But not too low. The limiting case is an employee, who gets maybe $100k return with close to zero variance. Most of us are entrepreneurs because we wanted to take on more risks than employees in exchange for greater rewards.

Exactly, and that's why you need to be very careful with hiring. If you give one of your early employees 1%-5% equity, getting bought for 10-100 MM just doesn't cut it. After taxes, fees & TPS said employee could easily walk away with under $1 million (even if you're bought for over $100 million). This is still obviously awesome, but is probably not the upside that many potential hires are expecting.

I always took it as a given that employees will not get rich off an acquisition, unless the company is a Google or Netscape or Stratus (and even then, only if they were management-level and hired fairly early on). I did the math on my last equity offer (as an employee; not counting cofounder offers): I would've ended up with about $5000 worth of stock in a best-case (~50M) acquisition. My former coworker was an early employee of CCBN, purchased for $40M: he ended up with $3000.

Both founders and employees need to be very aware of the different risk/reward structures for each. I've heard some founders complain about how hard it is to get decent, hardworking help. Well, of course it is - their upside is 1/10th of yours! And their downside is lower as well, since they usually take a market-rate salary. People are less inclined to put in herculean effort if they have no incentive to do so.

For employees, be very cognizant of how much risk the founder has actually eliminated and make sure that fits with the reduced reward. It's really, really hard to build something people want: if they've already done so, they deserve every bit of those outsize founder stakes. But if all they have is an idea and some VC funding, they're asking you to bear many of the same risks, yet leaving you with much less of a reward.

The takeaway, IMHO, is don't hire and don't take VC money until you have product/market fit. That gives your employees a risk & upside profile inline with their equity stakes. It also gives your VCs an acceptable return without them forcing you into taking outlandish risks, eg. going after that pie-in-the-sky market opportunity.

Hmmm ... those numbers are kind of depressing. But I had kind of come around to the same conclusion. Unless you are a founder, it's just not worth it most of the time.

Depressing? All this are saying is: Unless you're a founder, you're an employee. Earlier employees are closer to the founder end, later employees are closer to the employee end. Neither are probably going to retire at 23 from an early acquisition. The latter are probably not even gonna retire from a monster exit (though in this case there are probably more employees, early is relative).

They do have a chance at making quite a lot of money though. 3k/40m is less then 0.01%. So it's not really a big part of the compensation package. In that case, stock just isn't a reason to work there. There may be other reasons to.

It's depressing that being in the vicinity of a startup doesn't make you rich? If everyone was rich, it wouldn't be rich. By definition, it's not available to everyone. You think market rates + a 50% chance at being millionaire, should be the going rate?

I tend to following your line of thinking, but "you" is different than "many people". :)

Agreed; we're not.

Well, that depends on the individual situation. A micro-ISV could bring that number as low as a reasonable salary. A startup like 37Signals needs to have that number high enough to support a small number of employees. Of course, a VC backed firm counting on a grand exit needs a much greater reward.

I think what Matt correctly points out though is that by limiting yourself to the VC option, you are only seeing 1/3 of the avenues available to you. These are limits for the VC, but they don't need to be limits for a founder.

Only because the market ensure we have to though. We'd rather take on greater rewards with no more risk.

Not always true. There is the rare founder who is an "empire builder"-- the kind of guy who wants to do crazy ambitious things like build a railroad across the country (or the software equivalent). Bill Gates and Mark Zuckerberg would both qualify-- both have had ample opportunity to walk away with $30m.

These are the founders that investors want (including YC) - the $30m exits are just to "keep the lights on" if you do the math.

Right, but you're focusing on the exception. He's focusing on the rule.

I'd like to see a VC firm that kills it from dividend payments instead of _soley_ exits/IPOs (maybe one exists?). You'd need some very "open" limited partners.

can we settle for a high return and a very low variance? :)

Um, no. :-)

Sometimes you can, until the rest of the market catches on and bids up the going price until you have low return and low variance.