I think the most interesting part of the discussion is that the early employees almost always get the worst end of the deal:
Going in they have a lower salary than if they work for a more established company.
Then, either their shares end up being worthless, or at the final exit, they make less money than if they worked for a more established company the entire time. IE: Being an early employee in a startup is a lose-lose situation.
This is something founders need to understand when recruit their early employees: These are often the most critical hires for the business, and therefore it needs a high probability of upside.
IMO: A series of retention bonuses, and/or guaranteed bonuses at acquisition / funding events is a good solution. It's how I've sidestepped the equity issue when I was employed during an exit event.
I'm curious why you think these employees -- who are getting the worst end of the deal -- are working for startups in the first place?
Either they have the skills to be a founder themselves or to work at BigTech... or they are financially ignorant/disinterested enough to not understand how equity in corporations work? Or is the charming and misleading founder who is to blame?
My point is that considering the high avg intelligence of the typical startup employee, there must be something else going on.
Clearly, people like working at smaller companies that have potential to grow - maybe that's because there's more interesting work, less bureaucracy, smaller teams, more of a sense of a journey, etc. Easy to devalue these things, but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?
I think the other thing to realize is that the change in this "startup calculus" has happened only relatively recently.
The "old" calculus was that, being an early employee in a startup, you'd make less cash money than at a "big corp", but if the company "hit" you'd end up doing much better. Just look at the stories of early Microsoft employees, or the Google chef whose stock options ended up being worth tens of millions. Obviously those are outliers, but it was still common that early employees of "home run" startups would be doing great.
But the thing that really changed the calculus is that the FAANGs started paying extremely well, especially as the value of their RSUs skyrocketed. So the new problem was that even if your startup hit, you'd be doing about as well as a senior engineer who was at Google for 5 years.
I know in the past YC itself has commented about this dynamic, basically arguing that early startup employees deserve more equity.
This is absolutely true. I remember Dan Luu [1] and patio11's [2] blog posts from 9 years ago and 13 years ago respectively, which were widely shared, arguing essentially that you should always prefer to join a FAANG. With FAANGs all downsizing to varying degrees, or at the very least not in growth mode, this advice seems less clear-cut. For better or worse, I think we're starting to see the pendulum swing a bit towards startups with the AI gold rush.
(This is not to imply that compensation is now fair for early startup employees; it's not.)
For me I understand perfectly well that my EV cash-wise is lower working for a startup. I just don’t care past a certain income and working at a startup is more rewarding in other ways.
I'm in that position right now, and have done it a few times in the past (my entire career is switching between startups and public companies).
I work for startups because I get a ton of responsibility for things I would never get at a big company. I get a chance to learn a ton of new stuff.
Through my career, I've made all my money at the public companies, and had most of my skill growth from the startups (Netflix being the big exception, where I both made money and leveled up my skills).
I did not get any stock in reddit when I worked there. I worked there between when they were first acquired and when they were spun back out. The guys I hired got f-u money and I couldn't be happier for them, they deserve it for how hard they worked and how long they waited!
> they are financially ignorant/disinterested enough to not understand how equity in corporations work
Yes, definitely, I think we live in a bit of a bubble here where we actively read and think about these things. I think most early employees will see a 0.5% or even 0.1% equity offer and think that's incredible. It barely even registers that the founder sitting across the interview table from them holds 40% or whatever, and that while, yes, the founder has taken on more risk than they are about to take on, they certainly have not taken on 80x the risk or are putting in 80x the work.
Or they want to work at a small startup and have the technical skills, but don't necessarily want to manage people, work insane hours, and meet with customers and potential hires instead of building the product.
Maybe its the "romance" and "excitement" of it? I worked for a startup in Seattle, 20+ yrs ago. It had a fun exciting buzz, and... something special about it... the possibility of being part of something big... and having interesting, excitingly intelligent coworkers, that you can learn a lot from, but then of course , it all went to s** (less customers due to market bust). Ultimately we were all laid off, the options I'd bought at 5c each were worth nothing. I didn't expect any riches, it was just an adventure. And importantly, 30 mins drive to the ski hill which was open at night after work.. so.. not a bad time ;). Some of the early employees were bitter. Some had tried being early employees several times in a row, tried to make it big. To me, they were intelligent people so why they didn't they see it as just a gamble which is largely out of their control? Maybe people like to kid themselves? Its the dream of America to make your fortune out of something new and exciting. Why am I even reading this discussion and commenting here? ;) Becos' there's something intangible but exciting about it all. But a lot of it is fantasy. Maybe people like to work for startups for the same reason they like a good book or movie, you can suspend your disbelief and escape from the boring hum-drum where you do a 9-5 that can be similar year after year?
> but what else explains the fact that even when there's more risk and likely poorer financial outcomes these otherwise very intelligent people still choose to work at these companies?
That's the wrong question to ask.
The right question to ask is: "How does an early stage startup attract the people it needs to be successful."
Money isn't the only metric, and there are good reasons to say "if you want top dollar, go work for a FAANG."
On the other hand, I was once approached to be employee #1 of a rather interesting startup, and the risk/reward ratio just wasn't there. The company was more likely to fail, and I was more likely to find myself unemployed after 24 months. Now that I have children and a mortgage, I can not do this.
In contrast, the company severely needed someone like me: Significant experience and knowledge; AND active interest in their product, with a mildly personal stake. Relying on someone young and cheap would be risky for them.
Going in they have a lower salary than if they work for a more established company.
Then, either their shares end up being worthless, or at the final exit, they make less money than if they worked for a more established company the entire time. IE: Being an early employee in a startup is a lose-lose situation.
This is something founders need to understand when recruit their early employees: These are often the most critical hires for the business, and therefore it needs a high probability of upside.
IMO: A series of retention bonuses, and/or guaranteed bonuses at acquisition / funding events is a good solution. It's how I've sidestepped the equity issue when I was employed during an exit event.