The Real Risk Calculation for Early Startup Employees

Let's talk about startup employee risk.

It has always been a risky proposition to join a startup. Vast majority of startups fail, meaning those who work there have (likely) taken reduced salaries alongside equity packages that end up being worth zero.

Below is the data (dating back to 2022) for the equity packages granted to a first 10 hire at a startup in the US. Most of these startups were hoping or eventually did raise venture capital.

• 1.5%-2% equity for the first hire.

• About 0.5% equity for the 5th hire.

• 0.2% or so for the 10th hire.

Those are not huge percentages, to put it mildly.

Still, if the company gets bought, everyone wins right? Not so fast.

Most of these options come with double-trigger acceleration (if any acceleration). Which means that two things have to happen for unvested equity to become vested in rapid fashion: the startup must get acquired AND the employee must suffer a qualified termination in the first 6-12 months after a sale.

Which brings us to the new world illustrated by the Windsurf non-acquisition.

Now a startup may just be stripped for talent (execs plus top engineers) and the remaining team gets to run a ghostly company. And the acceleration triggers are never in play, because no one was acquired!

(I know Cognition just swooped in and saved the Windsurf team - kudos to Cognition, that's badass).

Look, before you comment below that this has always been the case, I get it. Bad deals, stranded employees, etc are not new.

But I do strongly feel like something is getting broken in the startup social contract.

Here's a quote from the legend himself Ben Thompson on in his Stratechery newsletter from this morning:

"The people who are getting screwed, however, are the folks who were never necessarily going to get rich — that’s reserved for founders, and appropriately so — but who could justify rolling the dice on a positive outcome as long as they had downside protection in the form of guaranteed employment with a Big Tech company if things didn’t work out. Now, however, the best route for any non-founder is simply to pursue employment with a Big Tech company directly; the alternative, if the downside is unemployment or a contract with a hollowed-out doomed company, isn’t worth the risk (which, ultimately, again favors Big Tech, as it lowers competition for rank-and-file employees)."

Does this push more early employees to be founders? Does this weaken the implicit structures the govern "positive-sum" startup ecosystems?

Melancholic on this one 😔

#startups #startupemployees #equity #startuprisk