Comment by dcow
6 years ago
This. There is really no reason a founder deserves as much equity as they generally give themselves (I know the investors also have a say in what an acceptable cap table looks like so it’s not just on founders). If early stage startup founders split equity more evenly I think the numbers would start to make more sense. Maybe like 10% founder, 5% first 5, 2.5% next 5, and then 15% equity pool as you grow from 10 to 50. And that still leaves you with half your company left to raise capital with.
Then there’s advisors and execs. You can enter into an A stage startup as an exec or an advisor and generally expect ~1% equity post dilution. This easily eclipses all but the first few early employees who have been working their asses off with much less comp for a much longer time. Maybe really good execs and advisors are game changers but I haven’t seen it play out in practice. More often than not success of the early few hides failure of the new leadership to do anything remotely resembling what they’re paid so preciously to do.
So in the current market the only valuable part of working at a small gig becomes the alignment of risk profiles and consequential networking, and the do or die environment that accompanies an 18 month runway. I think these are good experiences for anybody to have at some point in their career. But since most people are rational they look at the numbers and it just doesn’t add up.
"deserve" doesn't really mean anything. As for why founders get the most equity, it comes down to the most risk. They have the most to lose and are usually are paid last compared to employees who get cash and benefits. It's easy to claim the profits and yet ignore all the risks and losses incurred by founders.
I've yet to see someone who thinks otherwise actually go out and start a company. Perhaps it's because the calculus changes when it's your business and livelihood on the line.
“Deserve“ absolutely means exactly what it means.
I’m talking about the equity distribution sub-10 here. What sub-10 employees are getting any more benefits than their founder(s)? Maybe marginally more cash but it’s all still below market so it doesn’t really matter. But most founders I’ve encountered are actually paying themselves more than their early employees because they have to in order to maintain their lifestyle in big city. But they also have remarkably disproportional slices of equity.
If a founder is investing large sums of their own cash it’s because they have that luxury. And I don’t think that’s actually very common. More often a founder drops some sweat and cash to incorporate and then maybe isn’t getting paid much while they pitch for seed capital but they’re doing so because they can’t afford to take no salary for very long. Even if you occasionally do see founders who’ve “killed” themselves for their cause, most of the founders I’ve encountered actually come out of cushy jobs where they essentially moonlit as a founder until they met someone willing to blow a few MM their way. In my opinion this type of story does not justify such disproportional equity distribution.
At this point I honestly think telling founders that they take on so much risk and should retain such a large portion of their company because they did all the hard work is a somewhat subversive tactic used by investors who want to retain control over their investments. It’s a lot easier to reason with a single founder than 5 large equity holders.
I think founders deserve a lot. I don’t think the typical founder deserves 10 times the equity of sub-10 employees. I think you’d see more people willing to join early stage companies if the attitude around equity shifted.
It doesn't mean anything because its a completely subjective moral judgement. There's no global arbiter of what people deserve.
And again, if you think founders should take less equity then you're free to start your own venture and show everyone how well it works. I've yet to see single example of this though. If it's so easy to start a company without risk and get rich then what's stopping anyone else?
Do you realize VC companies are less than 1% of all the small businesses out there? Most entrepreneurs are not well-connected wunderkind raising millions, they're just normal people busting their ass and risking everything they have to start and grow a business. Reality is much harsher than some wishful thinking.
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You are free to found your own company and do this.
Of course I am! But I don’t want to found a company just to found a company. We’re talking about attracting talent to small companies. I’m offering my perspective on why joining a small company doesn’t make tons of sense with the status quo equity packages and sub-market salaries offered. There’s some good discussion on another post about this exact problem and it seems, at least, that VCs are starting to come around as well and there is productive discussion about alternative early stage plans/strategy for capitalizing in a way that can attract top talent from big companies. I’m not founder bashing please don’t take my comment the wrong way.