[tptacek]

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.

[michaelochurch]

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 families pulled connections to expedite pre-packaged outcomes.

Sure, more risk should mean more reward, but not the order of magnitude Spolsky suggests, especially given that most of this "risk" people claim to have taken is fabricated; they're really rent-seeking off the connections that made their forays not risky.

Making the system fair (and I recognize that this is impossible) would require taking into account the socioeconomic status of the players. I'm not actually suggesting it should be done that way, because it would be a total clusterfuck and no startup would ever be founded for all the nasty arguments that would ensue, but it would at least be closer to fairness.

[imagnitude]

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 in. The equity a founder gets is small compensation for giving up years of his life. Even after raising money, a founder will continue to live on subsistence wages, giving up the opportunity cost of a cushy 6 figure job. In pretty much every venture backed startup, the founders are some of the lowest paid employees at the company. Most of the funded startup founders I know make less than $50K, which is a big improvement from the minimum wage salary they paid themselves in the first two years of the startup.

When your startup falls, there's not some kind of cushy EIR gig waiting for you at the friendly VC. Unless you're a tech celebrity, you're lucky to get an entry level PM job at a Google or Facebook. Source: Dozens of founders I know who raised money and failed.

Your portrayal of all founders and investors as some kind of scheming robber barons is insulting and incredibly demeaning to every single entrepreneur on this forum.

Guess what: founders are regular programmers, just like you. And they deserve every last bit of equity they get.

[tptacek]

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"

[michaelochurch]

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.

[tptacek]

You write comments like this and I worry about your mental health.

Not because I think EIR positions are fairly allocated among deserving people, but because you've clearly fixated on something as petty and irrelevant as EIR positions at venture capital firms.

What in the world could possibly matter less to young entrepreneurs than EIR positions?

And yet here you are with stories about EIRs used to hush up things that happened at business school or bribing Senators. You've taken the time to actually tell yourself stories about them. About EIRs. The most boring feature of a VC firm. The guy they bring into the room to screen you when you're not compelling enough to get a meeting with an associate.

If I'd been offered an EIR position at a VC firm, I'd worry about what I'd done wrong, shortly after checking my hairline and hair color to make sure I hadn't suddenly gone grey and bald.

[michaelochurch]

About EIRs. The most boring feature of a VC firm. [...] If I'd been offered an EIR position at a VC firm, I'd worry about what I'd done wrong

See, you're doing the right thing here. You're ridiculing the welfare-for-rich-people system out there, just as I am. That's a first step. First, you use ridicule and attack prestige; after prestige falls (and mild embarrassment does that job) you hammer away at legitimacy underneath. Then, the corrupt edifice falls away and you can build something new.

High real estate prices and low occupational autonomy are the surest sign of congestion. It means the wrong people are winning and it's up to the rising generation to fix the world.

[mjn]

The vast majority of founders are not spoiled rich kids playing with daddy's money.

I can believe most aren't rich, in the grew-up-in-a-mansion sense. But it'd be interesting if there were some hard numbers on it. What is the distribution of socioeconomic backgrounds of founders who raise VC? I've got some anecdotes myself (mostly suggesting solidly upper-middle-class), but data would be more enlightening.

[michaelochurch]

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.

[tptacek]

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"?

[U32LnJfiYoiLQP]

I know of a company where the parent of one of the founders made a ton of money for the VC. Twice. In exchange, one of the partners has put some seed money into the kid's startup. The seed money is a pittance compared to how much money the VCs got.

What's sad about it is that there's no entrepreneurial spark in the founders. They're not hungry for success. They're paying themselves way too much and working with no effect. The company will fail, and they'll go on to whatever nice lifestyle awaits them.

(edit: Note that I'm not saying that this is typical, just that there are examples of this "insider" activity.)

[michaelochurch]

What's sad about it is that there's no entrepreneurial spark in the founders. They're not hungry for success. They're paying themselves way too much and working with no effect. The company will fail, and they'll go on to whatever nice lifestyle awaits them.

This is interesting and insightful. I suppose the learned laziness these kids have is just as adverse to creative accomplishment as the learned helplessness that the rest of us end up with.

I should add that I don't actually think every VC-funded startup is bullshit. It just seems that the good ones are quite rare. They're also very selective (which they should be) but that becomes a problem when you've worked for garbage startups that have damaged your career. So you have to be really careful in the VC-istan game.

[yuhong]

Note the "in 1999". michaelochurch can you comment on when it started?

[danielweber]

Over the past decade I've had the, um, interesting experience of watching a number of start-ups fail, VC-funded or not, sometimes competitors to 'tptacek's companies. I've never seen an EIR landing. I'm not even sure there are enough EIR spots available.

Maybe lightning will strike and your name becomes recognizable on the front-page of the business section and then people throw results and funding at you in a self-fulfilling prophecy because they want to be on your good side. But I've also seen a lot of people team up with these famous folks only to massively regret it.

It's definitely not the most efficient graft-free super-meritocracy ever, and there's a lot of luck even once you get past that, but I just don't see it.

[imagnitude]

My comment is specifically about founders of VC funded startups. It might be different outside Silicon Valley. But in my experience in SV, I know the founders of about 20 venture funded startups socially. One of them is what you would call a "rich kid". The rest bootstrapped for many months, paying themselves virtually nothing, getting deep in debt, before their Series A. Even after raising an A round, they pay themselves subsistence wages, just enough to eat so that they can pay market rate six figure salaries to the engineers on their team.

This might be unique to the West Coast. But around here, social/country club connections mean nothing for raising money. Anyone can get a meeting with a top tier VC pretty easily, even if you are a complete nobody. Having a well connected family might help with other things, but it has absolutely zero effect on fundraising.

[michaelochurch]

The rest bootstrapped for many months, paying themselves virtually nothing, getting deep in debt, before their Series A. Even after raising an A round, they pay themselves subsistence wages, just enough to eat so that they can pay market rate six figure salaries to the engineers on their team.

I actually agree with you that, if they're truly suffering financial hardship (but I'm never impressed by a rich guy taking a $1 salary) they deserve a lot more than the engineers taking full salary.

What about those horrible executive implants installed by investors, though? They also get an order of magnitude more equity and full salary, and that's wrong.

[tptacek]

You don't actually agree with that. You said, just downthread, that only 4 such founders actually existed.

As for horrible executive implants --- I've been the "victim" of those, scare quotes included because my victimhood was partially my own damn fault. VC firms don't "implant" executives as a way of soaking their own funds back from companies they've invested in; they do it because (a) they think those executives are going to help and (b) they are dumb. If you accept those people, or if you acknowledge the roles they're supposed to fill should exist but can't recruit your own credible candidate, you're dumb too.

Being in a sticky situation in a board meeting where you acknowledge that you need someone to lead marketing but can't yourself find a viable candidate is, yes indeed, a good reason not to seek venture capital. The VC model requires you to strap yourself to an unguided missile that everyone hopes is aimed somewhere lucrative but is just as likely going to carom off a series of brick walls. Things move fast, because that's the model.

What, exactly, does that have to do with the fairness of equity grants to executives?

[imagnitude]

You are completely right in this case. Sometimes, when the company is not doing well and the founder CEO is not hitting the performance targets agreed on earlier, the VCs will fire the founder and install one of their MBA buddies to try to turn the company around. This is usually a condition of further funding when the company is in a weak negotiating position and on the verge of shutting down, and it's incredibly unpleasant for everyone involved. However, the executive implants only come in when the company is circling the drain. It's basically failed at that point, and the founders get nothing. Sure, the executives may get a big chunk of equity to lure them into a company that's going to zero, but barring an incredibly rare miraculous turnaround, that equity is completely worthless by the time the VCs get their liquidation preferences.

All of the things you describe are aspects of bad startups. Things are very, very different in good startups that are doing well, even the VC funded ones.

[gfodor]

Even rich kids have to deal with opportunity cost. (Besides, claiming VC funded founders are all rich kids requires evidence, and you haven't provided any.)

Besides, why do you get to say what a founder "deserves" of their own company? If I bake a cake, and agree to give people small slices of it in exchange for things, you still think I don't deserve the rest of it even though I made it myself?

[pcwalton]

I don't agree with michaelochurch here at all, but I don't think I agree with your cake analogy either: early employees of startups often work very hard. Of course founders do an exceptional amount of work and take an exceptional amount of risk, and, having not been in the founder position, I won't take the position that they don't deserve the equity they receive, but they aren't baking the whole cake.

[gfodor]

The cake isn't assets or liabilities, products or customers, it is the equity of the company, and equity is created when the founders decide to incorporate the business and it belongs to them. As such it's theirs to do with as they please, from the time it is worth nothing to the time when everyone wants some of it, if they are so lucky.

It's kind of lame to say what they do with it is or isn't "fair" since the exchange of equity for something else is always done between two agreeing parties. It's extremely over-simplifying things to look at a liquidity event and then at the equity division to say if it was "fair" based upon who contributed what to the company. The equity and its distribution happens on a separate plane from the actual operating activities of the company itself, and the individual efforts or contributions of employees. There is no particular reason to believe that someone who provided huge amounts of value to a company "deserves" equity based upon this fact alone, though often founders will give up their equity to these people in exchange for their good work.

Any equity in the hands of a non-founder can be traced back to the founders giving up the equity they had up to another party in a mutual agreement, so it's quite bizarre to try to apply some external notion of fairness since nobody is forced to take such an offer.

[jt2190]

  > 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.

[danielweber]

Back in 1996 it was recognized as one of the classic start-up mistakes. It's so old I could only find a PDF:

http://www.yesatyale.org/files/lecture_06.pdf

I think vesting might avoid the problem, but I tend to think one person is probably more invested in the start-up and should take charge. I've seen too many times where "everyone is responsible" leads to "no one is responsible."

[tptacek]

You need to designate someone as the tie-breaking authority for disputes, but it doesn't follow from that that you need to give that person more compensation.

Two things that would keep me from joining any founding team at this point in my career:

* Not having everyone on a 4-year vesting schedule, founders included

* Not giving equal shares to the partners

I'm with Spolsky: if you think it doesn't make sense to give a "founder" the same share as yourself, that person isn't really a founder.

[pdog]

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.

[beat]

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

[michaelochurch]

VC-funded founders? Not rich?

I have no problem with you four.

[tptacek]

This new trope of yours is extremely irritating. I come from a solidly middle class background. My parents didn't even pay for college --- I didn't go. Two of my siblings are in the arts, and one is a lawyer at a domestic violence clinic. I'm on startup #5 (year 8), with no VC funding at all. 2 of the previous startups I was at (one of which I cofounded) were VC funded. Not only am I not a trust-fund type, but nobody I ever worked with was.

The founders of startup #2 for me just sold their third company. Both were middle-class Canadians with no "connections", just a solid professional track record. My 2 cofounders at startup #3 were well-off; both were working professionals, like me. Startup #4 was a spinoff of the University of Michigan started by a professor and his postdoc.

At each of the 5 startups I've worked for, I worked with 2-3 founder/cofounders. That's ~12 (I just counted them out) people I've worked with that had founding roles at startups; none of them recurring from previous companies. Not a single one of them fits this inane description you keep using.

Am I just extremely lucky, or are you a little bit full of it?

[bokonist]

"Am I just extremely lucky, or are you a little bit full of it?"

My own observations corroborate your data.

I've personally known about a dozen founders who have built a seven or more figure net worth from startups. About ~6 were upper middle class. That is they had parents wealthy enough to pay for a "good" school. But the parents did not have enough money to fund their kids startup or pull on VC connections. Around ~3 people came from well off parents, who might have had enough money for a small trust fund (I do not know whether they actually had a trust fund). One had parents with VC connections. Overall, the career arcs of the well-to-do founders were indistinguishable from the upper middle class kids. The founders from upper class backgrounds were just as smart and hard working as any other founders. The other three founders in my personal dataset were immigrants with very little family support and had to hustle their whole way up.

In my observations, getting VC funding requires at least one of five paths:

a) building a product via bootstrapping and/or seed money, and then either getting significant traction or have a prototype of genuinely novel tech.

b) developing a proven track record as an employee at a company. Maybe you joined a startup early that became big. Maybe you joined a big company and worked your way up to VP of Sales.

c) Having some specialized and valuable knowledge. Maybe you consulted for a particular industry, and thus have inside knowledge about a valuable product that industry could use. Maybe you a professor that just developed some new technology that can be commercialized.

d) going to business school, getting a job as VC associate, and then launching a company with some funding from that firm.

e) having started and exited a previous company

Getting VC funding requires connections. But building these connections is a trivial problem compared to the problem of establishing a track record via either bootstrapping or working your way up at a company. If you cannot establish those connections, you probably do not have the hustle it takes to found a company. If you have VC connections, but no product with traction nor track record of success, then you are not getting funding.

The world michaelochurch describes, "the VC-funded startup CEOs ... I know didn't take any real risk, because they're all trust-fund kids " is a very different world than the one I have experienced.

[fearless]

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.

[michaelochurch]

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.

You know nothing about about me, what I have seen, or where I have been. It's true that I've picked some terrible startups, but hundreds of people have had similar experiences to corroborate. If I were the only one who held these opinions or had that category of experience, I'd think differently about the whole thing.

I'm pretty good at picking out genuine problems (i.e. the persistent low status, mistreatment, and mediocre compensation of software engineers in this industry) from noise (transient bad luck that happens to all of us).

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

That is far from what I said. Not even close. Not every one is bad. However, I do think that the social class distance between VCs and petitioners is vast and is already at, if not beyond, the point of being the most important factor in the interaction.

This game has already been worked out, and we should leave it to the people who won it and go build something new. They don't have much without us, so what are we waiting for?

[tptacek]

I think you're making this up, and that the supposed "social class distance" between founders and VCs isn't a significant factor at all.

Also, not sure you're allowed to be indignant about what commenters claim to know about you after saying something like Most often, "took more risk" means "comes from a rich background and had a softer landing".

[beat]

I'm not VC-funded, either (hopefully I can avoid that entirely, but at the moment I've barely started working on angel funding).

I was born into a poor family, with no connections to speak of. I simply did not know anyone who was wealthy or successful when I was a kid. I've made a comfortable middle-class life for myself through lots of hard work. Starting a software company is something I'm doing because I see a valuable problem to solve, and something I believe I can do because I'm smart and determined - not because I was born into privilege.