First employee of startup? You are probably getting screwed

Imagine three twenty-something guys working on a startup that has more lines of code than dollars in the bank. They're working out of an apartment and spend most evenings eating ramen noodles from the same MSG-laden box. They work approximately equal hours (too many). They suffer approximately equal stress (more than they ever expected). They bear approximately equal responsibility for not tanking the company through poor performance. They each accept dramatic pay-cuts relative to easier, better jobs which they could sleepwalk their way into.<p>Next door, there are another three guys, eating ramen, etc etc.<p>Now, it seems to me like the three guys behind Door #1 are very similar to the three guys behind Door #2. However, in one case they're all co-founders, and in one case they are two co-founders and a first employee. Those are very, very different statuses for the third guy. The third co-founder gets mentioned in press hits about the company. The third co-founder can call himself a co-founder, a status of value in an industry (and society) which is sometimes obsessed with status. The third co-founder cannot get excised from the cap table without that being mentioned as a subplot in the eventual movie.<p>The first employee will not usually get mentioned. The first employee gets no social status of particular esteem. The first employee will not have a seat at the table -- literally or figuratively -- when the eventual disposition of the first employee's equity is decided. The first employee's equity stake is approximately 1/6 to 1/40th (or less!) of what the third co-founder's was. Well, theoretically. 0.5% is 1/40th of 20% in engineering math, not in investor math, because investors can change the laws of mathematics retroactively. 0.5% of millions of dollars is sometimes nothing at all. (This is one of the least obvious and most important things I have learned from HN.)<p>If you're good enough to be a first employee, you're probably epsilon away from being good enough to be a third co-founder. There may be good reasons to prefer being an employee... but think <i>darn</i> hard before you make that decision.

Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say:<p>• Employee given 1%<p>• Two additional funding rounds at 30% dillution each bring that to 0.49%<p>• In a $30 million exit the employee will get $147,000<p>• 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)<p>• So the adjusted value, including probability of failure, of those options is just $14,700<p>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 can write an article claiming that anyone doing x is probably getting screwed, if you choose numbers that make it a bad deal. In my experience (which at this point is pretty extensive) the numbers he uses here are extreme outliers.<p>I'd expect a startup that was only able to raise money at $2m pre to be giving the first employee way more than 1%. How much more depends on how good he is (a factor that's not even considered in this article). Someone as good as the founders could reasonably expect 15%.

A more accurate title for this would be:<p>"Taking a pay cut that is more than the market value of your equity stake? You are probably getting screwed."

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%).

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:<p>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.<p>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.<p>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 founders are playing a dangerous game in this story. If key engineers don't have much reason to stick around other than it being exciting, they are likely to leave as soon as they get bored or tired. And yes, you can get bored while working 80 hour weeks.<p>I was once in this exact position. I was the first employee and over the next few years a bunch of senior managers came in and each got 5-10x the stock I'd gotten.<p>When the whole thing got old, I looked around and saw that I didn't have much upside potential (especially since there had been dilution), my salary was below market, and I left.<p>What was incredible looking back is that something similar happened with a truly key engineer... someone who was recruited out of a university because he had more or less built the text mining library the company was using by himself. A product line rested on his shoulders, so he had a ton of responsibility, but when things got rough he didn't have enough reason to stick around.<p>Added: The point is, there are good times and bad times in startups. In the good times you should look around and decide who you really need to stick around in the bad times and give out stock accordingly.

Happened to me.<p>Years of effort . . . startup bought . . . eventually wound up with 17 shares of Oracle.<p>I'm not bitter. It was a fun ride, I learned a lot, and after an initial pay cut (when I first joined, and funding was tight) I got paid a decent salary.

Some people are talking about the "expected value" of being an early employee, which is a very valuable view. I'd like to focus more on the best case to give a sense of what you can hope for if everything goes right.<p>I was fortunate enough to be an early engineer at LinkedIn after I graduated college. I was one of the first few engineers hired. I'm not an amazing company picker, and I barely knew what a startup was at the time -- I just got lucky because I knew one of the cofounders.<p>I received a decent option grant (especially for a kid just out of college!) and stayed at the company for two years. My options got diluted approximately 50% during the various funding rounds. Right now, LinkedIn is a top 20 website in the world, and there's a consensus that its current stock price is "very optimistic". My net worth on paper ends up being a couple of million. Needless to say, I'm thrilled. However, I also want to point out that there are only twenty "top 20 websites", and most of them aren't going to change anytime soon. So if you're one of the first few engineers at one of the 10-20 companies that's going to go from nothing to huge in the next 5-10 years, then you can view a few million -- perhaps 10-20 million -- as being the best that you can expect. And there are literally a few dozen, or maybe 100 people that will get this kind of success every decade. There is little skill involved here. It's all about getting lucky.<p>Furthermore, people forget that it takes time for value to build. It might take you 4 years to get most of your stock options and decide you want a more stable job or a change of scenery, but it might take another 10 years for your company to go public or get sold. You're giving up a big chunk of your 20s for the potential of a few million in your mid-late 30s -- but you could probably save close to that much anyway with good spending habits and better paying jobs.<p>So if you want to be an early employee at a start-up, it's an awesome experience. But you should do it because you love it, because you're passionate about the product, or because you cherish the learning opportunity. You shouldn't do it because you think it will make you a gazillionaire.<p>(just to be clear, I did love my time at LinkedIn -- I made some great friends, learned a ton, understood that startups are the kind of places that I like to work at, etc. I'm really happy I was there, and would be even if the company hadn't become a big success)

My first gig out of school was with a startup. First employee. They paid 20% below market wage and gave way less than 1% equity. I didnt know any better (young/naive). I got screwed, big time.

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.

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.

I'm not sure, but if you want to build a world class team you need to pay more than market rate + excellent team/work environment + more responsibility + more impact on world + give equity. There is no free lunch. Really.<p>Did Facebook become successfully because they went cheap with hiring VP of engineering early in their game? (answer not: they recruited the top)<p>Yes, you can get lucky and build a successful company by hiring people which are fresh from college for less than market and dream about being rich.<p>The point is the following: DONT HIRE BAD DEVELOPERS.<p>Unfortunately, good developers are good in math and they were around so they will not go with salary cut + questionable equity stake. Yes you can get lucky but there are so many other unknowns when you run a business and you should limit unknowns to the minimum.

I didn't know the forgone loss of salary for equity could be compared with investment that easily. That's brilliant!

If you give employee #1 only 1% of your startup, then there is something wrong with you, or employee #1 is more of an intern and not a key hire.

Alternative title: "Don't remember how to multiply, add, subtract and divide? You are probably getting screwed".<p>There's so many things in life where party A gets away with soaking party B because B didn't perform some simple arithmetic.

There's a mistake in the math: one year of a salary cut is given as the amount invested. Why one year?

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.<p>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.

Just wanted to point out (read a bit) you get equity at big companies too? That's not a not negligible amount of cash. So the guy isn't just losing $50K in salary, but the equity that the other company (bigger company) would be giving him. Not sure what the equity grants at bigger companies end up being though.

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.<p>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.<p>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.

This post is missing the most valuable part of working at a startup: the experience.<p>Sure, you can go work at ________ (big company paying fresh developers $120k+), but you're going to be pigeonholed into working on a small aspect of the product/company.<p>If you join a promising small startup, you're going to learn about all aspects of business, startups, selling, marketing, fundraising, etc. These skills will be extremely helpful to you throughout the rest of your career, especially if you plan to start your own company someday.

Then open your own startup, and get 99% of the shares for 0% of your previous salary

Having been employee one and started 2 companies - I strongly disagree.<p>It is hard to find employees/co-founders that (a) have the right skills, (b) the right interests, (c) the right industry knowledge/contacts, and (d) are in the same place in their life to make the same amount of commitments.<p>And even when you do you find such people, it is hard to give them 10% equity in the beginning and then tell them that they are under-performing, and only deserves 2.5% equity.<p>Now, I agree, that the definition of under-performing is very different for a startup compared to a more established company. I have also found people are willing to accept when they are under-performing, but contracts and equity that is given is harder to change.<p>However, I would love to have the right cofounder, and even share the equivalent equity with him if he can take over half my burden.<p>Perhaps the answer is to find people with a very good fit, start them with low equity (~1%), and tell them how they can get more equity. And then doubling equity multiple times as they are able to rise to a founder level responsibility.

Differences between Co-Founter, Investor, First Coder:<p>Co-Founder: - Starts the compamy, has the idea/initial impl - Takes risk, may work for a while with zero salary, investing personal time for nothing. - May wind up getting ZERO (total) for the investment. - Company does not get paid, co-found does not get paid. - Big potential payout - Health benefits? Post funding, or from other job while building startup.<p>Investor: - Puts money into company. - May lose everything, that money is just going to the founders for some food and servers or something of that nature. - Payout depends on investment size. However lets say compared to co-founder, small payout. - Minimal invested personal effort compared to co-founder. - Invested time assisting the company and connecting the company to personal contacts to help it grow. - Provides advice when needed (hopefully)<p>First Coder: - Gets paid less than average coder - Gets potential payout less than investor - Gets paid or laid off. There is no in-between. May agree to not get paid this month and instead get paid later in hopes of assisting the business during a tough month. - Has to be pretty close to the business since it's so volatile, so will see the lay-off coming. - Probably coming in with benefits provided to employee.<p>As you can see risks/benefits are quite different for everyone. So its not just "you are getting screwed".<p>I think that getting a very small % is actually practical depending on how far along the company is. The question is about how much risk is being taken, and how much is being contributed. A smart co-founder will see the contribution of a very valuable employee and offer more % to that employee especially if they are so critical to the company. Its not about employee #1 its about the fact that during the early phases, each individual person has the ability to make big things for the company, and they should be rewarded for those big things. Keeping life static is quite boring and no incentive. Yet having incentives for employees transforming the business early on is quite good.

Cash is king. You can demand more equity and priority in the debt stack ordering when you write checks. Life's not fair but whining over how you're getting screwed won't help you realize the opportunities that are available to you.

The question is: would someone working on 100k salary invest <i>real</i> 50k into a startup? And the answer is 99.9% no. They'll just spend the 50k on fancier food and other crap.

If I were valuing the deal, I would give primary consideration to the likelihood that the business is underfunded based upon their inability to provide a competitive salary after receiving funding. I would also consider the crap nature of the equity offer as evidence that their source of funding does not bring a wealth of experience to the table...no smart tech investor is going to tolerate the risk associated with screwing over critical hires.

my history with startup options:<p>1st company: acquired 2nd: ipo 3rd: bankrupt 4th: acquired<p>Net value of all option shares : 0<p>Meaning, in toto, my strike price x shares is almost exactly what they ended up being worth. The net present value of an option is the strike price. Even the private options market is pretty efficient. Whereas a lottery ticket might have a net present value of only 60%, so these are pretty good lottery tickets. But that is essentially all they are.

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.<p>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.

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.

I was a co-founder of a startup (non-tech) that raised $60+ million over 10 years and in my experience, a dollar of sweat equity, particularly from a person without some extraordinary personal value-add, is rarely as valuable as a dollar of paid in capital, all things being equal.

Interesting responses: I've never worked with startups for the payout, but for the experience of working with startups.<p>As to stock, I prefer shares to options from both sides of the transaction.<p>Finally, FASB 123 doesn't cover contractors or other non-employees - worth keeping in mind.

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.

At least he got offered equity. The first one I joined didn't even have that.

This covers the equity issue pretty well:<p><a href="http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn" rel="nofollow">http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...</a>

This is just a special case of "Working on a startup? You are <i>probably</i> getting screwed." The first employee doesn't have it too much worse than the founders, the second employee, or the third.

He forgot to factor the risk into the equation here. Investors have risk. If the company goes down they lose $500K. How much do you lose $50K?<p>1% may or may not be less. We definitely need deeper analysis here.

Related question: when we're talking "equity" here for early employees, are we talking stock or options? At my last startup, all employees (even #1) were given options, not stock outright.

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.

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.<p>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.<p>The money is less risky giving it a higher value, plus its all upfront which has already been discussed.

It's a market. If you think you can get &#62;1% for "saving the company" with your hax0r skilz, go right ahead and try to negotiate that.

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.

If you are going to work as an employee in a startup primarily for the money, you are doing it wrong already.

Youre not getting screwed if you walk into the job with your eyes wide open.

At a start-up I'm making a good rate for my first job.

First, I disagree that early employees of startups are "probably" getting screwed, but it definitely can happen, and often does to people who don't know their real value.<p>The part of this that resonates with me isn't the mathematics. The math isn't very relevant because there's a really large unknown: the eventual value of the company. One percent could be a lot of money, or it could be nothing. There's also the matter of dilution: is he protected against dilution from investor and employee stock grants over the next N years? I would guess not. His 1% could be 0.2% or less by the time an exit happens.<p>What is obvious is the emotional undercurrent to this very common anti-pattern. It sounds like he's not a real co-founder, he's "just a coder". They seem to be trying to sell him on a rotten deal because they think it's just such a privilege to work on their golden idea that they don't need to compensate properly. He's going to bust his ass to make the code work, for a salary half of his market rate, and in return he gets a tiny sliver of the company that gives him no real control, on a 4-year vesting cycle. I'm sorry, but these two guys are not (after 4 years, after he's done some real work) worth 79 times what he is just because they had the connections to raise money.<p>Prospective employees tend to view equity grants in a pre-employment context, when a 1% share seems extremely generous because the employee hasn't done anything yet. But that's what vesting's for! Vesting allows companies to compensate based on future contributions, with the knowledge that if the employee quits or is fired before the 4-year period is up, they won't have to pay for all 4 years of work.<p>At the least, if still thinks it's an "exciting" opportunity worth pursuing, he should recognize that he <i>probably</i> can't value the company better than the market, that we are in frothy times, and that the equity is worth more to an investor than to him (different risk profiles). So the value of 1% (post-money) of a $2.5 million company is $25,000 at most. That's $6,250 per year, far less than what he's giving up.<p>The first employee of a startup is not necessarily getting screwed. If that employee gets appropriate respect for his skill set, and reasonable compensation for the risks inherent in a startup, then it's a fair trade. A lot of people go into startups as early employees knowing the risks and upsides and that's fine.<p>What he should do if he actually wants to work on the startup: First, he needs to value his contribution to the company over the next 4 years appropriately and put a number on his "sweat equity". Let's say his market salary is $100,000 and he's being paid $50,000. Now add to his base salary: benefits (15% for health insurance, 401k matching), job-loss risk (25%, since typical severance offers are 1/4 tenure at current salary), career risk and opportunity cost (15%), and overage hours (30%, assuming a 50-55 hour work week). That's $185,000 per year. Take that, less the $50,000 he's making, and his sweat equity is $135,000 per year. Over 4 years, that's $540,000. The company's valuation is $2.5 million, "pre" to his contributions. He should be getting about 16% of the company, assuming he remains for 4 years. This number seems high, but if he's there after 4 years he will have been there almost as long as the founders, so it's about right.<p>First action: he needs to ask for 20% and settle for no less than 12%. If they say, "but you haven't done anything yet", he should point out that the equity grant is subject to vesting and that he won't get anything if he doesn't do any work.<p>Second action: he needs to demand the right to listen in on investor and client meetings. Otherwise, the other two founders will hold all the power in the organization because they, and they alone, hold that special knowledge of what investors want. If they think he's "just a coder", they'll show it by saying (in effect) that no, he's not "good enough" to be in the investor meetings.<p>The most likely outcome of his making these two demands is that they'll tell him to get lost. If that's the outcome, it's also the best outcome because it means the startup's a tarpit.

I think it depends on how much work was actually done before you joined. If the 2 co-founders already completed the main app/product, and you joined, 1% actually sounds fair. If you're gonna be the one creating almost the entire product from scratch, 1% is pitiful.

you got a mistake with your math 500K of 2 million is 25%

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.

No offense, but this is horseshit and the math is embarrassing.<p>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.<p>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.<p>Ask the secretaries at Microsoft or Google if they got ripped off. This is a joke.