What does this mean? To me it means that the way a company structures itself needs to change. More ownership needs to be given to employees, and founders need to get less.

That how I want to start my next company. Double the options pool, and lower the founder equity. Just because your employee #1 and it was my idea doesn't mean I get to dilute your share of the company but that big of a margin. We'll all be doing a ton of work.

That being said, can someone tell me why this might be a bad idea? :)

Edit: and I guess on one hand innovation and providing jobs is good but for everyone to want to do it now is a little crazy.

I don't think that's true, it just looks that way inside our tech bubble. If I look at the 100 people I know best (all in their early/mid twenties) only myself and 3-4 others have started businesses. I've stuck at it for about 5 years now, the others only lasted between 1 month and 4 months. I don't know for sure but I believe most businesses that are started are still local service businesses (barber, butcher, convenience store etc.) which you wouldn't think from reading the tech press everyday.

My guess is that most rational people who attempt the former learn to respect the latter, and either do a better job the second time (or, rarely, figure it out the first time) or decide they're better off working for someone else.

Of course, that formula fails as soon as some gasbag gets VC money for spouting the right spin... but hopefully that's a very, very small minority. :)

I hate that taking an office job was ever trendy and that most people do it.

I think it is fantastic that people want to create companies. After all entrepreneurs take risks to create jobs, value and wealth.

However, many employees consider it pretty enriching to work in a start-up environment for $200k+/year of salary and stock options, where the stock option portion is generally going up.

If you actually join early enough to get 0.25% of a company, like immediately post VC raise, usually the "success" scenario you talk about is not selling for 3x the current valuation. (I wonder how many companies that sell for that are actually "failures" but with well-connected VCs that can make a sale.)

And can we stop talking about "success" like a lottery? There are many Bay Area companies with actual business models making good revenue and growing it steadily into the multiple millions. I'm sure the early employees will make out just fine. I'm sure the founders would be interested in applying this "you're basically rolling the dice" model of business to their companies.

0.25 percent of a post-A company is pretty weak sauce. You should value equity at a fraction of what investors do. First, investors are diversified. You're not. Second, their stake gets the VCs control and an excuse to hand out executive positions to their underachieving, middle-aged friends. Yours doesn't. Third, your equity comes with a cliff and I can name a couple startups that are notorious for firing people days before cliff.

Actually, it is. For some theoretical literature on this, look into the Kelly Criterion, which argues that the best financial strategy is to optimize for log(W), where W is your total wealth (including future income, properly discounted, less costs of living, if one wants to get technical). The assumption is that, since it's (approximately) as hard to go from $50 to $100 as from $100 to $200, the proper utility function is the logarithm.

If you're a person of average means, you'd rather have $4.5 million than a 50-50 shot at $10 million. If you're a billionaire, you'd rather have the latter because of its superior EV.

Correlations also play a role. Assets with negative beta (correlation to equity market performance) can actually trade above expected value because of their risk-reducing benefit: they go up when the world goes down, which makes them desirable as hedges. All in all, you'd rather not have a basket of assets that all dive at the same time.

As a startup employee, you're typically poor enough to be risk-averse, and the one asset that you hold (equity) is correlated to your job and your reputation. Taking equity in lieu of cash makes you very exposed. You should expect a lot of equity to account for this. If you're giving up $20,000 per year in salary, you expect about $100,000 per year in equity at-valuation. Why? Because in addition to the concerns above, not only are you giving up some salary at the time, but you're also giving up future salary because startups tend not to give raises. (When things go well, the equity appreciation is the raise; when things go to shit, it's not a time to ask for much of anything.)

As an investor, you're rich and diversified enough that you can value assets at EV. As an employee dependent on stable income and reputation, you should be a lot more cautious about taking on that high-risk asset. Your life can go to shit in all sorts of ways: business failure isn't even the worst of them. The investor just sees the loss as a cost of doing business.

If nothing else, Zynga established what can go wrong when the bulk of your financial wealth is tied up by your employer. I mean, talk about a gigantic abuse of power: one's financial portfolio controlled by someone with firing authority.

VC-istan is built on the backs of young engineers who don't understand this stuff.

I agree that very small equity grants don't exactly help engineers pay the bills compared to salary. In fact, small increases in salary seem to confer disproportionate financial and psychology benefits to employees, while stock options are more abstract, and looking to other fields they don't seem necessary to retain skilled professionals. So why not pay engineers with all salary and hold onto the stock? Mainly because start-ups have limited cash too, and equity to give away.

However, at the risk of over-generalizing, I think the competitive job market in the Bay Area means that engineers are paid good salaries plus at least a token amount of stock. For an early employee, it could mean a little icing on the cake, or in the best case significant wealth.

I'm also writing with engineers in mind rather than executives, and based on Bay Area salaries.

If you "cliff out" an investor, you go to jail. If you do that to an employee, that's fair game.

"Do what you love and the money will follow"

It's pretty cliche, but the point is that you need to actually enjoy what you're doing and worry less about the money (unless you're in love with money, in which case go get a job on Wall Street). Sure, the chance to cash out big is a huge plus, but as Mark pointed out unless you're a founder it's very unlikely.

This is most likely a contributing factor to the talent crunch in the Bay Area. No one wants to take the chance on being the #1 or #2 engineering employee since the odds are weighed heavily against you. I imagine most sane people would look at it like this:

C-level / Founder: Risky, less salary now but larger option grants. Lots of hours.

Early employee: Riskiest. Less salary and less options. More hours.

Later employee: Least risky. Salary approaching market rate. No significant options. Hours that approach a normal work week (~40).

So, he has "(0.5%) eventually sell for $150 million or more".

Okay, so what? Is his argument that the chances of an entrepreneur are just a lottery draw with winning odds of 0.5%? If so, then that's misleading.

Why? Because it shouldn't be a lottery draw. Instead, the entrepreneur should know more than just a lottery draw. The entrepreneur should have done some good, careful, solid, and quite likely effective planning so that when, based on the additional information he has and the planning he has done, he goes for the $150 million or more, his chances are quite good, hopefully well over 50%. If he can't plan that well, then he needs to learn how or get into another game.

VCs, including Mark, won't teach how to do such planning, won't help with the planning, won't evaluate the planning, and, instead, will just report the figure of 0.5% from just looking in simple terms at all the e-mail they receive or some such.

Although the odds may have looked like 0.5% from 50,000 feet up, it is quite possible that for the winners down on the ground the odds looked and were much better than that.

Net, it is quite possible to see a large need, think of a good solution, find a way to provide that solution, and plan a business to deliver that solution, even with some new, advanced technology, all with quite high probability -- all over our economy, all around the world, in many industries, people do such planning and execution with quite high probability.

E.g., when Intel decides to move from line width of some x nanometers to 0.66 x nanometers and build a $2 billion plant to manufacture at 0.66 x nanometers, do you believe that the project is high risk with only 0.5% chance of success? BS. Intel has taken many such steps in their history, and so far they may have had some delays and some kinks to iron out but never really had an actual failure.

E.g., recently movie director James Cameron got in a specially designed 'boat' and took a little side trip to the bottom of the Mariana Trench, about six miles down or some such. No one, not even all the world together, has a lot of experience building 'boats' to go six miles down. So, what he did was essentially for the first time. Thus, he needed a lot of quite good planning. And he came up alive. Lesson: Planning to attack the unknown for the first time is possible.

The great old lesson was the Wright Brothers. Langley had just fallen into the Potomac River. But the Wright Brothers took a train from Ohio to Kitty Hawk and flew apparently with little or no doubt. Why? Good planning. How? They built the first quite good wind tunnel and, thus, had some good data (although they missed Reynolds number) on wing lift and drag. They also knew horsepower and thrust of their propellers. They had the weight of their plane and passenger. They understood the crucial role of three axis control and had a good enough solution. A little arithmetic, and it was clear that they should be successful. And they were. First time.

Planning is doable. Sorry, Mark.

Let's put it this way, drawing from Mark's post: He did point out correctly that a house in the area will set one back about $2 million. Well, if making that much money is as difficult as Mark suggests, then house prices should fall!

Are we learning yet, e.g., how to earn?

A good, old lesson, especially in business, is "Always look for the hidden agenda.". So, VCs are in the business of buying parts of young companies. So, as a buyer, they want more inventory to select from. So, Mark can tell CxOs that their slot is for just chump change and that they need to be CEO and get some VC funding. And if they were a real man, they'd d be paying cash for a $2 million house, and for that they'd need to be a CEO with VC funding. For more, a buyer wants to tell the seller that their product isn't very good, e.g., has only 0.5% chance of being worth $150+ million. So, maybe such is part of Mark's agenda.

Then telling entrepreneurs how actually to plan a $150+ million exit, with some significant probability, is not part of the agenda.

You understand: You saw the move 'Wall Street', right? So, what was the probability of a big move up of the PA steel company? Low, right? "A dog with fleas". But the conditional probability given that the takeover guy's plane was flying to PA was quite high. Got it now?

Again, yet again, to repeat just for you, from my three examples in my post, it's possible to plan effectively, even for advanced projects, and then perform according to plan with relatively low risk.

On picking winners, VCs don't try very hard to evaluate projects. E.g., recently a VC told me that he sees a lot of projects that currently have $2000 a month in revenue. Thus he missed the point: No doubt at one time each of Apple, Microsoft, Google, and Facebook had about $2000 a month in revenue. What is just crucial in picking "winners" is essentially to f'get about the $2000 a month and look closely at the project. VCs don't like to do that. Moreover, in recent years in information technology projects, VCs just don't want to believe that there could be any advanced, solid, unique, powerful, valuable technology difficult to duplicate or equal to be evaluated. Evaluating technology and projects just isn't how their business model works.

On my startup experience, you were guessing and guessed incorrectly.

Are you writing for Mark?

More generally, the goal is something exceptional. Can't get much insight into that looking at what was not exceptional. But there are some good guidelines for being exceptional. Yes, there are not many examples among the famous IT successes. From this you can conclude either that the path to being exceptional doesn't work or that there are good opportunities.

Whatever the entrepreneurs are, it's easy enough to identify the several dozen well known venture partners. Sadly, for the well known path to being exceptional, they are not and, really, don't have the backgrounds to do the evaluations. E.g., they are not much like the problem sponsors at NSF, NIH, or DARPA or leaders of significant, advanced projects at major labs or businesses.

So, again, the VC business model is not following all the promising paths to success.

For me, this isn't about me.

Bingo. In fact, the employee is less informed. If the VC asks to see the cap table, it happens. If the employee asks to see the cap table, the offer goes away because it was a "rude question". A VC can get lunch with investors and co-workers at the founders' previous companies. The employee has to decide, based on an hour where both parties are posturing, whether he "basically likes the guy". VCs can assess the engineer compensation structure and get a basic sense of what kind of coding chops the company will be able to get. The engineer knows his offer and nothing else.

If anything, we're talking about a market where employees trade time (often of unconsidered value, because they're too young to know what they're worth) for illiquid stock their parents would (for their own protection, although it's debatable whether such laws are good) not be legally allowed to buy. The VCs, with webs of social connections that de-risk the whole process for them, are hard-core insider traders.

People tend toward overconfidence and therefore want to load up on their own performance risk. That's fine. If you're a +3 or +4 sigma intellect, you probably are smarter than people will perceive you as being. That's one key informational advantage you have over the rest of the world: you're smart, they don't realize it. But... that means nothing once you're subsumed into a 50-person "startup", whose macroscopic performance is not really changed by taking on a +4 sigma guy at some dippy subordinate level.

VC-istan investors are the ultimate insider traders. They know everyone, including the acquirers who make markets for their wares. As an employee, you don't. In VC-istan, you don't know shit and the earlier you learn this, the better.

Mark Suster is right about the financials. You won't get rich.

I will go further. The VC-istan startup promise is empty. You probably won't get investor contact unless you negotiate for it. Why would they help you get the connections needed to be a founder, when the alternative is that you not get those and never be a competitive threat?

Many of these VC-istan firms develop horrible cultures as the engineers realize they won't get the leadership opportunities they were promised, because those are going to go out to entice new hires. You get a lot of ill-advised code throw-outs that exist only because someone was promised, in hiring, that he'd have that authority... so he uses it on the first day without even knowing what's being tossed.

I don't think you should use "learning" as justification for taking a bad deal. Not if you don't know the people, because how do you know if you're going to learn anything?

In general, higher pay tends to lead to higher-quality projects, not for the obvious reasons, but for this: your salary is how much it costs your boss to waste your damn time.

If you're a founder or a key hire and you trust the people involved, it's different but, in general, don't use "these are my learning years" to justify an awful deal.

You're right that it's no justification for taking a poor package at a startup, but I think the median startup job is much better than the median corporate job in terms of engineering education.

As an addendum to this: be realistic what this means in terms of work-life balance or whatever you want to call it. Any executive position that lets you EARN will not only take up large chunks of your life but it will basically become your life. You will have to be available almost 24/7, you will be having phone conferences on the weekends, you will be checking your smartphone constantly, getting ready for meetings, you will be going through tons of paper, you will be having a LOT of unpleasant conversations with all sorts of people for all sorts of reasons. And you will have to put up with the particular kind of people these positions of power typically attract. And remember, the further at the top, the lonelier it gets and especially in large organizations you will have to protect yourself from all sorts of politics and other shenanigans. There is a reason burn-out, heart attack and psychological issues are so extremely prevalent amongst managers.

So before you do make that decision to EARN, you should talk to friends or other people in similar positions and get a feel for what their whole life is like - then decide if that's for you. Money is one thing but what is that nice little place in an exotic country worth when you die from a heart attack at age 50 or 60?

(source: my best friend's partner holds an executive position for an S&P500 company; another friend took over the successful family business)