5 ms·

Employee Equity: Too Little?

57 points by arnauddri 12y ago

hapless 12y ago
If it costs you 10% of your company to attract a top engineer, and it's not worth that much to you, you're going to make do with less than the top engineers. At best, you will be recruiting people not smart enough to ask important questions about equity. Fred Wilson seems to be suggesting that founders should indeed hire second-rate candidates if it means they get to keep more of the pie. Maybe he's right.
- deleted 12y ago
  [deleted]
  - kenjackson 12y ago
    It doesn't reduce the amount available to investors. It just factors into the valuation. And then dilution happens across the board (generally). So after taking a few rounds the founders have less of the company than if they had given less to the employee. Likewise, the founder will have less of the company if they give more to the VC. The question for Fred is if an employee is $1m and your cash is worth $1m -- should they both get the same valuation with respect to equity?
chasing 12y ago
I find it weird that the only discussion about this seems to be coming from the founder/VC side of things. Any offer has two sides. The one who offers and the one who accepts (or declines). And I feel like employees need to fully understand what they're getting themselves into. Then they can decide whether what they're being offered is worth it. The last time I was offered a chunk of equity to work with a start-up, I ran the math and decided it wasn't enough to compete with other opportunities. The start-up wouldn't agree to raise the equity to a point I was comfortable with, so I walked and went on to other projects. If more employees negotiated -- and negotiated seriously from a place of knowing both their value and the value of the offer -- I feel like we'd quickly get a better sense of how much equity is fair.
- malandrew 12y ago
  As someone who was once a founder (failure) and is now the first engineering hire at a funded startup and plans on founding something after my current gig, the issues Sam raised that are most concerning to me are all the other issues besides the size of the grant. Don't get me wrong, I wish the grants were higher, but all the other issues are more pressing since they increase the utility of the small percentage I earned without diluting anyone else. Solving those issues that increase the utility of a good limited in supply and makes the valuation of that good far less nebulous makes it much easier to more accurately determine the amount of equity an employee demands/receives. Getting a bigger percentage with unfavorable terms that might be used to limit how much upside I can get or nullify the upside entirely matters far more. I would prefer terms: * where the exercise window is long (10 years) * where the employees and the founders have the same conditions in funding rounds or acquisitions. i.e. equal dilution. equal opportunity to take money off the table if that is an option. same triggers (double, single). * protection against liquidation preferences (honestly this shouldn't even be a thing) * restricted stock instead of options, with a bonus to cover the tax on it for the year it was issued that is paid out either on the 12th month when the cliff is reached or when taxes on it are due, whichever comes first. Beyond that, a change in tax treatment for these illiquid assets would be awesome.
fingerprinter 12y ago
This is dumb. There are at least three sides the equity equation: founders, VCs/investors and employees. I notice that only two are considered "variable" in this article: founder and employee. The fact is, VCs/Investors are becoming less needed than they were 10-20 years ago. Why wouldn't it be logical for their stake to take a hit for the money they put in?
- walshemj 12y ago
  But dont a lot of emploee share options get diluted away in later rounds.
  - fingerprinter 12y ago
    Yes, which is another reason they would need more initial shares or a better structure.
- tptacek 12y ago
  Because at the margin, of the three parties we're discussing, the investors have the least market pressure. For all the talk of valuation bubbles, top-tier VC firms still fund one company for every ten-twenty-thirty? companies they meet with.
  - fingerprinter 12y ago
    That just tells me that VCs should be taking less. The fact remains that Fred only looked at two options; either the founder stake goes down or the employee pool does. A third option also exists...Investor total share goes down. I personally believe we will see this more in the future.
    - tptacek 12y ago
      The VCs are going to take what the market will bear, is my point.
- malandrew 12y ago
kenjackson 12y ago
Fred seems to ignore that it costs less to create a viable company now. Hence the amount they need to raise from VCs is smaller. In the past I may have needed $30m from VCs, now I need $5m. Additionally, as hapless notes, the cost of good engineers is the price of business. You could flip it the other way and say that VCs should pony up the $30m and founders give the engineer $1m signing bonus with market wages and no equity. But I think founders would be more squeamish about that then giving up equity that really has little cash value 90% of the time. BTW, I've never seen a non-founder engineer get 10%. Maybe it happens, but I think its still pretty rare.
mjmahone17 12y ago
If we take this article down the "slippery slope" it proposes, you'd end up with 8 people in the company owning ~80% of the total equity, with the "founder" only owning ~15-20%. But why this is a negative thing for the company is still up in the air: at that point, you might as well have a partnership, like consultancies, law firms or advertising agencies. There's no inherent reason a partnership couldn't make the next LinkedIn or Oculus Rift.
- tptacek 12y ago
  That's about where founders land now, isn't it?
  - mjmahone17 12y ago
    Yes, but it seems like with much less say than they would have if they were a partner, as opposed to just 15% shareholders.
- busterarm 12y ago
  That would be a terrible turn of events though; law parternships have had to grow significantly (in number of partners) to survive. having a partner that wants to retire or leave often risks dissolution of the entire partnership. You end up having to bring in more and more partners just so people can leave without sinking the whole ship. This industry moves _way too fast_ for partnerships to really work and convert business equity into cash at the same time.
tptacek 12y ago
The other problem with large equity grants to employees is that employees discount them irrationally, why by "irrationally" I mean things like "by trying to value them without doing the math or research". Employees are usually at a sharp disadvantage when it comes to valuing equity, which means that when you allocate it to employees, you're paying a premium to do that. My sense of it is, it's good to give generous equity to keep the team's skin in the game, so that the ups and downs of the business are meaningful to everyone. And, key team members that really want equity and are willing to do the work to value it, also good. But pro-forma "competitive" equity grants? Pay cash instead. Incidentally, the odds that the "best" engineers getting 10% of startups at signup are actually the best developers is, I don't know, something like 𝛆.
- adambenayoun 12y ago
  This. What I find help with it is give them as much information as possible and be there to answer any question they may have. If you're giving away generous stock option grants you want to make sure they are as educated as possible about their value as opposed to some companies where they'll be secretive about the actual outstanding shares issued and other preferences that could hurt employees grants when a liquidation happens. Additionally for people who may not value option stocks like you do (as a founder or early team member), we usually offer generous equity grant but also allow employees to swap some of them for a higher pay. I think employees are grateful when given the ability to pick more pay or more options. It allows them to put a price tag on these stock options which make these more valuable and tangible.
adambenayoun 12y ago
I am a bit disappointed no one actually addressed* an issue that every founder has to deal with when raising series A: the option pool (it's true most start with a small option pool long before series A but the friction start during series A fundraising). Most (if not all) VCs require the option pool to be formed before the series A transaction is completed and usually push for a very high option pool to avoid granting more options and dilute themselves in case the option pool is not big enough. This conflict of interest lead founders to fight the VC to form the smallest option pool possible while VCs want the biggest one. And the non-sense is that most of that option pool will be granted to employees that will be hired after series A. *Sam Altman actually wrote a short note but didn't expand on it and I think it's a shame.
caseyf7 12y ago
I would like to see more evidence of employees getting too much equity. What I see more often is the VCs getting the large option pool and then the founders try to issue as few options as possible to protect themselves from the dilution the large option pool created for them.
balls187 12y ago
"Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it." I totally disagree here. I don't think you compete with Facebook on comp in this manner. Facebook stock is as good as cash. Stock at a ~A/post A company isn't. Even if you say you'll give this employee $1mil worth of stock, there is a high likelihood that stock isn't going to be worth it. Don't go after Facebook's top engineers trying to compete with comp until you have the resources to get them, take the money ball approach and find talented people who aren't having the world thrown at them yet, and lure those people away.
- potatolicious 12y ago
  Or... find people worth less than $1mm. It's strange that people even talk about recruiting top (and I mean top) engineers when I can count on one hand the number of startups I've ever seen that'd justify that kind of talent (think John Carmack level). The vast majority of startups are business process improvements (think AirBnb, think Uber) where there's no freaking way you'd really need a Carmack on your team. I disagree with the point about finding talented but under-recognized people. I've seen companies do this, and in this market they will get discovered, it's only a matter of time - and the switching cost of jobs right now is nearly zero. If you're going to lure ridiculously undervalued people away, only to continue to undervalue them (just not as badly), you're going to get a lot of attrition.
  - balls187 12y ago
    > I disagree with the point about finding talented but under-recognized people....If you're going to lure ridiculously undervalued people away, only to continue to undervalue them I agree with this point, though I don't think that not-offering them 10% of your company is undervaluing them. I'd like to believe that most people who are undervalued at BigCo's are because they either lack the self-promoting skills, or haven't yet found the right environment to be successful.
7Figures2Commas 12y ago
> Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it. She is. 1. Facebook and Google are publicly-traded. $1 million in equity at a publicly-traded company is not the same as an equity grant at a startup that is theoretically worth $1 million based on the valuation given to the startup by venture capitalists in its last round. The startup's equity might never be liquid and it's far more vulnerable. 2. Most startups do not have to compete with Facebook and Google on compensation. Most of them can't really afford to. The truth of the matter is that as a startup, if you can't get folks excited about working for you without matching the dollars offered by the richest tech companies, there's something wrong with your value proposition or you're trying to recruit the wrong people. 3. What's the difference between a "top software engineer" and a "software engineer"? Different companies have different needs. This idea that all startups need the best of the best (i.e. the person who Facebook and Google are battling for) and that you can't put a limit on the worth of an engineer ("I am not saying the engineer isn’t worth it") is ridiculous.
rch 12y ago
> I am not saying the engineer isn't worth it. She is. I am just pointing out how dilutive employee equity is becoming in silicon valley. Maybe this reflects the fact that it's so much easier to get by with less early capital these days. Those early employees are simply worth proportionally more to a startup than they might have been 5-7 years ago.
zacharycohn 12y ago
"...companies make very large grants to early employees and that ends up hurting the founder’s stake..." Isn't that the point? That early employees are worth more than they've historically been compensated?
claudiusd 12y ago
Stop taking advice about equity from VCs. If you've ever read a term sheet or a SPA, then you know that VCs have a huge incentive to encourage founders to increase the size of their option pools: your typical term sheet requires the existing shareholders to take the dilution of the option pool rather than the investors. Because of this, the bigger your option pool is the lower your price-per-share becomes, and as such the investor gets a bigger cut. It requires founders to budget their option pool up front and divvy it up carefully until the next round of funding. These terms ENCOURAGE founders to keep their option grants tight. Sam Altman and others need to put their money where their mouths are - if you want bigger option pools for employees then remove this clause from your term sheets and encourage other investors to do the same. If you think that more employee equity is good for business, then give us more flexibility with the option pool and share the dilution with us. Don't blame us when the real change starts with you.
- tptacek 12y ago
  The option pool issue is obviously a hot button here, but remember that Sam Altman's commentary on it ends with "Option pools are complete fiction; boards can increase them whenever they want. It should never be used as a reason for not making a grant.".
  - claudiusd 12y ago
    I do agree with him on that, but ask any founder if they feel like that's a real option. Any VC pre-closing will certainly give the impression that it is not.
    - malandrew 12y ago
      Unless YC goes out on a limb here and starts pushing to make it a condition for getting face-time with YC companies on demo day. IANAL, I would expect it's collusion if the startups get together and start agreeing to terms they will accept collectively. But if instead YC, a single entity, uses entrance into its demo day event, as a bargaining chip that can change the conversation around term sheets for the entire industry. i.e. make this rule: Every investor YC allows into demo day may only offer term sheets that does not require the size of the option pool to be raised until after closing the financing. Instead the size of the equity pool will be negotiated after funding closes and will be based on the amount of dilution both the founders and employees and the VCs think okay with relative to the benefit they receive from a larger pool. Individual YC companies would still be free to engage with investors outside and after the demo day event and take the less favorable terms where the option pool is negotiated ahead of time.
gavanwoolery 12y ago
I've been on both ends of the spectrum - as an employee who got very little equity and as a founder who had to distribute it. All I can say is that you don't fully appreciate the worth of equity until it is your own that you are giving away (and I consider myself a relatively generous guy). :)
malandrew 12y ago
I'm wondering why we don't make the vesting of the grant variable as well. Why four years? Why not allow an employee to negotiate for double the chunk for double the length of the grant? That's far more desirable than getting 4 years worth, arriving at year 4 realizing you've succeeded in building a company of true value only to discover that the amount you are re-upped is now at a strike price far greater (that you are responsible for achieving). i.e. you are punished for succeeding if you stay long enough to get re-upped.
brudgers 12y ago
[Preface: My assumption is that Altman is thinking about greater employee equity as something which will create value in YC's portfolio companies. I take it as a given that YC now has sufficient data points to perform regression analysis on this sort of thing among their portfolio companies (and perhaps others outside their portfolio), and that Altman's attention has been drawn by some trend in YC's data and the possibility of increasing YC's rates of return.] I doubt Altman is trying to make life easier for VC's like Wilson. My sense is that YC's business model is oriented to disrupt the traditional VC model and more closely align the interests of investors with those of people at the company. Pretty much every financial innovation YC has made has had the effect of pushing the transfer of power from the people working at the company to those providing capital further and further down the road - from YC's taking common stock, to connecting companies with Angels, to convertible note financing, each move has been toward getting capital into companies without payment always being made in board seats. YC's stated goal is to invest in people over ideas, while founders may be the first order investment, the employees of the companies they fund are still a critical part of that bet. Thinking on the bigger horizon, more equity for employees favors founders whose ability to get things done is less dependent on total control, which almost certainly correlates with the sort of leadership that benefits big companies - and big companies are the outliers that YC is looking for. To put it another way, a CEO who has experience building consensus among principle and minority shareholders is better prepared to deal with the diverse and competing ownership interests that exist after a company has taken VC. At least that's my theory of the day.

57 points by arnauddri 12y ago

If it costs you 10% of your company to attract a top engineer, and it's not worth that much to you, you're going to make do with less than the top engineers. At best, you will be recruiting people not smart enough to ask important questions about equity. Fred Wilson seems to be suggesting that founders should indeed hire second-rate candidates if it means they get to keep more of the pie. Maybe he's right.

deleted 12y ago
[deleted]
- kenjackson 12y ago
  It doesn't reduce the amount available to investors. It just factors into the valuation. And then dilution happens across the board (generally). So after taking a few rounds the founders have less of the company than if they had given less to the employee. Likewise, the founder will have less of the company if they give more to the VC. The question for Fred is if an employee is $1m and your cash is worth $1m -- should they both get the same valuation with respect to equity?

chasing 12y ago

I find it weird that the only discussion about this seems to be coming from the founder/VC side of things. Any offer has two sides. The one who offers and the one who accepts (or declines). And I feel like employees need to fully understand what they're getting themselves into. Then they can decide whether what they're being offered is worth it. The last time I was offered a chunk of equity to work with a start-up, I ran the math and decided it wasn't enough to compete with other opportunities. The start-up wouldn't agree to raise the equity to a point I was comfortable with, so I walked and went on to other projects. If more employees negotiated -- and negotiated seriously from a place of knowing both their value and the value of the offer -- I feel like we'd quickly get a better sense of how much equity is fair.

malandrew 12y ago
As someone who was once a founder (failure) and is now the first engineering hire at a funded startup and plans on founding something after my current gig, the issues Sam raised that are most concerning to me are all the other issues besides the size of the grant. Don't get me wrong, I wish the grants were higher, but all the other issues are more pressing since they increase the utility of the small percentage I earned without diluting anyone else. Solving those issues that increase the utility of a good limited in supply and makes the valuation of that good far less nebulous makes it much easier to more accurately determine the amount of equity an employee demands/receives. Getting a bigger percentage with unfavorable terms that might be used to limit how much upside I can get or nullify the upside entirely matters far more. I would prefer terms: * where the exercise window is long (10 years) * where the employees and the founders have the same conditions in funding rounds or acquisitions. i.e. equal dilution. equal opportunity to take money off the table if that is an option. same triggers (double, single). * protection against liquidation preferences (honestly this shouldn't even be a thing) * restricted stock instead of options, with a bonus to cover the tax on it for the year it was issued that is paid out either on the 12th month when the cliff is reached or when taxes on it are due, whichever comes first. Beyond that, a change in tax treatment for these illiquid assets would be awesome.

fingerprinter 12y ago

This is dumb. There are at least three sides the equity equation: founders, VCs/investors and employees. I notice that only two are considered "variable" in this article: founder and employee. The fact is, VCs/Investors are becoming less needed than they were 10-20 years ago. Why wouldn't it be logical for their stake to take a hit for the money they put in?

walshemj 12y ago
But dont a lot of emploee share options get diluted away in later rounds.
- fingerprinter 12y ago
  Yes, which is another reason they would need more initial shares or a better structure.
tptacek 12y ago
Because at the margin, of the three parties we're discussing, the investors have the least market pressure. For all the talk of valuation bubbles, top-tier VC firms still fund one company for every ten-twenty-thirty? companies they meet with.
- fingerprinter 12y ago
  That just tells me that VCs should be taking less. The fact remains that Fred only looked at two options; either the founder stake goes down or the employee pool does. A third option also exists...Investor total share goes down. I personally believe we will see this more in the future.
  - tptacek 12y ago
    The VCs are going to take what the market will bear, is my point.
malandrew 12y ago

kenjackson 12y ago

Fred seems to ignore that it costs less to create a viable company now. Hence the amount they need to raise from VCs is smaller. In the past I may have needed $30m from VCs, now I need $5m. Additionally, as hapless notes, the cost of good engineers is the price of business. You could flip it the other way and say that VCs should pony up the $30m and founders give the engineer $1m signing bonus with market wages and no equity. But I think founders would be more squeamish about that then giving up equity that really has little cash value 90% of the time. BTW, I've never seen a non-founder engineer get 10%. Maybe it happens, but I think its still pretty rare.

mjmahone17 12y ago

If we take this article down the "slippery slope" it proposes, you'd end up with 8 people in the company owning ~80% of the total equity, with the "founder" only owning ~15-20%. But why this is a negative thing for the company is still up in the air: at that point, you might as well have a partnership, like consultancies, law firms or advertising agencies. There's no inherent reason a partnership couldn't make the next LinkedIn or Oculus Rift.

tptacek 12y ago
That's about where founders land now, isn't it?
- mjmahone17 12y ago
  Yes, but it seems like with much less say than they would have if they were a partner, as opposed to just 15% shareholders.
busterarm 12y ago
That would be a terrible turn of events though; law parternships have had to grow significantly (in number of partners) to survive. having a partner that wants to retire or leave often risks dissolution of the entire partnership. You end up having to bring in more and more partners just so people can leave without sinking the whole ship. This industry moves _way too fast_ for partnerships to really work and convert business equity into cash at the same time.

tptacek 12y ago

The other problem with large equity grants to employees is that employees discount them irrationally, why by "irrationally" I mean things like "by trying to value them without doing the math or research". Employees are usually at a sharp disadvantage when it comes to valuing equity, which means that when you allocate it to employees, you're paying a premium to do that. My sense of it is, it's good to give generous equity to keep the team's skin in the game, so that the ups and downs of the business are meaningful to everyone. And, key team members that really want equity and are willing to do the work to value it, also good. But pro-forma "competitive" equity grants? Pay cash instead. Incidentally, the odds that the "best" engineers getting 10% of startups at signup are actually the best developers is, I don't know, something like 𝛆.

adambenayoun 12y ago
This. What I find help with it is give them as much information as possible and be there to answer any question they may have. If you're giving away generous stock option grants you want to make sure they are as educated as possible about their value as opposed to some companies where they'll be secretive about the actual outstanding shares issued and other preferences that could hurt employees grants when a liquidation happens. Additionally for people who may not value option stocks like you do (as a founder or early team member), we usually offer generous equity grant but also allow employees to swap some of them for a higher pay. I think employees are grateful when given the ability to pick more pay or more options. It allows them to put a price tag on these stock options which make these more valuable and tangible.

adambenayoun 12y ago

I am a bit disappointed no one actually addressed* an issue that every founder has to deal with when raising series A: the option pool (it's true most start with a small option pool long before series A but the friction start during series A fundraising). Most (if not all) VCs require the option pool to be formed before the series A transaction is completed and usually push for a very high option pool to avoid granting more options and dilute themselves in case the option pool is not big enough. This conflict of interest lead founders to fight the VC to form the smallest option pool possible while VCs want the biggest one. And the non-sense is that most of that option pool will be granted to employees that will be hired after series A. *Sam Altman actually wrote a short note but didn't expand on it and I think it's a shame.

caseyf7 12y ago

I would like to see more evidence of employees getting too much equity. What I see more often is the VCs getting the large option pool and then the founders try to issue as few options as possible to protect themselves from the dilution the large option pool created for them.

balls187 12y ago

"Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it." I totally disagree here. I don't think you compete with Facebook on comp in this manner. Facebook stock is as good as cash. Stock at a ~A/post A company isn't. Even if you say you'll give this employee $1mil worth of stock, there is a high likelihood that stock isn't going to be worth it. Don't go after Facebook's top engineers trying to compete with comp until you have the resources to get them, take the money ball approach and find talented people who aren't having the world thrown at them yet, and lure those people away.

potatolicious 12y ago
Or... find people worth less than $1mm. It's strange that people even talk about recruiting top (and I mean top) engineers when I can count on one hand the number of startups I've ever seen that'd justify that kind of talent (think John Carmack level). The vast majority of startups are business process improvements (think AirBnb, think Uber) where there's no freaking way you'd really need a Carmack on your team. I disagree with the point about finding talented but under-recognized people. I've seen companies do this, and in this market they will get discovered, it's only a matter of time - and the switching cost of jobs right now is nearly zero. If you're going to lure ridiculously undervalued people away, only to continue to undervalue them (just not as badly), you're going to get a lot of attrition.
- balls187 12y ago
  > I disagree with the point about finding talented but under-recognized people....If you're going to lure ridiculously undervalued people away, only to continue to undervalue them I agree with this point, though I don't think that not-offering them 10% of your company is undervaluing them. I'd like to believe that most people who are undervalued at BigCo's are because they either lack the self-promoting skills, or haven't yet found the right environment to be successful.

7Figures2Commas 12y ago

> Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it. She is. 1. Facebook and Google are publicly-traded. $1 million in equity at a publicly-traded company is not the same as an equity grant at a startup that is theoretically worth $1 million based on the valuation given to the startup by venture capitalists in its last round. The startup's equity might never be liquid and it's far more vulnerable. 2. Most startups do not have to compete with Facebook and Google on compensation. Most of them can't really afford to. The truth of the matter is that as a startup, if you can't get folks excited about working for you without matching the dollars offered by the richest tech companies, there's something wrong with your value proposition or you're trying to recruit the wrong people. 3. What's the difference between a "top software engineer" and a "software engineer"? Different companies have different needs. This idea that all startups need the best of the best (i.e. the person who Facebook and Google are battling for) and that you can't put a limit on the worth of an engineer ("I am not saying the engineer isn’t worth it") is ridiculous.

rch 12y ago

> I am not saying the engineer isn't worth it. She is. I am just pointing out how dilutive employee equity is becoming in silicon valley. Maybe this reflects the fact that it's so much easier to get by with less early capital these days. Those early employees are simply worth proportionally more to a startup than they might have been 5-7 years ago.

zacharycohn 12y ago

"...companies make very large grants to early employees and that ends up hurting the founder’s stake..." Isn't that the point? That early employees are worth more than they've historically been compensated?

claudiusd 12y ago

Stop taking advice about equity from VCs. If you've ever read a term sheet or a SPA, then you know that VCs have a huge incentive to encourage founders to increase the size of their option pools: your typical term sheet requires the existing shareholders to take the dilution of the option pool rather than the investors. Because of this, the bigger your option pool is the lower your price-per-share becomes, and as such the investor gets a bigger cut. It requires founders to budget their option pool up front and divvy it up carefully until the next round of funding. These terms ENCOURAGE founders to keep their option grants tight. Sam Altman and others need to put their money where their mouths are - if you want bigger option pools for employees then remove this clause from your term sheets and encourage other investors to do the same. If you think that more employee equity is good for business, then give us more flexibility with the option pool and share the dilution with us. Don't blame us when the real change starts with you.

tptacek 12y ago
The option pool issue is obviously a hot button here, but remember that Sam Altman's commentary on it ends with "Option pools are complete fiction; boards can increase them whenever they want. It should never be used as a reason for not making a grant.".
- claudiusd 12y ago
  I do agree with him on that, but ask any founder if they feel like that's a real option. Any VC pre-closing will certainly give the impression that it is not.
  - malandrew 12y ago
    Unless YC goes out on a limb here and starts pushing to make it a condition for getting face-time with YC companies on demo day. IANAL, I would expect it's collusion if the startups get together and start agreeing to terms they will accept collectively. But if instead YC, a single entity, uses entrance into its demo day event, as a bargaining chip that can change the conversation around term sheets for the entire industry. i.e. make this rule: Every investor YC allows into demo day may only offer term sheets that does not require the size of the option pool to be raised until after closing the financing. Instead the size of the equity pool will be negotiated after funding closes and will be based on the amount of dilution both the founders and employees and the VCs think okay with relative to the benefit they receive from a larger pool. Individual YC companies would still be free to engage with investors outside and after the demo day event and take the less favorable terms where the option pool is negotiated ahead of time.

gavanwoolery 12y ago

I've been on both ends of the spectrum - as an employee who got very little equity and as a founder who had to distribute it. All I can say is that you don't fully appreciate the worth of equity until it is your own that you are giving away (and I consider myself a relatively generous guy). :)

malandrew 12y ago

I'm wondering why we don't make the vesting of the grant variable as well. Why four years? Why not allow an employee to negotiate for double the chunk for double the length of the grant? That's far more desirable than getting 4 years worth, arriving at year 4 realizing you've succeeded in building a company of true value only to discover that the amount you are re-upped is now at a strike price far greater (that you are responsible for achieving). i.e. you are punished for succeeding if you stay long enough to get re-upped.

brudgers 12y ago

[Preface: My assumption is that Altman is thinking about greater employee equity as something which will create value in YC's portfolio companies. I take it as a given that YC now has sufficient data points to perform regression analysis on this sort of thing among their portfolio companies (and perhaps others outside their portfolio), and that Altman's attention has been drawn by some trend in YC's data and the possibility of increasing YC's rates of return.] I doubt Altman is trying to make life easier for VC's like Wilson. My sense is that YC's business model is oriented to disrupt the traditional VC model and more closely align the interests of investors with those of people at the company. Pretty much every financial innovation YC has made has had the effect of pushing the transfer of power from the people working at the company to those providing capital further and further down the road - from YC's taking common stock, to connecting companies with Angels, to convertible note financing, each move has been toward getting capital into companies without payment always being made in board seats. YC's stated goal is to invest in people over ideas, while founders may be the first order investment, the employees of the companies they fund are still a critical part of that bet. Thinking on the bigger horizon, more equity for employees favors founders whose ability to get things done is less dependent on total control, which almost certainly correlates with the sort of leadership that benefits big companies - and big companies are the outliers that YC is looking for. To put it another way, a CEO who has experience building consensus among principle and minority shareholders is better prepared to deal with the diverse and competing ownership interests that exist after a company has taken VC. At least that's my theory of the day.