4 ms·

The reason why founders hold the majority of the company even years after their role -- important though it remains -- is nothing more than managerial, custodia

by 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.
        thecage411 12y ago
        Do you think founders have a moral obligation to educate potential employees about financial projections?
        tptacek 12y ago
        To some extent, yes. If you acknowledge someone's market rate is X, and offer them X-k + Y shares, you're obliged to back up why Y is >= k.
        jasode 12y ago
        Y is also partially determined by the employee. There is uncertainty from both the employer and employee on what the potential upside of Y could be. If an employee (programmer) believes his unique skills will be instrumental in making the company succeed, he won't discount Y as much as another employee (e.g. a chef just cooking the lunch meals for the programmers). The potential employee programmer knows more than the employer about how good his skills actually are and how dedicated he will be which can affect the value of Y.
nostrademons 12y ago
What you describe is basically vesting and additional stock issuance, and it's common practice for most companies today. The actual numbers are usually 4 year vesting of founder shares, so they get about 6% of their allocated shares per quarter. Employees also typically also get refresher equity grants, eg. my initial options package at Google was worth less than half the total equity I received in my 5 years there. And new stock is issued in fundraising events, so ownership percentage of the company does tend to decay with a half-life of a bit less than 17 years (eg. Bill Gates owned 66% of Microsoft at its founding, had about 26% IIRC in the late 90s, and now owns only about 3-4%). I think you're completely ignoring the fact that there is a liquid and very competitive market in the founder/labor market. If employees were getting a raw deal at startups, they would quit to become founders, driving down the supply of employees and up the supply of startups until they start getting better equity grants. I've done that; I've been an employee at 2 startups and one big company, and am now founding my second startup. Anecdotally, I know many others who have also bounced between working for startups and founding startups. I think a more likely explanation is that a massive number of startups die before ever getting their first employee. And so all of those early startup employees who try their hand at being a founder don't actually increase the pool of employing startups very much, and are re-absorbed back into the system as early employees at other startups. If you want a more equitable system, you'd want something where when people quit their jobs, they have a high chance of being able to make it on their own, and there's not a winner-take-all effect where most organizations fail to get traction and the winners absorb those that can't. But then, that system already exists as well. It's called consulting, and is probably the truest indicator of what an employee's actual market value is.
_delirium 12y ago
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? Some of the more obvious other systems are also legally disfavored. For example American corporate law is really oriented towards equity-based corporations, not workers' cooperatives. This doesn't mean that an alternate legal climate would lead to everyone structuring tech businesses as workers' cooperatives, but the current American legal climate makes it difficult, so fewer are founded than might be the case in a more favorable environment.

by maaku 12y ago

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.
      - thecage411 12y ago
        Do you think founders have a moral obligation to educate potential employees about financial projections?
        tptacek 12y ago
        To some extent, yes. If you acknowledge someone's market rate is X, and offer them X-k + Y shares, you're obliged to back up why Y is >= k.
        jasode 12y ago
        Y is also partially determined by the employee. There is uncertainty from both the employer and employee on what the potential upside of Y could be. If an employee (programmer) believes his unique skills will be instrumental in making the company succeed, he won't discount Y as much as another employee (e.g. a chef just cooking the lunch meals for the programmers). The potential employee programmer knows more than the employer about how good his skills actually are and how dedicated he will be which can affect the value of Y.

nostrademons 12y ago

What you describe is basically vesting and additional stock issuance, and it's common practice for most companies today. The actual numbers are usually 4 year vesting of founder shares, so they get about 6% of their allocated shares per quarter. Employees also typically also get refresher equity grants, eg. my initial options package at Google was worth less than half the total equity I received in my 5 years there. And new stock is issued in fundraising events, so ownership percentage of the company does tend to decay with a half-life of a bit less than 17 years (eg. Bill Gates owned 66% of Microsoft at its founding, had about 26% IIRC in the late 90s, and now owns only about 3-4%). I think you're completely ignoring the fact that there is a liquid and very competitive market in the founder/labor market. If employees were getting a raw deal at startups, they would quit to become founders, driving down the supply of employees and up the supply of startups until they start getting better equity grants. I've done that; I've been an employee at 2 startups and one big company, and am now founding my second startup. Anecdotally, I know many others who have also bounced between working for startups and founding startups. I think a more likely explanation is that a massive number of startups die before ever getting their first employee. And so all of those early startup employees who try their hand at being a founder don't actually increase the pool of employing startups very much, and are re-absorbed back into the system as early employees at other startups. If you want a more equitable system, you'd want something where when people quit their jobs, they have a high chance of being able to make it on their own, and there's not a winner-take-all effect where most organizations fail to get traction and the winners absorb those that can't. But then, that system already exists as well. It's called consulting, and is probably the truest indicator of what an employee's actual market value is.

_delirium 12y ago

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? Some of the more obvious other systems are also legally disfavored. For example American corporate law is really oriented towards equity-based corporations, not workers' cooperatives. This doesn't mean that an alternate legal climate would lead to everyone structuring tech businesses as workers' cooperatives, but the current American legal climate makes it difficult, so fewer are founded than might be the case in a more favorable environment.