Comment by kartickv | Hacker News Reader

Comment by kartickv | Hacker News Reader

If I were a founder who wanted to make sure employees and founders get a better deal, what are my options?

Can I accept money from investors only on the condition that they get paid only after employees and founders get paid a minimum amount, like $1M each?

The stronger version of idea is to not grant stock / stock options to employees (or grant only one share if needed for legal reasons). Instead offer a guarantee that only after they earn some large amount, enough to retire, say $10 million, will any investor receive anything. Employees would never make more than $10 million, but they would maximise the chance of making $10 million. This would make the startup a less risky place for an employee to work, assuming the goal is to maximise the probability of making enough to retire. Then the investors can have whatever liquidation preferences, seniority, ratchets and so on, as they want, and it wouldn't matter to either the founders or the employees.

I'm willing to accept a lower valuation (the certainty of a $100 million company is more important to me than a 20% chance of a billion dollar company).

Does this make sense? Would you suggest a different approach to reduce risk for founders and employees?

The closest I've seen to this in real life is where an investor will purchase common shares meaning they are on equal footing to investors. It's rare, but it does happen.[0]

[0] http://www.wsj.com/articles/snapchat-discloses-650-million-p...

I'm confused. Employees and founders get a salary. There is no risk to them. If the company fails the investors lose millions of dollars, the founders and employees leave with 1-2-3 years of salary in their pockets and then go get another job.

That is why investors get paid first. Am I missing something? I guess I don't understand where this idea that founders and employees should get paid first. In guessing because the did the work but they seem to be forgetting they also got paid for the work. As a startup it might have been less than some other jobs, in compensation they took some tiny tiny risk that if the company is successful they get a taste. But they risk is orders of magnitude less than the investors.

Sorry if I'm not understanding

The ethics of this go deeper than what you describe. If Warren Buffett invests 1m in a company, is he in a riskier position than if a McDonald's clerk were to invest 10k in the same company? The absolute dollar value is not the only way to gauge risk exposure.

Not only is the McD clerk less able to afford loss, she doesn't get the opportunity to diversify risks, as Warren Buffett does by investing in many companies.

except for the fact that Employees and founders salary is generally below market rate while at the same time they are expected to work more than standard hrs( 8 Hrs?? ) and be available 24x7 to fix issues. Equity with promises of big payout is given as a reason to take such such a deal over a job at a Bank.

Now these employees and founders know that these promises are empty and the example provided above is one good way to keep the promise.

Lots of investors expect Founders to take a salary needed to survive and also don't get paid for the sacrifices already made.( its assumed their equity stake makes up for the difference)

I'm probably not seeing the difference but it almost seems like by this logic a busboy (busperson?), the person that cleans up the dishes at a restaurant is owed $$$$$$$ because he could have gotten a higher paying job so he's sacrificing for the rest of us?

Is a fast food worker who goes to company A at $8 a hr but expects to move up into a management position and then gets denied, is he owed money because he could have gone to company B at $10 but without a management position expectation?

Employees and founders get paid. So it's lower than market rate it's still > 0 which means zero risk. They get a tiny piece of the pie. If things fail they still got > 0 whereas investors got < 0. You want the big payoff you have to take the big risk.

We are in full agreement that risk and reward go together. In fact, my suggestion is a way to shift more risk and more reward onto investors.

If I impose the condition that investors get paid only after employees get paid, I expect that I'll get investment at a lower valuation. Which means greater upside for investors if the company becomes a big success.

Alternatively, if each employee's upside is limited, then that leaves more of the money (again if the company succeeds) for investors.

In either case, the goal is to shift more risk AND reward onto investors, not only risk.

By same token investors should be assured only a % of their principal in case of down rounds. You want the big payoff you have to take the big risk.

To be assured the whole principal or 2X is ensuring that the risk is transferred to other parties.

Besides, how many fresh-faced twenty something employees at a startup understand the fine print — things like liquidation preferences (optional, participating, stacked and so on), ratchets, valuation caps, and so on?

If people are signing up for something without really understanding the tradeoff, then the argument that they are taking more risk for more reward falls apart. It would be more accurate to say that they are being taken advantage of.

"Can I accept money from investors only on the condition that they get paid only after employees and founders get paid a minimum amount, like $1M each?"

Sure, you can do that, but good luck finding an investor who would be willing to actually give you money under those conditions.

If I were an investor, what incentive would I have to take on this additional risk? There are thousands of founders lining up outside my office who are more than willing to accept my standard terms.

Zukerberg managed to get such investors. If investors want in on the game, then they need to make the sacrifice.

If the company wants the investor money, they make the sacrifice.

whoever is desperate loses more.

The incentive is more reward, like investing at a lower valuation. Or if each employee's upside is limited, that leaves more money for investors, if the company succeeds.

More risk, more reward. Anything I'm missing?

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