Nivi · February 19th, 2011
Is it fair for founders to own about 100% of a startup while employee #1 only owns a few percent? Are founders 10-1000x more valuable than employees?
The answers are
- Yes, it is fair.
- Value doesn’t matter, timing does.
In fact, many employees get better equity deals than the founders. There are two cases.
1. The founders are not intrinsically fundable
When the founders start the company, it is worth approximately $0. So their equity is worth $0.
Let’s say the founders work for 6 months, make progress, and then raise money at a $10M post. Then employee #1 joins and gets 1% of the company. So his shares are worth $100,000.
So each founder got $0 of stock when he joined the business. The employee got $100,000 of stock when he joined the business.
Every employee that joins the business gets more stock than the founders did. Not in shares, or as a percentage of the company. But in the only metric that really matters, the dollar value of stock at the time the employee joins.
That’s why some people say that anyone who joins a company before they raise money is a founder. In other words, anyone who joins the company before the stock has value to a third party, is considered to be a founder.
2. The founders are intrinsically fundable
Some founders can raise money with nothing to show other than their smiling faces.
Let’s say the founders raise money at a $10M post-money, simultaneous with founding the company. In this case, the market is valuing the founders’ contribution at $10M.
Then the company identifies employee #1 and tries to hire her. The company will have to compete with every company in the world for that employee, and therefore the market, not the company, is setting the employee’s compensation.
Continued in Part 2.
Measuring your stock in dollars is not at odds with measuring your stock in percentages. They’re just different views on the same data. If you’re an employee at Facebook and the stock price is monotonically increasing, look at the dollar value of your stock. If you’re joining a company today and you’re trying to figure out what you get if the company sells for $100M, use percentages.
(Note: This is the first time I’m testing this argument. Be gentle.)