Startup Boy

Truth in Startups, and a Whole Lot Less

Why You Can’t Hire

with 62 comments

There isn’t a shortage of developers and designers. There’s a surplus of founders.

The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.

Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*

Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.

Yammer can hire. Square can hire. Twitter can hire. These companies have achieved product / market fit. Your pre-traction company has not, and so it has a hard time hiring.

If the costs of founding a pre-traction company have gone down, then returns to pre-traction founders must go down.

Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.

Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.

Your next five designers and developers? Your cap table probably can’t even afford them until you have traction, and the cash that follows it.

Close the equity gap, and hiring will get a lot easier.


* Of course nothing is ever “easy” – but it’s a lot easier than it used to be.

** This is just my opinion, not that of my employer. But you can see what they’re doing to help at AngelList Talent. Coincidentally, the lead hacker on that project put up this related must-read post on his own blog yesterday.

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Written by naval

December 13, 2011 at 9:04 pm

Posted in Uncategorized

« Towards a Literate Nation

62 Responses

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  1. Something you said earlier this year has really stuck with me. “Find the smartest engineers you known and do anything to convince them to work with you.” Major equity stake seems the very least of things to fall into that ‘do anything’ category. Whether you’re 6-months into a project – consider making them founders, with founder level equity. If it doubles or triples your company’s value to have them, or better makes success likely, then giving up 10-20% almost feels like a no-brainer.

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    Derek Andersen

    December 13, 2011 at 9:13 pm

    Reply
    • I disagree.

      If you’re 6 months into a project and you’re company’s value will double or triple by adding a talented developer you’re doing something wrong.

      I’m a developer, and dare I say a talented one, so this “developer as a diva” talk is something my ego wants to hear, but I’m also an entrepreneur and I know that having talented developers is important, but it’s just one piece of the puzzle.

      Your company will fail or succeed based on the value it provides to the marketplace and its capitalization. The most common reason for failure of the new companies is that they run out of the money, the second most common reason is that they don’t provided the value to the marketplace.

      There is a big difference between an employee and a founder. The founder is in “get rich or die trying” position, he risks everything, while for the employee this is just a job. If you’re a talented developer and you’re tired of making other people rich – do your own thing! If you’re hired as an employee, do your job to the best of your abilities and stop whining about not having the same equity as the guys who started the company because you’re not one of them. If you want big rewards take big risks and start your own company, otherwise STFU.

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      RandomGuy

      December 14, 2011 at 9:16 am

      Reply
    • Having made the equity mistake myself in the past, I would caution against it. Founders have a totally different mindset than those they bring on afterward. I talk about this in my latest blog post here: www.presidentspilotsentrepreneurs.com/2011/12/how-to-choose-ideal-business-partner.html.

      The bottom line is if you offer someone equity because they bring a UNIQUE skill to your team and fills a much needed gap, they still need to have skin in the game in the form of a cash investment. Then you know they are really committed. Otherwise, you may give someone equity who still has an employee mindset. The minute things gets tough, as they most certainly will at some point, they will go looking for a job. Now you have a guy who has equity in your company who isn’t even a full time contributor. Been there, done that. Be very stingy with equity folks.

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      Derrick S Jones (@djoneslucid)

      December 14, 2011 at 4:09 pm

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      • But don’t forget that when people bring “unique” skills, they create intellectual property that the company owns. In that respect, they have skin in the game, because they could have sold the IP elsewhere.

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        Anonymous

        January 7, 2012 at 12:26 am

  2. Thank you. I’ve been saying this for the past year or so, although perhaps not as succinctly.

    news.ycombinator.com/item?id=3155079
    news.ycombinator.com/item?id=1369039

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    Anonymous

    December 13, 2011 at 9:13 pm

    Reply
  3. Love this post. I’m biased though.

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    Hong Quan (@hongdquan)

    December 13, 2011 at 9:13 pm

    Reply
    • I think he was talking to those of us who are biased, either on one side of this discussion or the other spacer

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      Keith Brown

      December 14, 2011 at 2:40 am

      Reply
    • You don't sound like a dick–you sound like a busy psroen being polite. Good luck!

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      Farhad

      February 9, 2012 at 4:54 am

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  4. just awesome! And as @paulsingh says – more start ups means more noise and harder job for start up accelerators, angels and investors. Is someone working to improve signal to noise ratio?

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    sarvjeet ahuja (@sarvjeetahuja)

    December 13, 2011 at 9:26 pm

    Reply
    • @sarvjeetahuja – yes – although inadvertently – more noise is bound to bring along more signal – as its the nature of competition, but your question about improving that ratio is very interesting. I would think that the ecosystem would strive to increase the ratio naturally rather than individual companies/independent entities.

      @Vsistla

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      @vsistla

      December 13, 2011 at 10:49 pm

      Reply
  5. @charfortuno #yammer “Yammer can hire, Twitter can hire” holla

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    Joe Cheung (@Joeseekit)

    December 13, 2011 at 9:52 pm

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  6. Completely agree…nowadays everyone is a founder of sorts but the ones who truly know the calculations will hire because they know they should be eating ramen noodles along with their team. I think NYC startups understand this logic more because everyone, from musician to chef, wants to be the next big thing in the city that never sleeps.

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    John Sumpter

    December 13, 2011 at 9:52 pm

    Reply
  7. Completely agree…nowadays everyone is a founder of sorts but the ones who truly know the calculations will hire because they know they should be eating ramen noodles along with their team. I think NYC startups understand this logic more because everyone, from musician to chef, wants to be the next big thing in the city that never sleeps.

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    John Sumpter (@jsumps)

    December 13, 2011 at 9:53 pm

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  8. “Raising the first $25K for product development is easy – join an incubator.” Sure, let me just press that “Y Combinator” button on my computer… now where did that go?

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    coglethorpe

    December 13, 2011 at 10:26 pm

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    • Haha yeah I wish we that button existed spacer
      I think the author meant incubators in general though, and not just the top-tier ones like YC. There are so many incubators – granted they are of less prestige – that chances of getting into at least one is decent.

      Although he does make starting a company easier than it should be, it doesn’t take away from his overall and intriguing view of the shift of surplus to companies.

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      Gerald Fong

      December 14, 2011 at 3:22 am

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      • There are lots of incubators these days that is true. However there are even more founders so it is still difficult to get in. Furthermore very few of them will give you cash, but rather charge you so I honestly think it is a poor suggestion to “just join an incubator”
        Comments like these are great for Colleges to get graduates into the startup world, but in the real world I suggest looking at working-for-free-until-you-make-it, as that is the way 99% of startups really work.

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        snow

        December 14, 2011 at 4:05 am

  9. standing ovation from me!! brilliant and I concur

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    John Furrier

    December 13, 2011 at 10:45 pm

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  10. 100% spot on.

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    Anonymous

    December 13, 2011 at 11:40 pm

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  11. I agree… but only to a point. You speak of making early engineers “founders,” and suggest equity positions of 10-20%. I am not in a tech field, but I’ve been an entrepreneur for 10 years+ now. I know what it means to “make payroll” every week. Do these “early engineers” as you call them collect a paycheck? Are they equally responsible for coughing up cash when payroll comes due for the staff? Equity means “skin in the game” in my mind. And this means that one is responsible (personally) for bills, corporate obligations, and payroll. My grandfather was a CPA his whole career, and one of his favorite lines was “don’t ever mess with payroll.” If the early engineers don’t have to reach in to their pockets in order to cut paychecks for the staff, when, and if, necessary, then they DO NOT deserve the title of “founder.” However, if they do have skin in the game (and not just their own personal well-being), then by all means, YES, give them a big nut and call them “founder.”

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    Benjamin deRuyter

    December 13, 2011 at 11:44 pm

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    • Agree — founder is more than mere title or status. Earned by “all in” level commitment, motivation and contribution whether financial, vision, talent, skill, leadership, etc. Most likely all of these.

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      Stacie

      December 14, 2011 at 1:45 am

      Reply
    • Benjamin

      I’ve been involved in a few startups over the last 13 years and I can tell you that when you find a truly talented engineer he/she will often mean the difference between success and failure of a young company. In that case, is their value as the one doing the work not as valuable as the man with the money? If the “founding” engineers also need to front money, what else are you (as the entrepeneur) bringing to the table? If you expect them to produce excellent work efficiently and on time as well as take financial responsibility, then the “non techy founders” need to bring more than just money as well.

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      Craig Bryden

      December 14, 2011 at 4:08 am

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    • Thank you for listing the tasks an entrepreneur does and making it sound so important.

      Yet there is a glut of founders and a lack of developers.

      Engineers that work night and day and christmas and new years when a project depends on them… and don’t worry about making payroll, have skin in the game and deserve founder status. Don’t give it to them and you suddenly have no product. Good luck with payroll then.

      Giving them 0.2% cut is an insult when “entrepreneurs” can’t achieve shit without a great engineer behind them.

      The market has spoken and @naval is simply explaining why.

      ~ Supply. Demand. Life isn’t fair. The end.

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      Joe Devon

      December 15, 2011 at 2:35 am

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  12. So if not the traditional model, what would you offer to get and retain key early engineers? How about sales people? Community manager?

    To clarify, perhaps what equity percentages you’d offer to the following? Or something similar?

    1 – 5 Employees – Engineers

    1 – 5 Employees – Sales

    1 – 5 Employees – Community Manager/Support

    6 – 20 Employees – Engineers

    6 – 20 Employees – Sales

    6 – 20 Employees – Community Manager/Support

    Thanks in advance!

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    Anonymous

    December 14, 2011 at 1:19 am

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  13. So what do you think the new caps should be?

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    Curious

    December 14, 2011 at 1:46 am

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  14. Not sure how to respond… I guess it’s best to start by saying that I’m a founder too, and I don’t think that’s a bad thing for the industry, it’s just a real world example of people voting with their feet.

    I decided to do this after working as a developer for 3 years at a successful local startup, getting my $40K buyout, and watching the “founders” of that company walk away with multiples of what I received as employee #9. I worked nights and weekends to get our product out. I recognized that I’m just as bright, just as able, just as driven as they are. If they can do it, so can I. I’m tired of being a “cog” in their machine, generating both cash multiples and exotic cars for the founders, while not being recognized within. There’s no reason I shouldn’t get my cut too. So I’m rolling my own, I want to see 10x or 100x return just like they did.

    Here’s the thing though, hiring will get easier when there’s a little more equity between the developers and the “C-Levels” who run power point decks and give motivational speeches from their boats.

    People talk about the explosion of executive pay as follow-on to the explosion in pay for professional athletes. Welcome to the dawn of the “developer” as the franchise player, expect to pay accordingly because I won’t accept anything less.

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    Anonymous

    December 14, 2011 at 2:02 am

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  15. Love and agree with the sentiments. However, later round investors will need to get comfortable with a flatter cap table with more key participants. This means more decision makers, less dominating voice just because of having the investor role – overall more decentralized company control structure.

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    alberth

    December 14, 2011 at 2:12 am

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  16. Try doing what Naval said and I bet after few years of operation the company would not be in a position to hire anyone worth while. Remember there is a reason why a founder is a founder and not everyone in the startup is a co-founder.

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    Ramesh

    December 14, 2011 at 2:26 am

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  17. 38 thumbs up, and the very first line of this post blew me away, “There isn’t a shortage of developers and designers. There’s a surplus of founders.” With so many people looking for top talent, it makes you think twice about starting a company when you might not have the tools to get it done first in class.

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    Keith Brown

    December 14, 2011 at 2:39 am

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  18. => When I was studying CompSci in college, they taught us that platforms don’t matter – that understanding algorithms was critical and certainly more important than being well-versed in any one language. After college, every single job required being well-versed in the specific platforms they were using and that was almost the only criterion headhunters and employees care about

    => Almost every software engineer has lied on their resume with keywords; I personally have had headhunters yell at me on the phone to add technolgies I had only a moment’s experience with

    => As a result a few engineers I’ve known have learned their “required language” in the two weeks before they went onboard their new company

    => In the last 12 years the IT industry has shrugged off 1 million jobs, according to the Dept of Labor

    => People who are building the very front line of the Internet — the Internet!! — and hosting their apps in the cloud — the Cloud!! — are insisting that their staff MUST commute to a single, shared office

    none of this makes sense, therefore you must acquit.

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    Undertoad

    December 14, 2011 at 3:44 am

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  19. Good stuff, Naval — this is what I’ve started thinking of as the “dark pool” of talent, much like angel investors were once a “dark pool” of capital. I think you already know the guys there but I’d love to get your take on GroupTalent (www.grouptalent.com) — they have significant evidence (in terms of developer adoption) for your thesis that the most talented digital creatives simply aren’t available for FT employment (although they are willing to work on high-impact projects at premium rates).

    Talent use to chase money, now money chases talent (and that’s the way it should be)

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    Chris DeVore (@crashdev)

    December 14, 2011 at 4:38 am

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  20. More like a surplus of founders not working on opportunities with the potential for meaningful impact (aka positive social impact)?

    I’ve been struggling with this question the last few years designing accelerators…however a few considerations:

    -Surplus of founders is more like a local problem (until the next bubble burst) and probably still not globalized
    -Look around and there a lot of f-ed up problems that need to solved, too many founders are not working on meaningful enough problems
    -More cycles/iterations generally mean better, so even if founders fail, they should learn and be smarter with better startup/product skills
    -Even if founders fail, they should have new found appreciation as an employee once they realize how f-ing hard it is
    -More founders mean more experiments, thus more data for us to make sense of things
    -You can think of the current me-too founder trend also as applied graduate school, it’s probably actually more efficient to do a startup than a phd
    -Startups also stretch the potential of the human race, rather than have so many people underemployed and not reaching their full potential

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    Enrique Allen

    December 14, 2011 at 4:46 am

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  21. I agree with the basic argument that if the equation has changed, the numbers should reflect that – but as these things are typically dictated by market force, shouldn’t you be focusing on the problem rather than the solution?

    Do you think that the kind of developers who would prefer the risk and excitement of being an early employee at a startup are actually bad at negotiating? In my experience, they ask for what they want, and if they don’t get it, they go to Google where they’ll be paid $250k a year and ride around the office on skateboards. They don’t lack leverage, so why is it that equity distribution inside of startups isn’t “as it should be”? This isn’t charity, so why isn’t it reality yet?

    I feel that you’re in an advantageous position to outline anecdotes of anonymous early-stage startups who were too greedy to give up the equity that it would take to make the right hire, and subsequently went down in flames. There’s a concrete lesson we can all learn from.

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    Andrew Kinzer

    December 14, 2011 at 5:13 am

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  22. Totally agree with the stake part. The first couple of employees are just the late founders. They take as much risk as the founders do!

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    Debjit

    December 14, 2011 at 5:22 am

    Reply
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