Joel Spolsky's Totally Fair Method to Divide Up The Ownership of Any Startup.
Here's the thing about each layer after the founders owning 10%. In his example, layer 2 (first employees) consists of 5 people, each of whom own 2%. Those employees probably took a pretty significant pay cut to work at this startup.<p>Let's say a programmer who could make $120,000 a year joins the startup at a $70,000 salary. The next year it gets bumped up to $85,000, and then the year after $95,000.<p>After three years that programmer has now forgone $110,000 in income. If the company sells the programmer has to earn at least that much back (and we're ignoring lost opportunities from not having the money). So the company has to sell for $5.5 million dollars.<p>And of course, the programmer may have worked <i>way</i> more hours than she would have at that $120,000 hour job. Let's assume she average 50 hours a week. In any sane world she would earn 25% more for that amount of work. So if we value her time based on her possible $120k salary, the sale needs to deliver $200,000 to her to be worthwhile.<p>Now we're looking at a $10 million dollar sale.<p>Oh, and that's assuming that the company doesn't have investors with preferred shares who will take a 3x return. So maybe the sale really needs to be $15 million just to get that $200,000 back. And of course many sales are not all in cash, so maybe she just gets stock in some other company, and that stock may not even be liquid.<p>All of this assumes that there is an exit as opposed to a bankruptcy.<p>She's gambling on an amazing exit (not necessarily Google, but something like VMWare buying Zimbra for $100 million. That happens, but it's pretty damn rare.<p>All of this is compounded by the fact that for the founders, a smallish ($5-20 million exit) is entirely worthwhile. They walk away with a few million dollars each.<p>Early startup employees get completely and utterly screwed. I'd never consider being one of these employees again unless I was offered a lot more than 2%. I think a fairer number might %10. But really, if you're willing to take that much risk, you might as well just be a founder. That's where the real rewards are.