Why you can't hire

&#62; 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.<p>Choice quote. I'm kind of amazed this isn't brought up more.

&#62; There isn’t a shortage of developers and designers. There’s a surplus of founders.<p>This is especially true of non-tech companies looking to hire quality people for positions in their IT departments.<p>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.<p>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.<p>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.

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).<p>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>P.S. That said, psst psst, being last cofounder beats first engineer 100% of the time.

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.<p>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.<p>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.<p>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.

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.

Amen, brother!<p>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.<p>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.<p>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.<p>A few extra percentage points of a deal that will probably never happen is not really all that attractive.<p>The only solution is to raise more money and pay them more.

"Raising the first $25K for product development is easy – join an incubator."<p>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.<p>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.

This. A thousand times this.<p>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.

This should be common sense.<p>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.<p>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).<p>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.

I agree it's a supply and demand issue. But for comparison: We couldn't find people to hire in Y2K either after having raised $20M.<p>Throwing equity around does not solve the fundamental issue, it just is a competitive tactic.

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.<p>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.<p>Assuming 2 investors (40%) 2 founders (40%) that leaves only 20% remaining which does not fit the proposed changes.

Succinct and to the point. +1.<p>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.<p>Great post.

Yes! This article just raised my market value by giving me new insight into the market.

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.)<p>On the other hand, even more than getting the top 2% unicorn squad, I want <i>engineers who believe in the business</i>. 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.<p>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?<p>To clarify, perhaps people can post their thoughts on what equity percentages you'd offer to the following? (or something similar) :<p>1 - 5 Employees - Engineers<p>1 - 5 Employees - Sales<p>1 - 5 Employees - Community Manager/Support<p>6 - 20 Employees - Engineers<p>6 - 20 Employees - Sales<p>6 - 20 Employees - Community Manager/Support<p>Thanks in advance!

I don't want your fucking equity. Pay me, and when you inevitably can't pay me anymore, I'll move on.

I think that this is true in Silicon Valley and possibly NYC, but not in other areas.<p>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.

I agree that something in the cap table has to give, but I don't think it's founders. It's investors.<p>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.<p>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.)

Thank you for showing and communicating a sense of clarity that many colleagues around me (sometimes myself incl) seem to lack. People talk of 'founding' a startup and 'i'm an entrepreneur' as if its like a roadtrip to tahoe. Its not. Period.

Instead of comparing the equity of the first engineer with the founders, it is easier to compare how much his lower salary can buy him if he takes another job with full salary and invest the difference in the company as an angel investor. If there is an engineer whose salary is $120k/year and is joining a startup at $90K/year, he is taking a 30k/year loss. Let's say the startup has received $500K investment at the valuation of $2.5M. Since the startup has passed its valuation point already, its current value is somewhere between 2.5M and its future expected value.<p>Let's assume the prediction for valuation at the next round is $10M and there is 50% chance that the company gets there. This would make the value of the company about $5M at this point. This means that the engineer's discounted salary is worth about 0.6% equity (30K/5M=0.6%) for the company. Usually companies make the offer for 4 years worth of equity with a vesting plan. Again it is not correct to multiply 0.6 by 4 because the salary of engineer will reach to its market value after the next round of funding. It is fair to multiply it by 2x. This brings the total equity given to the engineer to be about 1.2%. I made a few assumptions here such as what the expected value of the startup would be in the next round of funding and how much the salary is lower than the market value. This calculation shows that the current amount of equity offered to the first employees is not that different from what it should be contrary to what the author of the blog post has suggested.<p><i>To offer a simple formula:</i><p>Y (expected equity of the first employee for the first year) = X (loss in income for the first year) / V (valuation at the next round of funding) * P (probability of the startup getting to the next round).<p><i>For our example:</i><p>Y = 30K / 10M * 0.5 = 0.6%<p>I know engineers often compare themselves to the founders and wonder why they should get so much less equity considering that they have similar skills and are putting equal effort into the company. One thing they ignore is that what founders have already put in. In most typical startups, the founders have been developing the idea at least for two years and have worked full-time on the startup for 6 to 12 months before receiving the seed funding. They have done this at the time that the possibility of getting to the seed funding round was less than 20%.<p>If we assume their market value was $120K/year, that means they each put in something about $120K at the time that there was less than 20% chance that the company would get to the point of $2.5M valuation. If there are two founders, this would be about $240K investment at the valuation of $500K (2.5M * 20%). That means the founders should get 48% in vested shares in the company. Instead they get all their share as unvested shares and have to work for the next 4 years in the company to earn them. Considering the remaining sacrifice they have to make, it is totally fair for them to receive 60% instead of 48%.