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Founders versus early employees

Not everyone can be a founder. We talk about the founders of startups and companies. We focus on the founders. The founders get press coverage. They get invited to speak at events. Sometimes they get rich. But for every founder, there is an early employee that takes near equal risks in joining an early-stage company.

Steve Blank divides the individuals associated with startups as:

  • Founders
  • Early Employees (Employees # 1-25)
  • Later Employees (Employees # 26-125)

The majority of his division is about the temperament of the individual as related to risk and dealing with chaos and uncertainty. Not every one can be a founder, i.e., can you imagine trying to start a company with 10,000 people? It’s just unfeasible.

“Being an early hire at a startup gives an individual the ability to make tremendous impact on an organization as it grows – and both the founders and those hires should know it.” David Beisel

We need to celebrate the employees at startups. We need to make sure that early employees are compensated, incented and rewarded for their decisions to join startups. Early employees have a huge impact on the growth and culture of a company.

How do you compensate early employees? Paul Graham provides a model for calculating value. As Naval points out that you still need to pay employees market rates, but with all employees you need to ask yourself “whether she [a new hire] is likely to increase the next round’s share price”. This should force companies to think about building value with each early hire, and not just filling a position.

Title Range (%)
CEO 5 – 10
COO 2 – 5
VP 1 – 2
Independent Board Member 1
Director 0.4 – 1.25
Lead Engineer 0.5 – 1
5+ years experience Engineer 0.33 – 0.66
Manager or Junior Engineer 0.2 – 0.33

Table 1: Options Grants in Silicon Valley for Series A from VentureHacks

The numbers from VentureHacks are guidelines. They are rough estimates.Any one have sample option grants in Canada? Are the percentages different? I would assume that they are very similar but given the lower valuations and this may change the salary/options mix.

Remember the goal is to incent early employees to have an emotional ownership of the product and company they are building. Equally said, potential employees need to understand what they are getting into. Darmesh Shah has a great list of insights for employees joining early stage companies. Early employees are critical for startups, and we need to recognize that not everyone can be a founder.

I would love to hear your thoughts on being a founder or an early employee.

 

Additional Resources

  • http://blog.bmannconsulting.com/ Boris Mann

    It’s important to note that those options grants are AFTER a Series A funding. Those numbers will be significantly higher for pre-funding startups. The founders will each take a major chunk (e.g. 50 – 50, 60 – 40, etc.) and then further dilute for advisors (0.5% – 1% – 2%) and early employees (5 – 15% *if* they are foregoing major chunks of salary).

    If the early employees *aren’t* foregoing major chunks of salary, you’re probably still looking at 1 – 5% to keep things interesting.

  • http://bmannconsulting.com boris

    It's important to note that those options grants are AFTER a Series A funding. Those numbers will be significantly higher for pre-funding startups. The founders will each take a major chunk (e.g. 50 – 50, 60 – 40, etc.) and then further dilute for advisors (0.5% – 1% – 2%) and early employees (5 – 15% *if* they are foregoing major chunks of salary).

    If the early employees *aren't* foregoing major chunks of salary, you're probably still looking at 1 – 5% to keep things interesting.

  • http://davidcrow.ca/ davidcrow

    Yeppers, I did forget to mention that this was after a Series A raise, and it doesn’t talk about dilution in future rounds.

    How many early employees are forgoing salary?

  • http://davidcrow.ca/ davidcrow

    Yeppers, I did forget to mention that this was after a Series A raise, and it doesn't talk about dilution in future rounds.

    How many early employees are forgoing salary?

  • http://blog.bmannconsulting.com/ Boris Mann

    I would hope that most early employees are forgoing some of their salary in exchange for a larger equity chunk, and to help with early stage cash flow. There is a “right way” to structure this, of course.

  • http://bmannconsulting.com boris

    I would hope that most early employees are forgoing some of their salary in exchange for a larger equity chunk, and to help with early stage cash flow. There is a “right way” to structure this, of course.

  • http://davidcrow.ca/ davidcrow

    I’m assuming that by a “right way” to structure this, you’re referring either to a performance based compensation plan that includes equity (Incentive Stock Options) or cash bonus based on sales/revenues (possibly on product launches or fundraising but I can think of potential issues here).

    http://www.askthevc.com/blog/archives/2007/11/compensation-in-1.php
    http://onstartups.com/home/tabid/3339/bid/66/Startup-Founder-Compensation-Useful-Results-From-A-Recent-Survey.aspx

  • http://davidcrow.ca/ davidcrow

    I'm assuming that by a “right way” to structure this, you're referring either to a performance based compensation plan that includes equity (Incentive Stock Options) or cash bonus based on sales/revenues (possibly on product launches or fundraising but I can think of potential issues here).

    http://www.askthevc.com/blog/archives/2007/11/c
    http://onstartups.com/home/tabid/3339/bid/66/St

  • http://blog.bmannconsulting.com/ Boris Mann

    Sorry to be oblique! Yes, that’s in part what I meant. The other part is that with certain Canadian programs (in particular SRED) you can structure things to conserve cash flow.

  • http://bmannconsulting.com boris

    Sorry to be oblique! Yes, that's in part what I meant. The other part is that with certain Canadian programs (in particular SRED) you can structure things to conserve cash flow.

  • http://www.homezilla.ca/ Sandy Ward

    One hire that can be tough is the first person after the founders. If this is a senior tech person it can be the worst position because you get a TON of responsibility with limited stock reward (around 1%). (Yes, I am speaking from experience) But on the other hand, having the opportunity to lead a tech-team in a startup is a fantastic learning experience.

    Based on that comment, if you are in a startup and unhappy with your equity…just remember with all the experience you are gaining…you will get even more stock next time. :)

  • http://www.homezilla.ca/ Sandy Ward

    One hire that can be tough is the first person after the founders. If this is a senior tech person it can be the worst position because you get a TON of responsibility with limited stock reward (around 1%). (Yes, I am speaking from experience) But on the other hand, having the opportunity to lead a tech-team in a startup is a fantastic learning experience.

    Based on that comment, if you are in a startup and unhappy with your equity…just remember with all the experience you are gaining…you will get even more stock next time. :)

  • http://davidcrow.ca/ davidcrow

    Reminiscent of Gabor Cselle at Xobni leaving http://www.techcrunch.com/2008/07/23/a-xobni-executive-leaves-the-red-hot-startup-but-why/ who is now working on ReMail http://www.remail.com/

    Sandy this is exactly the point. It can be very difficult to grow and sustain an early stage startup if your early employees aren’t recognized and rewarded. If they are always leaving for their own startups you’ll be spinning your wheels recruiting and not building/shipping/selling the features that customers want.

    What could your previous employer done to keep you interested/engaged? More equity? Better performance pay?

  • http://davidcrow.ca/ davidcrow

    Reminiscent of Gabor Cselle at Xobni leaving http://www.techcrunch.com/2008/07/23/a-xobni-ex… who is now working on ReMail http://www.remail.com/

    Sandy this is exactly the point. It can be very difficult to grow and sustain an early stage startup if your early employees aren't recognized and rewarded. If they are always leaving for their own startups you'll be spinning your wheels recruiting and not building/shipping/selling the features that customers want.

    What could your previous employer done to keep you interested/engaged? More equity? Better performance pay?

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  • http://www.homezilla.ca/ Sandy Ward

    Turnover in a startup can be deadly! But people should also remember that is inevitable…what a good founder needs to watch is the ‘real why they left’…not what they tell you or what they say in an exit interview? (side note: is anyone crazy enough to really say why you are leaving in an exit interview?)rnrnDavid, the one thing they could have done… ‘more equity’! Or maybe even more exact…a better equity structure…Sr Biz folks were getting hired with option packages the same as mine…even though I was the lead eng and responsible for a 10 person eng team. An additional grant that said ‘we really value you’ would have been a nice move. rnrnAnother tip for new founders, when you employee work together 50+ hours a week…salary/options level will leak out between employees. This isn’t a bad thing if everything is fair…

  • http://www.homezilla.ca/ Sandy Ward

    Turnover in a startup can be deadly! But people should also remember that is inevitable…what a good founder needs to watch is the ‘real why they left’…not what they tell you or what they say in an exit interview? (side note: is anyone crazy enough to really say why you are leaving in an exit interview?)

    David, the one thing they could have done… ‘more equity’! Or maybe even more exact…a better equity structure…Sr Biz folks were getting hired with option packages the same as mine…even though I was the lead eng and responsible for a 10 person eng team. An additional grant that said ‘we really value you’ would have been a nice move.

    Another tip for new founders, when you employee work together 50+ hours a week…salary/options level will leak out between employees. This isn’t a bad thing if everything is fair…

  • http://www.homezilla.ca/ Sandy Ward

    Turnover in a startup can be deadly! But people should also remember that is inevitable…what a good founder needs to watch is the 'real why they left'…not what they tell you or what they say in an exit interview? (side note: is anyone crazy enough to really say why you are leaving in an exit interview?)

    David, the one thing they could have done… 'more equity'! Or maybe even more exact…a better equity structure…Sr Biz folks were getting hired with option packages the same as mine…even though I was the lead eng and responsible for a 10 person eng team. An additional grant that said 'we really value you' would have been a nice move.

    Another tip for new founders, when you employee work together 50+ hours a week…salary/options level will leak out between employees. This isn't a bad thing if everything is fair…

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