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.
This is true outside of startup as well. You can get a 100s of seeds in a paper pouch for 99 cents but each germinated tiny little plant can sell for a few bucks easy.
A similar way to look at this is to ask what did the founder get the stock for and what did employee #1 get the stock for. If employee #1 comes in and gets a salary that’s 10% below market or makes a sacrifice because his job at the startup is not going to be as secure as at an established company, it’s one thing. If the same employee works for the company for 6 months for no salary or 80% below market it’s a totally different thing.
Ideally, you’d put a monetary value to everything and give people percentages based on what they brought/will bring to the table. In practice, having gone through this exercise recently, it’s hard to measure the value of certain things.
I’m going to disagree. I think the 1st 1000x is harder. Here is why. You are taking an intangible and making it concrete. Getting from $999 to $999,999 means you did that first part right. In a relative sense $999,999 is bigger but bigger doesn’t always equal harder. Just my two cents.
the intangible asset becoming valid, real and commercially successful is a fine exercise in belief, focus and execution with the later being more focus and non-stop follow-up and follow-through. So why do 90% fail – not cause they don’t embrace failure but cause they don’t really follow-through in my humble view. We all are challenged by this on occasion but how you respond matters and how you adapt and respond again when you fall short or just plain fall. It is just beginning to become real for us now and it is incredibly exciting and fantastic when the improbably becomes commonplace and all you do is follow the guideposts from the universe. Taking a small march madness break now. Happy Spring!
‘the improbable becomes commonplace – pardon that there typo, mondo.
Pulling our profile back now until tax day and then be ready to roll mondo geeko! After that – it’s Katy bar-the-door!
This does not change the fact that even though the value of a business may be non-zero in the early days, the risk of it eventually being zero remains very, very high. The paper valuations at a seed or A round are meaningless because no market exists for the whole company at that price. All the value is in the future promise of the opportunity, which has to be realized through execution.
Employee #1 with a few percent of equity is usually taking founder-level risk without remotely commensurate return. This is a terrible deal for employee #1 if his skills and experience are both rare and necessary for the eventual success of the company.
Typically these earliest employees are what you would call “suckers”.
Nivi – This is true, yet nothing is absolute per se. It’s like saying getting to stage 1 is a breeze. No. Everything should be viewed in context. Getting to stage 1 (from 0) is not necessarily a breeze. Context is everything. Remember the corollary of Newton’s first law of motion, viz: inertia is the reluctance of a body to move while at rest or to stop while in motion. This may very well provide a counterargument to your assertion that the first 1000X in valuation is the easiest. Context is everything.
I believe this view is really simplistic….and is bound to miss the larger picture…..However, I do not disagree that mathematically you are right. However, practically, I beg to differ.
Imagine your company has a starting value of $1,000 now to get a value $1,000,000 valuation you will have to do magical hard-work. And imagine not being able to leverage the benefit of your team (wonder what kind of full-time team would you have at $1000 or several thousands), no brand name, no fixed source to fund your WCR, and no structure into things. All you would have is you, and only your smallest possible team.
The day you reach $1,000,000 you will grab some attention from market players….and begin to make a name for yourself…..and by this time you would have a target market, brand name, processes in place, teams in shape, and you will be surrounded by full-time team members, and the best part – Banks/Investors will be willing to fund your growth. All you need is a proper control over your teams, add more people & technology for the next 1000x.
Do you notice the difference?
I strongly believe first $1000 growth is the most difficult and hence it should come with a huge premium.
I love your site Nivi. As an entrepreneur your insight and experience is priceless.
You can tell the difference between people that give information for their own benefit, and those that do it because they want to help others and change the world. You are the latter. Thanks..
Well the domain name costs more than a dollar 😉
The start-up is definately the most time consuming and difficult part of starting any business. Once it’s up and going it’s just a matter of waiting.