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For retention. If the company actually starts taking off, the equity keeps people there. If they don't have equity, every person with a decent title at a fast g

For retention. If the company actually starts taking off, the equity keeps people there. If they don't have equity, every person with a decent title at a fast growing startup will jump ship to other competitors immediately and get a big (cash) raise. The equity keeps people in the fast growing startup longer. Golden handcuffs and all that.

IgorPartola 12y ago
But if it's worthless, and the employee realizes it, then it will not serve its purpose. Case in point: my last gig gave me something like 0.15% of the company vested over 4 years. I left after 2.5 years and the equity did nothing to keep me there even though the company was in a reasonable place financially. Why? Because 0.15% * the valuation * likelihood of a sale * sale price * likelihood of my shares actually being given any value in a sale is effectively 0. Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.
fsk 12y ago
Conversely, if the startup starts taking off, the startup might look for an excuse to fire you to weasel out of paying your unvested options. That happened at Zygna and Facebook. So, there are several bad things that can happen with options/equity. 1. The company fails, the options are worthless 2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience). 3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).

IgorPartola 12y ago

But if it's worthless, and the employee realizes it, then it will not serve its purpose. Case in point: my last gig gave me something like 0.15% of the company vested over 4 years. I left after 2.5 years and the equity did nothing to keep me there even though the company was in a reasonable place financially. Why? Because 0.15% * the valuation * likelihood of a sale * sale price * likelihood of my shares actually being given any value in a sale is effectively 0. Everyone keeps suggesting that when evaluating a compensation package, one should not count equity for anything since it's worthless. Well, it is nearly worthless, unless you happen to hit the startup that becomes Facebook, Google, Dropbox, etc. and you get in early enough (usually only employee #1 gets over 1%). So why bother even offering a worthless piece of compensation. The startup might as well include a bunch of lottery tickets with every paycheck instead.

fsk 12y ago

Conversely, if the startup starts taking off, the startup might look for an excuse to fire you to weasel out of paying your unvested options. That happened at Zygna and Facebook. So, there are several bad things that can happen with options/equity. 1. The company fails, the options are worthless 2. The company is moderately successful, but not spectacularly successful. If your unvested options are worth (say) $30k/year, then they have no reason to give you a $30k raise if market rates increased by $30k (either due to a better job market, or your increased experience). 3. The company is spectacularly successful, your unvested options are worth big $$$. Now, your employer has an incentive to cheat you. They can look for an excuse to fire you (not too hard with at-will employment). They can raise another round of financing with a liquidation preference, reducing the value of your common shares. They can block you from selling your shares (Uber did this recently). The executives can give themselves big options grants, further diluting your common shares (happened to Eduardo Saverin at Facebook).