4 ms·

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

by 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?
  - maaku 12y ago
    I am ;)
    - tptacek 12y ago
      So, first, sincerely: good luck to you, and second: doesn't the fact that you can do this indicate that founder terms aren't a conspiracy against employees? If you don't want to accept employee equity, start a company. I'm not arguing that employee equity valuation can't be abusive. It often is. Dishonesty is dishonesty regardless of who shoulders the risks. But if you're a founder and you're transparent and honest, the market does a pretty solid job of allocating upside.
      - maaku 12y ago
        > I'm not arguing that employee equity valuation can't be abusive. It often is. And that's all I'm arguing. It often is abusive, and it shouldn't be. Of course one of the problems is that young coders just out of college looking at the startup scene (typically the only people to make the sacrifices necessary to be first employees, because of a lack of other commitments) don't know that they are getting a raw deal. So I make posts like this on HN, in the hopes they someone might read it and choose differently.
        tptacek 12y ago
        People who want to make careers in the startup sector need to be taught the skill of doing simple financial projections --- how to make 3 revenue forecasts, how to see what multiple of forward revenue results in in what final deal size, and how to work back from total deal size to employee outcome. I agree that because almost all startup candidate employees don't do this, equity can be exploitative. But by the same token, most engineers don't know how to negotiate salary, and will lose even more money as a result.

by mrkurt 12y ago

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?
- maaku 12y ago
  I am ;)
  - tptacek 12y ago
    So, first, sincerely: good luck to you, and second: doesn't the fact that you can do this indicate that founder terms aren't a conspiracy against employees? If you don't want to accept employee equity, start a company. I'm not arguing that employee equity valuation can't be abusive. It often is. Dishonesty is dishonesty regardless of who shoulders the risks. But if you're a founder and you're transparent and honest, the market does a pretty solid job of allocating upside.
    - maaku 12y ago
      > I'm not arguing that employee equity valuation can't be abusive. It often is. And that's all I'm arguing. It often is abusive, and it shouldn't be. Of course one of the problems is that young coders just out of college looking at the startup scene (typically the only people to make the sacrifices necessary to be first employees, because of a lack of other commitments) don't know that they are getting a raw deal. So I make posts like this on HN, in the hopes they someone might read it and choose differently.
      - tptacek 12y ago
        People who want to make careers in the startup sector need to be taught the skill of doing simple financial projections --- how to make 3 revenue forecasts, how to see what multiple of forward revenue results in in what final deal size, and how to work back from total deal size to employee outcome. I agree that because almost all startup candidate employees don't do this, equity can be exploitative. But by the same token, most engineers don't know how to negotiate salary, and will lose even more money as a result.