The Rise of the Angel Employee Class
Who they are and why they matter to Founders
I recently finished Paul Graham’s book “The Launch Pad” where he states several times the best time to start a company is when you’re in your early to mid ’20s. Essentially, when the only responsibility you have is to yourself. I thought, “Boy, that sounds about right and that’s what I did.” Then I stumbled upon a Business Insider article by Sahil Lavingia where he talked about Angel Employees and how it’s a terrible path to wealth considering how the equity packages are structured. Based on my experiences, I wanted to provide some color and suggest that there is an ever-growing pool of Angel Employees who should indeed be celebrated and rewarded.
Paul was certainly right based on my history. I started my first company at 19 yrs old, my second at 23 yrs old, and co-founded my 3rd at 25 yrs old. While my second had a successful exit, the third imploded four weeks before my wedding day. Shortly thereafter, we got pregnant and my priorities immediately shifted. While I certainly had the itch of the startup life, taking the risk with a young family at home just wasn’t practical anymore especially living in Silicon Valley.
So, I started looking for early-stage startups where I could cover the basics of living standards but still feel the thrill of startup life and perhaps get some upside on equity while making cash along the way. Additionally, with two successful startups under my belt and earning my “Silicon Valley MBA” with the crash and burn of my third, I certainly felt there was some additional value to bring to the table.
My first endeavor was WePay which is a payment startup that competed with Paypal. I joined as an Account Executive on the Sales team right before the Series B funding round and the value at the time was around $60M. I stuck around for a little over a year and certainly agree with Lavingia that the equity offered was not compelling enough to keep me around…which was a shame considering my position we should move to a SaaS-based payment platform which was the direction WePay ultimately took and recently got acquired by Chase for $400M. I did make some good cash while there and the equity payout as a result of the Chase purchase was certainly a nice Christmas bonus.
I moved to another payment startup post Series B funding called Braintree Payments which got acquired by Paypal just 6 months into the Enterprise Account Executive role. While I missed the equity payout and my options got moved to RSUs (hey, that’s the way the cookie crumbles) it was validating to know there is a world where my previous founder experience can help me pick the winners — or maybe it was just dumb luck. After working for Paypal for about a year, I had enough of that big company stuff.
I then joined Segment as employee 17 as the first dedicated salesperson the company ever had. Here is where I disagree with Lavingia that not all Angel Employees can/will get the short end of the stick and where a startup might have done it right — at least with me anyway. I joined shortly after the Series A round with a $70M valuation. I’ve been there for five years at the time of writing this and the company now has a valuation of $1.5B. At the time of the Series C with a $600M valuation, I personally contributed to 42% of the Business Tier ARR (annual recurring revenue) that year, 26% of the overall Business Tier ARR company-wide and if we factor in self-service to the total ARR, the number settles at 19% total company ARR. Simple math would suggest I helped drive $114M toward the overall valuation. Am I getting even 1% of that slice, not exactly but based on my Angel Employee position I do feel I’m getting a pretty fair share and feel good with what I contributed. Should I exit based on the current $1.5B valuation, I wouldn’t be able to retire but would certainly have a nice cushion. Should the company exit at say $6.5B (similar to Mulesoft), I could “self-retire” as I call it and likely be set for life. So, am I getting the short end of the stick? Only if the company falls off a cliff…otherwise, doesn’t feel that way to me as an Angel Employee.
So why should the Angel Employee be celebrated and rewarded? Risk vs reward yes, but more importantly impact. Someone once said the first 25 employees make up the culture of the company and while that’s true — I’d argue the first 25 have the biggest impact. When founders can recruit and retain talented individuals that have entrepreneurial experience, understand what it takes to get a startup off the ground, scale the startup, and drive revenue in the right direction it can have a significant positive effect on the overall success of the company and the commensurate valuation associated with a startup’s success. These are the folks that give their blood, sweat, and tears. They bleed your company’s colors, take ownership as if they were a founder, and make sacrifices for the good of the company. So why not reward them with an equity package that makes them feel like an owner? It worked for me and is a major contributing factor to my dedication to the company.
While cap tables can influence founder's ability to reward early employees — it would behoove them to not take equity for granted as part of the compensation plan and invest in the team members that can help drive the business forward in all regards. Feeling like an owner is more powerful than any other motivator for the Angel Employee class and shouldn’t be reserved just for a future Exec-Level hire who will wait to join the company until the risk is reduced and there is a parachute package. In fact, I’d argue Angel Employees should be treated the same as those future C-Level hires, if not better, because if the company doesn’t get off the ground…well, there will be no opportunity to dole out those reserved stock options as the company simply won’t exist.