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While I think this is a good idea, what advantage is there for a business to issue equity like this. They would be better off taking more cash from the VCs and

While I think this is a good idea, what advantage is there for a business to issue equity like this. They would be better off taking more cash from the VCs and just paying higher salaries.

stanleydrew 11y ago
Incentive alignment.
- danieltillett 11y ago
  Wouldn’t a high salary align interests too? Given how much people discount the future it should actually be cheaper. Interesting when I first started my business I paid well over the industry norms. I later tried moving to a model where employees (voluntarily) were able to trade in this high salary for a normal salary and a significant equity share (between 2% and 5% without vesting or a cliff). None of my employees wanted the trade. In the long run it worked out well for me, but I was surprised at the time.
  - stanleydrew 11y ago
    High salary doesn't align interests. If I'm the board of directors, I care about profit. I care about dividends on equity. If I'm an employee working for cash, I care about cash. Yes you can argue that smart employees will realize that revenue and ultimately profit leads to more available cash which leads to continued employment and salary, but that's an indirect effect. Of course you can also say that most employees don't understand equity or why they should care about it, so granting equity alone doesn't align incentives. Arguments can be made in both directions. I think it's an interesting debate actually. I've come down on the side of granting equity and encouraging employees to understand their grants so that (hopefully) incentives are more aligned than at the average company. An alternative way to get a similar result is to give a bonus based on company performance I think.
    - danieltillett 11y ago
      Yes I think bonuses are the better way to go too. They just need to be crystal clear in how they are awarded or else you will end with more bitching than effort.
jacquesm 11y ago
One of the major issues in keeping a start-up on the rails is that not everybody is in the same phase of their lives and not everybody has the same financial stability. By making the situation of more people crucial to the continued well-being of the company in sync some of these discrepancies cease to be a problem. The more you do this the bigger your chances of success because it translates into a much stronger feeling of solidarity.
- danieltillett 11y ago
  I tend to think the value of equity is discounted pretty heavily by most people. It is seen as a bit of lottery ticket. Having a great environment, a great mission, and good salaries will motivate most people to near 100% effort.
  - jacquesm 11y ago
    That's because the percentages are super low and it isn't rare to be screwed out of even that bit. If that should change then I think that the value of equity would go up quite quickly.
    - danieltillett 11y ago
      My personal experience says otherwise (see my post below), but I am happy to be convinced by data. Do we know of any startups where employees are granted equity with the same level of protection as investors? How have they performed?

While I think this is a good idea, what advantage is there for a business to issue equity like this. They would be better off taking more cash from the VCs and just paying higher salaries.

stanleydrew 11y ago

Incentive alignment.

danieltillett 11y ago
Wouldn’t a high salary align interests too? Given how much people discount the future it should actually be cheaper. Interesting when I first started my business I paid well over the industry norms. I later tried moving to a model where employees (voluntarily) were able to trade in this high salary for a normal salary and a significant equity share (between 2% and 5% without vesting or a cliff). None of my employees wanted the trade. In the long run it worked out well for me, but I was surprised at the time.
- stanleydrew 11y ago
  High salary doesn't align interests. If I'm the board of directors, I care about profit. I care about dividends on equity. If I'm an employee working for cash, I care about cash. Yes you can argue that smart employees will realize that revenue and ultimately profit leads to more available cash which leads to continued employment and salary, but that's an indirect effect. Of course you can also say that most employees don't understand equity or why they should care about it, so granting equity alone doesn't align incentives. Arguments can be made in both directions. I think it's an interesting debate actually. I've come down on the side of granting equity and encouraging employees to understand their grants so that (hopefully) incentives are more aligned than at the average company. An alternative way to get a similar result is to give a bonus based on company performance I think.
  - danieltillett 11y ago
    Yes I think bonuses are the better way to go too. They just need to be crystal clear in how they are awarded or else you will end with more bitching than effort.

jacquesm 11y ago

One of the major issues in keeping a start-up on the rails is that not everybody is in the same phase of their lives and not everybody has the same financial stability. By making the situation of more people crucial to the continued well-being of the company in sync some of these discrepancies cease to be a problem. The more you do this the bigger your chances of success because it translates into a much stronger feeling of solidarity.

danieltillett 11y ago
I tend to think the value of equity is discounted pretty heavily by most people. It is seen as a bit of lottery ticket. Having a great environment, a great mission, and good salaries will motivate most people to near 100% effort.
- jacquesm 11y ago
  That's because the percentages are super low and it isn't rare to be screwed out of even that bit. If that should change then I think that the value of equity would go up quite quickly.
  - danieltillett 11y ago
    My personal experience says otherwise (see my post below), but I am happy to be convinced by data. Do we know of any startups where employees are granted equity with the same level of protection as investors? How have they performed?