Startups: It’s not 1990. Stop treating employees like it is.

Startups today have everything backwards.

Why are we still using old 1990's cap tables and the same tiny option grants for employees as we did back then?

Is that fair? To whom? Is it the right thing to do? I don’t think so.

Back in the 80s or 90s, founders had to take actual risk to start a company. You didn’t have today’s glut of capital and investors chasing any two MIT dropouts still looking for an idea. Raising money used to be *hard*. Everything was expensive, even hard disk space.

Old days: Capital and investors scarce. Easier to hire. Not as many people online — less potential customers. Founders had to take enormous risk. Engineers sometimes considered “fungible”

Today: Capital abundant. Many new investors, including “angels.” Talent scarce, especially technical talent. Many more people online — more and larger markets to attack. Founders can start a company for $7 on Digital Ocean taking almost no risk. Founders complain constantly they can’t hire engineers.

Back in the 80s, for example, terms from investors were brutal, if you were lucky enough to even get their attention at all. Like 3x participating preferred rounds were not uncommon. Today you would never see that, because companies have more leverage. Too much capital chasing too few good deals. More startups are dictating terms to investors, the opposite of what you’d see 25 years ago.

Back in the day, founders would go into debt to buy a hard drive. Today you can launch for $7 on Digital Ocean.

Back then, some founders even mortgaged their homes to keep things afloat. Who’s the last founder you met who did that?

Then there’s the whole founder/employee distinction, which is often absurd. Sometimes the early employee starts around the same time as the founders. The titles need to get fixed. And should the compensation be so disparate for those two people?

So if founders aren’t taking the risk today, and professional investors are usually gambling with other people’s money, like your 6th grade teacher’s pension money from CalPERS, who is taking the risk?

Employees.

Employees take the most risk today. Not the investors or the founders. But they’re still compensated like it’s 1990.

They take large pay cuts compared to a big tech company salary (not to mention financial firms). They get options that often (usually?) expire worthless.

Not to mention all the terrible crap around employee options, like if you leave the company you almost always have only 90 days to exercise and buy the stock or lose it. That can be very expensive and not awesome when you aren’t sure if the company is going somewhere or not. And it can be a lot of money if the strike price is high. There are lots of other problems with employee options too.

But let’s say you’re one of the lucky ones. You stay at the company, you’re loyal, and there’s a great liquidity event. Hurray! But you didn’t exercise early (most folks don’t — strike prices are often high, and that’s your real money you’re gambling and not spending on say your family). Well that must be great, right? Guess who gets long-term capital gains tax treatment and who doesn’t? Weird, employees get screwed again. Of course, founders and investors get the long-term cap gains treatment (assuming they’ve had the stock over a year). I won’t even talk about the retention packages and the golden handcuffs where the employees have almost no power in the negotiations and suddenly might find they need to spend another few years at the acquiring company, for example.

Conventional wisdom is 15–20 companies make it really big a year, like making a VCs fund. Those are the cases where the options can be really meaningful, but you’d still need to join relatively early. I’m often surprised how little folks who join at the mid-level stage actually get in a “great” exit.

So what do investors think about all this? Most still try to force this outdated 90s math on today’s startups and employees. Series A investors usually ask for veto rights on option grants to employees. I had to fight on that one. One told me, “I’ve never given an engineer over a point, and I’m not going to start now.”

So what do founders do about all this? Bitch about how hard hiring is. “Why won’t engineers leave nice jobs at Google to join my startup where they can be over-worked and under-compensated? I know, let’s H1B people and start FWD.us since those folks will work for us no matter what we offer them.”

We could acknowledge these glaring problems. Perhaps even treat employees well (not “free food in the kitchen” well, I mean truly fair compensation commensurate to risk taken.)

What do we really do? Bitch all day how hard hiring is. There are no good engineers. “The person I want won’t leave Google to join my startup that hasn’t shipped anything. It’s only a 40% paycut and the options are worth a lot, I swear.” Ask most any founder - they’ll say hiring is their #1 problem.

Tl;dr: Founders and investors are wildly overcompensated while employees are taking the most risk of all.

My next company is fixing this glaring structural problem, and I might be more proud of that than anything else.