8 ms·

Is It Possible to Achieve Equitable Equity for Startup Employees? [audio]

57 points by joeyespo 11y ago

jeremysmyth 11y ago
As far as I'm concerned, Joel Spolsky wrote the canonical answer to this sort of question at a Stack Exchange site that has since closed, but the answer is reproduced here: http://money.stackexchange.com/questions/26337/what-to-ask-for-on-a-business-partnership http://money.stackexchange.com/questions/26337/what-to-ask-f... In short, here are the two key points: > The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer > What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the answer is simple: the investment just dilutes everyone. He gets into more detail on specifics, e.g. vesting, early employees who don't take salary, and investors taking a large stake. (The podcast gets more into the sort of problem that plagues unicorns, but let's be honest: This sort of problem won't affect more than a handful of people reading this, if even, and a situation that rare won't be covered by a podcast or stackexchange answer even by someone as special as Spolsky or Horowitz)
- kzhahou 11y ago
  Under this "canonical" answer, ONE of those layers owns as much as the rest of the company combined. By some curious phenomenon, this outsized layer belongs to... the person who invented the scheme. What a twist! Founders should own as much as every single other contributor and investor, combined?? They should keep several orders of magnitude more than all the other professionals that give years of their life, and make important decisions and breakthroughs? Only greed and self-importance justifies this outlook. The company's first non-founder employee takes a HUGE risk. He joins when no one else has taken that leap of faith. He joins maybe a few weeks after the founders started up. He takes a huge financial hit, foregoing that fat salary and bonus of the established company. And without those first employees, there will not be enough product or progress to show, to recruit the next batch. Derek Sivers explains this best in his First Follower talk [0]. That employee's reward? A percent (if he's a good negotiator). Compared to the founders' 50%. How equitable! [0] https://sivers.org/ff https://sivers.org/ff
  - kanwisher 11y ago
    Agreed, I don't know why anyone would come in as employee number 1 at a startup. You take a large portion of the risk with almost no upside. At least if your engineer number 20 your getting full salary and benefits and you have no delusions about your stock option value. I think Joel's post is not correct. Most people have to just discount all options to zero value
    - sbov 11y ago
      Before coming to this site I never realized how shafted employee number 1 gets at most startups. I've worked with the same CTO as employee #1 at various startups for the last ~10 years. I generally get around 5%. The idea that people would take 1% or less sounds crazy to me. It's just not worth the hours and stress it involves that early on. In return I earn about 33-50% less salary than what I probably could elsewhere. So far it's paid off for me. But if I got less than 1% instead I would be worse off for it.
    - mbesto 11y ago
      Simple. Look at early Google and PayPal employees (Marissa Mayer, Dave McClure, Keith Rabois, Reid Hoffman, etc). They are kings in the valley right now. It's an irrational aspiration, but if you happen to lock in early at "the next big thing", the opportunity doors swing wide open.
      - kzhahou 11y ago
        Sergey and Larry had 30 BILLION dollars in stock on the day of IPO. Google made a lot of multi-millionaires, but the wild discrepancy between founder and non-founder equity was present there as well.
  - wdewind 11y ago
    Yes but that doesn't take into account that startups are far more likely to hire someone in a growth/reach position. Yes the employee takes a risk, but in many cases the company is taking a risk hiring them as well. Joining a startup early isn't the best choice for everyone, but for someone looking for a new role, or significant responsibility growth, it can be a great opportunity to prove yourself that you otherwise wouldn't be offered at a bigger company. Examples of this can range from someone coming out of a bootcamp into their first engineering position, or a senior engineer from a bigger company joining as CTO of a startup.
hapless 11y ago
It's not about what's equitable, or fair, or "reasonable." It's about what the market will bear. Individuals with a realistic worldview, a little background information, and the ability to do simple math will conclude that startup equity offers are typically worthless. The fractions of the company are too small, the protections given to founders and investors too large. Startups are not getting the best talent with these compensation packages. And the people doing the hiring don't care. They clearly do not want any better than what they're getting. If there were unsatisfied demand for better staff, we would see more compelling offers. Hiring irrational optimists, the math-impaired, and folks who fail to do basic research on the field seems to be working out OK.
- ditonal 11y ago
  I still meet a ton of engineers, who while being surprisingly analytical in other aspects of their life, think their worthless equity packages are worth something. Some people don't even know what percentage their shares represent. They definitely don't give enough thought to dilution, liquidation preference, lack of voting rights. I'll say it over and over again - if you're asked to take a total compensation cut i.e. turn down public stock or salary from an established company to take options at a startup you are an investor. In fact a bigger portion of your net worth and income is invested then the typical VC's portfolio. And yet you don't get voting rights, you get screwed by liquidation preference etc, and the standard response is "well, you're not an investor, so you don't get preferred shares." Engineers are often hilariously bad at finance and even worse at negotiation.
  - rjbwork 11y ago
    I asked about the value of my shares. They're subject to dilution, and the company won't tell me what % of the company they represent, nor the board-evaluated value of the company. Thus I have to consider them entirely worthless until proven otherwise.
    - potatolicious 11y ago
      I think sama had something good to say about this: https://twitter.com/sama/status/628713105824964608 https://twitter.com/sama/status/628713105824964608 I would walk away from that situation. Any startup that's unwilling to do everything Sam outlined above is IMO not worth my time. Hell, refusing to answer something as simple as "what percentage are these shares worth"?! I'd run, not walk, away from that one. If you want to encourage workers by making them investors in the company, then treat them like it.
brandonb 11y ago
This is a really good podcast--I love the idea of progressive equity, and Ben and Andrew do such a thorough job of talking through the implications on employee motivation, secondary sales, pro-rata vs flat, ... Has anybody aside from Detour implemented progressive equity so far?
MCRed 11y ago
I just heard about this the other day: http://slicingpie.com http://slicingpie.com Not sure if it works or not. I think the current trend of 4 year vesting with a 1 year cliff (and 0.1%-0.5% for very early engineers in startups less than 7 people, as it seems on angel.co job postings) is totally messed up. It seems every startup wants to you take a $40k salary cut at least and isn't giving you equity anywhere close to that value (even optimistically, though it really should be at net present valuation. EG: If your last funding round was an incubator which put in $20k for %5, then your valuation is $400k, and each year that engineer gives up $40k in salary, he should get %10 of the company... until you do another round, at which the $40k will buy less of the company. But nobody is doing that...) Don't even get me started on the one year cliff. Can you imagine any other investor in a startup taking a one year cliff? "Ok, we'll take your venture capital, but you're going to vest and it's got a cliff. If you act like jackasses in the first year we're going to cut you off and you get nothing" Here's the magical thinking: Somehow investor dollars are more "real" than employee sweat, or lost salary the employee gave up to come work there. Hell, if they pay you %60 of a market salary and then give you %40 as deferred salary, you should still get probably %4 of your salaries value in equity to compensate for the risk that the deferred salary will never be paid. And why don't startups use deferred salary? Just each funding round, pay off some of the deferred salary. Make the interest on deferred salary something like %5. You're gonna grow a lot faster than %5 right? Oh, that's right... Companies don't use deferred salary because Investors don't want the company to have liabilities-- investors want the first place in line when the company gets liquidated. More magical thinking-- their dollars contributed by pension funds and tied to "you must pursue the higher risk strategy, we don't care if it destroys the company" pressure is more "real" than the salary employees give up to do the actual work. I'm far from a unionist, but I blame founders for putting up with this kind of employee hostile thinking. Look to bright lights like Basecamp and Github-- you don't have to sell your soul to start a company. Bootstrap and it will let you treat your employees well. And then if you do want to take VC money, like Github did, you can do it on your own terms, not theirs. Too many founders seem to come out of an incubator (which is coaching them for demo day- seemingly the whole point of many incubators) thinking that their purpose is to get VC money. IT's not. It is to build a business. VC money is a loan that is an ongoing drag on the business (even more expensive when you consider the advice of VCs.)
mrmcd 11y ago
I made a googledocs spreadsheet that modeled various equity payouts after doing a bunch of research to evaluate a job offer from a fresh Series A startup: https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4DM1cERYSgBIHM6Sp_Mye1Gc/edit?usp=sharing https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4... You put in your shares as a percentage, the cost to exercise, and the opportunity costs of taking the job for 4 years (or whatever the vesting period is.) It spits out a grid of the various payouts for various exit prices and funding round dilutions. Feel free to clone and play with the numbers or hack on it for your own needs. Ultimately I ended up passing on the offer because they were pretty stingy on the equity, and wouldn't budge. The amount they offered would've had to be an exit well above 100M to be a "good deal" versus what I was giving up, even without considering the risk of it failing completely.
- deleted 11y ago
  [deleted]
delinka 11y ago
I get paid a good salary. I also have options. Options to buy some fraction of the company. Those options could be a bonus if a Desirable Event occurs. Otherwise, I'm still being paid very well to do what I do on a daily basis. If you've been offered a decreased salary and shares to compensate (or [$DEITY forbid] options) for the lack of salary, then negotiate or politely decline.
rajacombinator 11y ago
Cliffs on Ben Horowitz's take on it?

57 points by joeyespo 11y ago

As far as I'm concerned, Joel Spolsky wrote the canonical answer to this sort of question at a Stack Exchange site that has since closed, but the answer is reproduced here: http://money.stackexchange.com/questions/26337/what-to-ask-for-on-a-business-partnership http://money.stackexchange.com/questions/26337/what-to-ask-f... In short, here are the two key points: > The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer > What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the answer is simple: the investment just dilutes everyone. He gets into more detail on specifics, e.g. vesting, early employees who don't take salary, and investors taking a large stake. (The podcast gets more into the sort of problem that plagues unicorns, but let's be honest: This sort of problem won't affect more than a handful of people reading this, if even, and a situation that rare won't be covered by a podcast or stackexchange answer even by someone as special as Spolsky or Horowitz)

kzhahou 11y ago
Under this "canonical" answer, ONE of those layers owns as much as the rest of the company combined. By some curious phenomenon, this outsized layer belongs to... the person who invented the scheme. What a twist! Founders should own as much as every single other contributor and investor, combined?? They should keep several orders of magnitude more than all the other professionals that give years of their life, and make important decisions and breakthroughs? Only greed and self-importance justifies this outlook. The company's first non-founder employee takes a HUGE risk. He joins when no one else has taken that leap of faith. He joins maybe a few weeks after the founders started up. He takes a huge financial hit, foregoing that fat salary and bonus of the established company. And without those first employees, there will not be enough product or progress to show, to recruit the next batch. Derek Sivers explains this best in his First Follower talk [0]. That employee's reward? A percent (if he's a good negotiator). Compared to the founders' 50%. How equitable! [0] https://sivers.org/ff https://sivers.org/ff
- kanwisher 11y ago
  Agreed, I don't know why anyone would come in as employee number 1 at a startup. You take a large portion of the risk with almost no upside. At least if your engineer number 20 your getting full salary and benefits and you have no delusions about your stock option value. I think Joel's post is not correct. Most people have to just discount all options to zero value
  - sbov 11y ago
    Before coming to this site I never realized how shafted employee number 1 gets at most startups. I've worked with the same CTO as employee #1 at various startups for the last ~10 years. I generally get around 5%. The idea that people would take 1% or less sounds crazy to me. It's just not worth the hours and stress it involves that early on. In return I earn about 33-50% less salary than what I probably could elsewhere. So far it's paid off for me. But if I got less than 1% instead I would be worse off for it.
  - mbesto 11y ago
    Simple. Look at early Google and PayPal employees (Marissa Mayer, Dave McClure, Keith Rabois, Reid Hoffman, etc). They are kings in the valley right now. It's an irrational aspiration, but if you happen to lock in early at "the next big thing", the opportunity doors swing wide open.
    - kzhahou 11y ago
      Sergey and Larry had 30 BILLION dollars in stock on the day of IPO. Google made a lot of multi-millionaires, but the wild discrepancy between founder and non-founder equity was present there as well.
- wdewind 11y ago
  Yes but that doesn't take into account that startups are far more likely to hire someone in a growth/reach position. Yes the employee takes a risk, but in many cases the company is taking a risk hiring them as well. Joining a startup early isn't the best choice for everyone, but for someone looking for a new role, or significant responsibility growth, it can be a great opportunity to prove yourself that you otherwise wouldn't be offered at a bigger company. Examples of this can range from someone coming out of a bootcamp into their first engineering position, or a senior engineer from a bigger company joining as CTO of a startup.

hapless 11y ago

It's not about what's equitable, or fair, or "reasonable." It's about what the market will bear. Individuals with a realistic worldview, a little background information, and the ability to do simple math will conclude that startup equity offers are typically worthless. The fractions of the company are too small, the protections given to founders and investors too large. Startups are not getting the best talent with these compensation packages. And the people doing the hiring don't care. They clearly do not want any better than what they're getting. If there were unsatisfied demand for better staff, we would see more compelling offers. Hiring irrational optimists, the math-impaired, and folks who fail to do basic research on the field seems to be working out OK.

ditonal 11y ago
I still meet a ton of engineers, who while being surprisingly analytical in other aspects of their life, think their worthless equity packages are worth something. Some people don't even know what percentage their shares represent. They definitely don't give enough thought to dilution, liquidation preference, lack of voting rights. I'll say it over and over again - if you're asked to take a total compensation cut i.e. turn down public stock or salary from an established company to take options at a startup you are an investor. In fact a bigger portion of your net worth and income is invested then the typical VC's portfolio. And yet you don't get voting rights, you get screwed by liquidation preference etc, and the standard response is "well, you're not an investor, so you don't get preferred shares." Engineers are often hilariously bad at finance and even worse at negotiation.
- rjbwork 11y ago
  I asked about the value of my shares. They're subject to dilution, and the company won't tell me what % of the company they represent, nor the board-evaluated value of the company. Thus I have to consider them entirely worthless until proven otherwise.
  - potatolicious 11y ago
    I think sama had something good to say about this: https://twitter.com/sama/status/628713105824964608 https://twitter.com/sama/status/628713105824964608 I would walk away from that situation. Any startup that's unwilling to do everything Sam outlined above is IMO not worth my time. Hell, refusing to answer something as simple as "what percentage are these shares worth"?! I'd run, not walk, away from that one. If you want to encourage workers by making them investors in the company, then treat them like it.

brandonb 11y ago

This is a really good podcast--I love the idea of progressive equity, and Ben and Andrew do such a thorough job of talking through the implications on employee motivation, secondary sales, pro-rata vs flat, ... Has anybody aside from Detour implemented progressive equity so far?

MCRed 11y ago

I just heard about this the other day: http://slicingpie.com http://slicingpie.com Not sure if it works or not. I think the current trend of 4 year vesting with a 1 year cliff (and 0.1%-0.5% for very early engineers in startups less than 7 people, as it seems on angel.co job postings) is totally messed up. It seems every startup wants to you take a $40k salary cut at least and isn't giving you equity anywhere close to that value (even optimistically, though it really should be at net present valuation. EG: If your last funding round was an incubator which put in $20k for %5, then your valuation is $400k, and each year that engineer gives up $40k in salary, he should get %10 of the company... until you do another round, at which the $40k will buy less of the company. But nobody is doing that...) Don't even get me started on the one year cliff. Can you imagine any other investor in a startup taking a one year cliff? "Ok, we'll take your venture capital, but you're going to vest and it's got a cliff. If you act like jackasses in the first year we're going to cut you off and you get nothing" Here's the magical thinking: Somehow investor dollars are more "real" than employee sweat, or lost salary the employee gave up to come work there. Hell, if they pay you %60 of a market salary and then give you %40 as deferred salary, you should still get probably %4 of your salaries value in equity to compensate for the risk that the deferred salary will never be paid. And why don't startups use deferred salary? Just each funding round, pay off some of the deferred salary. Make the interest on deferred salary something like %5. You're gonna grow a lot faster than %5 right? Oh, that's right... Companies don't use deferred salary because Investors don't want the company to have liabilities-- investors want the first place in line when the company gets liquidated. More magical thinking-- their dollars contributed by pension funds and tied to "you must pursue the higher risk strategy, we don't care if it destroys the company" pressure is more "real" than the salary employees give up to do the actual work. I'm far from a unionist, but I blame founders for putting up with this kind of employee hostile thinking. Look to bright lights like Basecamp and Github-- you don't have to sell your soul to start a company. Bootstrap and it will let you treat your employees well. And then if you do want to take VC money, like Github did, you can do it on your own terms, not theirs. Too many founders seem to come out of an incubator (which is coaching them for demo day- seemingly the whole point of many incubators) thinking that their purpose is to get VC money. IT's not. It is to build a business. VC money is a loan that is an ongoing drag on the business (even more expensive when you consider the advice of VCs.)

mrmcd 11y ago

I made a googledocs spreadsheet that modeled various equity payouts after doing a bunch of research to evaluate a job offer from a fresh Series A startup: https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4DM1cERYSgBIHM6Sp_Mye1Gc/edit?usp=sharing https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4... You put in your shares as a percentage, the cost to exercise, and the opportunity costs of taking the job for 4 years (or whatever the vesting period is.) It spits out a grid of the various payouts for various exit prices and funding round dilutions. Feel free to clone and play with the numbers or hack on it for your own needs. Ultimately I ended up passing on the offer because they were pretty stingy on the equity, and wouldn't budge. The amount they offered would've had to be an exit well above 100M to be a "good deal" versus what I was giving up, even without considering the risk of it failing completely.

deleted 11y ago
[deleted]

delinka 11y ago

I get paid a good salary. I also have options. Options to buy some fraction of the company. Those options could be a bonus if a Desirable Event occurs. Otherwise, I'm still being paid very well to do what I do on a daily basis. If you've been offered a decreased salary and shares to compensate (or [$DEITY forbid] options) for the lack of salary, then negotiate or politely decline.

rajacombinator 11y ago

Cliffs on Ben Horowitz's take on it?