6 ms·

Well if there is no money then pay with "fair" equity. I.e. you give a person 0.5% of a company and they have that same 0.5% in the next 5, 10, 20 years etc. No

by Yizahi 9y ago

Well if there is no money then pay with "fair" equity. I.e. you give a person 0.5% of a company and they have that same 0.5% in the next 5, 10, 20 years etc. No preferential share classes, no dilution, no golden parachutes for corporate investors, have predefined IPO date (e.g. no later than in 10 years or something like that), no any of the popular ways to screw employees with equity/options out of their shares.

jasode 9y ago
>Well if there is no money [...] No preferential share classes You're creating a circular contradiction about the money flow. A founder has no money. He gets interest from a VC like Sequoia Capital to invest $10 million. The standard and non negotiable terms of the deal means Sequoia gets "preferential shares" as a condition of writing a check for $10 million. One of my potential employees (Yizahi) I'm trying to recruit insists on "no preferential shares!". Sequoia then says, "Ok, no $10 million deal then. Bye!" As a result, both the founders and the employees have no working capital to build a more valuable company. We can't just shout out "no preferential shares" and "no dilution" without understanding the full ramifications of what that actually means.
- bitwize 9y ago
  I wish more people would understand this. It generalizes. We say "no DRM on the Web!" Hollywood says "Okay, no cross-platform movies on the web then, either. Bye!"
- tibbetts 9y ago
  Right. People often fail to recognize that without preferential shares startups would just raise at a lot worse valuations. If Sequoia is offering $10m at a $40m post money, how do you think that would change if they weren’t getting control and a guarantee they get paid first? Because without preference the founder incentive is a quick low risk liquidation at a price notably lower than $40m as soon as possible, because they’ve got 50% of the equity. This is another way in which financing valuations are an optimistic fiction.
  - hugs 9y ago
    Another option people fail to consider is not pursuing a term sheet from Sequoia in the first place. Go get money from customers, instead.
    - mertd 9y ago
      Some products require a great deal of initial investment to even roll one unit out. Not everything is an app or a service.
      - extrapickles 9y ago
        The initial cost for unit 1 can be quite expensive (>500k) if its a non-consumer product. Outsourcing production is hard with lower volume products that require modifications to meet customer needs (eg: they need M6 screws holes instead of 1/4-20 or want it in a particular metal). Contract manufacturers are generally interested in making 10k+ of the same item, not 100.
    - amarkov 9y ago
      That's a great option for a founder to consider, but it means you won't have the resources to give compensation that's even competitive on paper.
- philipodonnell 9y ago
  No, but you can grant shares to employees whenever there is a round so that their share stays the same? Many times shares are being created to sell in the round, why not create shares for the early employees?
  - eropple 9y ago
    Because the goal is to dilute early employees so that their shares are worth less. The literal and specific goal of the modern stage of tech VC is to reduce all other holders of equity to the point where the money, if any is made, is going to the "right people"--the folks who came in with the cash in the first place. You're mixing up symptom with cause. The employee is the sucker at the table. (Most founders aren't far behind.)
    - rdlecler1 9y ago
      No the goal is not to dilute early employees so their shares are worthless. You’re mixing up symptoms with cause.
    - theptip 9y ago
      This is bass ackwards. The founders get diluted more than anyone else. Every time you issue a new tranche of equity, the existing holders take dilution proportional to the share they currently own. If the original founders each hold 40%, and some employee holds 1%, after 50% dilution (common after the first couple rounds) the founders are down to 20% and the employee is down to 0.5%. It's possible to bump a star employee up by 0.5% to counter dilution. It is impossible to bump the founders up by 20% to get them back where they started. The reason founders are OK with this is that they understand that 40% of a $1m company is worth less than 20% of a $10m company.
      - eropple 9y ago
        The founders get diluted more than anyone else. They also start with overwhelmingly more than anyone else. Pity the poor founder with their meager twenty percent--an employee at their pennies of equity is vanishingly unlikely, even at a successful company, to make back the opportunity cost of having their salaries gashed by going to a startup.
- esrauch 9y ago
  Effectively what you are saying is that venture capital funds (correctly) think that that percentage of shares aren't very valuable when they are equal preference to the employees. The employee should use exactly the same evaluation framework: if the VC had nonpreferencial shares they wouldn't be worth the cash equivalent, so don't value your sweat equity that way either. Having the lower class of share should be valued even less. It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"
  - jaredhansen 9y ago
    >Effectively what you are saying is that venture capital funds (correctly) think that percentage of shares aren't very valuable when they are equal preference to the employees. That's not quite right - instead, he's implying that vc funds (correctly) think that the chance that this company's shares standing alone will suffice to return a multiple of the fund is low if they are of equal preference to the employees. That's not the same thing as "not very valuable", and the very counterintuitiveness of vc math should tell you that an asset a vc may not want (say, 5% of a company that sells for 75M after 3 years) may in fact be pretty valuable for the median employee. >It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!" Not at all - look, there are lots of good resources where you can learn more about how your equity works, and good founders will probably point you to them (e.g [0] and [1], although if you need a pointer to this instead of doing the 2-second google search yourself, you're probably not a great startup candidate anyway). Deception need not and should not enter into it. Not to say that there aren't scammy founders, but it's not best practice, and I don't believe Fred Wilson or most other reputable VCs would claim otherwise. [0] https://blog.dweek.ly/introduction-to-stock-options-startup-founder-entrepreneur-employee/ https://blog.dweek.ly/introduction-to-stock-options-startup-... [1] https://foundersgrid.com/employee-equity/ https://foundersgrid.com/employee-equity/ ...
icedchai 9y ago
You can't really have "equity" without the possibility of dilution. The nice thing about shares is you can always create more of them. (Most companies will be lucky to be acquired, never mind IPO. Unless you're talking listings on the pink sheets.)
austenallred 9y ago
This is practically impossible. That’s like saying you should give out equity and make sure to never raise money again. Even investors in early rounds that put in $500k are later putting in millions upon millions to hold their stake exactly the same.
- philipodonnell 9y ago
  Employees are continuing to put in effort through all those rounds and spending their most valuable resource to do so - time. Why shouldn't they be compensated with equity when there is a round so they keep their same share for putting in the same amount of work?
  - austenallred 9y ago
    They are, it’s called vesting. You don’t get the equity in one lump sum up front, you get it over time.
    - philipodonnell 9y ago
      Not the same. If you got new stock grants in each round and they all vested on that schedule extending farther and farther in the future, then yes, you are correct. But to say that 'you should take a reduced salary because you get this awesome stock grant that vests over four years' then for four years say 'you should stay at this lower salary as you are diluted because we are giving you stock every year' followed after four years by 'you got your stock and that's it so keep working at the lower salary and your now diluted worthless stock' is not the same at all.
  - nostrademons 9y ago
    Good startups (and big tech companies) give employees refresh grants - if they continue to be a good performer, they get follow-on equity grants to replace the ones that have vested, and if they're a really good performer, the refresh grants are often significantly larger than the original hire grant.
- 9y ago
ska 9y ago
That doesn't make any sense (i.e., you can stipulate this maintenance of %age, but you are crippling your ability to raise money). Predefined IPO data is similarly unrealistic, as there are too many external factors. What does make sense is to have a risk conversation with these early people, and be willing to give up enough equity to have that make sense to them. So, if your target is to give them 0.5% "at exit", you're going to be giving them, say, 1-2% initially. And do this in the best way, tax-wise, for them in your jurisdiction.

by Yizahi 9y ago

jasode 9y ago

>Well if there is no money [...] No preferential share classes You're creating a circular contradiction about the money flow. A founder has no money. He gets interest from a VC like Sequoia Capital to invest $10 million. The standard and non negotiable terms of the deal means Sequoia gets "preferential shares" as a condition of writing a check for $10 million. One of my potential employees (Yizahi) I'm trying to recruit insists on "no preferential shares!". Sequoia then says, "Ok, no $10 million deal then. Bye!" As a result, both the founders and the employees have no working capital to build a more valuable company. We can't just shout out "no preferential shares" and "no dilution" without understanding the full ramifications of what that actually means.

bitwize 9y ago
I wish more people would understand this. It generalizes. We say "no DRM on the Web!" Hollywood says "Okay, no cross-platform movies on the web then, either. Bye!"
tibbetts 9y ago
Right. People often fail to recognize that without preferential shares startups would just raise at a lot worse valuations. If Sequoia is offering $10m at a $40m post money, how do you think that would change if they weren’t getting control and a guarantee they get paid first? Because without preference the founder incentive is a quick low risk liquidation at a price notably lower than $40m as soon as possible, because they’ve got 50% of the equity. This is another way in which financing valuations are an optimistic fiction.
- hugs 9y ago
  Another option people fail to consider is not pursuing a term sheet from Sequoia in the first place. Go get money from customers, instead.
  - mertd 9y ago
    Some products require a great deal of initial investment to even roll one unit out. Not everything is an app or a service.
    - extrapickles 9y ago
      The initial cost for unit 1 can be quite expensive (>500k) if its a non-consumer product. Outsourcing production is hard with lower volume products that require modifications to meet customer needs (eg: they need M6 screws holes instead of 1/4-20 or want it in a particular metal). Contract manufacturers are generally interested in making 10k+ of the same item, not 100.
  - amarkov 9y ago
    That's a great option for a founder to consider, but it means you won't have the resources to give compensation that's even competitive on paper.
philipodonnell 9y ago
No, but you can grant shares to employees whenever there is a round so that their share stays the same? Many times shares are being created to sell in the round, why not create shares for the early employees?
- eropple 9y ago
  Because the goal is to dilute early employees so that their shares are worth less. The literal and specific goal of the modern stage of tech VC is to reduce all other holders of equity to the point where the money, if any is made, is going to the "right people"--the folks who came in with the cash in the first place. You're mixing up symptom with cause. The employee is the sucker at the table. (Most founders aren't far behind.)
  - rdlecler1 9y ago
    No the goal is not to dilute early employees so their shares are worthless. You’re mixing up symptoms with cause.
  - theptip 9y ago
    This is bass ackwards. The founders get diluted more than anyone else. Every time you issue a new tranche of equity, the existing holders take dilution proportional to the share they currently own. If the original founders each hold 40%, and some employee holds 1%, after 50% dilution (common after the first couple rounds) the founders are down to 20% and the employee is down to 0.5%. It's possible to bump a star employee up by 0.5% to counter dilution. It is impossible to bump the founders up by 20% to get them back where they started. The reason founders are OK with this is that they understand that 40% of a $1m company is worth less than 20% of a $10m company.
    - eropple 9y ago
      The founders get diluted more than anyone else. They also start with overwhelmingly more than anyone else. Pity the poor founder with their meager twenty percent--an employee at their pennies of equity is vanishingly unlikely, even at a successful company, to make back the opportunity cost of having their salaries gashed by going to a startup.
esrauch 9y ago
Effectively what you are saying is that venture capital funds (correctly) think that that percentage of shares aren't very valuable when they are equal preference to the employees. The employee should use exactly the same evaluation framework: if the VC had nonpreferencial shares they wouldn't be worth the cash equivalent, so don't value your sweat equity that way either. Having the lower class of share should be valued even less. It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"
- jaredhansen 9y ago
  >Effectively what you are saying is that venture capital funds (correctly) think that percentage of shares aren't very valuable when they are equal preference to the employees. That's not quite right - instead, he's implying that vc funds (correctly) think that the chance that this company's shares standing alone will suffice to return a multiple of the fund is low if they are of equal preference to the employees. That's not the same thing as "not very valuable", and the very counterintuitiveness of vc math should tell you that an asset a vc may not want (say, 5% of a company that sells for 75M after 3 years) may in fact be pretty valuable for the median employee. >It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!" Not at all - look, there are lots of good resources where you can learn more about how your equity works, and good founders will probably point you to them (e.g [0] and [1], although if you need a pointer to this instead of doing the 2-second google search yourself, you're probably not a great startup candidate anyway). Deception need not and should not enter into it. Not to say that there aren't scammy founders, but it's not best practice, and I don't believe Fred Wilson or most other reputable VCs would claim otherwise. [0] https://blog.dweek.ly/introduction-to-stock-options-startup-founder-entrepreneur-employee/ https://blog.dweek.ly/introduction-to-stock-options-startup-... [1] https://foundersgrid.com/employee-equity/ https://foundersgrid.com/employee-equity/ ...

icedchai 9y ago

You can't really have "equity" without the possibility of dilution. The nice thing about shares is you can always create more of them. (Most companies will be lucky to be acquired, never mind IPO. Unless you're talking listings on the pink sheets.)

austenallred 9y ago

This is practically impossible. That’s like saying you should give out equity and make sure to never raise money again. Even investors in early rounds that put in $500k are later putting in millions upon millions to hold their stake exactly the same.

philipodonnell 9y ago
Employees are continuing to put in effort through all those rounds and spending their most valuable resource to do so - time. Why shouldn't they be compensated with equity when there is a round so they keep their same share for putting in the same amount of work?
- austenallred 9y ago
  They are, it’s called vesting. You don’t get the equity in one lump sum up front, you get it over time.
  - philipodonnell 9y ago
    Not the same. If you got new stock grants in each round and they all vested on that schedule extending farther and farther in the future, then yes, you are correct. But to say that 'you should take a reduced salary because you get this awesome stock grant that vests over four years' then for four years say 'you should stay at this lower salary as you are diluted because we are giving you stock every year' followed after four years by 'you got your stock and that's it so keep working at the lower salary and your now diluted worthless stock' is not the same at all.
- nostrademons 9y ago
  Good startups (and big tech companies) give employees refresh grants - if they continue to be a good performer, they get follow-on equity grants to replace the ones that have vested, and if they're a really good performer, the refresh grants are often significantly larger than the original hire grant.
9y ago

ska 9y ago

That doesn't make any sense (i.e., you can stipulate this maintenance of %age, but you are crippling your ability to raise money). Predefined IPO data is similarly unrealistic, as there are too many external factors. What does make sense is to have a risk conversation with these early people, and be willing to give up enough equity to have that make sense to them. So, if your target is to give them 0.5% "at exit", you're going to be giving them, say, 1-2% initially. And do this in the best way, tax-wise, for them in your jurisdiction.