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Your explanation of the mechanics is excellent. IMO, the current startup structures vastly overcompensate late employees who took no risk at the expense of ear

Your explanation of the mechanics is excellent. IMO, the current startup structures vastly overcompensate late employees who took no risk at the expense of early employees that take lots of risk. That is why FAANG/established companies are getting the best employees and why startups are struggling to find talent

zaroth 7y ago
Thank you. It’s interesting that, even as a Founder of a few small startups that I feel differently. Yes, I take a lot of risk by working without pay initially. But my early equity, even after dilution, means that once some funding has been raised and is being used to pay a bunch of employees, they are all essentially working for me and creating value for my shares. Once there are hundreds of employees and millions of dollars at play (unfortunately not a scenario I’ve personally experienced), the early employees ride the rocketship and enjoy a 100x or maybe 1000x larger share of the profits than slightly later hires who are working just as hard every hour of the day.
- wtvanhest 7y ago
  I think a nice balance would be an option pool set at 6% with a full ratchet provision. The option pool could be established in such a way that any employee gets points toward the pull based on a formula* and no employee would need to exercise their options until their is a liquidity event that buys out the pool. Formula could be something like: # of days from when startup was founded to liquidity event, that gives the equity per day. Then divy up the equity per day by the number of employees that worked that day. In a hypothetical example where the company had 3 people for the first year, those days would be worth a lot, but if it took 10 years to get to a huge exit, the people that put that first year in would get about: 6%/10 years/3 = 0.2% equity which at a very large exit would be something significant, but would also be somewhat fair because they did help get the thing launched, which is hard. There could also be provisions which eliminate or vastly reduce the value of equity earned for part-time employees or employees with other jobs. Say a .1 multiplier. Now you guy that goes to facebook after 3 months but moonlights for another 9 months gets: (.06(90/360))/10/3 + (.06(270/360))/10/3).1) = 0.065% The other 4% of the pool could be normal executive payouts that you need to make later, and other bonus allocations.

zaroth 7y ago

Thank you. It’s interesting that, even as a Founder of a few small startups that I feel differently. Yes, I take a lot of risk by working without pay initially. But my early equity, even after dilution, means that once some funding has been raised and is being used to pay a bunch of employees, they are all essentially working for me and creating value for my shares. Once there are hundreds of employees and millions of dollars at play (unfortunately not a scenario I’ve personally experienced), the early employees ride the rocketship and enjoy a 100x or maybe 1000x larger share of the profits than slightly later hires who are working just as hard every hour of the day.

wtvanhest 7y ago
I think a nice balance would be an option pool set at 6% with a full ratchet provision. The option pool could be established in such a way that any employee gets points toward the pull based on a formula* and no employee would need to exercise their options until their is a liquidity event that buys out the pool. Formula could be something like: # of days from when startup was founded to liquidity event, that gives the equity per day. Then divy up the equity per day by the number of employees that worked that day. In a hypothetical example where the company had 3 people for the first year, those days would be worth a lot, but if it took 10 years to get to a huge exit, the people that put that first year in would get about: 6%/10 years/3 = 0.2% equity which at a very large exit would be something significant, but would also be somewhat fair because they did help get the thing launched, which is hard. There could also be provisions which eliminate or vastly reduce the value of equity earned for part-time employees or employees with other jobs. Say a .1 multiplier. Now you guy that goes to facebook after 3 months but moonlights for another 9 months gets: (.06(90/360))/10/3 + (.06(270/360))/10/3).1) = 0.065% The other 4% of the pool could be normal executive payouts that you need to make later, and other bonus allocations.