First employee of startup? You are probably getting screwed

Yes, if you take a $50k/year paycut for $25k/year in equity, you're getting screwed.<p>But mess with the numbers just slightly - a $4M premoney valuation, and 2% of the company - and suddenly you're getting $100k/year in equity for a $50k/year paycut.<p>Now of course that equity is risky. It still might not be a good deal, unless you think you have at least a 1 in 2 chance of success.<p>But the point is: you can obviously get a very good deal as a first employee without taking on the risk of quitting your job with no paycheck. Make sure that it IS a good deal first though!<p>The first employees of all the startups I know personally have gotten very good deals.

This article should probably be retitled 'Working for half your market salary? You are probably getting screwed' - but then the whole thing sounds a little obvious, no?<p>If the company is strong, paying you appropriately won't make or break it. If the company really can't afford to pay you appropriately, you should be a cofounder.

His numbers are way off. 2M is not a "high" pre-money valuation--most startups nowadays raise a seed round at a 5-10M pre-money valuation. So for $50k, an investor will get 0.47-0.91%, whereas the employee in this example gets a strictly better deal at 1%.<p>That said, I agree that $50k/1% is a low offer. Lots of startups (at least in the SF bay area) are offering 50-100% higher than that, and these are good startups with experienced founding teams, funding from top investors, paying customers or traffic already, etc. So definitely explore your options! There are great deals out there.

It would seem to me that there are many more factors that go into making a decision like this worthwhile versus getting screwed.<p>-Type of company(do you like the product, is it something you can see yourself wanting to wake up for?)<p>-Type of founders (like-minded, fun having, professional but not bureaucratic - comes to mind as possible wanted features)<p>-Equity(literal percentage wise and decision making-wise, are you going to be leading a team in a year? or still grinding away all day?)<p>-Perks(Gym in workplace? What about sports area? Video game room? Movie theater spot?)<p>-Location(Where will you get to work, a nice second story office overlooking the bay? a park?)<p>-etc...<p>These are just off the top of my head. I'm sure there's more.<p>Edit: Fixed my line spacing.

That's the thing, working as one of the first people at the startup is a pretty intimate close team (or at least should be). There's a lot of "safer" and or more compelling ways to pull folks in. a) Offer a moderately accelerated vesting schedule for early employees. b) have the initial work be as a sort of moonlighting in terms of time commitment (more suitable / appropriate when either taking a bootstrapping approach and or building out the MVP.) c) seriously, it's your first hire, you folks will likely (and perhaps unfortunately)spend more time together than you will with your respective significant others.<p>Point being, yes it's "just business", but if you're not setting things up to be awesome for that first hire, are they going to be sufficiently awesome do as to be worth spending so much time together? And if they're that great, how much do you wish to ensure that you guys are likely to choose to work together again?<p>I'm likely way over reacting, but still, it's a matter of some importance, exercising choice over who you spend time with, so why settle for less than awesome or treating them awesomely?!

Yep, fell for this too. Joined as their second hire, working under a senior developer... who promptly left. I assumed his role (and responsibilities), but not his pay. Not to worry I thought, stock options are coming. 11 months later I got papers for less than 1/4 percent with no vesting schedule (must stay until exit). Handed in my notice soon after.<p>That said, the experience I gained in the year helped me land better paid contracting gigs after, so... swings and roundabouts.

Discussion from a year ago: <a href="http://news.ycombinator.com/item?id=2949323" rel="nofollow">http://news.ycombinator.com/item?id=2949323</a>

50K$ worth of work and 50K$ in cash are not the same thing. The former has a higher risk associated with it than the latter. For example, there are the risks that the employee becomes unable to work for health reasons, disappears or just isn't suited for the job. Also, the full value of the latter is only delivered, if everything goes well, after one year.

Sure I got screwed and the investors got a way better deal.<p>But then again, every other startup would have given me the same deal or worse, and the alternative would have involved me still being in college taking out student loans. I think I'll stick to my mediocre salary and nonfounder equity[1].<p>[1]: Since day one, the company has done quite well and my pay is no longer mediocre, and my equity would be a nice 6-7 figures bonus if the company sold today.<p>Quit focusing on the injustice of an employee share versus a founder or investor share. Quit comparing yourself to others, and instead focus on whether the numbers offered to you make sense for you, personally.

I used to fall for this trap.<p>But now I just calculate my expected return based on a 10% chance of a buyout for $100M or so (cockily I'm assuming I can screen the obvious losers out with common sense alone though that is of course debatable) and if it's not a net uptick from the current gig, I pass on it. And up to now, I've <i>always</i> passed on it, and none of them succeeded.<p>Other than that, the only startups I'm interested in are ones where I have one of those nifty 3 letter titles and 5% of the company in my pocket.

Yeah...this depresses me. I am one of those guys that is going to get screwed. The only thing I guess I would say in response is that I would be an investor instead of a first employee if I could, but I can't. I don't have the capital sitting around to play with and there is a difference between differing salary and having cold hard cash to inject into a company. In other words, an investor giving $50K is more valuable than an employee deferring $50K in salary.<p>Also, in many cases, the employee is getting value that the investor is not. Specifically, the employee (i.e. me) likely doesn't have a ton of start up experience and is able to leverage the work as employee #1 to then start his or her own start up later. The investor on the other hand has likely been involved with many start ups and isn't as much interested in learning or experience. They just want a return on their investment. So, from that sense, this article is sort of comparing apples to oranges.

I did this for a bit although I got 3% of the company. The resume bullets and name recognition since I left have more than made up for the low salary, at later jobs.

If you're an early employee of a startup, you have better de facto information rights than any investor, even a board member. If not, you're seriously incompetent, or the company is totally dysfunctional. i.e. if things are going really badly, you'll know before the investors do, and could jump ship.<p>The only thing you might not see is acquisition offers, but you can assume those are constant noise and meaningless until a certain point.

All depends on that first employee, for some that would be an amazing deal for others it is laughable. If I was out of the school but with some skills and liked the company in general I would jump on it. Now the idea, founders, investors would have to absolutely blow me away (order of magnitude higher then anything I experienced). I like to get payed in cold hard cash and now not later.

That looks like a post from someone who fundamentally misunderstands the dynamics involved in evaluating value in a startup environment (and likely in business period).<p>There are too many variables to consider in order to make a generalization like that. Even if you have a firm handle on the financial variables (how much you're earning, what your opportunity costs are, what the company will be worth, etc.), it doesn't at all consider the intangible value. So your friend is going to get 1/2 pay for 1%... maybe the experience alone in being able to evaluate his self-worth in the future or in being able to start up his own company will more than make up for a couple of years at 1/2 salary? Who knows. I'd be willing to bet that this blogger doesn't.

People don't know how to negotiate. Equity is the founder's only payoff, so they're going to be incredibly stingy about it, while playing up the intrinsic benefits.<p>Also, people don't know how to measure opportunity cost.

There are so many variables that go into valuing an offer from a startup that any general article like this can not ring true. Here's some questions I'd ask myself if I were considering an offer from a startup.<p>(wow, this is a lot longer than I expected it to be)<p>1) Who are the investors?<p>Before I joined VA Linux in 1998, I knew they were super close to closing the Intel Capital deal, so I knew (to a certain degree of accuracy) that they were close to having money in the bank. I agreed to take less salary for equity and a promise from the CEO that salary would improve as the company got more solid funding. The CEO was good to his word, too. I might have taken the job without the vc funding, but knowing what was up there was really helpful.<p>There is more knowledge now about the equity picture of a private technology company today than ever before in history. It's very easy to get an idea of a companies valuations and then if you agree with those values and if you think they'll increase.<p>Some VCs also have a reputation for screwing early employees and pancaking out those that might leave before an exit. This is very important to know if you're going to be valuing a potential equity stake. So, your equity could disappear without any regard for your feelings on the matter.<p>2) How far along are they towards going public/another exit.<p>I joined Google the week before it went public (in 2004), meaning my initial strike was the ipo opening price. Considering that made Google more stable than competing offers from younger startups, and more fun than some of the other companies I had offers from. The former was important as I had just come out of a failed startup and some time consulting, and I wanted stable more than I wanted fun. I got both, but that's pretty rare in companies of Google's vintage (I still have it, which is one of the reasons why I stay).<p>The point of this is to understand what the future of a company looks like. I knew what Google looked like, and for other companies when considering/working with them, I asked myself what do similar 'exits' look like. That leads to understanding of what an equity position means.<p>You can look at an offer and ask yourself: Will the company actually increase in value before an exit that makes this equity worth it?<p>3) Is there an established bonus system?<p>A lot of companies have no bonus and weaker benefits/salaries pre-ipo. They have the equity stake offer and so these other considerations are sidelined until they become larger and those equity offers stop attracting good people by themselves. These differences can mean 70 to 80k less per year for a senior employee. So, know what you're worth and decide if it is worth the risk.<p>4) Are the people running the company any good? Are they ethical?<p>This is actually hard to answer, but I've seen plenty of acquisitions become less lucrative than a similar job in an established company. I won't mention the company, but I've seen large companies (not Google that I know of) end up giving less in financial terms to acquired employess than they give a new hire wrt equity participation. It's kind of sad how little people know about the companies they join.<p>I'll say it again: I often see companies on HN get acquired, but for many of the employees, and not a few founders , of startups, this is a much worse deal financially than taking a job with an established firm. Your mileage may vary, and take it with a grain of salt, but remember you are trading money now for the chance of much more money later.<p>There's so much more I'd like to tell people here about considering offers, but I've already blathered on a bit much on this. I also readily admit I have a different approach to risk as a husband and father (2004) than I did as a single developer (1998)...

When joining a startup company that is anywhere from 5 to 50 people, what are some things I can/should ask for in a contract negotiation?<p>Can I ask for acceleration of my options if the company gets acquired before my cliff? Can I ask for a guaranteed contract with a buyout, in case they want to let me go before my options vest?

I wrote up a similar sort of article last year:<p><a href="http://auscillate.com/post/238" rel="nofollow">http://auscillate.com/post/238</a><p>Curious what the HN community's take on that is. The conclusion is basically the same, but I attempted to be a bit more rigorous with the numbers.

this part about 50% of the market salary to work at the startup in US was always quite weird to me. Here in Israel I was working at startups my entire career, expect for the first 3 years spent at NetManage. Through out all those years I got above average salary. No established company ever offered me more then I could get at some hot startup needing my skills.<p>different markets different rules I guess.

I've decided that I am too stupid to figure out such schemes. I just figure out how much my work is worth to a company and then ask for that. As I see it, working for equity is essentially begging to get screwed by someone who understands the finance game better than me.

(Please read this comment carefully.) The author's comparison at the end of the article is correct.<p>It is obvious that it is much better to get the package "2% of company shares, Priority on exit, Invest small part of his capital" for the same $50k (i.e. the programmer's guaranteed lost income) when you are paying the money directly.<p>Further, investing $50k directly does not even involve working full-time or part-time (except on financials related to the round), and has an equal chance of both lost money (company doesn't get on sure footing), and returns on the money, that the programmer faces.<p>So bottom line. If you have identified a company that you think has good chance of success, you should simply decline to work for them for equity and a lowered wage: instead, find a source of great personal wealth, and invest a small part of it directly in the company.<p>Working for your equity means you're getting screwed. Being very rich gives you a lot better deal.