[anandkulkarni]

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 company, versus your first engineer, which would be more damaging? The investor's money is already in the bank, whereas the engineer will cost time and money to replace, as well as disrupting the ongoing development.

[jimmykennedy]

"It's more valuable to have them invested long-term in the company's success." Why? A cash bonus of "If we meet this deadline you will receive $X" is going to increase my productivity much more than "you own 0.01% of an illiquid, unprofitable company". Startup equity is way too abstract for employees to affect their motivation. Peer pressure, mission, pride in work, cash bonuses / raises / promotions are infinitely more impactful.

[firloop]

Sure, the argument isn't that equity is the end-all to employee compensation. But early-stage startups often aren't able to to give (significant) cash bonuses, and more importantly, compensating an employee with equity means that 5 years down the line, you're more likely to have someone on the cap table that both contributed to past efforts that made the company successful and also cares about the company's future.

I think in practice this preference makes more sense when you consider that most of the (non capital based) value that early-stage investors can provide applies mostly to early-stage companies.

[Retric]

It's not about having equity now.

If you have a seed company that fails in two years then the equity equation is meaningless. However, if in two years things are going good, but it's not clear you are the next google then you really don't want to lose key employees and it's going to take more equity to keep them interested. On the other hand if in two years it looks like you will be the next google then getting more capital is easy and you really don't want to lose a key person.

[rqebmm]

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.

[jacquesm]

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.)

[softawre]

> Technical founders are less likely to do this to non-technical co-founders. (But it does happen.)

Technical people are so great, aren't they! No bias here.

[jacquesm]

It's not that they're 'so great' it's just that they are usually less business savvy and doing less 'jockeying for position'. They tend to not be in it for the money as much as they're in for the challenge which makes it relatively easy to take advantage of them. (Been there, done that, have several t-shirts to go with it and I promise it won't happen again but if I had known 20 years ago what I know now... never mind, hindsight is always perfect.)