> The DSP pool is egalitarian, shared equally amongst the first fifteen employees we hire. So it’s a rich incentive at 1 percent of the company (before any futu

> The DSP pool is egalitarian, shared equally amongst the first fifteen employees we hire. So it’s a rich incentive at 1 percent of the company (before any future dilution). The fact that the author considers 1% of a startup's illiquid equity pre-dilution to be a "rich incentive" highlights just how much rethinking is required. For argument's sake, lets assume an early-stage startup has no future dilution and five of the first 15 employees leave before a liquidity event. In 2012, over half of startups exits were $50 million or less. With a $50 million exit, the 10 early employees would each receive $750,000 pre-tax from the DSP pool. Even with a $100 million exit, each employee's DSP pool share is not likely to net $1 million after taxes. Of course, at a typical venture-backed startup, dilution is likely to be meaningful, liquidity preferences can prevent employees from receiving anything at all and the odds are against a $50 to $100 million exit ever occurring. Experienced and/or savvy employees know this, and they can do basic math. So it shouldn't come as a surprise that early-stage startup equity is generally a poor retention tool. It's like using a screwdriver with a nail instead of a hammer. Retention requires a sustained effort to keep employees happy on a daily basis. This is usually best accomplished with financial tools that provide for near-term, recurring rewards such as bonus and profit sharing packages, as well as non-financial tools (pre-tax benefits, flexible schedules, etc.).