i think vc/founders need to innovate on this topic to: provide better effort/reward incentives, and reduce risk for employees, giving that they have less voting control over equity.

Could be something like:

- companies keep lower number of employees, higher grants, but demand founder-like effort for early years

- early employees get substantial equity grants 5-10%, that must be sold to VCs on secondary offering at next rounds. In that case, employees could directly benefit from startup grows, while reducing risk compared to FAANg, and founder can keep their equity size. Yes, upside is limited, tax/legal work, but could be covered by new refreshment grants from employee pool

- YC creates/funds employee union-like organization, that funds/organize activities/benefits for early stage startups

- help legally with paying/hiring employees remote with equity package

also joining startup and buying out $$$$$ worth of stock options that could turn to 0 is a downside compared to stock grants from FAANg.

Idea #2 is genius. In my experience early employees become a liability as you scale and exceed their experience skill level. This makes it a win for them and for the org. Nothing worse than an early employee who is hanging on to a high level role when everyone knows they aren’t cutting it. What are some possible downsides of this?

In other words, idea #2 is to have a mini-IPO (liquidity event) for the early employees, by round A or B. B might make the most sense. Kind of like a super-bonus or extra warrants. So at least the early employees don't have to wait 7-10 years to see an outcome, but can expect a (smaller) windfall within 1-3 years, to put them on par with high-paying jobs if the company is successful enough to raise a B round.

Downsides could be - more risk for founders raising rounds, since its unconventional - increase of tax complexity for both employees and employer - more complex cap tables and/or processes around converting stocks, since employees are usually owning common stocks, while investors are looking to get new preferred stocks issued for round

But I think big vc orgs and especially YC could pioneer / help with new approaches

I really like your second idea!

I generally see <1% for first engineer hires. In order to hire someone who can 1) do the work initially and 2) grow the team, I think a 5-10% grant with a salary that's 60-80% of market is appropriate.

At least, that's what it would take for me to join a startup as first engineer versus starting my own business.

When you say 'first engineer' do you mean literally the first employee, or early (say 1 thru 5)? If the former, what do you think would be appropriate levels for, say, employees 2 thru 5? If the latter, are you arguing that the first 5 employees should be offered 50% of the company?

Just to be clear, I'm not disputing the point and don't have a strong opinion. I'm curious where HN users—who include many prospective early engineers—think the market needs to go. The comments about startup compensation are routinely so negative that it seems clear it needs to move; the question is what range would start to be fairer.

Since no one threw out any percentages, I'll take a shot at it.

I think the first engineer employee should get 2-3%, next three should get ~1% each. Sam Altman has said he thinks the first 10 should get 10% total [1], so you could front load the early employees even more.

We're a long way from that. The offers I got were in the .02-.03 percent range with most of the standard terms. Not even a 10 year exercise window. This was as one of the first 5 engineers.

Why is it like that? Guess people can hire a sufficient number of engineers without offering more. Maybe with FAANG squeezing everyone out we'll see the numbers go up, I wonder if they've been going up already.

I was certainly disappointed with my equity offers, for that YC has said about rewarding early employees, I was expecting more. Oh well.

[1]: https://blog.samaltman.com/employee-equity

Even if the first five employees get 50% that will be diluted to ~5% by the time there is any form of satisfactory exit, so while it sounds high, its not crazy either. If the company doesn't exit well the 50% doesn't matter.

What do you think early employee equity should look like relative to founders'? And what should employee #1 equity look like relative to #2, #3, and so on? In a fair world.

I think a lot of that depends on the field the company is in, how much vision is is brought in by fouders (is it a radically new, risky field that requires true vision, or is it another sass app that is reinventing the wheel while taking out a few of the hassles in current industry, etc...). It also depends on how much talent/skill is brought on by employees 1,2,3... etc... Is it rare expertise that is hard to find, vs just another javascript dev that knows AWS etc.... So to define that is tough, or rather fluid but I think offering employee's 1-5 <1% pre-dilution with a low salary is definitely someone being taken advantage of regardless of the company....

I would be OK with contracts that say employee's 1 through 5 get 0.8 to 1% share of the company but is non-diluatable. So their equity stays the same regardless of the success of the company. (of course there is room for discussion with an idea like this but hopefully you get the point Im trying to make)

I land on the idea that the percent is not as important as the raw value if the company hits the targets. 1%? 5%? Of what? If the company plans to get to a $1B valuation, that is different than a company that wants to exit at ~$10M. And since we all know that equity is usually worthless anyway, I think the real way that smaller companies should compete for talent is with other perks. More time off, less days per week, more control over the product's direction, better perks, etc. Oh, and better liquidation preferences that favor employees at the same level as investors because employees _are_ investors if they are taking a pay cut.

Of those, it seems to me that more time off and less days per week are mostly out-of-scope for seed-stage startups—it's just too hard for them to survive even when people are working full time and focusing hard. More control over the product's direction (relative to BigCos and large teams) seems already to be part of the startup deal, no? As for better perks, I don't know what you have in mind, but the ones that come to my mind are just fiddling with the margins, and I know a lot of cynical HN users who would argue that's why companies offer "perks" in the first place.

This bit, however:

better liquidation preferences that favor employees at the same level as investors because employees _are_ investors if they are taking a pay cut

seems serious and fair to me, and perhaps something that startups could actually do to stand out. I don't know how doable that is vs. what barriers there might be to it, but I'll ask.

It also seems fair to relate the discussion of the appeal of a lack of share dilution mentioned earlier - If the view is that you're actually building this product with others then it can be assumed you're constantly contributing to the immediate and long term value - given that stance upward creeping granted value (as direct ownership or options to buy) is similarly logical, the proportional contribution you're making to a company will vary over the length of the company, initially the founder that's brought the actual business proposal to the table will be the main driver - but as you realize that proposal and put forth infrastructure (technical or best practices) the value being brought out of that proposal is shifting toward the engineering side - it's only late in the game once explosive growth has begun (maybe near the 50 employee mark?) that the power of your voice and the weight of your decisions will start appreciably shrinking... I think for the early growth period most additional employees are more further reducing the founder's share in the value created rather than other employees...

This is all intensely vague and general but it's an interesting line you started down with the balance of investment vs. employee contributions, risk and compensation.

I think the idea of startups offering perks as a way to compete with big companies is a good one. Being more flexible on how employees work and offering things most big companies don't (fully remote, for example), is one of the things startups can uniquely offer.

The thing about fiddling with liquidation preferences is that it's very hard to change and will have minimal impact on the bottom line for employees. Liquidation preferences only matter in the case of companies that fail, where they might make the difference between making $0 and making a tiny bit of money. Employees will make virtually all of their money on the companies that are successful.

FWIW my Airbnb stock was worth about $1mm/year when I joined (in 2013 as a IC SWE). To be fair, the starting salary was well below market, but I got a raise to bring it up to the market rate about 1 year in. I've since never seen a startup that generous, only FAANGs come close.

That's super interesting, but Airbnb in 2013 was long past the seed stage, and when we talk about early engineers that's what we mean, no? Those are the startups that have the chicken/egg problem with hiring.

Not that it's a minor point if Airbnb was that far ahead in employee compensation.

They gave you stock rather than options? Is that usual at that stage?

Any offer I've seen from a startup (admittedly a small sample size, and always later stage) has been options rather than stock, and I've never heard of a company providing enough information to actually value the options.

To clarify, I was granted options, although they did switch to RSUs later on.

Ah, thanks for the clarification. So they became worth $1mm/year, that wasn't the fair market value when they were granted?

I was granted 36,000 shares (or options to buy shares), vesting over 4 years, with a strike price near $4. IIRC, preferred share price was ~$120 in 2015, but I don't recall the precise details. AFAIK there were no refreshers of any kind while I was there.

I think the amount I got was pretty standard for an engineer, but I also know some engineers received 4 or 5 times as much, and others got half that. I think the recruiters had a lot of discretion to decide how much to hand out in order to hire great people.

According to this article the common shares were worth ~$120 in 2019. Preferred will be different from common, but this would mean the investors saw no gains from 2015 to 2019.

Either some info is incorrect somewhere, or there was some split or valuation indeed didn't change much in 4 years.

https://www.vox.com/2019/3/19/18272274/airbnb-valuation-comm...

Gotcha. I appreciate the transparency, I'm always curious about how these early-hire packages work!

Not necessarily a correction, but find a way to make startup game work with remote engineering teams. Either fully remote, or remote-from-headquarters but collocated team.

There are going to be challenges, no doubt. Depending on where the team is, there will be legal stuff to figure out, time zone difference will be an issue and it will require some work to maintain the same "all-in-this-together" team atmosphere.

On the other hand, you are not competing with FAANG on compensation. For example, in Eastern Europe, even low-level Bay Area salaries are higher than most offers people will get locally. And equity grants are basically unheard of. English levels are very high, culture is pretty compatible with the US. And the level of accessible engineering talent is also very high, since you can outbid the local market easily.

There is a pretty well-developed remote contracting ecosystem where I live, but hiring people to be a part of the core team (by US startups) is comparatively rare.