Startup Hiring: The 10% Solution

LinkedIn employees get a 24-hour gym. Twitter workers get free laundry service. Googlers get Japanese toilets with a cool “rear-cleansing” function. How can your startup compete with that? It’s not easy.

When tech giants such as Facebook give their workers six-figure packages and everything up to and including free leather repair (leather repair?), a salary in the low 80s isn’t going to land you any elite tech talent. But you can still reel in good people – if you’re generous with your equity.

“Pinterest can hire, Square can hire, Dropbox can hire – these companies have a clear demand for their products and are becoming market leaders,” explains Naval Ravikant, founder of startup advice site Venture Hacks. “Every other company must now give up 10% to their first key employees.”

Ouch.

That’s a large piece to break off to someone who wasn’t there back when your company didn’t have two iPhones to rub together. But you don’t have a choice if you want top-flight people. Offer them a big chunk of equity, or they’ll go to a company that’s actually selling its products – and where half of 1% is more likely to one day be worth some real money.

“You must treat early hires like late founders, or you won’t be able to hire until you get market traction,” Ravikant warns. “If a company has no clear evidence of customer demand and the founders own 30%, 40%, 50% apiece, and they want to offer their first employees half a percent, that’s ludicrous, because they don’t have anything yet of any great value. Potential employees, at least the good ones, aren’t interested. They’d rather start their own companies.”

Which is now fairly easy to do. If you have a good idea, money is there for the taking. Need $25,000 for product development? No problem. Join an incubator. Need the next $100,000? Easy. Investors now follow incubators with automatic notes.

“That means everyone and their brother who you would normally hire is now starting a company,” says Ravikant (who himself founded Epinions and Vast.com).

You’d think entrepreneurs would get the message. But many are not. The industry clings to its old rules: VCs get about 30% of equity, founders get 60% and the entire employee pool gets maybe 10%. And a chair massage.

Ravikant also runs AngelList, which pairs entrepreneurs with angel investors. The site just launched a recruiting service for startups, where it asks companies to state how much salary and equity they’re offering to employees – and Ravikant says he still sees a “huge disparity” in the range.

“Some companies are offering $80,000 and 0.1%, and others are offering $80,000 and 10%. The pricing is all over the place. But when push comes to shove, the company offering 10% equity will absolutely get the better hire. Close the equity gap, and hiring will get a lot easier,” Ravikant suggests.

Image courtesy of Shutterstock.