Friday, March 23, 2012

Risks, Rewards, Stress: Early Employees & Founders

People who have not started a company often do not realize how hard and painful the very early, raw days, of a startup can be.
Early MSFT team;  Looks like photo taken with Instagram
This has lead to one of the fallacies I frequently hear - early employees "take on as much risk and work just as hard as a company's founders, but don't get the same rewards".  While there may be some instances where this is true (e.g. if the early employee is basically joining the startup when there is no product, no money raised, and no vision for where things are heading and then works his or her butt off), in most cases the risk undertaken and work ethos of the founder and their early employees differ dramatically.

1. Risk Levels
Product Risk.  Often the founder has worked for months without pay, or has scraped by on savings for 3-12 months while coming up with their idea for the startup. By spending time exploring a market or building a prototype, the founder(s) has already started to take risk out of the company.  People under-estimate the value of this phase and the de-risking associated with the random walk of choosing the product to build and market to enter.   

Financing Risk.  A big step-function in de-risking a startup further is raising money.  Although seed rounds have gotten easier and easier to raise over the last few years, not all people are able to close them (ether at all, or on good terms or from good investors).   Fundraising basically means that (a) the company will have cash so it won't die immediately / can pay employees and (b) the idea is good enough for someone else to invest in it.  Lots of companies never raise money.  In a rough sense, the more capital a company has (as long as it does not foolishly over-capitalize) - the lower the risk there is in joining it (since capital = time to figure things out, experiment with e.g. ad buys, or money to scale something that is working).

Execution Risk.  Finally, hiring is hard.  Building a small team take a lot of sales/recruiting talent.  By the time the first few employees come on board the risk has gone down further, and the value of the company has gone up.  This is due to a few factors:
1.  The product continues to get built as more and more people join, further decreasing the risk of the company.
2.  The larger the team, the larger residual exit value of the team as an "acqui-hire".  Note, most startups fail without the teams getting bought, and startup failures get under-reported.  So you can't count on this as a founder or early employee.

Due to the factors above, founders typically have taken on a lot more risk then their employees who join even weeks or months later.

2. Work Ethic
Almost every founder I know works harder then their early employees, even if the early employees don't notice it.  Founders will often be online at all hours / when they get home.  Founders often take actions that employees may view as "social activities" (e.g. meeting VCs for a drink, meeting an engineer they want to recruit for dinner, etc.), when it is really work.  As a founder you may spend a big chunk of every weekend working on a pitch deck or meeting half a dozen people for recruiting.  Since you are not in the office, or may not be online, your early team members may not notice.

Are there early employers who work every bit as hard as founders?  Absolutely!  And  are there lazy founders?  (yes, but for many of them their startups usually crash and burn quickly - although I have seen notable counter examples to this).  But this is the exception rather then the norm.  I have had numerous founders ask me if it is normal for them to feel like their team is slacking [1] relative to the founders (answer: Yes, it is).

In general, my experience has been that the founders of a company work harder then their early employees.  This may shift as a company hits "hyper growth" mode with product/market fit - at which point cultures may shift to being even more hard charging and hard working.  Note, once there is massive product/market fit, the risk of joining obviously drops dramatically again.

3. Exposure To Startup Stress
Although a startup may feel stressful to everyone involved, founders often shield their employees from multiple stresses that come with running a startup.  This includes things like:
  • Investor antics.  Investors sometimes behave pretty badly, and the founders have to manage this.  Most employees never learn about the antics of the investors.
  • Running out of money.  This is stressful for everyone, but the founder feels responsible for their employees, themselves, and for their reputation.
  • Managing.  People threaten to quit. People get emotional.  People get fired.  People dislike other team members or act like prima donas.  Entrepreneurs often need to deal with this background drama that the team may never be exposed to.
4. Rewards
Commensurate with the extra risk and extra work founders often take, founders often own much more of the company then early employees.  This means founders will get larger rewards if they make it to a successful exit.  They will also be lauded with praise if the startup succeeds.

Do the founders deserve this additional upside?  I think the vast majority of the time they do - the founders took on more risk early on, built the initial team (and often the early product), raised the money, and drove the execution of the company.  While there are undoubtedly many situations where the founders succeed despite themselves (and potentially on the backs of their employees who contributed more then they did) I think in most cases there is a big trade off in the risk taken by the founder and the commiserate end rewards.  

[1] "Slacking" is a relative term.  Employees at a startup may be working long hours, it is just the founders may be working even more.

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