only 20% remaining which does not fit the proposed changes.
[+] [-] jroseattle|14 years ago|reply
I really appreciate the comment about the surplus of founders (as opposed to a shortage of developers.) There's a context that's very important in that statement: that not all founders are really necessary, nor do they really come before other key team members (namely, engineering) in terms of foundership.
Great post.
[+] [-] NHQ|14 years ago|reply
[+] [-] rfrey|14 years ago|reply
On the other hand, even more than getting the top 2% unicorn squad, I want engineers who believe in the business. Taking equity in lieu of salary is a sort of screen for this, and I think that's why I've structured things that way in the past.
I agree with the article that it's not fair to the first N employees, though.
[+] [-] throwaway3234|14 years ago|reply
To clarify, perhaps people can post their thoughts on what equity percentages you'd offer to the following? (or something similar) :
1 - 5 Employees - Engineers
1 - 5 Employees - Sales
1 - 5 Employees - Community Manager/Support
6 - 20 Employees - Engineers
6 - 20 Employees - Sales
6 - 20 Employees - Community Manager/Support
Thanks in advance!
[+] [-] BrainInAJar|14 years ago|reply
[+] [-] hkarthik|14 years ago|reply
I firmly believe we just haven't churned out enough CS graduates nationwide over the past decade to meet the demand of both the startups and the established businesses that are all hiring right now.
[+] [-] fleitz|14 years ago|reply
[+] [-] angersock|14 years ago|reply
I hear there's a gem for that...
[+] [-] umjames|14 years ago|reply
You need to have a genuine interest in what you're doing. Otherwise, you're not likely going to do (let alone enjoy doing) what it takes to be good at this.
You always need to improve your current abilities and add new ones. That can be done by coding and reading (probably in that order). Github is great for this kind of thing.
You need to be aware of advancements and changes in your profession. Sites like HN are great for this.
[+] [-] ebaysucks|14 years ago|reply
Psychologically, I would also make sure those "early employee founders" really risk something; even if it's just securing $20K of their savings in a bank account to be used in a pre-approved way if the company needs to make payroll. $20K is, after all, just 2 months of gross salary for your self-determined great engineer applicant.
Doing something like this has 2 benefits: 1. Applicants self-select for risk tolerance. 2. You avoid the spoiled kid syndrom of "co-founders" making all types of employee requests ("I need $6K for a top notch working station", etcetera.)