One of the top comments on the YouTube video attached to the article talks about how someone wasted their 20s working as the founding engineer (employee #6 of a 6-person startup) and when the company exited for $100 MM, they only got 100k and are still working at 40 years of age while the other 5, presumably having cofounder-level equity, are retired.
This is the true risk of startups, and, if you're looking to maximize your earnings, it's best to either join a big tech company or start your own startup owning most of the equity, perhaps as a side hustle while you grow it enough to be profitable.
But getting "founding engineer" level equity on the order of 0.5% (before dilution!) seems to basically be a scam, where you're working 2x the amount for lower salaries than the market, all while having some nebulous carrot dangling in front of you for a reward that may never come, most likely, or even if it does, the value is so small as to not make up even on a per-hour basis the amount you spent working at the startup.
> But getting "founding engineer" level equity on the order of 0.5% (before dilution!) seems to basically be a scam, where you're working 2x the amount for lower salaries than the market,
0.5% at an early stage with below market compensation, no refreshers with future rounds, negligible comp increase with future rounds, and below-market salary is indeed a scam. A lot of startups are happy to operate this way.
On the other hand, getting 0.5% equity in addition to market rate salary (or adjusted to market rate as soon as funding comes in) with refreshers on each raise to offset dilution and reasonable work life balance can be a very good deal.
I’ve worked for both types of startups. The first type quickly loses their best talent as they figure out they’re getting the short end of the stick. The second type can build a happy founding engineering team that grows with the company and wants to stay for the long term.
Fortunately, the internet has made it harder for companies to get away with the bad deal, below market rate, terrible WLB arrangement that was so common at startups a decade ago. Some people still get trapped by bad deals. Usually when you look at those companies giving bad deals it’s a small group of older founders managing a group of early 20s college grads who don’t yet know better.
Serious question: if you're truly being paid a market-rate salary -- e.g. roughly as much as you could make at any other VC-funded enterprise, any FAANG company, etc, not the same $110k/yr you'd make at a bank or consulting firm -- why would you get any equity? The whole point of equity is that you have skin in the game and "work harder" (whatever that means) to make the company a success. At least in the early days part of that was accepting lower cash compensation in exchange for a piece of the upside. Why, if you're going to treat a founding or near-founding position as a 9-5, 40-hour week, clock-in-clock-out type of position, would you get a piece of the upside compared to just working at a bank or consulting firm?
Google will pay a senior engineer 200k base and 250k in liquid stock a year for 450k TC. That stock is also incredibly low risk.
If a startup paying market means 450k cash, absolutely there’s no need for equity. But if it means matching the 200k base then obviously you’re screwed with no equity. And I’m theory it should be a lot of equity given the much higher risk premium.
According to levels.FYI, Google average for senior engineer is closer to 360k. But your point still stands.
You are getting equity either way, both are likely to appreciate, but one is likely to be more liquid. So you're trading liquidity for a higher return.
More than half of all startups fail within the first 10 years. They’re not just less liquid, they never experience a liquidity event at all. That equity is effectively $0.
The odds of any given big company going bust are dramatically lower than that. Their equity might depreciate but it’ll at least be worth something.
> Why, if you're going to treat a founding or near-founding position as a 9-5, 40-hour week, clock-in-clock-out type of position, would you get a piece of the upside compared to just working at a bank or consulting firm?
One can be very dedicated on a 9-to-5 schedule. Just because you value WLB doesn't mean you are in a 'clock-in-clock-out' mentality. People have lives outside of work, may be even hobbies. The idea that a startup owns your life needs to die, stat. That is an extremely toxic line of thinking.
> market-rate salary -- e.g. roughly as much as you could make at any other VC-funded enterprise, any FAANG company
From my experience, the group of people seeking FAANG jobs or prestigious roles at big companies doesn’t have all that much overlap with the group of people who like to build early stage startups.
Some people really liking going into a huge machine of a company, doing a lot of meetings and planning documents and consensus-building, playing the office politics game, and working with huge teams where everyone gets a narrowly defined slice of responsibility that they’ll be evaluated on 12 months from now in their performance review. These people usually struggle at startups and leave anyway.
Other people can’t stand anything resembling big company operations and won’t be working for FAANG or Series D behemoths for very long even if they’re making $400K or more.
This is why you’ll see companies like Oxide Semiconductor pay $200K, accept only the best candidates, and still have people lining up to apply.
If the only thing that matters to someone is cash, moving to a Tier 1 city and joining FAANG to play the game is just what you do. Just don’t be surprised when you find yourself surrounded by other people who care primarily about playing the game to maximize their comp, because they’re doing the same thing.
You'd get equity because you have the market power to demand it. Same way bankers can demand high bonuses etc. Everything else is negotiating tactics but at the end of the day - folks get equity because they can demand it and won't take the role without it, and the companies aren't willing/able to eliminate those roles.
Equity is skin in the game. Why are you implying that a well paid engineer, in both salary and equity, would be treating their start-up role as a 9-5 bank job? At the very least a startup is not as safe a bet as a stable job at a big company like that. With equity they're going to want to work hard to increase the upside of their contributions.
Another reason could be career progression. A startup is generally "up or out" growth, right? A mid or mega corp has some opportunities for advancement (especially for juniors). In practice juniors get better gains from job-hopping but some play it safe and want to build 401k or get into management. Something that a startup doesn't offer if they run out of money.
I believe the parent comment is using founding engineer to mean early employee (not necessarily first, and differentiated from "founder"). 15% is certainly "founder" levels of equity, but it's all arbitrary.
Founding engineer usually implies that you’re getting paid because the company has raised funds or has significant income.
Getting 15% is only really possible as a cofounder or if you’re joining as the only engineer before they have money to pay anyone. I assume that’s why you said “sweat equity agreement”.
There can only be 100% total, so giving everyone from cofounders and the engineering team 15% would max out at 6 parties total, assuming no investors and the remainder goes to a pittance of an option pool for new hires. Unless you never plan to grow the company the math just doesn’t work.
If you joined pre-money and took pure equity as compensation while building the company from scratch then you’re more traditionally called a co-founder.
Generally, startups don't pay market rate, it seems. I've seen offers for $125k - $175k as the base, while bigger tech companies will pay a total compensation of double or even triple that, so the 0.5% needs to make up for that difference. I don't see any startups paying at that "market rate" of big tech, as I've generally seen. Yes, I am focusing on big tech specifically but those that work at startups should be good enough to get into a big tech company anyway.
One thing people need to remember is the world runs on incentives. And on this topic, there is a HUGE incentive to mislead people.
The facts are:
1) Tech startups usually need a bunch of good engineers
2) Investors and founders want these engineers for as little money as possible, as almost every owner-labor relationship in history has gone
3) Stock options have mystique from once-in-a-lifetime companies like Google but are overall very complex financial instruments
4) Many engineers are a combination of poorly informed about these complexities and easily impressionable to be “sold” that these options are a good idea.
The end result is a massive amount of effort expended to hoodwink engineers on this topic. The existence of the term “founding engineer” is exhibit 1, they are an employee and could simply be called software engineer, the term was invented to add the mystique (and workload) of a founder to what’s just a regular employee without founder equity.
Exhibit 2 is this idea that being a founding engineer is a path to being a founder , this gets repeated ad nauseum despite being easily disproven by 5 minutes on linked, a slim percentage of hot startup founders had previously been “founding engineers” . Of course some startup experience might be useful but just as often you’re the code monkey hired precisely so that the actual founders have more time to do the founder stuff you’re not doing and therefore not learning.
YC is basically a VC firm so it’s like taking Exxon Mobiles PR about climate change risk at face value. There’s a huge potential for bias. And even by VC firm standards YC has been shown to be exceptionally employee- hostile in their communications to founders and the behavior of their portfolio companies.
Once again, people ask “what would a union do” and once again, here’s an answer. It could hire lawyers with a collective budget to review startup option terms and make them less likely to screw over early employees. Because the lawyers that the VCs hire are working to protect the VCs, not you. And the blog posts they publish on employee equity are written to serve their interests, not yours.
Basically, VCs optimize for many small bets, ie investing in many, many companies where only one needs to hit it big in order to recoup the investment cost, while startups focus only on their own success, so it's in the VCs' best interest to sell the dream of working on or at a startup, thereby increasing VCs' own success without necessarily materially affecting the success of the startup itself.
Wasn't it jwz who first widely pointed this out: startup stock is a lottery ticket. Nobody should take 1/2 wages because their boss gave them a lottery ticket.
And then his accountant/advisor said something like, "If you'd told me you were going to buy a nightclub, there are easier ways to lose all your money."
In JWZ's case, IIRC, he actually had this exchange with an accountant/advisor.
But it seems to have worked out OK for him.
Andreessen has made a lot more money since then, but JWZ got to build up many aspects of something cool that he cared about, and also occasionally still write some code on the side.
Keep in mind it's not just the percentage, but whether it will be possible to keep any of it.
I've done five startups now and my conclusion is I'll only consider joining a startup at two points:
In the beginning, when the share valuation is less than a penny. The valuation is low, do an early exercise of all shares up front and file an 83b. Now, as you vest, you actually own the shares. So you can leave the company in the future and keep all your so-far vested shares.
Or, late in the startup cycle when the company is already well-known and very clearly on the IPO path.
Anywhere between these points is not worth it. The valuation will be too high to early exercise so may lose everything but the probability of success will be too low to take the risk.
Yes, that would make mid-growth startups more attractive to join. I know a few startups have done that but I haven't encountered one yet.
Also, wasn't there a scandal a few years ago of a startup that promised that and later canceled? So would have to see the contractual wording carefully.
I didn't hear about this, nor could I find anything specific on Google. I did find that apparently some companies have pretty aggressive clawback clauses, which is a huge yikes from me.
Anyway, I think if you ever do talk to a mid stage startup, you should tell them this is what it would take to convince you. More people demanding it will likely cause the market to move.
And that is exactly why I left my last company. As person #4 I was offered 1% over four years, an extremely below-market-rate salary, and no benefits. I left after exactly one year and didn't bother to exercise my 0.25%. People #2 and #3 left a little while after that. Person #1 / CEO / CTO / Maker-Of-All-Decisions is still there, somehow, still funded by monthly donations from family members and now crowdfunding.
Same. My net is the -$200 I spent exercising options in my first startup.
I'm currently on my fourth because it's good experience and I needed a job after being laid off from a larger company. I'm a exec and have a decent amount of options and the company has customers and a path to profitability, but I'm still not counting on those options being worth anything.
Of my previous 3 startups. 2 were acquired and one is still chugging along and making a small profit with no exit plans. Total value of my stock was the aforementioned negative number.
Join startups for the experience, not for the paper money.
I think there is a clear mismatch between how founders and employees value equity. The advice on the internet is to always ignore the equity component, but founders are definitionally there because they think the thing they are building will be worth something, otherwise they should still be working somewhere else.
I think the actual takeaway here is that people who go to work at startups should be far more discerning about the company they are working for than when they are getting paid in liquid stock.
I think early employees should also be willing to bail early if it's not growing at a rate that justifies the stake they get.
I wonder how sensitive the HN crowd is to the specific % number here. Do you think 1% is a meaningfully better amount of equity for employee #6 (assuming this is the first non-founder)? Does front-loading vesting (eg, 35, 35, 20, 10) change your thoughts at all?
I am unaware of any situations where employees have been diluted out but founders have not. There are cases where everyone gets diluted out because the company is doing poorly and needs to be recapitalized, but in those situation everyone's shares are basically worth nothing and founders are unlikely to be issues large stakes.
Companies do generally want to disincentivize employees from cashing out for a while since it lets them maintain a very low 409a valuation for common stock so that they can issue options with low strike prices (which is good for employees), but generally secondary markets do exist for companies that are doing well.
But yes, fundamentally, employees and other small shareholders do not get to make the decisions about company fundraising, either in startups or big companies. The lack of control doesn't make these companies bad investments.
Not a bad investment per-se, but regarding "there is a clear mismatch between how founders and employees value equity" - The founders have more control, and therefore their equity is worth more.
e.g. Founders raise, selling off some of their shares as part of the raise. Everyone else has an illiquid asset, Founders can negotiate a payout.
The major shareholders can authorise issuance of new shares, different classes of shares, issue new shares with anti-dilution clauses. You're correct though, it's easier to value shares with a secondary market.
There are lots of schemes that an unscrupulous founder has at their disposal, so one has to be their own advocate and value their shares appropriately.
Not to deny that founders are in a privileged position, but they are still beholden to other investors and have clear incentives (and legal obligations) to not screw over current employees.
Even when founders control the board, the company has to sign binding documents with investors that govern what can be done, and the investors have a lot of leverage to ensure that the terms do not allow wiggle room for founders to screw them over.
No major investor is going to agree to anti-dilution terms for founders, and you better believe they are not going to give additional grants to founders for the sake of it.
Founders will definitely cash out some stock if they can, but generally it is a small part of their total holdings at fundraising time (e.g. 5% of their holdings per round) since that is both meaningful downside protection for them and not so much that investors believe the founders are no longer aligned. This is definitely a real benefit, but I don't think most employees would be moved by being able to sell 5%/round.
Either all or a vast majority of founder stock is still common stock alongside employees though, so they're generally fairly aligned with employees IMO.
Which is all to say; I think it is actually pretty tricky for a founder to create an outcome that makes themselves disproportionately rich beyond what the ownership%/strike price combo should imply and I don't think founders can generally turn a given % of a company into meaningfully more money than an employee can if there is any sort of liquidity event.
There are situations (acquihires, recapitalizations, etc) where founders get bigger forward looking grants for themselves than employees, but I think this is less about the stock itself and more about what they can convince investors/acquirers about the forward looking value they provide and are generally all symptomatic of a startup that is failing in some way.
While it's hard to comment on a specific situation, in my experience engineers are typically more interested in cash compensation rather than equity, even with less than 10 employees. And this is when offering them the option; they just choose the cash most of the time. Meanwhile, the founding team often is just paying themselves stipends for rent. So there's some classic risk tolerance here: if the company fails (which 90% of startups do), the founders have burned all their savings and have skills that are more broad than deep, whereas the employees are better off, and often more hireable given the skills they've developed in their specialization. Also, when things aren't going well for the company, the engineers can put out feelers to leave ship and line up another job, whereas the founders typically have to go down with the ship and shut the entire company down if they are exhausted.
Yes, in the small % of cases the company is very successful, the founders will gain more, but it's disingenuous to not consider the risk.
Startups are not a risk-adjusted way to maximize earning potential for nearly anybody --- not even VCs! VC returns overall typically are less than S&P500.
From digging around, I suspect there is a starting base phenomenon for that risk tolerance.
For example I was watching a documentary and got curious about theglobe founders — one was the son of Valley business type and the other was the grandson of the founder of Nestle.
Many engineers come from more pedestrian roots, and need money to make rent if the company folds, while the founders can accept “stipend” money because they have cash flow guarantees (probably estate tax avoidant annual gifts) and possible even jobs from family connections.
These folks just put up a long post trying to weigh the risk v reward at various startup stages.
Mostly summarized into: "Joining at Series C may give you an ideal combination of risk and reward. Series C startups had the highest weighted growth in our analysis, followed by Series B and A."
There are 2 problems with the analysis in the article:
1. They choose startups from 2014-2015. Valuations were (a) more reasonable then and (b) we've just been through one of the biggest bull markets of tech stocks in the past decades.
2. That taking the "Mean Valuation Growth" over that time period is meaningless if (a) there hasn't been a liquidity event and (b) if the mean is weighted by outliers (which it always is).
Portfolio / VC strategy is a bet on power laws. We, as employees, don't have that opportunity. That means we've got to be deliberate about who we join to try to hit a power law outcome.
Not exactly the same, but I worked 11 years at a start up, the third hire. These were my prime years, gone in the blink of an eye, where I missed so much, made many sacrifices, and ruined my body and mental health… and got $2000 at the end.
The stress was unbelievable the entire time. I even quit once but stupidly came back, and they kept throwing Monopoly money at me which was going to make me a millionaire, supposedly. I believed them, sunk cost fallacy and all, but eventually the owner got sick of it, sold it, and my position was diluted almost into oblivion.
Maybe a shrewder person would have seen it coming, but I worked with several very smart and successful people and we all got taken on it. If things are bad and they start throwing Hail Marys at you to keep you around, I dunno man, it’s probably not worth it.
They didn't say, you could ask them on the YouTube comment, but it is likely that their TC was below market compensation, by the way they stated their story; if they were really satisfied with their TC, it's likely they wouldn't have made such a comment.
The path to getting into these founder / c-suite roles is those founding engineer roles in which you can learn how to scale and operate these ventures.
The founding engineer role at 0.5% is not meant to be a role to retire on, but a stepping stone to those bigger roles.
Not really, it's better to just start your own startup instead, there is not much need to spend years as a founding engineer before becoming a founder, you might learn some skills but it's nothing you can't learn yourself, as evidenced by the people who are first time founders who did not previously work at a startup. If you get to some scale and get acquired (or even shut down), you can leverage that for future higher positions that a founding employee would not get you.
It just depends on if you have the background and talent to warrant that role. I think that is an exceptional case for someone to get funding and support to build a venture without any operating experience.
Most companies that YC and other VCs fund are by first-time founders, mostly those who have not been in other startups. Like the other commenter said, the path to being a founder is actually founding.
It seems common enough that early engineers are purged for "higher quality talent" from the big companies at some point. Most of the high quality engineers won't join early on because they don't work for startup equity. Once the business is established and salaries are higher those FANG engineers are happy to join.
The folks designing the compensation plan and explaining the plan to the potential employee. I can't speak to unethical cases in which things are misrepresented.
This is the true risk of startups, and, if you're looking to maximize your earnings, it's best to either join a big tech company or start your own startup owning most of the equity, perhaps as a side hustle while you grow it enough to be profitable.
But getting "founding engineer" level equity on the order of 0.5% (before dilution!) seems to basically be a scam, where you're working 2x the amount for lower salaries than the market, all while having some nebulous carrot dangling in front of you for a reward that may never come, most likely, or even if it does, the value is so small as to not make up even on a per-hour basis the amount you spent working at the startup.