The more interesting point, I think, is not the entrepreneur side of the equation, but the YC side. The author claims that YC is exploiting entrepreneurs. This claim is more interesting (in the social-studies sense) as it seeks to uncover a particular kind of exploitation that's a feature of our current age. First, it's important to point out that this question is completely orthogonal to whether the allegedly exploited person is better off or not. A capitalist could start an iPhone factory on an island full of starving people and pay each a loaf of bread a day; while the people are certainly better off, they're still being exploited.

YC specifically is most certainly not exploiting anyone, as on average it gives companies much more value than it takes. But the question remains on whether the Silicon Valley ecosystem in general is exploitative, and I think the answer to that is yes, although this kind of exploitation is rather mild – I would call it "taking advantage" more than "exploiting". I think those taking advantage are not VCs, but large tech companies. Rather than paying regular salaries to large research departments, the SV ecosystem encourages a lottery-style payoff. Lots of people work trying to invent a novel product, or find an unexplored market niche, and instead of paying them all for their efforts, there's a large prize offered to those who succeed. I think that large tech companies are taking much more value out of this arrangement than they're putting in, so there's probably some exploitation there (in fact, any lottery-style economic construct, be it based on "merit" or sheer luck, suggests some sort of exploitation taking place).

The theoretical economic model for this case is the dictator game[1]. In the dictator game, one player receives an amount of money, and he has to offer the second player a portion of it. If the second player rejects the offer, neither gets any money. Often, the only distribution accepted will be 50% or close to it, but when a rich person plays a very poor person, the rich person knows that the poor player will take any offer rather than go home empty-handed. That's exploitation.

Now, a misguided free-market advocate, not familiar with both theory and practice might say that the islanders do have bargaining power, as they can invite another employer to their island in exchange for a loaf of bread plus a burger per day. But, of course, this can't happen, as the second capitalist knows the first will retaliate on their own islands. This is a digression, but in fact, in a saturated market, the best strategy for competitors of roughly equal size (even quite far from equal) is almost never to compete, certainly not on price. Lowering prices is not an option as your competitor has the resources to do the same, which will result in the same market distribution, only with all competitors worse off. Again, this is supported both by theory and practice.

FYI, a lot of the regulation in the US government came as a result of the US economy under the rule of the robber barons a little over one hundred years ago. Similar to the island story, some employers would pay their employees not in US dollars, but in their own currency, which the workers could only use in stores owned by the employer ("the company store").

Of course, the situation in Silicon Valley is not that of full blown exploitation, since startup founders are not without options. Still, large tech companies benefit from the lottery model, as they profit more from it than from large research departments; the founders, on the other hand, get an unfair share of the cake. In this case, the large companies are not exploiting the entrepreneurs lack of options, but are simply taking advantage of their psychological preference for the lottery. There is more to that, as all parties know that if the lottery were to go away (say VC money stops), and everyone would have to work for the large companies, salaries would drop (that's a sort of a sword those companies hold over the workers should anyone decide to rebel). We don't even need to speculate, as we know that large SV employers already colluded to lower salaries.

Take the dictator's game. The flaw with your model is that it's not iterated. A more realistic dictator's game would be iterated (repeated). In which case over time a poor party can force the rich party to give it a higher share.

You think of exploitation as just something like slavery.

But slavery is too an example of taking advantage of another's lack of options.

In slavery it is: "You either do this or I kill you".

Which is not that different from "You either do this, or you and your family die of hunger / end up homeless".

You either have options -- so you get to pick and you're not exploited.

Or you don't have options, in which case, you either get a fair price for your work (compared to what value your employer gets out of it), or you are exploited.

Sharecropping, the post-slavery solution to keep poor blacks and whites in their place, was also exploitation, based on their lack of options.

I mean, your 2) point is critical: I am in Brazil, I am in a startup because I had no choice, and although I am getting paid with someone else money, if the startup crashes, I will go down with it, and go down I mean, get in worse situation than I already am... currently I am struggling to pay my rent and food, if my startup fails, I won't be able to pay rent and food, at all, considering my parents are having money issues too, this mean most likely I would experience real starvation, something that I am not much keen on experiencing.

The reason SV is relevant is because the article is specifically talking about YC.

Would emigration be an option? Since you are on HN, I assume you can program. There are lots of companies in lots of places world wide looking for talent, and paying for it.

Seemly people don't want remote that is not already in the US, and H1B is very hard to get or something.

Also I don't figured how to get in other countries.

Hmm. Is "generally" right here? Are founders really getting hired at a enough of a premium to earn the ~$100-200k they lost over 1-2 years while failing?

I think "person who is a top 10% but not top 5 Stanford undergrad CS senior" who then goes to found a YC-backed startup which ultimately fails after 2y is ultimately better off than the person who takes the "good dev job" at Google or Facebook. When the founder is looking for a job 2 years later, if it's via acquihire, it is probably a wash on cash (due to taxes...potentially quite ahead); has almost certainly had more public visibility and thus potentially is in a "bidding" situation for his talent, etc. I doubt the 90th percentile Stanford CS grad gets more than $150k cash, $250k total compensation, in year 1, and probably not more than 200k/300k in year 2, at a tech company.

A person at the 90th percentile, all things being equal, probably isn't good enough to get one of the $250-500k hedge fund programming jobs.

Taking the good dev job/employee #1 at the hot startup which happens to do well is better than being founder of the failed startup.

Obviously, the person who starts Facebook is ahead of everyone.

Partially it's that equity compensation (in an acquihire/earn out) is tax privileged, part is that it's essentially forced savings. From $100k to $200k, you lose a lot of your income to basically bullshit -- US/CA taxes and somewhat higher living standard, higher student loan repayment, etc. -- where if you can essentially bet that "pre-tax" on a startup, you probably come out ahead.

I'm not sure how this applies to someone in the bottom 90% of Stanford, or in the bottom 99% of the world. Probably the best bet is to somehow get into a top startup in a role where performance isn't so critical to the ultimate success of the company, usually after Series B, or at a big company.

Someone who is the top CS grad for the year, or who is later in career with exceptional talent, or who has a burning drive for a specific area (e.g. Steve Mann in wearables), has an entirely different analysis, too. At that point what actually matters is role.

I personally am happy doing a startup to accomplish my specific change-the-world goals and would be equally happy doing so at a large company; it's just that it would be much more difficult in ways I don't enjoy at most large companies (budget and multiple hats at a startup; stupid politics at a big company). (If I had more of an aero/engineering background, I'd probably prioritize space, and try to work for SpaceX; as it is, the only things I'd be qualified for there are IT, and their IT is windows shit, and not core to the success of the enterprise.)

Or just buy a lottery ticket. I'd argue the odds are much similar, with much less effort.

> (If I had more of an aero/engineering background, I'd probably prioritize space, and try to work for SpaceX; as it is, the only things I'd be qualified for there are IT, and their IT is windows shit, and not core to the success of the enterprise.)

SpaceX has several IT positions in roles where you're not going to touch a windows box. I know, because I check constantly. Their HR team is apparently not so hot at getting back to the Jobvite apps though, or the bits are dropping somewhere.

No one pays you a salary to buy lottery tickets.

Wage income or RSUs from Google, Apple, etc. are pretty low risk. Wage income and options from a post-B successful company are pretty low risk, too (e.g. if you're an IT guy at Dropbox, you probably make $80-120k in salary, and the bar to be hired as an internal IT support person is a whole lot lower than lead developer at a 1-10 person startup. You'll get some equity upside which is pretty much guaranteed to be worth something -- if Dropbox IPOs at $10b, it's worth $x, and if it goes up to $30-40b (which is speculative), it's worth more -- but it seems unlikely Dropbox would be worth <$5b, and very unlikely less than $1b, and your salary checks from the previous 4 years would not be taken back even if Dropbox somehow goes out of business.

Good luck picking that 7% that won't, AND that's only Y Combinator startups.

Lottery tickets it is.

rdl is suggesting you pick top startups that are post Series B and which already have multi-hundred-million to billion dollar valuations (think: Stripe, Pinterest, Airbnb). He is not suggesting you join a 5 person YC startup that is still trying to get product market fit. Hugely different categories. rdl is essentially suggesting you work for the roughly one YC company out of every batch that becomes a great success - and that you make that leap when the startup had already proved itself.

From reading your other posts it seems like you are willfully misunderstanding his point.

Also, I didn't know who I was conversing with. Checked out your profile, and am humbled.

Oh my!

A great read if you're interested in learning more about the history and operating procedures of the sales & trading side of investment banking is Traders, Guns and Money by Satyajit Das. Its sections on credit default swaps and collateralized debt obligations are particularly interesting when you consider that they were written in 2006, pre-crisis (around the same time that Leveraged Sell Out was getting started, in fact).

1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome.

The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward calculation. There is no implication that you wouldn't work as hard simply because it isn't your money.

Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else?

The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).

Re-read the comment.

An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different.

There's no moral hazard here, unless you believe receiving a salary is a moral hazard.

The entire reason VCs give you the money is to take more risk. That's, literally, the point.

So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.

This may be true for technical founders/employees[1]. I doubt it is the case for a non-technical founder who would otherwise work in the finance sector - which appears to be the case this story is about.

[1] I'm not convinced, but I'll concede it since there is another thread where that discussion is ongoing.

i always feel disgusted by this sort of attitude. sure it mitigates risk, but as secular and reasoned as i like to think i am its just morally reprehensible as an attitude to take...

i treat other people's money with /more/ respect than my own. maybe thats just me being backwards.

always taken the attitude that if you need someone else's money to start then you aren't really ready to enter that business. maybe you should start a small business and build funds first... instead of taking a risk with other people's money when the sum total of your experience is approaching zero.

sure its their own fault for investing the money... but that doesn't make it easier for me to swallow.

i do not consider this irrationality to be a bad thing

This is why you take investment from professional investors on open and honest terms, not from people like "friends and family" who feel pressured to do so and may not be in a good position to accept the risk.

Wall Street is all playing middleman with other peoples' money too.