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I can speculate on two reasons why things are the way they are: 1) Companies generally set aside a certain percentage of their common stock for employee compen

I can speculate on two reasons why things are the way they are: 1) Companies generally set aside a certain percentage of their common stock for employee compensation. I imagine much of this is allocated towards C-level hires, and anyone else is getting the scraps. I've also heard (but not confirmed firsthand so take with a grain of salt) that VCs don't like overly large employee stock pools. I have no clue why - VC stock is preferred and employee stock is common so it's not they're offering any competition. It might have something to do with founders getting discouraged by additional dilution, which in turn limits the kinds of deals that founder is willing to participate in. 2) Paying out more cash to engineers makes it more difficult for your company to achieve a positive (or break-even) EBITDA. Negative EBITDA makes you a much less attractive acquisition target unless you're either trendy or have some ungodly large number of "eyeballs" that haven't been monetized yet (They're paying for the upside). An entrepreneur contemplating offering market-clearing salaries could talk themselves out of it by concluding "I can probably just hire the same engineer for less if I just wait longer and work harder at screening" -- effectively trading time to save money. Not always a smart move, but not necessarily a stupid one either. Again, just speculation.

michaelochurch 13y ago
These explanations make a lot of sense. For #1, the stated reason VCs discourage substantial employee equity is that they don't want the "equity-oriented culture". The real reason is greed in what they perceive as a zero-sum game (but it's not; different policies would create different companies!) #2 is probably quite accurate. It's sad, though, that paying well confuses Wall Street into thinking a business is ineptly run.
- tptacek 13y ago
  Once again, you beg the question. You pretend to draw a conclusion about how VC works, but that conclusion is based on the unsupported premise that VC works the way you say it does. To the extent company boards are parsimonious about equity, it's probably in order to preserve optionality: a new chief operating officer, or a new high-profile engineer to lead a new product team, or a new CEO, all draw significantly from the pool of equity available to employees. Humans are loss averse, so a smaller up-front allocation is preferable to a larger allocation that subsequently has to be diluted down.

michaelochurch 13y ago

These explanations make a lot of sense. For #1, the stated reason VCs discourage substantial employee equity is that they don't want the "equity-oriented culture". The real reason is greed in what they perceive as a zero-sum game (but it's not; different policies would create different companies!) #2 is probably quite accurate. It's sad, though, that paying well confuses Wall Street into thinking a business is ineptly run.

tptacek 13y ago
Once again, you beg the question. You pretend to draw a conclusion about how VC works, but that conclusion is based on the unsupported premise that VC works the way you say it does. To the extent company boards are parsimonious about equity, it's probably in order to preserve optionality: a new chief operating officer, or a new high-profile engineer to lead a new product team, or a new CEO, all draw significantly from the pool of equity available to employees. Humans are loss averse, so a smaller up-front allocation is preferable to a larger allocation that subsequently has to be diluted down.