Startup founders in SF: why should first employee join you?

Jan 12 10 Comments

Context: I am a multiple startup founder (non-SF) coming from engineering + picked up business&management, have a decent cashflow from an organic (non-startup) tech business that I've built myself, moved to SF, worked as VP of engineering for a startup for the past 2 years, left the corp a few months ago. On the learn...earn scale, I'm heavily on earn, agnostic on the financial instruments, but the current setup makes absolutely no sense to me.

Startup math from where I stand: first employee equity comp: 1-5% ,which gets diluted to, at most, .5% at exit; with apriori probability <1% exiting $100M in 8-10 years. Even if I'm 100% convinced it will exit, yearly comp on this is ~$50K. I'm not, and a probabilistic scenario-analysis paints a non-working picture even to the rosiest of Pascal's mugging. VC very explicitely invests into strategies that has low-probability home-runs (and actively drive the corps towards these strategies). Running with 5% success rate at $1B exit yields $25K yearly comp.

Taking a long-term view, "freedom/ownership" generally goes way down as companies matures; and gets replaced by either sales-driven, or market/conversion-funnel-driven metrics. Over the period of 8-10 years, this is also not a good answer. For professionals with long experience, titles also don't mean much (esp not in new startups). Please don't write "passion".

Salary math: Housing prices increase 10% yoy (because this is SF). Good rule of thumb is for total post-tax comp to be 3x rent. This means that regardless how below of my means I'm living, any year in which I don't get a 10% increase on my topline revenue is a year in which rent bites into my buffer. Startup salary re-negotiation is also probabilistic. This is a game with only downside.

Given the above, why should a seasoned veteran engineer join your startup?

I'm looking at this from all sides of the table -entrepreneur, potential employee, and hiring engineers at previous place- and the lack of working math here geniunely perplexes me. Looking for genuine answers from entrepreneurs: why should seasoned high-caliber people join your startup as a first employee?

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TOP 10 Comments
  • NVIDIA / Product
    Momentoe

    NVIDIA Product

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    NVIDIA
    Momentoemore
    also why should anyone be the first investor of the company and have lowest company ownership % as the cofounder? Some hungry inexperienced founder would ask the cofounder, friends and family to take risk before landing any seed funds and demand as much as they can.
    Jan 12 0
  • Microsoft justletme
    You glanced over the “freedom/ownership” part of this very quickly. I like to think about this in terms of what lifestyle (as a programmer) do you want? Joining an early stage startup can be a lifestyle choice. Just as someone who takes a comp hit to move to the midwest as a programmer can be a lifestyle choice.
    Jan 12 1
    • OP
      Comp hit from moving to midwest is balanced out by cheap, cheap housing. Ratio of post-tax income / rent is educational here: rule of thumb is generally to be above 3; SF is more like 2 or less. So, if it's a lifestyle, it's one that is being adversarially selected against by the yoy +10%, at least in SF
      Jan 12
  • Twitter true534
    You’re looking for answers from the wrong people. Founders will tell you “it’s a unique chance to change a 2B market and be the person that started that, you can have a lot more influence that at your big company”.

    Startups is where young kids work, usually not caring about money yet and a bit foolish about the usual outcomes. I’m happy to work in a company with real scale, good lunch and good pay. Been in startups, one was fun, another was terrible. Money were shit in both cases.
    Jan 12 3
    • Twitter true534
      I meant that founders are the wrong people to ask. I’ve been sold jobs by founders many times, it’s always the same talk and then the companies don’t go anywhere.

      You obviously have the background, I don’t know what you expect to hear that you have missed?
      Jan 12
    • New / Product
      smitt3

      New Product

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      Pindrop
      smitt3more
      Try startupsanonymous.com
      Jan 12
  • Comcast s184je
    Literally only reason I can think of is if you’re financially independent and going to work every day to be part of a well-oiled machine does not motivate you. You’d rather have a more sense of ownership and would rather “go big or go home”. You’re not looking at E(payoff) rather at the long right tail of that payoff.

    Ofcourse an optimal decision is being a founder yourself, if it were up to me, but for some people that comes with dealbreakers like even more stress and ability to be Ok with uncertainty.

    This is all conjecture and for the most part founders know this is a hard sell. If you try hard enough someone gullible/not motivated by money is going to take the deal.
    Jan 12 1
    • OP
      Based on experience I don't perceive the difference between founder, and 1st employee to be nearly as big of a chasm as compensation makes it so. And this equally applies to employees no 1-10
      Jan 12
  • Palo Alto Networks bbcddszoop
    Your logic about housing cost does not seem right. Once you buy the cost is locked in and if you are renting I don’t think rent increase 10% every year.

    It’s a bet that you make. If the idea is good then startup can become multi billion $ company like lift, uber, box, slack, facebook, google etc (remember they were all startups once upon a time) and you can carry-on your title with you along with the benefits or if the exit can be made in a couple of years(like whatsapp and nicira) then also you make money.
    Jan 12 0

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