Okay, I'll bite: why shouldn't the founders and investors have a lot more equity than the employees? If the business goes belly-up, they lose everything they've put into it, while an employee just goes out and finds another job.
Risk and reward need to be related somehow, surely?
Losing “everything they’ve put into it” suggests that the founders will actually lose money if the business fails, where in most cases the business goes bankrupt and the founders only lose whatever seed capital they put into the venture before incorporating as a limited liability venture (specifically to limit their personal liability).
The employees also lose eveything they put into it, which is however many months or years of their life they contributed to the venture.
Do you really not understand the concept of equity?
"suggests that the founders will actually lose money if the business fails, where in most cases the business goes bankrupt and the founders only lose whatever seed capital"
Oh, they only lose their "seed capital" (plus all the --usually unpaid -- work they've put into starting and growing the business).
That makes it okay, then!
"The employees also lose eveything they put into it"
The employees got paid every week, dude.
It's a tempting gamble - hoping for a 100x or 1000x payoff on that bet, especially since most people who take that bet believe they can "make the difference" - but if they're unhappy with the prospect of "losing it all", they perhaps should "just find another job".
Yes, they did. And they chose to forgo a regular paycheck.
Why don't the employees take advantage of this "tempting gamble", then? According to you, there's really no downside at all, right?
(Also in consequence ruining lives of others.)
The gamble is not free at all.
I have twice, neither time particularly successfully - in fact one time quite spectacularly unsuccessfully if measured purely by how much money I put in my bank account for that 18 months of full time work. And I'm seriously considering an offer to ride that ride again right now...
The downside is the consequences of failure usually include losing money - either real invested money, or in opportunity cost of the gap between market-rate-salary and what you're able to pay yourself for the time you spend working on your own business. This is often not a problem for early twenties tech dudes, it's not a realistic gamble for someone with a family or other responsibilities for which foregoing a reliable regular income isn't really a sensible/ethical option.
At the end of the day people have jobs because they need to eat, the point was not that founders shouldn't have more equity it was that their incentives are not aligned. Lower wages is good for the employer and bad for the employee, it is adversarial and sugar coating it as if it's not is bullshit.
(Not that I think companies can't have good relations with their employees, just at the very least wages are adversarial)
Not if the wages become so low that qualified employees refuse to work there, it isn't. There's nothing more deadly to a business than crappy, unmotivated employees.
- The founders had the original idea / area to work in (usually not very well-defined yet).
- The founders raised capital. Yes, this takes some number of unpaid weeks or months, toiling deep in the mines of Palo Alto coffee shops.
And yes, they do a bit more than that, but that's the essence. Then you hire your first few people and off you go.
Founders believe that effort is worth 10-100X more than early employees' contribution, and at least 1000X more than the later ones. Employees, often unaware of how lopsided their equity is, go into it believing they're "in it together!" with the founders.
Maybe the "early employees" should become founders, then. There's nothing to it, right? Just hang around some coffee shops!
The right answer is for employees to start calling bullshit on the standard Silicon Valley equity agreement, where Emp#1 signs up for 1% (imagine having 1% of Google!!), Emp#2 takes .6%, Emp #10 goes with .05%, and so on... often unaware the founders hold 60%+ between the 2-3 of them.
It's appropriate for there to be a falloff in equity, but it's just too lopsided today. Emp#1 should ask how much the minority founder holds, and ask for (say) 80% of that. You spent 6 weeks without pay? Great, you get more reward. But not 50X more than #1. After all, the payoff is only if the company is successful, many years later... when those unpaid weeks are minor relative to the collective sacrifices of the company in whole.
Because it's an excellent argument.
"often unaware the founders hold 60%+ between the 2-3 of them."
Everyone who goes to work for a company knows that it's owned by someone else, dude. The vast majority of employees in this world get no equity at all. Ever.
the collective sacrifices of the company in whole.
As an employee, you are being offered a certain salary in exchange for performing a certain duty. You decide whether it's a good deal or not. There's no "sacrifice" involved.