Why You Can’t Hire

There isn’t a shortage of developers and designers. There’s a surplus of founders.

The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.

Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*

Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.

Yammer can hire. Square can hire. Twitter can hire. These companies have achieved product / market fit. Your pre-traction company has not, and so it has a hard time hiring.

If the costs of founding a pre-traction company have gone down, then returns to pre-traction founders must go down.

Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.

Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.

Your next five designers and developers? Your cap table probably can’t even afford them until you have traction, and the cash that follows it.

Close the equity gap, and hiring will get a lot easier.

* Of course nothing is ever “easy” – but it’s a lot easier than it used to be.

** This is just my opinion, not that of my employer. But you can see what they’re doing to help at AngelList Talent. Coincidentally, the lead hacker on that project put up this related must-read post on his own blog yesterday.

80 thoughts on “Why You Can’t Hire

  1. Something you said earlier this year has really stuck with me. “Find the smartest engineers you known and do anything to convince them to work with you.” Major equity stake seems the very least of things to fall into that ‘do anything’ category. Whether you’re 6-months into a project – consider making them founders, with founder level equity. If it doubles or triples your company’s value to have them, or better makes success likely, then giving up 10-20% almost feels like a no-brainer.

  2. Completely agree…nowadays everyone is a founder of sorts but the ones who truly know the calculations will hire because they know they should be eating ramen noodles along with their team. I think NYC startups understand this logic more because everyone, from musician to chef, wants to be the next big thing in the city that never sleeps.

  3. Completely agree…nowadays everyone is a founder of sorts but the ones who truly know the calculations will hire because they know they should be eating ramen noodles along with their team. I think NYC startups understand this logic more because everyone, from musician to chef, wants to be the next big thing in the city that never sleeps.

  4. “Raising the first $25K for product development is easy – join an incubator.” Sure, let me just press that “Y Combinator” button on my computer… now where did that go?

  5. @sarvjeetahuja – yes – although inadvertently – more noise is bound to bring along more signal – as its the nature of competition, but your question about improving that ratio is very interesting. I would think that the ecosystem would strive to increase the ratio naturally rather than individual companies/independent entities.


  6. I agree… but only to a point. You speak of making early engineers “founders,” and suggest equity positions of 10-20%. I am not in a tech field, but I’ve been an entrepreneur for 10 years+ now. I know what it means to “make payroll” every week. Do these “early engineers” as you call them collect a paycheck? Are they equally responsible for coughing up cash when payroll comes due for the staff? Equity means “skin in the game” in my mind. And this means that one is responsible (personally) for bills, corporate obligations, and payroll. My grandfather was a CPA his whole career, and one of his favorite lines was “don’t ever mess with payroll.” If the early engineers don’t have to reach in to their pockets in order to cut paychecks for the staff, when, and if, necessary, then they DO NOT deserve the title of “founder.” However, if they do have skin in the game (and not just their own personal well-being), then by all means, YES, give them a big nut and call them “founder.”

  7. So if not the traditional model, what would you offer to get and retain key early engineers? How about sales people? Community manager?

    To clarify, perhaps what equity percentages you’d offer to the following? Or something similar?

    1 – 5 Employees – Engineers

    1 – 5 Employees – Sales

    1 – 5 Employees – Community Manager/Support

    6 – 20 Employees – Engineers

    6 – 20 Employees – Sales

    6 – 20 Employees – Community Manager/Support

    Thanks in advance!

  8. Agree — founder is more than mere title or status. Earned by “all in” level commitment, motivation and contribution whether financial, vision, talent, skill, leadership, etc. Most likely all of these.

  9. Not sure how to respond… I guess it’s best to start by saying that I’m a founder too, and I don’t think that’s a bad thing for the industry, it’s just a real world example of people voting with their feet.

    I decided to do this after working as a developer for 3 years at a successful local startup, getting my $40K buyout, and watching the “founders” of that company walk away with multiples of what I received as employee #9. I worked nights and weekends to get our product out. I recognized that I’m just as bright, just as able, just as driven as they are. If they can do it, so can I. I’m tired of being a “cog” in their machine, generating both cash multiples and exotic cars for the founders, while not being recognized within. There’s no reason I shouldn’t get my cut too. So I’m rolling my own, I want to see 10x or 100x return just like they did.

    Here’s the thing though, hiring will get easier when there’s a little more equity between the developers and the “C-Levels” who run power point decks and give motivational speeches from their boats.

    People talk about the explosion of executive pay as follow-on to the explosion in pay for professional athletes. Welcome to the dawn of the “developer” as the franchise player, expect to pay accordingly because I won’t accept anything less.

  10. Love and agree with the sentiments. However, later round investors will need to get comfortable with a flatter cap table with more key participants. This means more decision makers, less dominating voice just because of having the investor role – overall more decentralized company control structure.

  11. Try doing what Naval said and I bet after few years of operation the company would not be in a position to hire anyone worth while. Remember there is a reason why a founder is a founder and not everyone in the startup is a co-founder.

  12. 38 thumbs up, and the very first line of this post blew me away, “There isn’t a shortage of developers and designers. There’s a surplus of founders.” With so many people looking for top talent, it makes you think twice about starting a company when you might not have the tools to get it done first in class.

  13. Haha yeah I wish we that button existed 😀
    I think the author meant incubators in general though, and not just the top-tier ones like YC. There are so many incubators – granted they are of less prestige – that chances of getting into at least one is decent.

    Although he does make starting a company easier than it should be, it doesn’t take away from his overall and intriguing view of the shift of surplus to companies.

  14. => When I was studying CompSci in college, they taught us that platforms don’t matter – that understanding algorithms was critical and certainly more important than being well-versed in any one language. After college, every single job required being well-versed in the specific platforms they were using and that was almost the only criterion headhunters and employees care about

    => Almost every software engineer has lied on their resume with keywords; I personally have had headhunters yell at me on the phone to add technolgies I had only a moment’s experience with

    => As a result a few engineers I’ve known have learned their “required language” in the two weeks before they went onboard their new company

    => In the last 12 years the IT industry has shrugged off 1 million jobs, according to the Dept of Labor

    => People who are building the very front line of the Internet — the Internet!! — and hosting their apps in the cloud — the Cloud!! — are insisting that their staff MUST commute to a single, shared office

    none of this makes sense, therefore you must acquit.

  15. There are lots of incubators these days that is true. However there are even more founders so it is still difficult to get in. Furthermore very few of them will give you cash, but rather charge you so I honestly think it is a poor suggestion to “just join an incubator”
    Comments like these are great for Colleges to get graduates into the startup world, but in the real world I suggest looking at working-for-free-until-you-make-it, as that is the way 99% of startups really work.

  16. Benjamin

    I’ve been involved in a few startups over the last 13 years and I can tell you that when you find a truly talented engineer he/she will often mean the difference between success and failure of a young company. In that case, is their value as the one doing the work not as valuable as the man with the money? If the “founding” engineers also need to front money, what else are you (as the entrepeneur) bringing to the table? If you expect them to produce excellent work efficiently and on time as well as take financial responsibility, then the “non techy founders” need to bring more than just money as well.

  17. Good stuff, Naval — this is what I’ve started thinking of as the “dark pool” of talent, much like angel investors were once a “dark pool” of capital. I think you already know the guys there but I’d love to get your take on GroupTalent (http://www.grouptalent.com) — they have significant evidence (in terms of developer adoption) for your thesis that the most talented digital creatives simply aren’t available for FT employment (although they are willing to work on high-impact projects at premium rates).

    Talent use to chase money, now money chases talent (and that’s the way it should be)

  18. More like a surplus of founders not working on opportunities with the potential for meaningful impact (aka positive social impact)?

    I’ve been struggling with this question the last few years designing accelerators…however a few considerations:

    -Surplus of founders is more like a local problem (until the next bubble burst) and probably still not globalized
    -Look around and there a lot of f-ed up problems that need to solved, too many founders are not working on meaningful enough problems
    -More cycles/iterations generally mean better, so even if founders fail, they should learn and be smarter with better startup/product skills
    -Even if founders fail, they should have new found appreciation as an employee once they realize how f-ing hard it is
    -More founders mean more experiments, thus more data for us to make sense of things
    -You can think of the current me-too founder trend also as applied graduate school, it’s probably actually more efficient to do a startup than a phd
    -Startups also stretch the potential of the human race, rather than have so many people underemployed and not reaching their full potential

  19. I agree with the basic argument that if the equation has changed, the numbers should reflect that – but as these things are typically dictated by market force, shouldn’t you be focusing on the problem rather than the solution?

    Do you think that the kind of developers who would prefer the risk and excitement of being an early employee at a startup are actually bad at negotiating? In my experience, they ask for what they want, and if they don’t get it, they go to Google where they’ll be paid $250k a year and ride around the office on skateboards. They don’t lack leverage, so why is it that equity distribution inside of startups isn’t “as it should be”? This isn’t charity, so why isn’t it reality yet?

    I feel that you’re in an advantageous position to outline anecdotes of anonymous early-stage startups who were too greedy to give up the equity that it would take to make the right hire, and subsequently went down in flames. There’s a concrete lesson we can all learn from.

  20. Totally agree with the stake part. The first couple of employees are just the late founders. They take as much risk as the founders do!

  21. Great article. But, “there are too many founders” is debatable. It could probably be reworded as too many founders are exploring the same area (logically as well as physically). For a world population of 7 billion we need far more than the 60 startups that Y Combinator funds – by 3 to 4 more orders of magnitude. Given the high failure rates we might needs tens of thousands of startups to be formed every year to generate new employment that replaces the obsolete jobs.

    The founders take a bigger leap in deciding on a direction and spend many man-months before they could get to even a YC level funding. Even with all the newer improvements their risk is way more than the initial engineers. So, it might not be always right to give a founder level equity to an initial engineer – unless you get a prized hire who has revolutionized companies b4.

    The fact that most smart people jump on the founder boat themselves, it is quite likely that your hires might not be as smart or as risk-taking (otherwise, they would have startedup themselves given the low costs).

    I definitely think there are a great shortage of startup quality engineers and designers. Even Google and Facebook are finding hard time acquiring talent. In India, Facebook and Google offered some fresher bachelor level engineers at $150K salaries. World as a whole educates far less quality developers than the demand.

  22. Well no they don’t.
    Employees, especially in the current IT climate, can always walk away.

    I have employed more than 60 people in my life so far and my experience is that there is a huge drop off in terms of risk and sweat between real founders and first employees, and even between founders and co-founders.

  23. I disagree.

    If you’re 6 months into a project and you’re company’s value will double or triple by adding a talented developer you’re doing something wrong.

    I’m a developer, and dare I say a talented one, so this “developer as a diva” talk is something my ego wants to hear, but I’m also an entrepreneur and I know that having talented developers is important, but it’s just one piece of the puzzle.

    Your company will fail or succeed based on the value it provides to the marketplace and its capitalization. The most common reason for failure of the new companies is that they run out of the money, the second most common reason is that they don’t provided the value to the marketplace.

    There is a big difference between an employee and a founder. The founder is in “get rich or die trying” position, he risks everything, while for the employee this is just a job. If you’re a talented developer and you’re tired of making other people rich – do your own thing! If you’re hired as an employee, do your job to the best of your abilities and stop whining about not having the same equity as the guys who started the company because you’re not one of them. If you want big rewards take big risks and start your own company, otherwise STFU.

  24. In my experience, there are too many “Founder” wannabees. As an experienced senior engineer, I’ve been approached many times with “Founders” who have a “Game Changing Business Idea” … so much so the entire business is totally ready to go except for a tiny little bit … someone to actually write the software. You know, that tiny insignificant bit that any moron could do. (so why ask me?) That and someone to tell them point-blank that their “Fantastic Business” is insane and wont make any money, Its going to take several man-years to develop and no I don’t want to work for a year or two on stock options alone. Maybe its a self-fulfilling prophecy but just maybe the engineers know more then the founders and don’t want to work for nothing on a loosing cause.

  25. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap. This could be true in Silicon Valley but not here in Singapore. Nothing is free infact. You have to fight tooth and nail for everything. And coupled with the fact that companies here are far more conservative than their US counterparts, trying to get a business some traction itself is a painful but learning experience.

    Somebody wrote earlier that the problem could be too many founders working on the same problem.

  26. Totally agree. We fund at the beginning of the startup cycle and have an accelerator and I routinely tell people – don’t start a company just because you can. For all the reasons you mentioned, anyone can start a “company”. It does not mean they have the vision, intensity, leadership, hunger etc to be the founder and leader of a VC-backed company. Accelerators with automatic notes are not helping. But now having that follow on note is expected of the best accelerators.

    I’m all for giving more equity to team members. All good…

  27. Having made the equity mistake myself in the past, I would caution against it. Founders have a totally different mindset than those they bring on afterward. I talk about this in my latest blog post here: http://www.presidentspilotsentrepreneurs.com/2011/12/how-to-choose-ideal-business-partner.html.

    The bottom line is if you offer someone equity because they bring a UNIQUE skill to your team and fills a much needed gap, they still need to have skin in the game in the form of a cash investment. Then you know they are really committed. Otherwise, you may give someone equity who still has an employee mindset. The minute things gets tough, as they most certainly will at some point, they will go looking for a job. Now you have a guy who has equity in your company who isn’t even a full time contributor. Been there, done that. Be very stingy with equity folks.

  28. Spoken like someone who still doesn’t get it. You speak of hiring engineers first but you (and everyone else) seem to forget that you can have the very best engineers in the world build a highly complex and fantastic product that NOBODY will know how to use and you essentially end up with a polished and over engineered TURD. The VERY FIRST hire any product team should be making is a User Experience Designer that can take into consideration how a product should function from a USER perspective…you know, the people who will actually be BUYING and USING your products? If they can’t use it, it won’t matter how well it’s engineered, it won’t succeed. Design and usability should be at the forefront of your product design lifecycle and then you engineer the backend to fit that experience. That’s not saying engineers can’t be working in parallel to solve the architecture and infrastructure design, but UX should be out ahead defining the experience and use cases to design and engineer around. Trying to engineer a product and then cram a user experience into it is a direct recipe for failure.

  29. This is spot on. This is also why boom times are often bad times to start a company. I saw this back in 2007, when I was trying to hire people. I couldn’t get any of my friends to join me as an employee because they were all busy starting their own companies. Anyone you’d want as an employee was good enough to start their own company.

  30. It’s not just the equity gap, it’s the overabundance of would-be founders who bring nothing to the table except “vision” and money. All too often, their “vision” is a half-baked version of an idea that has already been executed several times and failed to gain traction. With the prevalence of funding in the startup community and the minimal infrastructure cost, a founder who lacks a design or development skill set needs to be a brilliant strategist or marketer. It’s rare to find a founder with a truly innovative idea and the dynamism to be able to attract the right people to guide it through to fruition.

    To the founders posting in the comments about “skin in the game,” consider opportunity cost. A developer who signs on to your startup is working for a company with an uncertain future, with one motivating factor being the potential value of an equity stake. This individual believes that your vision will succeed, and is actively working to further that goal rather than accepting a certain (likely higher) paycheck at a more well-established competitor (developers are in demand, remember?). If the startup collapses or fails, this developer has invested considerable time and isn’t even left with a deliverable product to point to on his or her resume.

  31. Thank you for listing the tasks an entrepreneur does and making it sound so important.

    Yet there is a glut of founders and a lack of developers.

    Engineers that work night and day and christmas and new years when a project depends on them… and don’t worry about making payroll, have skin in the game and deserve founder status. Don’t give it to them and you suddenly have no product. Good luck with payroll then.

    Giving them 0.2% cut is an insult when “entrepreneurs” can’t achieve shit without a great engineer behind them.

    The market has spoken and @naval is simply explaining why.

    ~ Supply. Demand. Life isn’t fair. The end.

  32. Why do (funded) startups insist on hiring instead of utilizing global talent? It takes time and effort to find outstanding remote contractors, but so is hiring. The Not Invented Here Syndrome?

  33. For a couple of reasons:

    First it’s much easier to iterate and grow as a start-up when everyone is in close proximity, Communication is instant and includes the social element, something that is missing with chat. Also having a beer after work is an important part for start-ups which is where a lot of great ideas come up and where everyone gets the necessary team spirit to work at hundred percent.

    In addition to that start-ups are a stressful environment, and people easily panic. The further away people are the more they rely on outside influence. As the old saying goes, you either sit at the table or are part of the menu, and people tend to feel that way.

    Finally, selling a team is always a fallback option. This however is much easier if you have a packaged team in one place that can be easily integrated into a larger organization.

    That said there are amazing opportunities out there to hire especially developers who work remotely, possible on the other side of the planet. Smart companies do that, despite the drawbacks listed above.

  34. It might just be the circles I travel in (lots of ideas but no contacts with actual money) but I have to agree with David. Even here on the mid-Atlantic coast, I’m probably approached three or four times a year with an “game changing opportunity”; I can’t imagine what it’s like for a moderately talented engineer in Seattle or Silicon Valley.

    I did that once and it was quite a learning experience. I traded sweat equity for a shot and ended up better than most. I didn’t recover the lost salary I would have made in a safe job but I made enough to pay off the credit card debts I accrued while I was working without salary for the “Founder”.

  35. Bravo. In fact I’d simplify the equation. If you can’t create the product (i.e. you are not an engineer, designer or creative force of some kind) then your one and only responsibility is money. You bring in money via investment or, preferably, customers or you have no business calling yourself a founder. Don’t give me the “idea man” BS. Money talks… ideas walk.

  36. As an entrepreneur who paid cash vs. equity for product development from a top-dog developer, I can attest that when money runs out, you’ll be in a pickle. You either then have to offer equity to continue forward (ie. your business will evolve continuously so to assume you hire it, they build it, your done is a falsehood IMHO), learn how to code yourself to get MVP of phase 2 out there in marketplace to generate revenue, or put biz on hold until you can cough up more money to pay for services.

    I’m at a crossroads now. I really don’t want to offer an equity stake to developer for phase 2 which amounts to about 1/10th of work already completed (he’s already rec’d lots of cash for core SaaS product dev’t), yet I don’t want to bring in someone else.

    Not sure which direction to go…leaning towards offering a limited %, but not overly thrilled about it.

  37. But don’t forget that when people bring “unique” skills, they create intellectual property that the company owns. In that respect, they have skin in the game, because they could have sold the IP elsewhere.

  38. laiculuiw on August 30, 2011 i like my personality, because i am a really happy person and i love to smile and make other people smile with me , kisses from Perú love youu

  39. We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equity so that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer’s book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator.

  40. I cant agree with you more when you said .. “they still need to have skin in the game in the form of a cash investment”. This is so true. If you are gaining the status of a founder in a startup, better put your money where your mouth is, no matter whatever unique skill you bring. Otherwise work like an employee.

  41. Value ≠ ideas or vision. Value = execution.

    I don’t think there are too many founders, (except maybe in SV). There’s a dearth of understanding of what it takes to execute a solid stayup business. There’s too much focus on what’s the going rate or the standard practice. Am I overpaying or underpaying? Will my future mentors or VCs think I’m dumb? Who cares?

    The first core people in a startup is all about negotiation based on the circumstances, the market, the challenge and being fair. Treat people right. Be generous and expect a lot.

    When everyone’s worried about getting theirs, nobody’s in the right state of mind to make a company generating the abundance of 1000’s of percent return. Too many times quibbling over equity fosters a company that stops caring about building value, whose equity ends up being worth nothing and everyone was just fighting and getting worked up over vapor.

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