16 ms·

Founders hold the majority of the stock because they shoulder the majority of the risk in the early days, employees are largely reward through their salary rath

by ig1 12y ago

Founders hold the majority of the stock because they shoulder the majority of the risk in the early days, employees are largely reward through their salary rather than their stock option. That said most employees make out reasonably through a combination of options & golden handcuffs.

maaku 12y ago
No, founders hold the majority of the stock because the standard unequal terms of silicon valley favor founders over employees (and investors over everyone). Founders got the ball rolling, but it is the employees that took the company from rough product to something acceptable for M&A. Employees can and should be getting a fair shake, but only if we take steps to change the norm together.
- deleted 12y ago
  [deleted]
- il 12y ago
  Founders owning the majority of the business is not a uniquely Silicon Valley phenomenon.
  - maaku 12y ago
    Many of the mechanisms which aggravate the situation (e.g. aggressive company-favored retention clauses in options) where pioneered here.
    - swombat 12y ago
      I'm not in SV. My cofounder and I own 100% of the business. And that's the way it works in most of the world. The SV approach of giving early employees shares as an incentive is actually fairly tech-centric. Whoever heard of a restaurant's first waiter getting shares in the business?
      - maaku 12y ago
        I could give cooperatives as a counter-example. However what I'm talking about is something different -- e.g. language in options contracts that cause you lose your shares if you leave the company unless you immediately exercise them, which most people are not in a financial position to do. This has caused many early employees to lose out on windfalls that would have been theirs if they had the same terms as founders (actual vested equity).
      - larrys 12y ago
        I'd actually love to see examples of companies in SV giving equity to people who are not even clued in and recognize that they need to or should be given equity. And would gladly work for a normal pay check. Anecdotal there are stories of the early janitor getting stock (or something like that) as if they wouldn't work for just a salary. The line that I've heard is that it's a way to get people to work for less money than they would get paid if they didn't get equity. [1] But is this really true and how often in actual practice? (Comments?). I mean in a way if it is true you are taking advantage of the naivete of "the janitor" or "admin assistant" who may not even have a clue at all the probability of that equity even being worth anything at all. Because all they know about is what they read of the big wins that everyone talks about and they think they might actually stand a good chance of hitting the jackpot. Why is this right? To me it isn't (even if you believe it yourself as a founder). Separately with domain name deals there is always a push on the part of sellers that I have noticed to try to get some upside equity when selling what they consider to be a valuable name. In general since the seller isn't taking that much of a haircut on the price anyway it's is usually a bad idea. It's almost pure upside with nominal downside. [1] Along the lines of your comment "Whoever heard of a restaurant's first waiter" that would be the almost equivalent of the admin assistant or maybe customer service rep. Otoh anyone can easily see a new restaurant offering equity to people who work in the kitchen. Especially the the person in the kitchen (or several) need to be lured away from another job they are at.
        maaku 12y ago
        That is one philosophical position -- a classist and strongly capitalist one dividing members of a company into owners and employees. This leads to division of society into workers (who sell their labour) and capitalists (who collect rent). An alternative, more progressive position is that all workers should be entitled to some ownership of the fruits of their labour. That is to say, everyone involved in an enterprise, no matter how big or small, is entitled to receive ownership proportional to the impact of their contribution to the success of the endeavor. In this world view there is no division between owners and employees, and unearned rents are minimized. This is really a philosophical / moral / political debate.
- ig1 12y ago
  Yes and they get a salary for this like they would at any other company. If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that. Obviously you can argue that employees are in a weak negotiating position; but largely the tech sector in major hubs is skewed in favour of employees with a significant range of employers (run from tech giants to new startups). If a particular company isn't willing to offer a compensation package that satisfies you then there are countless other potential employers. (and you can obviously start your own company as well)
  - maaku 12y ago
    > Yes and they get a salary for this like they would at any other company. You've obviously never worked as an early employee at a startup. Pay is never equal or even close to what you'd get at typical big company. Typically that's explained to be because you get equity -- often a pitifully small set of options which if you do the math you'd realize probably wouldn't equal the difference in salary over 4-5 years in anything but the most wildly optimistic scenarios. (The OP's employees' windfall is probably break-even with their opportunity costs.)
    - matnewton85 12y ago
      Wanna quote the second line of his post? >Yes and they get a salary for this like they would at any other company. > If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that.
- mrkurt 12y ago
  I don't think it's either of the above, honestly. "The majority of risk" take is more of a rationalization about why it's ok for founders to get the bulk of the proceeds. "The unequal terms of silicon valley" is the flip side to that. Neither actually explains why this happens, because it's relatively mundane. Founders hold the majority of the stock because they "created" the corporation. When it's time to hire employees, presumably they have some money as well. If a company wants to hire someone, they offer some combination of benefits, equity, and salary that the new employee finds reasonably compelling. Early employees at startups are typically (1) engineers and (2) relatively inexperienced, thus they don't negotiate very large compensation packages. Employees are making the implicit decision to favor salary and a more certain (not very much more certain) over a disproportionate amount of equity. For every startup that actually hires multiple employees, there are probably 10 more where the equity is worthless.
  - maaku 12y ago
    The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodian, or public face, is because of the non-perishable, non-inflationary nature of equity. It is the nature of equity, and the legal system surrounding it, which is the problem. That's not to say that you can't design more equitable arrangement within the current system. For example, you can allocate an order of magnitude fewer shares than are issued, and each quarter do equity "bonuses" of an amount totaling 1% of the allocated shares so far. In other words, ownership percentage of the company for founders + employees would decay with a half-life of about 17 years. (You'd need protections of investor shares against this dilution to make it acceptable of course.) You can play with the numbers of course, but the idea is to have long-term ownership reflect an employees honest contribution (determined by relative bonus size vs. the size of the company), and eventually over time even out disproportionate allocations from early on. Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?
    - tptacek 12y ago
      Why haven't you started a company organized on some alternative set of terms?
- rgbrgb 12y ago
  > got the ball rolling That's quite an understatement of what it takes to quit a job with a salary, build an MVP, structure a company, convince people to work with you, and (if you're hiring pre-revenue) convince investors you'll make them money.
  - maaku 12y ago
    I am a founder of a company; I know what is involved. I've also been there on the employee side -- I know how much they contribute. And with that context, I can say with certainty that terms are almost universally biased in favor of founders and investors at the expense of employees. You can count the exceptions.
bluthru 12y ago
>Founders hold the majority of the stock because they shoulder the majority of the risk in the early days The investors shoulder the majority of the risk.
- jt2190 12y ago
  Founders are investors also, they're just using their time and effort [1] to buy shares, not cash. [1] Be very wary of working for founders who haven't put themselves on a vesting schedule, as it will be very tempting for them to put in as little effort as possible since they'll still reap the rewards if things go well.
borplk 12y ago
Pardon my ignorance but what is golden handcuffs?
- ryanburk 12y ago
  usually it is an option or stock award grant that is valuable enough when fully vested over a long term (usually 4-5 years) that it is very hard to walk away from it. it "handcuffs" you to the company. http://en.wikipedia.org/wiki/Golden_handcuffs http://en.wikipedia.org/wiki/Golden_handcuffs
- winslow 12y ago
  Golden handcuffs are a way to keep a key person at a company through massive payouts. For example the tumblr deal netted the CEO a massive golden handcuff of ~81 million to stay til 2017. [1] [1] - http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-golden-handcuff http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-...
rhizome 12y ago
We can quibble about the degree of risk at issue, but I don't think there's a question that employees create the majority of the value.
melvinmt 12y ago
It's not like founders don't get any salary.
- bigchewy 12y ago
  do you have a reference for this claim?

by ig1 12y ago

maaku 12y ago

No, founders hold the majority of the stock because the standard unequal terms of silicon valley favor founders over employees (and investors over everyone). Founders got the ball rolling, but it is the employees that took the company from rough product to something acceptable for M&A. Employees can and should be getting a fair shake, but only if we take steps to change the norm together.

deleted 12y ago
[deleted]
il 12y ago
Founders owning the majority of the business is not a uniquely Silicon Valley phenomenon.
- maaku 12y ago
  Many of the mechanisms which aggravate the situation (e.g. aggressive company-favored retention clauses in options) where pioneered here.
  - swombat 12y ago
    I'm not in SV. My cofounder and I own 100% of the business. And that's the way it works in most of the world. The SV approach of giving early employees shares as an incentive is actually fairly tech-centric. Whoever heard of a restaurant's first waiter getting shares in the business?
    - maaku 12y ago
      I could give cooperatives as a counter-example. However what I'm talking about is something different -- e.g. language in options contracts that cause you lose your shares if you leave the company unless you immediately exercise them, which most people are not in a financial position to do. This has caused many early employees to lose out on windfalls that would have been theirs if they had the same terms as founders (actual vested equity).
    - larrys 12y ago
      I'd actually love to see examples of companies in SV giving equity to people who are not even clued in and recognize that they need to or should be given equity. And would gladly work for a normal pay check. Anecdotal there are stories of the early janitor getting stock (or something like that) as if they wouldn't work for just a salary. The line that I've heard is that it's a way to get people to work for less money than they would get paid if they didn't get equity. [1] But is this really true and how often in actual practice? (Comments?). I mean in a way if it is true you are taking advantage of the naivete of "the janitor" or "admin assistant" who may not even have a clue at all the probability of that equity even being worth anything at all. Because all they know about is what they read of the big wins that everyone talks about and they think they might actually stand a good chance of hitting the jackpot. Why is this right? To me it isn't (even if you believe it yourself as a founder). Separately with domain name deals there is always a push on the part of sellers that I have noticed to try to get some upside equity when selling what they consider to be a valuable name. In general since the seller isn't taking that much of a haircut on the price anyway it's is usually a bad idea. It's almost pure upside with nominal downside. [1] Along the lines of your comment "Whoever heard of a restaurant's first waiter" that would be the almost equivalent of the admin assistant or maybe customer service rep. Otoh anyone can easily see a new restaurant offering equity to people who work in the kitchen. Especially the the person in the kitchen (or several) need to be lured away from another job they are at.
      - maaku 12y ago
        That is one philosophical position -- a classist and strongly capitalist one dividing members of a company into owners and employees. This leads to division of society into workers (who sell their labour) and capitalists (who collect rent). An alternative, more progressive position is that all workers should be entitled to some ownership of the fruits of their labour. That is to say, everyone involved in an enterprise, no matter how big or small, is entitled to receive ownership proportional to the impact of their contribution to the success of the endeavor. In this world view there is no division between owners and employees, and unearned rents are minimized. This is really a philosophical / moral / political debate.
ig1 12y ago
Yes and they get a salary for this like they would at any other company. If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that. Obviously you can argue that employees are in a weak negotiating position; but largely the tech sector in major hubs is skewed in favour of employees with a significant range of employers (run from tech giants to new startups). If a particular company isn't willing to offer a compensation package that satisfies you then there are countless other potential employers. (and you can obviously start your own company as well)
- maaku 12y ago
  > Yes and they get a salary for this like they would at any other company. You've obviously never worked as an early employee at a startup. Pay is never equal or even close to what you'd get at typical big company. Typically that's explained to be because you get equity -- often a pitifully small set of options which if you do the math you'd realize probably wouldn't equal the difference in salary over 4-5 years in anything but the most wildly optimistic scenarios. (The OP's employees' windfall is probably break-even with their opportunity costs.)
  - matnewton85 12y ago
    Wanna quote the second line of his post? >Yes and they get a salary for this like they would at any other company. > If they take on a below market salary and or additional risk exposure in join a startup they should negotiate a package (be it options or otherwise) that adjusts for that.
mrkurt 12y ago
I don't think it's either of the above, honestly. "The majority of risk" take is more of a rationalization about why it's ok for founders to get the bulk of the proceeds. "The unequal terms of silicon valley" is the flip side to that. Neither actually explains why this happens, because it's relatively mundane. Founders hold the majority of the stock because they "created" the corporation. When it's time to hire employees, presumably they have some money as well. If a company wants to hire someone, they offer some combination of benefits, equity, and salary that the new employee finds reasonably compelling. Early employees at startups are typically (1) engineers and (2) relatively inexperienced, thus they don't negotiate very large compensation packages. Employees are making the implicit decision to favor salary and a more certain (not very much more certain) over a disproportionate amount of equity. For every startup that actually hires multiple employees, there are probably 10 more where the equity is worthless.
- maaku 12y ago
  The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodian, or public face, is because of the non-perishable, non-inflationary nature of equity. It is the nature of equity, and the legal system surrounding it, which is the problem. That's not to say that you can't design more equitable arrangement within the current system. For example, you can allocate an order of magnitude fewer shares than are issued, and each quarter do equity "bonuses" of an amount totaling 1% of the allocated shares so far. In other words, ownership percentage of the company for founders + employees would decay with a half-life of about 17 years. (You'd need protections of investor shares against this dilution to make it acceptable of course.) You can play with the numbers of course, but the idea is to have long-term ownership reflect an employees honest contribution (determined by relative bonus size vs. the size of the company), and eventually over time even out disproportionate allocations from early on. Other systems are possible. The fact that founders and investors don't explore them is easily explained: the current system is heavily weighted in their benefit, so why bother?
  - tptacek 12y ago
    Why haven't you started a company organized on some alternative set of terms?
rgbrgb 12y ago
> got the ball rolling That's quite an understatement of what it takes to quit a job with a salary, build an MVP, structure a company, convince people to work with you, and (if you're hiring pre-revenue) convince investors you'll make them money.
- maaku 12y ago
  I am a founder of a company; I know what is involved. I've also been there on the employee side -- I know how much they contribute. And with that context, I can say with certainty that terms are almost universally biased in favor of founders and investors at the expense of employees. You can count the exceptions.

bluthru 12y ago

>Founders hold the majority of the stock because they shoulder the majority of the risk in the early days The investors shoulder the majority of the risk.

jt2190 12y ago
Founders are investors also, they're just using their time and effort [1] to buy shares, not cash. [1] Be very wary of working for founders who haven't put themselves on a vesting schedule, as it will be very tempting for them to put in as little effort as possible since they'll still reap the rewards if things go well.

borplk 12y ago

Pardon my ignorance but what is golden handcuffs?

ryanburk 12y ago
usually it is an option or stock award grant that is valuable enough when fully vested over a long term (usually 4-5 years) that it is very hard to walk away from it. it "handcuffs" you to the company. http://en.wikipedia.org/wiki/Golden_handcuffs http://en.wikipedia.org/wiki/Golden_handcuffs
winslow 12y ago
Golden handcuffs are a way to keep a key person at a company through massive payouts. For example the tumblr deal netted the CEO a massive golden handcuff of ~81 million to stay til 2017. [1] [1] - http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-golden-handcuff http://news.sky.com/story/1126468/yahoo-tumblr-founder-nets-...

rhizome 12y ago

We can quibble about the degree of risk at issue, but I don't think there's a question that employees create the majority of the value.

melvinmt 12y ago

It's not like founders don't get any salary.

bigchewy 12y ago
do you have a reference for this claim?