In SiliconValleyStartupLand there are memes that some repeat as if they were absolute truths. One of them is “the first employee of a startup gets screwed.” Sure, and the black guy always dies first in movies. While we are at it, you cannot get pregnant the first time you have sex (yes, some people believe this).
The truth is that being the first employee of a startup could be shitty, or it could also be a great investment of your time and effort. When I say “great investment” I’m not talking about outlier outcomes such as that of Craig Silverstein, Google’s first employee. That’s just winning the lottery several times. For the sake of the argument I’ll stick with the more common case; a startup raises a seed round or even a series A. They hire a few good people, operate for a few years, and exit for a number between 0 (failure) and maybe 100M.
In the worst case scenario, no employees (including the founders) receive a payout at the end of the journey. In the 100M case, the founders are set for life. Employee #1 (let’s call him Joe) makes a nice chunk of change but not enough to “solve the money problem.” If during all that time Joe had been working as hard as the founders while making a shitty salary, he will feel like he got a raw deal. This raises an obvious question: why did Joe take a shitty salary, a comparatively small equity stake, and then proceed to work as hard as a founder? Answer: Joe did not know what he was doing. He sold himself short.
So, without counting on riding a Google (or even an AirBnB or a Heroku), when/how/why is it good to be employee #1? Let’s describe one very specific case:
Bob is relatively young. He just finished college, and he’s working as an engineer for some boring corporation far from the coasts. He’s smart and ambitious, and he’d like to start a company. Maybe he even has an idea, a prototype, a potential cofounder named Pedro. What he doesn’t have is a few months worth of Bay Area living expenses in the bank.
Bob would like to move to the Bay Area with Pedro, make connections, raise money. They’d be burning their savings quickly while learning the Silicon Valley game. It may work, but it would be much harder than for someone who’s already been here for a while. Of course there are ways to solve that problem. Being accepted by an incubator such as YCombinator is one of them. However, most people won’t be that lucky.
In this particular case, being employee #1 of a startup could be the way to go. Bob (and maybe Pedro) could move to Silicon Valley for free, and make a reasonable salary. By reasonable I mean: you can rent an apartment in a decent location, live well, and have disposable income. Any startup with funding should be able to pay you a competitive Bay Area salary. If a startup cannot do that for you, then they need to make you a cofounder.
Bob will also get some equity, which could be 5% of what a founder has if he’s lucky. He should negotiate the best deal he can get, but not place any expectations in the potential value of his stock. He may leave before his first cliff, get diluted in subsequent rounds of funding, and of course the startup could crash and burn after a winter or two. The important thing is what Bob should try to accomplish while at the startup, namely:
1) Learning what being a founder means. He will have a chance to see the struggles of the founders up close, perhaps a window into their decisions and thought processes. He can take notes, imagine what he’d do differently, see how things turn out.
2) Making connections. Bob is in Silicon Valley, so he can attend all sorts of events. He can go talk to customers. He may work with potential partners for the startup. If the startup is doing well, he has all the time in the world to meet people who could become potential cofounders. If it’s not, then he’s getting a better deal than the founders from a financial perspective.
Bob is getting paid to get a crash course in startup life. He’s not committed to the company like a founder, so he has the option to abandon ship if/when things look dire. Also, he gets a lottery ticket as a nice bonus. Put this way, one or two years as employee #1 could be the best option for Bob.
If you’re not in Bob’s situation, then you may not want to take that gig. Just don’t go around preaching absolute truths about how stupid it would be to be employee #1, or about how black guys always die first.