1-2%. A lot of people say 5%. 5% is what you'll give to an executive down the road. First employees are very important, but probably not as important as your second CEO. 6% is what you give to YC. First employees are very important, but a first employee who is worth almost as much as YC should probably be your cofounder, not an employee.
This is also for your first employee. You may live or die based on the work this person does, and more importantly they may be accepting extraordinary risk (if your runway is less than 6 months, say). The same rules do not apply to employee #3.
Finally, if you don't pay the person, or if you pay them bare subsistence wages (say, $20-30k) and they're senior talent, you've introduced an additional level of risk, and you should pay a premium for that. However, there may be better ways to compensate that risk; for instance, you can defer salary at a premium rate.
A really important thing to remember about employee options is that employees don't know how to value them. You need to be really engaged with the strategic course of the business (not just the product: the business and its future cash flows) to really grok what options mean in rational terms. This is a good reason not to grant huge amounts to early employees; it costs you dearly and doesn't make them much happier.
I treat a first employee as a co-founder just with fewer shares. Its says "we're in this together" more than words can say. I have given them rights to review our financials (noone ever did, but perhaps my openness with our revenues made them comfortable), voting rights, same dilution rules as a co-founder, etc. The percent of shares varies, but being careful to not create different classes of people in such a small working group seems valuable.
You're not in this together. When you miss payroll, she gets paid first.
I've been in companies where my shares had dramatic legal rights, and where I had access to financials. I guess I liked that at the time, but to be honest, I didn't care. However, I have friends who have quit companies because they saw financials and got a warped idea of how much their time was worth, so doing that has downsides too.
There is no one-size fits all formula for this. Its what I did in the past and it had consequences I didn't dream of when I issued the shares. Here's a story of that company which shows how you can be wrong about the payroll comes first attitude:
Around '98, my company was me plus 8 employees. I was pushing hard to turn our model from a "consulting with a product model" to a full on product and platform business. This required taking some risks with our client base to enable us to invest in product R&D to make it ready for general consumption. We ended up with one client that year. They were a big-mother of a client and gave us access to a product strategy and acquisition if we pulled the job off. I became pushy with my client as we weren't getting to where I wanted to be quick enough. I finally lost my cool one day and the client told me he was through, get lost. This was going to cost him easily 20x what he had already paid to cut ties as his core product depended on us. But he was pissed off and I was pissed off and he could afford the big loss.
That same day, I went into the office after the client meeting and sat everyone down and told them our bleak outlook: we had enough payroll for 3 more months. The next day, each employee came to me individually and offered to work for free. Each one had a different story as to how long they could go without pay; 2 told me to quit paying them immediately.
They all acted like founders and I think its because I treated them like it.
This model probably doesn't scale well. But its an experience I'll never forget.
i know this is just one anecdote, but i respect that people often get what they pay for. you sound like a compassionate, collaborative, we are all in it together person. i bet you build teams. you weed out the non-committers from the beginning, and other savvy practical stuff. that's cool.
your parent post could also be sound. it depends on the philosophies of those hiring.
While I think your number is pretty low, your last sentence makes a lot of sense. These aren't investors. They haven't been looking for the the best shares to own. This is equivalent to more risk / lower value of the share to them.
It shouldn't be possible for them to buy shares at a price attractive to both founders/investors & employees.
1-2% is silly. You can get ~0.7% by coming in at the end of a round A right before around B. Do you seriously think that being the first employee, especially with nontechnical founders, is only 2 to 3 times as much risk?
Personally, I'd ask for 5% and might be willing to take 4%. Otherwise, there are startups that will pay market salaries at 0.7% with way less personal risk involved.
Well, you and I aren't negotiating, but the fact that the valley is full of shoot-the-moon startups offering almost 1% for people to take market salaries is something else I don't like about the valley. It's a distortion.
I'm apparently saying the same thing the Mint founder said, for what it's worth.
The first employee is getting this percentage before most of the dilution, whereas the CEO is getting his grant after some dilution has happened. So you can't compare E#1's 1-2% to the second CEO's 5%, because these numbers are at different stages of the dilution process. (Generally, you don't have a second CEO before a few rounds of funding have occurred.)
Also, the first employee may not be more important than your second CEO, but he should certainly not be outranked by post-funding VPs.
How true is this really? Employee #1 is getting diluted way down if the company takes a B round, but isn't getting diluted at all if the company gets snatched up early.
Should your first employee be outranked by a post-funding exec? Well, Twitter hired Dick Costolo. You need some pretty amazing Django chops to "outrank" him.
Comments
1-2%. A lot of people say 5%. 5% is what you'll give to an executive down the road. First employees are very important, but probably not as important as your second CEO. 6% is what you give to YC. First employees are very important, but a first employee who is worth almost as much as YC should probably be your cofounder, not an employee.
This is also for your first employee. You may live or die based on the work this person does, and more importantly they may be accepting extraordinary risk (if your runway is less than 6 months, say). The same rules do not apply to employee #3.
Finally, if you don't pay the person, or if you pay them bare subsistence wages (say, $20-30k) and they're senior talent, you've introduced an additional level of risk, and you should pay a premium for that. However, there may be better ways to compensate that risk; for instance, you can defer salary at a premium rate.
A really important thing to remember about employee options is that employees don't know how to value them. You need to be really engaged with the strategic course of the business (not just the product: the business and its future cash flows) to really grok what options mean in rational terms. This is a good reason not to grant huge amounts to early employees; it costs you dearly and doesn't make them much happier.
I treat a first employee as a co-founder just with fewer shares. Its says "we're in this together" more than words can say. I have given them rights to review our financials (noone ever did, but perhaps my openness with our revenues made them comfortable), voting rights, same dilution rules as a co-founder, etc. The percent of shares varies, but being careful to not create different classes of people in such a small working group seems valuable.
You're not in this together. When you miss payroll, she gets paid first.
I've been in companies where my shares had dramatic legal rights, and where I had access to financials. I guess I liked that at the time, but to be honest, I didn't care. However, I have friends who have quit companies because they saw financials and got a warped idea of how much their time was worth, so doing that has downsides too.
There is no one-size fits all formula for this. Its what I did in the past and it had consequences I didn't dream of when I issued the shares. Here's a story of that company which shows how you can be wrong about the payroll comes first attitude:
Around '98, my company was me plus 8 employees. I was pushing hard to turn our model from a "consulting with a product model" to a full on product and platform business. This required taking some risks with our client base to enable us to invest in product R&D to make it ready for general consumption. We ended up with one client that year. They were a big-mother of a client and gave us access to a product strategy and acquisition if we pulled the job off. I became pushy with my client as we weren't getting to where I wanted to be quick enough. I finally lost my cool one day and the client told me he was through, get lost. This was going to cost him easily 20x what he had already paid to cut ties as his core product depended on us. But he was pissed off and I was pissed off and he could afford the big loss.
That same day, I went into the office after the client meeting and sat everyone down and told them our bleak outlook: we had enough payroll for 3 more months. The next day, each employee came to me individually and offered to work for free. Each one had a different story as to how long they could go without pay; 2 told me to quit paying them immediately.
They all acted like founders and I think its because I treated them like it.
This model probably doesn't scale well. But its an experience I'll never forget.
i know this is just one anecdote, but i respect that people often get what they pay for. you sound like a compassionate, collaborative, we are all in it together person. i bet you build teams. you weed out the non-committers from the beginning, and other savvy practical stuff. that's cool.
your parent post could also be sound. it depends on the philosophies of those hiring.
While I think your number is pretty low, your last sentence makes a lot of sense. These aren't investors. They haven't been looking for the the best shares to own. This is equivalent to more risk / lower value of the share to them.
It shouldn't be possible for them to buy shares at a price attractive to both founders/investors & employees.
1-2% is silly. You can get ~0.7% by coming in at the end of a round A right before around B. Do you seriously think that being the first employee, especially with nontechnical founders, is only 2 to 3 times as much risk?
Personally, I'd ask for 5% and might be willing to take 4%. Otherwise, there are startups that will pay market salaries at 0.7% with way less personal risk involved.
Well, you and I aren't negotiating, but the fact that the valley is full of shoot-the-moon startups offering almost 1% for people to take market salaries is something else I don't like about the valley. It's a distortion.
I'm apparently saying the same thing the Mint founder said, for what it's worth.
Aaron Patzer knows how to code. And, he created the first version of the website himself.
I think it is a bit different here.
The first employee is getting this percentage before most of the dilution, whereas the CEO is getting his grant after some dilution has happened. So you can't compare E#1's 1-2% to the second CEO's 5%, because these numbers are at different stages of the dilution process. (Generally, you don't have a second CEO before a few rounds of funding have occurred.)
Also, the first employee may not be more important than your second CEO, but he should certainly not be outranked by post-funding VPs.
How true is this really? Employee #1 is getting diluted way down if the company takes a B round, but isn't getting diluted at all if the company gets snatched up early.
Should your first employee be outranked by a post-funding exec? Well, Twitter hired Dick Costolo. You need some pretty amazing Django chops to "outrank" him.