It’s not often that you get to be a spectator during the early stages of a start-up. Usually by the time a company appears on your radar it’s already past the start-up phase and into growth. I bet that companies like Twitter and Facebook already had millions of users before you first came across them. But Joel Spolsky has given us the chance to watch a start-up at the earliest stages.
StackOverflow has been running for a little while now and has established itself as a part of the programmers online community. If you’ve never heard of the site then definitely check it out. I have used it myself and received some good answers that helped in my work.
From comments made by Joel and co-founder Jeff Atwood it would seem that although the site is a success, something like 6 million unique visitors per month, it does not make a ton of money. In fact comments from Jeff on his blog and podcast would indicate it barely makes enough to pay himself and couple of other programmers a liveable wage. So they have expanded on the idea by releasing a hosted service so you can create your own question and answer site called StackExchange. This is a paid for service so they make some money whether your own site is popular or not.
At this point they have a couple of options. Either bootstrapping using internal resources or rolling the dice by taking outside funding. Joel has taken the bootstrapping route with Fog Creek Software. Founded in 2000 they have grown steadily to 34 employees and now have a range of different products including the well known FogBugz.
For StackOverflow it seems that Joel and Jeff are instead looking to raise venture capital money. Feedback on this has been generally negative with this post by David Heinemeier Hansson being a particularly scathing response.
Once Joel and Jeff sign on the dotted line for funding they are committed to either becoming large and profitable or instead dying. A VC has absolutely no interest in an investment that pikes along making a small profit. In fact they have a name for these investments, the walking dead. If you managed to become a 10 person company with profit of $300k per year the VC would consider that a failure and insist you take big risks to become much much bigger. They would insist on rolling the dice again.
For Joel this is a great approach. He already has a company slowly making him rich and so it makes no sense to bootstrap another in a way that makes no impact on his personal wealth. He might as well roll the dice and see if he can knock it out of the park. Jeff is the patsy in this scenario. For Jeff this is a terrible idea. There is a 90% chance the attempt to go big will fail and then he ends up losing everything he has built up so far. He is back to square one and looking for a permanent job again. Maybe he could apply to Fog Creek Software?
Joel knows this is a big risk and that is why he wants to risk others money and not his own. Fog Creek Software has 34 employees and if you estimate it makes a profit of $30k per employee  then they are making $1m profit per year. Split that between two founders and staff bonuses and you still get, lets say, $250k per year for Joel. There is no doubt that Joel could spend $500k of his personal money if he really believed it was a winner. If he really believed in the success of his ideas then he would spend that to retain ownership of the equity.
 The $30k profit per employee is probably a big underestimate if you look at proxies like the $500k they spent outfitting the new offices they have.