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Dilution

blog.ycombinator.com

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Re: Dilution

#11

Post by rqebmm »

anandkulkarni wrote: post #3
pdog wrote: post #2

> Most founders' instincts seem to be to give too much equity to investors and not enough to employees. Is this wrong? Investors don't receive anything for their capital but equity. Employees receive income, benefits, etc. that have to be factored into the equation.

In the final calculation, employees are the ones who are toiling day-in and day-out for the company's well being – in a real way, the company's future depends on them more than the investors. It can be more valuable to have them invested long-term in the company's success, point for point, than an investor. Another way to think about it is like this: if an investor told you tomorrow they'd no longer contribute to the…

I'd argue the better analogy is "If you have a great idea, what's more important to get it to market: your first engineer or your first investor?"

The next is always going to be "well, do I have enough money to pay my engineer?" This is why the investor holds all the cards and therefore gets the best deal up front. Without that up-front money there is no eventual business.

Re: Dilution

#12

Post by mianos »

idiot_stick wrote: post #9
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

> Employees are the ones who put in the work to actually build the company. Company and work that, in most cases, wouldn't exist without a capital investment.

It may be the chicken or the egg, but, if you have some employee that can achieve something that others can't, he can go somewhere else and achieve the same. The money could be equally applied and it will not bring success. No money means failure but no employee means no chance of success, money or not.

Re: Dilution

#13

Post by 65827 »

I think the spectacular real time failure of Uber is going to drive a lot of those valuations down.

Re: Dilution

#14

Post by maxxxxx »

tyre wrote: post #4
pdog wrote: post #2

> Most founders' instincts seem to be to give too much equity to investors and not enough to employees. Is this wrong? Investors don't receive anything for their capital but equity. Employees receive income, benefits, etc. that have to be factored into the equation.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

Re: Dilution

#15

Post by jacquesm »

maxxxxx wrote: post #14
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

Depending on how the investors got their money it could translate into years of their careers as well.

Re: Dilution

#16

Post by nostrademons »

idiot_stick wrote: post #9
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

> Employees are the ones who put in the work to actually build the company. Company and work that, in most cases, wouldn't exist without a capital investment.

I'd question that, actually. The vast majority of huge tech companies that you've heard of today - Microsoft, Apple, Google, Facebook, Amazon, EBay, AirBnB, Whatsapp, Snapchat, GitHub - managed to construct a working product without taking investment. Several others - DropBox, Stripe, Instagram, Slack - had only a relatively small seed or angel round before launching a product. Meanwhile the track record for companies that take a huge amount of investment before delivering a product - Theranos, Webvan, Go, Magic Leap, etc. - is pretty abysmal.

YC and several other top-tier VCs recommend that you keep the startup as small as possible, oftentimes just the founding team, until you've built a product that's popular enough that you're swamped with demand. Then you can go and raise working capital to fund expansion and fuel growth, but not before. It's not true that the company wouldn't exist without the capital investment, though - it's actually pretty critical that the company does exist before raising capital.

Re: Dilution

#17

Post by jacquesm »

rqebmm wrote: post #11
anandkulkarni wrote: post #3

Earlier quoted context omitted.

In the final calculation, employees are the ones who are toiling day-in and day-out for the company's well being – in a real way, the company's future depends on them more than the investors. It can be more valuable to have them invested long-term in the company's success, point for point, than an investor. Another way to think about it is like this: if an investor told you tomorrow they'd no longer contribute to the…

I'd argue the better analogy is "If you have a great idea, what's more important to get it to market: your first engineer or your first investor?" The next is always going to be "well, do I have enough money to pay my engineer?" This is why the investor holds all the cards and therefore gets the best deal up front. Without that up-front money there is no eventual business.

That's not true.

You have the option to give that engineer a real slice of the cake instead of the misers share that's common. I've seen co-founders be labeled 'engineer #1' because they sat down 15 minutes after the first meeting where a company's founding was discussed.

Non technical founders can - and do - use investors money to try to limit the number of co-founders so they get a larger share themselves. Technical founders are less likely to do this to non-technical co-founders. (But it does happen.)

Re: Dilution

#18

Post by kinkrtyavimoodh »

maxxxxx wrote: post #14
tyre wrote: post #4

Earlier quoted context omitted.

It's absolutely wrong! Employees are the ones who put in the work to actually build the company. As you said, investors only put in capital (and sometimes advice and/or intros.) Employees work full-time on the company, oftentimes for below-market rates (what they could reasonably assume to make in salary + benefits at larger companies.) A company at any size is far, far, far more likely to succeed or fail based on it…

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

Re: Dilution

#19

Post by maxxxxx »

kinkrtyavimoodh wrote: post #18
maxxxxx wrote: post #14

Earlier quoted context omitted.

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

I was at a failing startup during the .COM bubble. I lost my job in 2002 and was unemployed for almost a year due to the terrible job market back then. Definitely a very existential problem compared to the investors who either lost a small percentage of a large fortune or lost other people's money.

Re: Dilution

#20

Post by 100k »

kinkrtyavimoodh wrote: post #18
maxxxxx wrote: post #14

Earlier quoted context omitted.

Employees also take more risk. Investors just lose money but employees lose years of their career if things go wrong.

Why would employees lose years of their career? While it's true that early work-ex in a company that eventually becomes Google is great to have, it's not exactly a black mark on your resume if you have worked in a company that didn't do well. You still got plenty of engineering experience.

Sadly, four years of "heroic effort at failing startup" doesn't look as good on the resume as "worked at Google".
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