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A Good Way to Grant Equity to Your Employees
- acconrad 10y agoA good, but insufficient way to grant equity to employees. The fact is in 2016, startup founders take considerably less risk than they did a decade ago. You can go from idea to revenue in days, with essentially no cost upfront. If you hire me weeks or months later as employee 1, and I'm delivering 20% of the revenue, but as a first employee I get 2-5%, this will piss me off, and it should piss off every early-stage employee who works for tenths or hundreds of one percent. Unfortunately, I'm not sure how we can make institutional changes to ensure that the wealth is spread out a bit more, but it's something I will consider when I start my own company some day.
- cloudjacker 10y agoIt is even more unfortunate that this conversation is lost because equity at all is still a fairly unique aspect of the tech industry. So there isn't much empathy for the circumstances.
- CapitalistCartr 10y agoEquity is not a replacement for salary for non-founders. It can't be. It can only be a "bonus". If its being sold to you as anything else, they're lying to you, and probably themselves.
- cloudjacker 10y agoexcept you're the one looking for a job
- vkou 10y agoJobs aren't created out of the largess of your employer. Your employer's also the one looking for a talented employee.
- arcanus 10y ago> Your employer's also the one looking for a talented employee. This, 1000 times. How can it be 2016 and we are still having this discussion? Particularly with the group on HN, who are generally speaking extremely valuable and highly trained. If you do not bring value to your employer, you will be fired. That might be a highly liquid, difficult to characterize value, but it is undeniably a value-add.
- arkitaip 10y agoEven on HN people like to see themselves as brilliant billionaires in the making.
- cloudjacker 10y agoWe are talking about the hiring process here, being selected at all, how your financial prowess doesn't jive with the culture fit doctrine.
- CalChris 10y agoBeg to differ. I (gladly) worked for considerably less than market rate (while still not starving) for stock. I'd do that again and I'd offer it. Yeah, I was committed. Getting paid market rate and getting an option, done that too. It was a paycheck and a lottery ticket. Much less committed.
- kobeya 10y agoThat's great if you want to restrict your talent pool to college drop outs with no living costs or dependants.
- Dylan16807 10y agoYou know there is a large gap between a living wage and a typical software wage, right? If the wage discount is less than that, there is no restriction to who can take the job, despite dependents. (Whether they should accept such a tradeoff is a different issue.)
- tptacek 10y agoIf you join a company within days of its conception, you're a cofounder, not an employee.
- acconrad 10y agoI specified weeks or months later, after initial traction. Take Airbnb for example: their first hire wasn't for over a year, is he only worth about 1-3% of the company? Probably not, but he also probably doesn't care because that 1% is worth $250-300MM after taxes. Most 1st employees aren't that lucky, and would be putting in a similar amount of time and sacrifice for a much smaller payout.
- tptacek 10y agoIf you join a year after the company starts, you're probably not a cofounder.
- goykasi 10y agoWell that definitely wont ever happen, and Im pretty sure you know it isnt true. I assume you know from your UN, days (or even "months" -- doesnt matter) is an ambiguous metric. days == months == launches == rounds in reality. Unless you had the actual, initial idea, no future team (doesnt matter time) is going to be considered a cofounder. Meaningful equity and terms wont be given out after that standing. Incoming employees need to realize that -- equity++ means nothing; most should request a reasonable salary.
- tptacek 10y agoSorry, I don't understand this comment at all.
- eganist 10y ago> Unless you had the actual, initial idea, no future team (doesnt matter time) is going to be considered a cofounder. Meaningful equity and terms wont be given out after that standing. I see your angle with this, but I've personally seen Co-Founder thrown about as a perk in exchange for lowered compensation when the company is still fresh enough. A person who could add value might be offered to come in as a VP with substantial comp and equity but trades a good chunk of that comp away to be called a Co-Founder instead. It kindasorta betrays the idea of what a founder is, but somewhat like how time is meaningless by your example, so too can be titles. > Incoming employees need to realize that -- equity++ means nothing; most should request a reasonable salary. Yup. Unless you've worked for Palantir. Then your shares are worth their weight in magical fairy dust.
- user5994461 10y ago> hundreds of one percent Sounds like a reasonable offer :D
- acconrad 10y agoI've seen plenty of employees in the 20-25 range get 0.05% equity. Are they delivering less than 1% of the total value of the company? I would say not.
- user5994461 10y agoWell... why give more if they accept that? [definitely what the employers are thinking]
- ryandrake 10y agoMaybe it's the best they can find. It's not like tech jobs are growing on trees.
- acconrad 10y agoBecause it's institutional - the way it's always been. That percentage point made sense in the first dotcom boom when it required a lot of effort and capital to get a startup going. Inertia is an incredible thing, it's hard to change habits when the status quo is easier to adopt.
- kobeya 10y agoActually yes, they are probably delivering less than 1℅, according to a power law distribution.
- serg_chernata 10y agoI see what you did there. ;)
- meritt 10y agoMan, you've got an absurd sense of entitlement and self-worth. You honestly believe that a first-hire, in addition to receiving a competitive salary + benefits, is also owed >5% equity? No founder of a company with any traction is going to go for that, and no investor of any VC-backed company is going to agree to that either.
- sheepmullet 10y ago> You honestly believe that a first-hire, in addition to receiving a competitive salary + benefits, is also owed >5% equity? Competitive salary for top devs at big companies is reaching $250-350k/year. If your startup is paying that well then sure it doesn't need to offer a lot of equity. Most of the startups ive interviewed at over the last year don't even come close so they damn well should be offering a lot more equity to make up for it.
- meritt 10y agoEngineers making $300k/yr aren't interested in first-hire jobs over at the latest "Uber for X" YC-backed company. There will be exceptions, certainly, but that's going to be incredibly rare. First hires tend to be mid-level aspiring engineers looking for make a name for themselves and get in early but for whatever risk-adverse reason aren't looking for a cofounder type role. They usually need a steady paycheck. Obviously there's always going to be a balance between equity and salary, but the hypothetical scenario we're talking about here is "first employee" which tends to mean a salaried position with benefits.
- acconrad 10y ago> whatever risk-adverse reason aren't looking for a cofounder type role Or can't get it - because they don't have the idea to be a cofounder, or don't have the experience to be a CTO. And to address your comment in the higher tier, I never said the salary had to be competitive - in fact when I was a first employee my salary was cut in half (and my salaary was not that high by any stretch beforehand), but my equity was in a few percentage points. So yes, my point stands, if it requires very little capital or risk to found a company, but it's vital that you hire help, I would expect that you give them meaningful equity, especially if they're doing a great deal of the effort and labor to get there. I don't think that's entitled, I think that's being fair to your employees who are busting their ass to make you rich.
- Tenhundfeld 10y agoHow do you know you're "delivering 20% of the revenue"? Edit: Removing my example as it apparently misrepresents my intent. The gist is I think doing 20% of the work is not the same as delivering 20% of the revenue.
- st3v3r 10y agoIt absolutely is, considering that 20% of the work has to be done, and if the employee isn't doing it, then the founder has to be doing it, taking time away from revenue producing activities. This idea that only those who are delivering revenue directly deserve to be rewarded is asinine.
- Tenhundfeld 10y agoI'm an engineer. I'm not saying only sales people should be rewarded. I agree that is asinine. This is what I'm saying: If a founder builds a business over many months and then hires an employee who can take over 20% of the founder's current workload, that does not mean the employee deserves 20% of the company, IMO. It does not mean that employee is "delivering 20% of the revenue." It merely means the employee is doing 20% of the founder's current work. Equating percent of current work to percent of equity completely disregards the risks and effort involved in building a sustainable business. Developers tend to overvalue the software assets and undervalue the business relationships and other revenue-producing activities. Hence my question about how the OP is arriving at their figure.
- pcmaffey 10y agoThe whole point of equity is to measure what's invested. You could be doing 20% of the current work of a company, but that does not account for all the past contributions that got the company there in the first place. Equity is granted on a vesting schedule to approximate the future contributions of a person. If that approximation does not accurately represent the reality over time, it should be reviewed and renegotiated alongside performance.
- ohitsdom 10y agoYou are significantly underestimating risk and uncertainty that startup founders take on.
- jwebb99 10y agoUnless you are working for a discount, I don't see why an employee should be entitled to ANY equity just because they happened to show up before anyone else. The fact that you may be responsible for a large swath of a company's profit is beside the point. As an employee, you are a commodity. If I write a book, I'm not giving my web designer a percentage of the profit. Yes, my success is contingent on the quality of his work, but he's just one of many offering such a service.
- deegles 10y agoOr more likely, if your web designer demanded a percentage you would just find a different one. The reason employees are commodities is that they allow themselves to be treated as such.
- nickff 10y agoIf they are the same as founders, they can go earn founder salaries and equity by founding; why don't they?
- module0000 10y ago> I don't see why an employee should be entitled to ANY equity just because they happened to show up before anyone else I understand what you are saying, but there is something extra you are doing as employee #1. You're taking a huge risk not working for Cisco, Oracle, Google, etc...any of the players you know won't cease to exist overnight. The equity is offered because a skilled employee is taking a risk on you(the founder), and investing his time that could be better spent at an established company. That's how I view it at least - if you offer me equity at your FaceAppInGram startup, plus the salary I would expect from other fortune 500 offers - I might be tempted to work for you. Otherwise, there is no sane reason any engineer worth their salt would take the risk. edit: typo
- CalChris 10y agoYou're taking a huge risk not working for Cisco, Oracle, Google No, this is not risk. This is opportunity cost. When referring to finance or economics, risk describes the possibility that an investment's actual and projected returns are different and that some or all of the principle is lost as a result. Opportunity cost concerns the possibility that the returns of a chosen investment are lower than the returns of a necessarily forgone investment. http://www.investopedia.com/ask/answers/041015/what-difference-between-risk-and-opportunity-cost.asp http://www.investopedia.com/ask/answers/041015/what-differen... A VC can lose their cash money investment in StartUpCo. That's risk. An engineer choosing between StartUpCo and Cisco faces a choice between two opportunities. The cost of choosing one opportunity is the other. That's an opportunity cost.
- matchagaucho 10y agoIf a company is earning revenue day 1, then profit sharing can yield much higher returns than equity.
- nedwin 10y ago> The fact is in 2016, startup founders take considerably less risk than they did a decade ago. You can go from idea to revenue in days, with essentially no cost upfront. That's awesome. If it's so easy why are you an employee? You should totally start a company and go from idea to revenue in days with no cost upfront. Then you'll own 100%!
- cloudjacker 10y ago> The only reason not to implement the Wealthfront Equity Plan is greed, and greed seldom leads to a good outcome. Is there a more diplomatic way of saying that? Employees aren't in a position to question the "generous privileges" or "large equity stake" they are being offered.
- sidlls 10y agoWithout arguing the merits of the Wealthfront plan, "greed" is about as diplomatic as it gets in this scenario. It applies to both sides. However there is an information and cultural bias asymmetry that puts the company in a much superior position. As a result the equity and compensation issue is ultimately seen as the company taking advantage of employees in an unfair way.
- arcanus 10y agoDoes HN have a strong opinion on RSUs vs. stock options? The article makes a peripheral mention of this but otherwise does not address it.
- mathattack 10y agoIt depends on the maturity of the company. If you want everyone going for broke, options are better because there's no downside if the company goes under. If you want people to be more conservative, RSUs are better because they balance downside and upside. So companies aiming for home runs are better serviced by options, while companies looking for predictable quarterly earnings are better served by RSUs.
- sickrumbear 10y agoCould you clarify your point about no downside if the company goes under? If the options are underwater then you get nothing, yet if you have RSUs, they'd be worth whatever a share of the company is worth (liquidity because of public/ private notwithstanding)
- mathattack 10y agoWhen you get options, your starting point is effectively zero because the strike price usually is zero. So if the stock goes down, you are still at zero - you just don't exercise the option. You have upside but no downside. If you have an RSU, you have the same upside and downside - 1 for 1 with the price. Note - this isn't 100% accurate as options that are not in the money still have some value but the idea is more upside than downside.
- x0x0 10y agoEnormous tax differences, plus (I think?) employers avoid RSUs because they remove tax handcuffs for leaving.
- spullara 10y agoGenerally at private companies you aren't given RSUs. You are given a promise that at IPO or sale you will be given RSUs. If they gave you real ones they would be taxable but illiquid and you would be in a bad place.
- omouse 10y agoWhy not just be a co-operative and really be meritocratic and fair?
- erichocean 10y agoIn the US at least, you can do that if you want. Go for it!
- maerF0x0 10y agoIMO this should mention that trading salary for equity will not be met with a cliff. Imagine accepting a lower salary for equity, only to have the founders "pivot" months later leaving one without salary OR equity (thanks to the cliff) .
- ryandrake 10y ago> 4. Evergreen: These grants, which are appropriate for all employees, start at an employee’s 2½-year anniversary and continue every year thereafter. The idea is you don’t want to wait until the employee’s initial grant has been fully vested to give a new grant because by that time the employee will evaluate new opportunities. This is doubly true for RSUs, which are liquid the day you get them, not forcing you to stick around waiting for them to be exercisable. As someone approaching such a cliff, I have to say this "continual refresh" practice makes a lot of sense. Wish more companies would think of this. The day all your equity vests (and your total comp now drops, perhaps by a substantial amount) seems like a designed-in "last day".
- dreamdu5t 10y agoGranting number of shares instead of percentages gaurantees that employees will get screwed by dilution. Vesting shares over 4 years means most employees won't get much, since employees often last only one or two years. Options mean most employees lose their equity before a liquidity event, or otherwise pay thousands of dollars for a lottery ticket. In general, employee equity is a joke. Here's a "Good Way": - Lock-in percentages instead of number of shares. Real dilution protection - not handwavy vague reassurances. - Vest shares over quarters not years. - ISOs that convert to NSOs after employee leaves OR RSU's with the company paying the tax bill. - Termination protection Anything less is scraps of a lottery ticket.
- rdtsc 10y agoI find options confusing. How about this instead - a contract with the employee saying they get disbursed a % of the annual profits. If company does well they get a % of the profit. If it does badly (loses money) that year they get 0. Is that stupid? Seems simple so probably is stupid... But it would seem to incentivize the employee to make the company more profitable. I'd trade a reasonable % every year over a mythical pie in the sky exit one day. Yeah, I understand it is nice to dream owning a yacht and sail the world one day, and that is worth some something (in other words the ability to dream about it is important and people will get into situation to be able to do it). But I am more of a boring pragmatist and would rather have a bit less but more predictable reward every year or month instead.
- rfrey 10y agoMost startups make very little or no profit while they grow. They're often sold long before they turn a profit. In those cases a % of profit would be worth 0 while equity could be worth quite a lot. Profit sharing does have a long history in more traditional industries though.
- rdtsc 10y ago> Most startups make very little or no profit while they grow. Ok agree, that was the obvious bit I missed. I never really worked for startup, so wasn't familiar. So idea was silly, makes sense now.
- blennon 10y agoHow many startups have you worked for that are turning a profit? Most technology ventures less than 5 years old are running in the red or they are reinvesting their profits to grow faster.
- rdtsc 10y agoI've worked for a small company which turned out profit for many years. > Most technology ventures less than 5 years old Well you're right there. So it was a dumb idea.
- doki_pen 10y agoUntil companies start having longer exercise periods after employment ends, options have close to no value.
- dalbasal 10y ago"Wealthfront Equity Plan should result in approximately 3.5% to 5% annual dilution.. ..most public technology companies increase their option pools by 4% to 5% per year, so the proposed dilution is well within the reasonable range." Is this true? Dilution of this magnitude, on average?