Pitfalls of Equity for Employees In Startups • Hacker News Board

Re: Pitfalls of Equity for Employees In Startups

#11

Post by [deleted] » Wed, Jul 03, 2013, 6:03 PM UTC

michaelochurch wrote: post #6

tptacek wrote: post #3

Joel Spolsky's Stack Overflow answer to this question is to date the best single explanation of this issue I've read: http://answers.onstartups.com/questions/6949/forming-a-new-s... Also: keep your eye on the ball. When a software company gives equity to an investor in exchange for money, most of that money is going to employees anyways; salaries dominate the expenses of tech companies.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

[deleted]

Re: Pitfalls of Equity for Employees In Startups

#12

Post by pdog » Wed, Jul 03, 2013, 6:03 PM UTC

michaelochurch wrote: post #6

tptacek wrote: post #3

Joel Spolsky's Stack Overflow answer to this question is to date the best single explanation of this issue I've read: http://answers.onstartups.com/questions/6949/forming-a-new-s... Also: keep your eye on the ball. When a software company gives equity to an investor in exchange for money, most of that money is going to employees anyways; salaries dominate the expenses of tech companies.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

The absolute value of the startup when the founders and investors get involved (literally, founding the startup and investing in it) is often 1-2 orders of magnitude less than the value of the startup when the first employee is hired. So an employee may get 1/100th the equity of a founder, but still get more on an absolute basis.

Re: Pitfalls of Equity for Employees In Startups

#13

Post by tptacek » Wed, Jul 03, 2013, 6:07 PM UTC

imagnitude wrote: post #10

michaelochurch wrote: post #6

Earlier quoted context omitted.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

I know you're just trolling, but I'll comment anyway, because it's important to set the record straight. The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. Before getting funding, most bootstrap for years, neglecting family, friends, vacation, working 14 hour days, all for a business idea they believe…

This EIR thing† is one of the weirder beliefs he has about the startup market. I know hundreds of people involved with startups and many tens of founders, and I have never even heard of someone in my social network getting an EIR position.

The reality of EIR positions seems to be that they're places that VC firms park executives that they're almost willing to fund "on spec". That is: people who have already made them a shitload of money. I cannot find a way to give a shit about some VC firm paying a 50 year old former CEO to wait around for the next social cat picture startup to helm.

† He didn't say it here, but use the search box below to look for the phase "EIR sinecure"

Re: Pitfalls of Equity for Employees In Startups

#14

Post by michaelochurch » Wed, Jul 03, 2013, 6:07 PM UTC

imagnitude wrote: post #10

michaelochurch wrote: post #6

Earlier quoted context omitted.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

I know you're just trolling, but I'll comment anyway, because it's important to set the record straight. The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. Before getting funding, most bootstrap for years, neglecting family, friends, vacation, working 14 hour days, all for a business idea they believe…

The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup.

"The vast majority of founders" never take VC and aren't even working in a space that VCs will fund. I'm not talking about lifestyle businesses, which actually involve a lot of risk and sweat, I agree with you.

When your startup falls, there's not some kind of cushy EIR gig waiting for you at the friendly VC.

If you're VC-funded, there is. If you never get funding in the first place, then what you say is correct, there's no guarantee of anything.

By the way, the fact that it's unfair I don't believe to be worth complaint. My problem is that we've ended up supporting a game that actually increases and perpetuates inequality by making pre-selected rich kids look like they earned it.

In fact, the real respect goes to the risk-taking, unfundable, silent majority founders you described.

Re: Pitfalls of Equity for Employees In Startups

#15

Post by tptacek » Wed, Jul 03, 2013, 6:09 PM UTC

michaelochurch wrote: post #14

imagnitude wrote: post #10

Earlier quoted context omitted.

I know you're just trolling, but I'll comment anyway, because it's important to set the record straight. The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. Before getting funding, most bootstrap for years, neglecting family, friends, vacation, working 14 hour days, all for a business idea they believe…

The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. "The vast majority of founders" never take VC and aren't even working in a space that VCs will fund. I'm not talking about lifestyle businesses, which actually involve a lot of risk and sweat, I agree with you. When your startup falls, there's not some…

I was funded in 1999, at 2013 A-round levels. No EIR position awaited the failure of that company. Again: I don't even know anyone who's ever been offered an EIR position, and I know a fair number of people, many of whom have been funded, some of them by huge name VCs.

So, why don't we do it this way: why don't you name a couple people who've been recipients of "EIR sinecures"?

Re: Pitfalls of Equity for Employees In Startups

#16

Post by hga » Wed, Jul 03, 2013, 6:10 PM UTC

michaelochurch wrote: post #5

I don't think equity is a good way of paying employees. There, I said it. I know this is contrary to Silicon Valley wisdom, but I've studied the alternatives and I think I'm right on this one. Profit sharing (a larger percentage, but annually dispersed rather than permanent) is a much better method of upside compensation. I actually think that typical equity allocations in VC-istan fall into the uncanny valley and be…

In your short essay above you left out the perverse incentive that equity presents if the company becomes worth something: getting fired before the IPO or other cashing out event. To rag on your favorite target (http://en.wikipedia.org/wiki/Brian_Reid_(computer_scientist)...):

"In June 2002, [Brian] Reid became Director of Operations at Google. He was fired in February 2004, nine days before the company's IPO was announced, allegedly costing him 119,000 stock options with a strike price of $0.30, which would have been worth approximately $10 million at the $85 IPO price."

Still being litigated....

Re: Pitfalls of Equity for Employees In Startups

#17

Post by fearless » Wed, Jul 03, 2013, 6:12 PM UTC

michaelochurch wrote: post #8

beat wrote: post #7

Earlier quoted context omitted.

What about those of us who aren't "trust fund kids"?

VC-funded founders? Not rich? I have no problem with you four.

You're making a very bold claim that being born into wealth and connections is a prerequisite for VC funding. Do you have any hard evidence to back this up?

Please don't take this the wrong way: Your comments seem to reflect your own track record of professional failure rather than some legitimate trends or observations about the industry as a whole.

If every founder, investor, executive you have met has seemed malicious or incompetent, please consider this: the only common denominator is you.

Re: Pitfalls of Equity for Employees In Startups

#18

Post by jt2190 » Wed, Jul 03, 2013, 6:13 PM UTC

michaelochurch wrote: post #6

tptacek wrote: post #3

Joel Spolsky's Stack Overflow answer to this question is to date the best single explanation of this issue I've read: http://answers.onstartups.com/questions/6949/forming-a-new-s... Also: keep your eye on the ball. When a software company gives equity to an investor in exchange for money, most of that money is going to employees anyways; salaries dominate the expenses of tech companies.

I don't agree that founders deserve as much as Spolsky thinks. 3-5 times more than early employees, sure; 20 times more, no. Most often, "took more risk" means "comes from a rich background and had a softer landing". The VC-funded startup CEOs (and hedge fund CEOs; that was even bigger than VC startups in NYC for a while) I know didn't take any real risk, because they're all trust-fund kids and, half the time, their…

  > I don't agree that founders deserve as much as 
  > Spolsky thinks...

I've always read Spolsky's advice like this: "If you literally can't build the business without the other person, make them an equal partner." I agree that founders should think long and hard about this, because there are very few scenarios that require a fifty-fifty partner, and many that require high-skilled, but not unique, people.

Re: Pitfalls of Equity for Employees In Startups

#19

Post by mahyarm » Wed, Jul 03, 2013, 6:17 PM UTC

After working for a start up for a while, a couple of other things that would make equity far more attractive compared to Google paying $80k/yr more in total compensation:

1. Non-expiring options on leaving the company. Many SV companies have options expire in a couple of months after leaving. Some have them expire immediately upon firing.

This does remove some of the Schrödinger's golden handcuffs effects of equity, but start up equity is not liquid. It can be tough to expect someone to put a significant chunk of their savings into a company and deal with the tax BS just to purchase equity so they can move on. Much of the stress of start up equity I've realized comes from the non-liquid nature of the stock and the fact you don't have control over the company. Many companies want to completely control second market behavior when private, which removes even more liquidity. Much of the stress will just go away if I could keep the options.

2. A consistent pattern in working for various companies is giving the stock & employment contracts after hiring. From now on I'm making it a condition of accepting an offer to receive all contracts, stock contracts, proxy agreements, etc that I would be asked to sign. If you have a surprise call option on purchased stock, no way I will work for that company.

Re: Pitfalls of Equity for Employees In Startups

#20

Post by michaelochurch » Wed, Jul 03, 2013, 6:18 PM UTC

tptacek wrote: post #13

imagnitude wrote: post #10

Earlier quoted context omitted.

I know you're just trolling, but I'll comment anyway, because it's important to set the record straight. The vast majority of founders are not spoiled rich kids playing with daddy's money. The vast majority of founders take a massive risk when they go all in on a startup. Before getting funding, most bootstrap for years, neglecting family, friends, vacation, working 14 hour days, all for a business idea they believe…

This EIR thing† is one of the weirder beliefs he has about the startup market. I know hundreds of people involved with startups and many tens of founders, and I have never even heard of someone in my social network getting an EIR position. The reality of EIR positions seems to be that they're places that VC firms park executives that they're almost willing to fund "on spec". That is: people who have already made them…

That is: people who have already made them a shitload of money.

Also: people they owe favors, kids of Senators whose votes they need to sway, and people they did embarrassing stuff with in MBA school who are now getting the EIR job as a form of hush fee.

The whole world runs on extortion, influence peddling, and favor trading. That's thousands of years old and hasn't changed much. But technology was supposed to be different and maybe, at some point a long-ass time ago, it was.