[Chocobean]

His answer for "What happens if not all the early employees need to take a salary? " makes sense, but leaves the question of "why don't I get paid now instead of getting paid later if it means I get just as much (or less due to inflation)." Presumably, you'd have an understand co-founder who understands that cash in the company now is a little more important. Failing that, I think it might be fair to add interest to that IOU.

[barrkel]

The other problem with the approach is it increases the risk of the guy who goes without salary, without any reward (that theme seems to be a strong justification for compensation in Joel's article, though I'm not sure it is intrinsically fair).

If you go without salary, while the other people don't, and get IOUs, but the company goes bust anyhow, you'll be out of pocket but the other people won't. You're taking more risk; why not have more upside?

But the other side is this notion that reward is necessarily justified by risk. What if the company is motoring along steadily for a couple of years but as a lifestyle business, and then gets a star employee who creates a new product that takes off? Are they necessarily not justified in seeking more compensation - perhaps they have created more value than even the founders? Or are the founders better off with a bigger slice of a smaller pie, and not trying to reward innovation in their employee base?

[swombat]

If you go without salary, while the other people don't, and get IOUs, but the company goes bust anyhow, you'll be out of pocket but the other people won't. You're taking more risk; why not have more upside?

No one is suggesting that anyone gets a nice, ample, plush salary. This is a survival salary (anything more should not be allowed until the company can pay all founders). If the startup goes bust, a poor founder working 1 year on survival salary is no more "in pocket" than a wealthier founder working 1 year without salary. The valuable thing that they've both lost is a precious year of their life.

And if the startup has enough money to pay everyone, it makes no sense that someone would get more shares simply for taking less salary out. That's not what shares are for in an early startup.

[Chocobean]

Right. So the IOUs need to be a form of investment as well.

re: star employee example--it's not how much you made the company, it's how much of the company is yours to begin with. Founders will be smart to reward performance, but to reward proportionally based on contribution wouldn't work. If the star is unhappy, he's welcome to quit, take the risk and start his own company.

[barrkel]

Right - and by letting the star quit, the founders are ending up with less value, in this hypothetical. In other words, they are acting irrationally.

[zem]

that seriously underestimates how important the perception of fairness is. i'm with joel on that one.

as a side note, taking the emotional impact of your decisions into account is not acting irrationally. indeed, it's more rational than deciding things on a purely monetary basis, because it takes all possible inputs into account.

[barrkel]

No, it's not about fairness; it's about loss aversion bias, and how it can lead to suboptimal economic outcomes. It leads to poor investment choices all over the place. People are worse off when they don't control for it.

[jerrya]

"Failing that, I think it might be fair to add interest to that IOU."

Sure. That is treating that early founder as founder + lender and recognizing that IOU as a debt of the company.

[chmike]

Ok, but he takes more risk to never get his money then those who get paid. So it is a risky investment in the company and the interests or possible bonus should take this in account.

[bruce511]

Which is what interest rates are for.

In other words, if someone takes an IOU instead of cash then they are assuming risk. This risk has value, and in the real world this is what your interest rate reflects. The Lender adjusts the rate relative to the risk.

So by all means agree on the interest rate. We have an interest rate here set for both "lending to" the company and "taking from" the company. ie there are times when a founder needs some extra cash, and it makes sense to borrow it from the company rather than a loan-shark. We have that rate in place too.

The key here is not to use _equity_ to cover _operational_ expenses, at least at the founder level. Loan accounts should be used to cover operational expenses.

Equity has implications beyond pure "cash" because it contains a "power" component as well. The ability for one founder to "out vote" the other leads to poor conflict resolution on both sides - the one knows he has the ultimate decision, and the other knows it too.

More than that, the "cash value" of equity is a thumb-suck and will not be reflected in the final outcome (either way). Thus it's a complete gamble which will inevitably leave one side feeling screwed when the outcome happens (whatever the outcome is.)