Hacker News Reader

I am intimately familiar with high-level metrics at software businesses in many locales other than Silicon Valley, and direct cost of employees is the largest expense at all of them. (Not true generally, since marketing budgets get arbitrarily high at some firms, but true of all dozen or so that I have direct experience with.) It can easily range to 80%+.

Also, the imputed salaries being paid here are very much not Google/Facebook numbers. The payroll for a team of five Goolgers is plus or minus $100k a month, almost double what it was for Everpix. Everybody was likely taking far below-market salaries.

I did a bit of Excel modeling of this, based on Everpix's hiring timeline and published numbers. My count is that they had 157 employee-months prior to shutdown at a fully-loaded cost of approximately $9,200 per employee-month. An employee-month is one month worked by a founder or employee, but not a consultant. Fully-loaded costs includes recruiting, healthcare, salary, and taxes, but (for the purpose of this calculation) does not include pro-rated costs for rent, hardware, software licenses, or what have you. Those are all numbers I'd be careful to bake into my planning as a founder but which I don't need to reverse the math here to salary packages.

I would ballpark the average package at Everpix as what Americans would understand as "$90k plus healthcare plus equity." This is not straight-line comparable to "$90k plus healthcare" at other US-based software firms, even those with baseline perks packages for working professionals rather than those competing in the Valley perks arms-race with Google and Facebook. For example, if one were to take "$90k plus healthcare" at an insurance company doing Java EE XL mappings every day, it is virtually beyond question that there'd be 401Ks with employer matching and whatnot in the picture as well.

If you were to do a straight-line comparison with e.g. Google or Facebook, this is substantially below their pure-cash offers for fresh graduates with no professional experience, and both would add both substantial cash bonuses and incentives plus equity grants plus perks with non-trivial cash value. The compensation packages employees capable of solo-shipping e.g. iOS applications or non-trivial image recognition software would be offered are substantially north of that. $140k cash-on-the-barrel plus industry standard perks isn't even an eyeraising number for intermediate engineers with no skill more specialized than shipping working software.

I'm mostly doing this math to say that "Lavish expenditures on employees were not a contributing factor here. They paid substantially below-market wages for employees doing similar jobs locally." I know that this might cause people who are not located in the Valley to feel a bit of heartburn given the absolute numbers, but that's another discussion entirely. (It should be noted that I live in an area where $90k cash packages would be unusual for engineers with 20+ years of professional experience.)

I think this is probably the definitive comment for the 'cost of talent' portion of the discussion. I just wish it weren't buried so far down.

This breakdown is characteristic of software startups, not SV in particular.

I was involved in the Web startup community in St. Louis, Missouri for years before moving to SF. It was the same for those companies: salary costs dwarfed all other costs.

Unless I'm mistaken, workforce is the largest single expense of most businesses, not software startups in particular. If anything, as a percentage of operating expenses, 52% sounds kind of low.

A million dollars is a lot, but I have no reason to think it's crazy. Without very important context, hearing "a million dollars on salary" isn't useful.

What was the salary per person, for example?

Aren't these numbers also so high because they took VC funding? The VC wants to throw the company against the wall as fast and hard as possible to see if it sticks. That means no time to roll out custom infrastructure, and hiring rockstar consultants just to build the product as fast as possible.

The idea is not terrible, it's definitely better than doing everything the right way (tm) for 5 years, just to find out there is no way to fit the market.

>That means no time to roll out custom infrastructure

It is sad that the industry is so anti-intellectual that we're actually afraid of computers now. Giving dell a CC# and giving them your hosting providers shipping address is not a complex or difficult task. There is no need for "custom infrastructure" to run a trivial web app. You buy servers, you plug them in.

Depending on your service provider (hosting, msp, mttos, whatever), the up-front msa can be truly painful if you want "real" service. I.e., redundant power and multi-provider network connectivity with multiple connectivity points that have a massive capital cost but will be as reliable as your commercial or home utilities.

Couple the cost of establishing the relationship (especially with startup credit) with the NRC and MRC of hosting services, smart hands rates, reserved cabinet or cage space for those surprise boxes on the dock, and incremental pricing models, and it's very difficult to build out and manage poorly predicted growth in a financially constrained environment.

Saving money on this means you're allocating additional engineer hours to dealing with this yourself.

The 'middle road' is probably an operator in a decent NAP or superNAP that manages the big lease and then carves out a margin by offering smaller space, possibly even colocating your hardware in the same rack as someone else's (and maybe not in the same rack with your other gear), and charging more than a macminicolo but offering significantly improved and variable services.

There are a number of walls you can hit that will present themselves as an almost insurmountable obstacle when you own your own gear. There are mandatory professional services when setting up some gear (SAN vendors have been notorious for this) and it's just a bunch of attention you have to devote to something for which there is generally a good enough solution for a company that may not exist long enough to depreciate the servers that ate a huge amount of their startup capital.

It's not that we're 'afraid' of computers. It's like saying we were afraid of electricity or telephone lines 40 years ago. We can manage it, but it's almost irresponsible and risky to do so.

You are inventing a problem that doesn't exist. I can literally have a cabinet in a first class data center in 2 days and it takes 15 minutes of my time. You save assloads of money this way vs AWS which is incredibly expensive. You can buy an equally performing server for the cost of a month of renting the VM from amazon (for the big ones obviously, you can't buy servers as slow as a ec2 large instance.)

Alright, who in your company knows what hardware to buy at which datacenter for how much? What software is going to run on it? who picks that software? How do you get data onto it? How do you get data off of it? What happens when it goes down? How do you monitor it? How do you scale it to two servers? Or more? Who is going to do that? Who is going to know all that? Who else is going to know that so your company doesn't fail when the first person isn't around?

Exactly the same way as you do in the cloud: read the docs, write the script.

>Alright, who in your company knows what hardware to buy at which datacenter for how much?

Everyone? I don't understand how you can imagine a problem like this. "Who in your company knows how to tie their shoes?"

>What software is going to run on it? who picks that software? How do you get data onto it? How do you get data off of it? What happens when it goes down? How do you monitor it? How do you scale it to two servers? Or more? Who is going to do that? Who is going to know all that? Who else is going to know that so your company doesn't fail when the first person isn't around?

AWS solves precisely zero of those problems. It isn't magic pixie dust, it is renting Xen VMs.

In addition to being fast to deploy, cloud infrastructure lets you easily scale up and down to try things out. This is useful if you're still finding traction or distribution channels that work best.

>> Giving dell a CC# and giving them your hosting providers shipping address is not a complex or difficult task

Financially, cloud servers have properties that might make them attractive relative to this. Also -- buying and managing colo is a fairly specialized discipline. There are a ton of business reasons to not take on a risk in this part of your business when you can outsource it at nominal cost. A COGS of 14% is quite nominal.

>In addition to being fast to deploy, cloud infrastructure lets you easily scale up and down to try things out

And you can buy a single server for $5k that will outperform $5k/month of EC2 VMs.

>Also -- buying and managing colo is a fairly specialized discipline

What? That is like saying "buying and managing phones is a fairly specialized discipline". No, it isn't. You give money, you get service. Not complicated. People have been able to handle this just fine for longer than you've been alive.

I wonder how much of the resentment to owning hardware comes from the "fail fast" approach - if you're trying to vet a business model quickly or move onto the next thing, having actual physical assets to take care of if the company ends up failing could be an off-putting extra complexity for some people vs just clicking "delete instance" with some virtualized provider.

I think it has more to do with initial fixed cost.

Personally I used my cofounder's existing array, but that's not an option for most companies, particularly starting out, and cutting out server purchasing costs pays in the short term. However, if you have the initial funding, as in this instance, it pays to buy the servers you need.

Plus, it's an asset that, should your company fail in 6 months, can be sold to at least salvage some of the initial investment.

[edit]In the last boom, though, people bought millions of dollars worth of servers and equipment that are now less than worthless; in many cases you have to pay to get rid of them. So, I guess there can be a significant downside.

This is exactly what I was thinking. More, you can buy some used servers at well below the cost of new ones, they're perfectly serviceable.

> It is unusual to people outside SV* to see such a high number (the % was just an additional data point that signals to non-tech people how much salaries constitutes tech startups)

It's not unusual at all for payroll to be the vast majority of a company's expenses. Normal profitable business usually expect payroll to be 30~40% of gross revenue (and that's for companies actually earning money, not during bootstrapping), and 50% exists although it's usually considered dangerous for profitability.

And of course that depends on the domain, a hairdresser and a refinery will have very different payroll rates and structures. Pretty much all of software and saas company activity and value comes from the people working there, in fact I'd expect payroll %-age to be higher (not lower) outside of SV: lower rent and likely lower utilities.

So are we ready for more H1B visas? Or should we wait for the jobs move more to other countries?

I am not sure if H1's are paid any lesser than locals...Do you have data points to prove otherwise?

Economically increased supply will decrease the price. Supply & demand. Another way to increase supply and thus save money is to hire remotely, and not restrict yourself to a small geographic area. If you can hire a guy in upstate new york where a house costs $40k all in, that $1000-$2000/month saved in after-tax rent costs (~$17-34k/yr pre tax) alone will significantly decrease their required wage.

If the supply of labor is reduced, the price of labor will rise until demand falls to match supply. That means that some positions will go unfilled; positions whose returns don't exceed the cost of the labor. But we don't know the total value of that labor. The community could be worse off altogether with those positions unfilled, because price doesn't capture all the information - we don't use money for every social exchange, and nor can we reliably estimate the present value of future contributions.

For example, many US companies are created by immigrants (18% of Fortune 500, or 40% if you include children of immigrants). Steve Jobs was the child of an immigrant. Hiring a guy who is so enthusiastic about getting a job that he wants to live in a rural area and live on a pittance, vs hiring someone who's ambitious and hungry - who's going to create the most value?

If you're paying H1s less than locals you're violating immigration law. The idea behind the H1 program is to help you when you cannot find local expertise in your specialty and need to recruit globally. It's a very sensitive issue in the USA if you are bringing in less expensive foreigners to "steal" jobs from locals.

That said, it's prone to abuse and I have seen some H1s with really poor compensation due to a weak negotiating position (the difficulty of switching jobs while in-country, sponsored adjustment of status, etc.).

HR as a percentage of expenses will be close to or the majority in many companies, not just software or SV companies.