[Hermitian909]

> My feeling is that VCs and founders need to find a way to partially cash out rank and file employees along the way if they want start up model to succeed long term.

They also need to adjust comp structure. I've had a few offers to be engineer #1 at this hot startup or that, some of which I thought had a good chance of success. Assuming the best case scenario I always found the following to be true:

1. Founders would outearn me 100:1

2. Given any reasonable assumptions around likelihood we fail, the E(V) of the offer was less than I make now.

3. Founders could, at any time before IPO, completely screw me out of my paper gains e.g. via an acquisition.

I've always pointed out it's possible to make me an offer I'll take, the resources are there, but no one bites. This is absolutely killing a lot of otherwise potentially great startups. I've seen some fantastic business ideas fall down in execution because neither founders nor investors could bear to let key employees share more of the spoils and be equally protected from the downsides.

[meowmeowmoo]

Everyone feels this way. It feels like such a market inefficiency (which a company could arbitrage to get top talent). But the fact that this inefficiency never goes away makes me think I’m missing something. I usually just chalk it up to the majority of engineers not understanding the basics of startup equity (or expected value and failure risk… idk). Regardless, the end result seems to be that there’s an adequate supply of labor. So much so that the pressure which would correct this inefficiency is sufficiently mitigated. It makes no sense from a risk/reward perspective that an “founding” engineer is making 1/100th of a founder. They both have the same level of risk.

[Hermitian909]

I think it's worth remembering that these kinds of inefficiencies can last for years, maybe decades before correcting, this post has some good examples: https://danluu.com/nothing-works/

I think there are a few things that explain the phenomena:

1. You're asking rich and powerful people to give up control. Everyone hates giving up control, but my experience is that people accustomed to control hate it more.

2. It's not familiar, which means it feels risky.

3. It objectively lowers total payout in the best and worst case scenarios for power, and it's not actually clear the E(V) for the capital class goes up. It might, but no one knows apriori, and it's expensive to test.

This mix of low information, a small number of potential actors, and feelings of anxiety around uncertainty and loss of control is a pretty potent mix for inefficiencies like this to persist IMO.

[sokoloff]

Alternatively (which is probably a variant of 3), you’re asking someone to give you 10x or more the shares of what they have reason to think their next-best alternative is.

If an employee #1 share grant isn’t for you (as it isn’t for me), there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.

[Hermitian909]

> you’re asking someone to give you 10x or more the shares of what they have reason to think their next-best alternative is.

I don't think this is an accurate representation of my views. I'm happy to take more in the 2-3x range so long as I'm protected from the founders cashing out while screwing me out of my paper gains.

> there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.

Maybe, but they can't always find them! Businesses rarely fail for one reason but maybe 1/3 of the startups that approached me and failed were bogged down by poor technical decisions made early on (what's that? your engineering lead with 3 years of experience set up a totally custom kubernetes cluster and it's slowing down your execution? Man that's rough!)

[lotsofpulp]

That link is an interesting read. Thanks!

[seibelj]

Investors and founders hate down rounds. You want a pricing to be as beneficial as possible to all involved. Startups are extremely risky and getting a deal done at any price is an accomplishment.

Now you want to give a lot of small shareholders liquidity. The pricing is far more often. The whims of the world plus poorly negotiated deals can make a small sale be far below the last investment price. Psychologically this is bad even for wealthy investors and investing is heavily based on psychology.

No one wants to let that happen except the employees. The founders, the board, and the earlier investors don’t want anything that can jeopardize their argument for what their shares are worth.

[qqqwerty]

I don't think there is really a correctable inefficiency here for a number of reasons.

In regards to the very first 1-2 employees, from what I have seen is that they are either a) fairly inexperienced (and therefore willing to take lower compensation), b) very excited about the technology and willing to work for less compensation, or c) very experienced and compensated well and/or given a ton of shares to the point where they may even be considered a founder.

So if you are employee #1 and you are very experienced and can negotiate for a nice chunk of shares, you almost always will get pulled into the founding team. It is not uncommon for startups to have minority founders that have 5-10% of the shares.

And that means when you hear about an early employee complaining about their compensation, they are most likely going to be from category a or b. You aren't going to be hearing from category c, because they were treated well and might even consider themselves founders.