Nivi · March 12th, 2011
I recently wrote that it’s “fair for founders to own about 100% of a startup while employee #1 only owns a few percent.”
My argument was that the dollar value of stock that founders get when they start the company is actually less than the dollar value of stock that employees get when they join the company. The disparity between founders and employees is therefore just a matter of timing.
There’s a corollary to this theorem:
The first 1000x in valuation is the easiest.
The first 1000x in stock appreciation is easier than the next 1000x. Here’s why:
Let’s say the company is worth $1 when you start. To get a 1000x increase in valuation, you only need to grow the company to $1000 in value. So if you join a company when it’s worth $1, you only have to create $999 of value for your stock to appreciate 1000x!
If someone else joins the company after it’s already worth $1000, he has to create $999,000 of value for his stock to appreciate 1000x!
To get a 1000x return on your stock, you either have to create $999 or $999,000 of value. One of these is easier. By 1000x.
The first 1000x is the easiest, because it is easier in an absolute sense.