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Giving employees equity is a form of funding. If a company is bootstrapped and profitable, they can just pay employees money instead. In theory this should mean
by graeme 5y ago
Giving employees equity is a form of funding. If a company is bootstrapped and profitable, they can just pay employees money instead. In theory this should mean Mailchimp employees were paid more money than employees doing similar work where they were given stock options.
- robocat 5y agoGiving early employees equity is often a form of incentive. If giving an employee 1% of equity improves acquisition valuation by 2%, then it was probably a good move, as the remaining shareholders got 1% more than they would have otherwise. It gets less intuitive with multiple people: what to do if one founder owning a valuable small business adds a salesperson and a UI guru, each of whom adds 10x the valuation to the company? The main problem with equity is that it is extremely difficult to value how much a person will increase a future valuation by (ignoring complications with voting rights etcetera).
- FredPret 5y agoIt’s like funding in the sense that you can get an engineer who demands (for example) $200k in comp for $100k cash and $100k in stock options, saving the startup lots of cash in the beginning.
- robocat 5y agoSure. An aside as an engineer founder, I have always thought of accepting stock instead of wages is more like gambling. 1. You are concentrating your risk instead of diversifying. 2. As a minority shareholder in a private company you have virtually zero choice over any critical decisions, and the other shareholders have financial incentives to screw you. 3. You may influence technical outcomes, but even there you often realistically have limited financial incentive to improve profits. Unless you are an early employee, the amount of work you need to do to increase valuation by 10% is probably actually not worth the extra effort you put in for the $ you might get out. 4. Most people grossly misprice equity - ordinary shares are worth much less than the preferential shares an investor gets. Even though you are investing the equivalent of cash, you don’t get preferential shares. This is misrepresented everywhere, and certainly a startup has no financial interest in telling you the truth. 5. It is a high risk investment. That is fine for a VC which can spread their risk over many investments to get the industry average. It is a bad bet individually because even if you could invest your time in 10 startups, your variation in profit is still high. (Assuming one in ten startups is successful, which I highly doubt). Even VC funds are OK with ‘high’ variance because LPs are usually looking for diversification (especially non-correlated diversification with the rest of their portfolio), and the VC partners still get their tidy 2% even if the fund tanks. 6. Engineers usually seem to believe that they can pick a winner to join. VCs with decades of experience fail all the time, so the majority of engineers are just fooling themselves (or more truthfully, being fooled).
- ddorian43 5y agoEveryone that thinks taking equity for a lower salary needs to compare the difference with DCAing (dollar cost average) the extra salary into TQQQ,UPRO,SOXL. Might be higher profit and less risk.
- FredPret 5y agoAll good points. Which is why the stock comp would have to be multiples of $100k to equal $100k in cash in my eyes. Of course, if the startup ever goes public, you'll make out like a bandit on that amount of stock! But more likely, as you say, you'll be left with only the cash component.
- cmorgan31 5y agoWhat? You give stock as a way to manage retention of talent not funding. Mailchimp benefits from a market (GA) not saturated by competitive hiring.
- graeme 5y agoSuppose you could pay an employee $200,000 or $150,000 + stock options. If the two options were rationally considered equal that would mean the missing $50,000 NPV of the employee’s salary would be paid by future investors once they bought the shares. Either in an IPO or in this case by the acquiring company. Options are also a method to retain and incentivize talent, but they’re certainly a form of funding.
- elif 5y agoAbove market salary is also a way to retain talent.
- cortesoft 5y agoFor retention, you can do deferred cash bonuses. Doesn’t have to be stock.
- elif 5y agoThis is accurate. TC was ~25% higher than I would get working in SF. Plus I got to invest it how I liked.
- tclancy 5y agoExcept that’s explicitly not how the free market works. Employees would be paid at the rate their services clear at in the open market. If you’re paying more than that, it’s because you want to attract people above the average/ clear.
- graeme 5y agoNo, I’m saying they’d pay more cash than a company paying cash + stock. Total comp EV should be same for same position.