I know a lot of founders who've put in significant cash in their businesses. And besides, sweat equity is also, well, equity.
I'm not saying there aren't early employees that deserve better deals, I'm quite sure there are. But a lot of the perception of unfairness I think stems from a lack of understanding of the differences between being a founder and being an early employee. They are just very different bargains, each with their ups and downs.
For example, let's say three founders own 20% each and there's an external investor that owns 20% and a 20% options pool. The founders payed for their shares with a year's sweat equity. The first employee gets 1% from the options pool. From then on everybody makes the same, and works just as hard. Is that unfair?
I'd say it depends, and the math is not entirely straightforward... Stuff you would have to take into account (and which I rarely see mentioned when people talk about this) include the probability of the company failing before raising money / hiring the first employee, each person's alternative costs and the company's expected future value when the first employee was hired. There are also more subtle issues, like the employee having every right and incentive to leave the minute the company starts going downhill, whereas the founders... Well, it's just very different.
Come to think of it, I've been playing a bit with Bayesian probabilistic programming with PyMC lately, and it might be pretty interesting to put together a model for this. I think it could give a pretty interesting picture of how expected future outcomes vary for the different people, depending on the different parameters. Anybody want to join in the fun? :)
I'm not saying there aren't early employees that deserve better deals, I'm quite sure there are. But a lot of the perception of unfairness I think stems from a lack of understanding of the differences between being a founder and being an early employee. They are just very different bargains, each with their ups and downs.
For example, let's say three founders own 20% each and there's an external investor that owns 20% and a 20% options pool. The founders payed for their shares with a year's sweat equity. The first employee gets 1% from the options pool. From then on everybody makes the same, and works just as hard. Is that unfair?
I'd say it depends, and the math is not entirely straightforward... Stuff you would have to take into account (and which I rarely see mentioned when people talk about this) include the probability of the company failing before raising money / hiring the first employee, each person's alternative costs and the company's expected future value when the first employee was hired. There are also more subtle issues, like the employee having every right and incentive to leave the minute the company starts going downhill, whereas the founders... Well, it's just very different.
I've been both by the way. :P