Equity grants are based on risk, not ability.

Sometimes, very talented technical people are assuming extra risk due to opportunity cost; perhaps some other startup is offering comparable equity but has a longer runway and/or more traction. If those people are good at negotiating, they get better equity grants.

A few factors play in to the gulf between founder and early employee equity:

* Founders have by definition committed to the idea before it had any traction at all. More risk.

* Founders have spent more time at the company than employees. Each day spent at the startup, in addition to accruing compensable effort, carries opportunity cost (not to hop ship to some other company) and thus more risk.

* Founders have often worked, at least for a time, at zero salary. More risk.

* Founders that can get their companies funded, accepted into YC, or bootstrapped to market traction can presumably do that again somewhere else --- again implying they're accepting the opportunity cost of committing to one startup instead of starting another. Most employees, regardless of ability, can't say that.

It's important to remember that founding teams have drastically different compensation packages than employees do; it's almost an apples/oranges comparison. You want to remember this not to empathize with the founders but to keep in mind how different their incentives are from yours.

I would counter that equity grants are ultimately based on negotiating leverage rather than on risk or ability, each of which are important components of the negotiation picture. As a founder of a hypothetical company, I wouldn't offer more than 3% to an employee either if I could succeed without making that sacrifice. I completely understand the value proposition for a founder - pg has outlined it in exhaustive detail over a decade's essay writing. I'm not sure I've seen where he outlines the upside of taking a sub-market salary in exchange for low-single-digit equity.

My best guess is that early-employee startupping is an investment in one's network and skills: The company, like all startups, is likely to fail. Your equity has a low chance of paying off. On the upside, you're getting startup-tier technical experience that would be dramatically harder to come by in a BigCo job. And best of all, you're gaining entry into the professional networking world of startup founders and the extended YC family.

I don't mean to imply that early employees are getting shafted or that they are inherently owed large equity stakes, I'm just working my way to an understanding of exactly what the value proposition is for someone in this position.

It's kind of a banal observation to say that if you can do better than 3% / $70k in NYC, you shouldn't accept a 3% / $70k offer "just because it's a startup". But it's a valid observation, so, there you go.

I must've overstated my case. I've never worked in a technology startup and I'm only trying to suss out the motivations behind the different classes of players. There's plenty of ink spilled about VCs and founders, but not so much about early employees. I assume the people entering into these arrangements are rational players comfortable with their possible outcomes, and I'd like to better understand the deals.

Please don't take my observations upthread as dismissive or authoritative. I certainly don't have the startup experience to make such claims. I have no reason to mistrust pg (or you for that matter) and I'm genuinely hoping for digestible explanations. Perhaps I shouldn't have asked on HN but rather through a private channel.

Early employees accept offers at startups because:

* The working culture is almost always superior to that of better compensated big company jobs

* The career experience at a startup is often more valuable at a startup than a bigco job; at a BigCo, you're unlikely to be able to even use a good language, whereas at a startup you might own a whole product

* Early employees might not want to lock themselves down to a single company for a long time, and if you're aiming to work at lots of different places, the startup career track is more amenable to it than the bigco career track (where "job hopping" is stigmatized)

* The equity upside of a startup is extremely easy to overestimate

* Early employees have a good shot at becoming key employees, and key employees get better comp later on

* If you truly believe in a startup's offering, a 3% stake in it can still be reasonably valued at "life changing". A 2% stake in the second startup I joined was extraordinarily lucrative, well beyond "excellent bonus for every year I worked there"

* Over the long term, early employees might themselves want to found startups, and a good path to doing that is succeeding in an employee role in a smart startup (for the track record, the education, and the networking).

* Finally, most people satisfice. They'll quickly accept a good job rather than expending months of effort trying to find the optimal job.

All good points, the other I'd add is that I really think joining as an early employee is optimizing for happiness. Starting a startup is really hard and more often than not results in broken relationships, tons of debt and several months of severe depression.

As an employee at an early startup, you can still get significant upside exposure (eg make millions or tens of millions in a success scenario) while being able to "just code", have a much more normal work-life balance, and having much less exposure to risk.

If you're decently good at picking good startups to join, it is probably also an easier way to get seven-to-eight digits rich than starting your own company, since a lot of the risk is already removed.

Umm, I will have to disagree that an early employee status is a guarantee to making millions. First of all i havent heard of that many early employees getting anywhere close to 3%, most of the time its between 0.5% and 1.5% for a salary thats several tens of thousands below market. Secondly, if we are talking about companies that will get more funding, that means that your ownership of the company will be diluted further. So in laymans terms, if you get 1% of the company and that gets diluted to 0.66% after Series A/B/C funding, in order for you to reach your $1 million, the company would have to acquired for more than $150 million. And what are the chances of that? Furthermore, dont forget that while youre giving up some tens of thousands of dollars a year(that you might make at market), your equity stake is vested over 4 years, so if you do decide to leave after a year, you would have given up two years worth of potential market salaries for half of the equity that has potentially no value.

So basically, its a gamble and hopefully people do their research before taking a leap into the startup world.

I never said it was a guarantee to make millions, just that I think over a programmer's career it is comparatively likely to make $5-50M working at a startup than starting your own, and you will be net happier on average by working at a startup than starting your own.

Also, many startups these days do pay market rates. Weebly certainly does. The startups that don't pay market are generally sub-10 people and you get an even higher equity grant for that.

Regardless, joining a startup is obviously a gamble and very far from a sure thing, but at the end of the day, so is starting your own startup.

One way to make sense of the risk premium is to think of the grant in absolute dollar terms. When a company is just starting out with no product and no funding, the value of the business is very low (more or less just the founding team's value). In this situation, the company is likely worth a couple hundred thousand to a couple million tops. 33% of that is likely in the hundred thousand dollars range.

Once the company has a product, funding and some traction, the business' value is now likely at least a few million to tens of millions. 1-2% of that is also in the hundred thousand dollars range.

Yes, the founders' stake is now significantly more, but it wasn't when it was granted. They built the company's value and their stock value appreciated.

When you join a startup, you have the ability to do exactly the same thing!