9 ms·

Introducing Progressive Equity – Increase employee ownership as company grows

376 points by andrew 11y ago

bshanks 11y ago
Andrew isn't comfortable posting Detour's threshold, and i respect that, but for anyone actually thinking about using this in another company, a threshold must be chosen -- so what are other people's thoughts on what a good threshold might be? I'll start with an estimate. i think i saw a retirement savings calculator somewhere suggest that one should try to save ~$2 million by retirement per person(!) (sounds a little high to me at first but i guess that's only $75k/yr for 26 years of retirement, assuming you dont make any money on investments). So if one wants to provide for themselves and a spouse, that's $4 million. Moderately fancy homes in very expensive areas can be around $5 million. So $10 million would provide for two people and a nice house in an expensive area (we havent accounted for children yet but somehow i bet you could get by on $10 million, after all, most people do). We havent yet accounted for taxes (income taxes on the initial payment (~50% including federal and state?), and also ongoing property tax on the house), so lets say $25 million, which is the threshold used by https://news.ycombinator.com/item?id=9337915 https://news.ycombinator.com/item?id=9337915 . This sounds like a lot but my sense is that for the threshold number youd rather overshoot than undershoot, and some people may have more expensive tastes than others; in fact it may even be too low. $25 million is not that far off from the $50 million threshold used by https://news.ycombinator.com/item?id=9337837 https://news.ycombinator.com/item?id=9337837 . So, what do others (not Andrew) think; would $25 million or so be a good threshold to use if one were actually doing this?
andrew 11y ago
If anyone has questions about how this works, let me know!
- im2w1l 11y ago
  I guess you give the same amount of kickers to every employee. Wont the kickers then be too diluted to be worth anything? I haven't done the math, just a feeling.
  - michaelochurch 11y ago
    It doesn't seem like it. My read is that 50% of the windfall is distributed evenly and 50% is distributed according to the existing equity disbursement. It's like a basic income. It's designed so that in a company of N employees, no one gets less than 1/2*N of the payout. It's a great idea because it means that average employees will actually be motivated by the equity; let's be honest, 0.05%, vesting over 4 years, of a 100-person company isn't enough to motivate anyone except for a starry-eyed young kid on his first startup. If Silicon Valley ever wants to grow up and remain innovative, that's the sort of thing we'll need. A 0.05% slice is just a bonus and, compared to Wall Street, a pretty weak one.
- vasilipupkin 11y ago
  I am a little confused. Why would you continue diluting the employees? don't they get heavily diluted by subsequent VC rounds already ?
- aqme28 11y ago
  If I'm an employee above the distribution threshold, doesn't this incentivize me to leave early (ideally right before the distribution event) rather than get my shares redistributed?
- loceng 11y ago
  Is it really the best way to incentivize people to do a good job, the future possibility of a large exit, and that they'd get an additional share? I like the idea of something being pre-determined, set from the get-go, however as you mentioned different individuals have and bring different value and have different impact in the company. Does it make sense for high impact people to get a 1 megadonk increase, along with a low impact employee? There's another model I was hoping to be able to explore, though I don't have a lawyer nor could afford putting the resources towards writing any draft for it - which takes more of a convertible notes with a cap -- you give employees higher equity initially, so if the company doesn't do as well then those employees gain more, and that equity comes with a cap - so say it's 2.5% of the company with a $5 million cap and that employee has agreed they'd be happy with that outcome. The company exits for $1 billion which would require a lot more effort from a lot of people - save if it's some automatic viral scaling company with only a small team, e.g. WhatsApp with ~35 employees before selling to Facebook ... under this model then employees 30-35 in WhatsApp scenario could gain $100s of millions of dollars for very little time and energy invested?
- allanca 11y ago
  Is this something you implemented from the incorporation at Detour or only later on as the company started to grow? Seems like this level of complexity when the company is still incipient could be too much mental overhead.
- choppaface 11y ago
  If an early employee leaves, they don't get to participate in the kicker pool. Suppose it takes a company 10 years to have a significant liquidity event. In the timespan, it's very likely key employees join & leave and don't best a stake that would achieve financial independence. Shouldn't these employees also have access to the kicker pool? A relevant example here is Quora, where several very key engineers have left but (I'm assuming) wouldn't achieve financial independence in an IPO. Isn't this system a bit predicated on a high growth company that hopes to IPO within a few years? What might help is giving option/shareholders access to the kicker pool so long as they don't liquidate otherwise.
cleung2010 11y ago
What about people who joined early vs those who just joined?
brandonb 11y ago
That's a great idea! You're in kind of a unique situation, so I'm trying to figure out to what extent this idea can apply to your average startup. What were the reasons the Groupon board opposed your original proposal to redistribute equity? This time around, what type of pushback did you get from your lawyers and investors? Second, consider the "median" startup raising a series A or B--not necessarily a rocket ship with a lot of negotiating power, and not necessarily a famous founder. Do you think progressive equity would raise concerns from your typical series A/B VC?
- RussianCow 11y ago
  > Do you think progressive equity would raise concerns from your typical series A/B VC? I don't have any experience with VCs, but from the FAQ at the bottom: > ...it's designed so investors remain unaffected, but you're welcome to try and get them to opt-in. So I don't see why VCs should be concerned given that they will be unaffected by this system. I could be missing something, though.
- wilsynet 11y ago
  If Mr. Mason had proposed the progressive equity plan to the board at Groupon, the board may very well have agreed (it doesn't really impact the investor), but he would have had to get buy-in from the rest of the employees too (or risk revolt and lawsuits). It's fine that everyone agree to this up front as they join the company, but it's difficult to go back in time and re-write the employee stock plan.
  - spacehome 11y ago
    > it's difficult to go back in time and re-write the employee stock plan. As well it should be.
kak9 11y ago
This is really interesting, and I always like rethinking of equity distribution--since it's so lopsided currently. Some questions off the top of my head - Since employees leaving don't receive from the kicker pool. Doesn't this incentivize people who are unhappy and want to leave to stay? There are some benefits to this, but seem like a ton of costs too (and part of what Pinterest's change was addressing) - How is the kicker pool redistributed? Equally or along the lines of people's current distributions of equity? - Curious if you have opinion on where the threshold should be set? And if it eventually makes sense to do tiers of thresholds? Or if you think the simplicity makes it make sense not to. But think this sounds like a great thing, and would love to hear updates on it as it develops.
- JoshTriplett 11y ago
  > Doesn't this incentivize people who are unhappy and want to leave to stay? So does any other kind of "golden handcuff" stock option or time-vested stock grant.
  - kak9 11y ago
    Agreed. But to different degrees. In its current form this would be the strongest--since you can never leave if you want any of those shares. Also, consider this. Someone who joined one month before IPO would get more from the kicker than someone who worked for years and then left 1 month before IPO.
    - nathan_f77 11y ago
      Yep, I think that's a big problem. It shouldn't matter if you're still at the company when the redistribution happens, it should just be based on how many shares you own.
  - digikata 11y ago
    If you want to reduce the "golden handcuff" effect, then you can keep an account of each employees 'kicker shares', but continue to issue shares on an x every time period basis. This causes inflation in the currency of 'kicker shares'. If you stay on continuously, then you keep your percentage of the kicker. If you leave, then those shares you earned slowly deflate in value. You could even recognize higher risk of earlier employees by issuing special shares which have some mechanism by which if they leave, those shares may still deflate, but at a slower rate than later ones. e.g. for every time-period distribution of shares, these shares receive some fraction of the new distribution.
pg_is_a_butt 11y ago
so dumb. define "grows". you went from 5 people to 500 and took on $100,000,000 of debt plummeting the stock price? employees get percentages of the company, and as the company is worth more, that percentage is worth more. you're fixing a problem that doesn't exist with a new problem.
mahyarm 11y ago
I wonder how the tax consequences work with this.
- foysavas 11y ago
  For educational purposes only and not legal advice: This incentive plan is structured as restricted stock units that are paid out as shares upon an IPO or trade sale (called in the doc, the "Initial Vesting Event"). Tax laws in the U.S. will impose ordinary income tax on the fair market value of such shares when they are issued, which for clarity, is at the Initial Vesting Event. --- For the record, I am a bit peeved that the word "tax" is being used to describe aspects of this plan, as it may make looking up actually startup tax matters harder.
  - mahyarm 11y ago
    It's a good thing to know. Many employees who wanted to move on from companies find their stock options a financial penalty vs a financial benefit because of things like AMT. Now if there was a way to do this and get the long term capital gains tax rate vs. the ordinary tax rate. I can't think of any without paying the IRS before hand to buy your options or doing some sort of strange cyclical loan program with investors.
Quanticles 11y ago
If this doubles the chance of a unicorn, then everyone involved comes out ahead. Nice system
- marssaxman 11y ago
  What does "the chance of a unicorn" mean?
  - austinsharp 11y ago
    Unicorn usually refers to a company valued at >$1 billion[1]. So if a scheme like this increases the odds of massive success enough, then the average return to everyone (even those 'taxed') under this progressive scheme would be higher than with a normal equity scheme and the reduced chance of a world-changing exit. [1] http://fortune.com/unicorns/ http://fortune.com/unicorns/
moe 11y ago
I like that I can actually understand this program and don't feel like it was carefully designed to rip me off. Unlike the usual jungle of capped/uncapped notes, dilution, vesting schedules, option pools, pre/post valuation, etc...
- harryh 11y ago
  This doesn't get rid of any of those things.
  - alxndr 11y ago
    Could it reduce (or simply eliminate) the need for more complicated ownership sharing schemes?
    - harryh 11y ago
      No.
BinaryIdiot 11y ago
Okay this is a really cool concept. I'm going to read over the paperwork to make sure I understand this but if it's what I think it is I love it and will totally use it when I start my startup. Thanks!
deleted 11y ago
[deleted]
coffeemug 11y ago
I don't know if the mechanics work out (designing legal structures like this is super-tricky), but the idea is wonderful. Do you think it's possible to implement this in an existing (post-series A but pre-unicorn) company, or does it have to happen before the company takes on significant funding?
- andrew 11y ago
  That's a great question. I'll ask my lawyer and report back.
ucaetano 11y ago
Wouldn't this have the effect of changing the risk/return balance? For those joining your company early on, the risk would remain the same, but the return would fall sharply (by ~50%), while for those joining late in the game, the risk would remain the same, but the returns would increase a lot. If everything else remains the same, people would be less willing to take risks and join early stage companies, instead trying to join near-IPO ones, where you can get a disproportional payout from minimum risk. To maintain the same risk/return profile, you'd need to pay much higher fixed salaries to early employees and lower to late employees, which would probably drive the startup bankrupt on the early stage page.
- hkmurakami 11y ago
  The thesis/argument in support of "Progressive Equity" would be that the risk/reward balance is still skewed strongly towards founders (and to a much less extent early employees). One's position with respect to this thesis would determine whether you believe this equity structure is a step forward or not.
- ryandrake 11y ago
  Where is it written that returns should necessarily so heavily be tied to risk? Many enterprises are structured this way, but there's no law that says it must be so.
  - harryh 11y ago
    Because people won't generally buy high risk low return investments.
    - venomsnake 11y ago
      Zynga?
  - cauterized 11y ago
    Because it's the only way to incentivize people to take that risk?
  - 11y ago
jim-greer 11y ago
I like the innovation here. If it catches on it will be interesting to see how the market values a company where a far larger slice of the employees are going to be financially independent. This arrangement doesn't really seem to be in the shareholders' interest.
devNoise 11y ago
How do you think this idea would combine with the Pinterest 7 year stock option idea? Both seem like good ideas that benefit the employees. I assume that the Progressive equity would only be applicable to current employees of the startup.
kzhahou 11y ago
Wonderful to see this new idea. But Andrew: instead of inventing this new model, why not achieve the redistribution by changing the percentages of the well-understood system. So instead of, say: 50% founder, 35% investors, 15% option pool (i.e., all employees combined) Something like: 20% founder, 35% investors, 45% option pool
- pcl 11y ago
  If you made that change only, you'd presumably still end up allocating the remaining 45% in a way that skewed heavily towards early hires. On the other hand, this system allocates the unicorn value to much later hires as well.
- sadface 11y ago
  If the founders goals are to achieve a satisfying outcome ("financial security"), they would have to achieve a 2.5x bigger exit under scenario 2 than scenario 1. Andrew's new system retains scenario 1's "ease" of achieving a satisfying outcome for the founders while allowing the other employees to reap more of the benefits if the company grows further. It's a structure supporting the idea that the first $X million are pretty important for the founders (or anyone, really) but the next $XXXm aren't as big of a deal and can be spread around somewhat, hopefully increasing the total number of people who hit $Xm within the company if it becomes huge. I like the idea.
- andrew 11y ago
  The benefit to founders of progressive equity is that at a smaller exit they still get a big return. It's only when the numbers get huge, as they often seem to be doing these days, that progressive equity kick in. Like a progressive tax system.
joshjkim 11y ago
This is great, though one key practical challenge: in most cases only founders will really be "taxed" in a meaningful way, so it requires that founders want to and decide to do something that loses them some serious $$ (as noted in answer to the second FAQ). While I believe the additional upside presented to employees will have a positive impact re: incentive alignment and motivation, it is TBD if the gains realized by the founders will exceed the cost to the founders - I think that will be required before massive adoption (probably the biggest challenge here is measurement of that impact). Still, hopefully some just-plain-nice founders do this, and I hope it gets them a great team and great success. Even without mass adoption, it would be awesome to see this get adopted by other companies who (like Detour) were started by already-exited founders who are on a second (or third/fourth/fifth) project - there are actually a lot of them, so hopefully enough are gracious enough to experiment with this AND achieve success so that there is a sound basis for adopting this more widely (of course the trade-off might not be in the progressive equity’s favor – and while I’m making caveats, serial entrepreneurs generally do better than the first time entrepreneur for a bunch of other reasons like experience/connections, so it will be hard to determine/quantify what portion of success can be attributed to progressive equity and not to other factors…still hope they give it a shot anyhow).
tropchan 11y ago
This is very cool. One thing I've also wondered about is letting talent adjust compensation on floating scale between $$$ and equity... also, as in "earn-in"! I thought this could be an great way to attract high-impact team members. It's tough sell to leave a high-paying stable job for a risky lower paying job... but what if you could adjust your salary and "earn-in" more equity... It could lower the burn and align interests better. Thoughts? Also, can I get paid in Megadonks ?
- oaktowner 11y ago
  +1 to Megadonk as the currency of choice for my next job.
  - tropchan 11y ago
    Bitcoin needs to rebrand as Megadonks;)
  - noonespecial 11y ago
    Yes and is 1000 Megadonks a Badonkadonk?
    - tropchan 11y ago
      HAHAHAH!!
desireco42 11y ago
This looks like Mike Moyer's Slicing Pie http://www.slicingpie.com/ http://www.slicingpie.com/ He might not be as successful in promoting it but it is trying to solve same issue.
Saturnaut 11y ago
I worked for a company a few years back that followed a similar idea. We had a bottom line for operating costs (salary, benefits, rent, utilities, other general expenses) plus a flat 25% being invested back into the company. Everything else left over at the end of the month was distributed to the employees based on their roles. It took a while to iron out. At first we had issues as the money was rolled out as a quarterly bonus, which caused a lot of tax to be taken off the top. It changed a lot over the first year, and ended up being abandoned in favor of giving consistent raises.
zkhalique 11y ago
Has anyone read the book Slicing Pie? What do you think of the scheme presented there, with the "Grunt fund"?
- plumtucker 11y ago
  I wrote Slicing Pie! The problem Andrew is trying to solve, I think, is the core problem with fixed equity splits that give certain people an unfair share. The Slicing Pie model allocates equity fairly so no one person would have a disproportionate amount unless they made disproportionate contributions. If you used this model with a traditional fixed split you would spread out the wealth a bit. If you used it with the Slicing Pie model you would be breaking a perfectly fair split.
birken 11y ago
Here is an example I made to help me understand it. Say SuperAwesomeStartup had a system like this, and the threshold was an ungodly high amount of 50 million dollars. The company IPOs and is worth 100 billion dollars. Founder X owns 10%, Founder Y owns 8%, Founder Z owns 6%, Early Employee A owns 1%, Early Employee B owns 0.5%, Early Employee C owns 0.25% And there are 5,000 employees of the company Before After Founder X 10B 5.02B Founder Y 8B 4.02B Founder Z 6B 3.02B Early Employee A 1B 525M Early Employee B 500M 275M Early Employee C 250M 150M Amount Distributed to each employee: 12.72B / 5,000 = 2.5 million each on avg That is awesome. Though obviously very very few companies ever become worth 100B, it is a great example of how spreading the wealth from the founders makes little impact to them and a massive impact to everybody else.
- cyrusradfar 11y ago
  Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real http://kapuno.com/conversation/bblc6nqbe6qte http://kapuno.com/conversation/bblc6nqbe6qte
  - mattj 11y ago
    heads up, your math is a little buggy - 1% of $90b is $900m, not $90m
    - cyrusradfar 11y ago
      FRACK! Fixing, now. Thanks :)
      - cyrusradfar 11y ago
        UPDATED: The first version had an incredibly bad math error early in my math which ruined the calculation. Honestly, the error ended up to be about 10% but it was egregious to say 1% of a 90 billion is $90M. Thanks to @p45c41 (on Twitter) and many others here for telling me simultaneously.
doublerebel 11y ago
Unique, glad this is being shared. I've always looked towards the Wealthfront Equity Plan of Early Evergreen Grants [1] as a good example. It is arguably more performance-oriented than this Progressive Equity. I really like the concept of giving everyone financial independence, but it must take the right combination of culture, investors, and valuation to make it more motivating than it is inhibiting. Also, could the redistribution of equity at the time of sale have more cost in tax obligations than earlier redistribution? While I really appreciate the legal docs, the truth is in a longer description that remains easily comprehensible. I think the main barrier to most of these alternative equity structures is a lack of understanding from all parties. [1] https://blog.wealthfront.com/the-right-way-to-grant-equity-to-your-employees/ https://blog.wealthfront.com/the-right-way-to-grant-equity-t...
- andrew 11y ago
  In principle, I love the idea of weighting the distribution of an employee equity pool away from up-front grants and toward follow-on grants. It solves what I think is an even bigger challenge of equity grants, which is that someone's financial outcome is largely dependent on a guess you make about their impact before they've even worked a day. In practice though, I think it's hard for a lot of companies, because unless you're planning on having a larger % of the company in the employee equity pool in the long-term, you're basically robbing from the size of the up-front grants to feed the follow-on grants. So when you give your employee his or her offer letter, you'll say, "I know this is less than what you're getting at other companies, but if you perform better than 50% of the employees here, you'll end up getting more than what you'd get from other companies." A lot of employees are just going to go for the sure thing, making recruiting harder. At Detour we do give big follow-on grants, but we can do that because our employee option pool is like 45% or something, which we can only do because I'm funding the company, so it's not really a replicable model (while progressive equity is, I think).
  - deleted 11y ago
    [deleted]
tinco 11y ago
Perhaps it's a bit evil for me to suggest this, but I have the feeling that distributing that much wealth to so many employees in these super exits that they might not be inclined to work any longer. If I were a 4th level worker at your company implementing some important but invisible part of the core product, and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting. Who wants to be a middle class salaryman in (pretty shitty) San Francisco when they could be a comfortable upper class person in almost everywhere else in the world? Imagine running Facebook, and 50% of your 3200 employees suddenly earns $2M (for perhaps 2 years of work). How will your company suffer if even 10% of those immediately quit their jobs? That looks like a possible catastrophe to me. A simple solution would be to make the kicker pool a bonus pool that just pays out the due amount linearly over 5 years. No one will be thinking of leaving if they're going to be paid a bonus that's 3 times their salary for the next 5 years.
- yid 11y ago
  > If I were a 4th level worker at your company...and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting. This is precisely why equity vests over time instead of being awarded as a one-time event, and generally why the best employees are given regular equity refreshers. You could quit when you hit that $1m mark, but on the other hand, if you stay for another N years, you might make even more. That's the thinking they're trying out here. If you're really worthwhile to the company, your progressive equity refreshers might even be superlinear -- so you stand to make significantly more than what you've already made as an incentive to stay.
- twblalock 11y ago
  There are tons of people in SF and the valley who work even though they have enough money to retire right now. If this was a big problem, we would have found out about it years ago.
- pacaro 11y ago
  A friend who worked at MS from the mid '90s when it was at least apocryphally common for employees to “call in rich” claims that this is a good thing. The assholes leave, the people that you want to work with stay. When the compensation model at MS shifted away from equity (because of an essentially flat share price) in the '00s, then it became correspondingly more valuable to game the promotion system, and so the assholes become political and the rest is history...
twakefield 11y ago
"This definitely happened at Groupon - and by the time it was happening, it was too late to fix." When is it "too late" to set this up? Does it have to be set up around the time initial shares are allocated (a/k/a company incorporation)?
jessriedel 11y ago
This is essentially a way for founders to sell new employees a fraction of their lottery ticket, aka a risk transfer, aka insurance. It would be easier to assess this plan with traditional economics tools if it were stated in those terms.
nissimk 11y ago
What about eliminating all of the risks that employee stock holders own: Dilution Liquidation preference Change of control Investors get terms to protect them from these scenarios, but employee stockholders do not. If your market salary is x and startup wants you to work for x-y cash + z equity/options/rsu, then there should be multiple scenarios in the contract when z shares will deliver you y * time worked in cash. The thing that is so messed up is that in an actual liquidation event employee salary payable is the most senior level in the capital structure. If you are getting people to trade part of their salary for funny money it's better to have more scenarios where they are made whole than more scenarios where they hit the jackpot.
davemel37 11y ago
I really want to believe in this idea and I really wish human nature and greed weren't relevant to this discussion...but this is one of those ideas (like communism) that looks great on paper but are destructive in action. Just watch the final table of the world series of poker and you'll see what I mean. The guy who comes in second place or for that matter ninth place becomes a millionaire, yet he feels crushed and robbed by the few ahead of him. People are generally terrible at being happy with what they have and the age old maxim is still true that he who gets $100 wants $200. All these folks being taxed...even if they agreed initially will feel robbed by the recipients and resent them, and who knows how messy it might get. People are weird when it comes to their money.This will especially rear it's ugly head when peoples shares on paper cross their financial freedom number on paper prior to a liquidity event. (I.e. by each round of financing and a valuation is set.)
plumtucker 11y ago
This formula is a way to unwind an unfair equity split. It is common for founders to take a disproportionate chunk of equity at the outset of the venture even though they may not really deserve it. The Slicing Pie model ensures that each person on the team has exactly what they deserve to have. This would avoid unfair splits at the end that would need to be readjusted. Here is an article about how it works: http://www.slicingpie.com/how-to-use-a-dynamic-equity-split-program-so-everyone-gets-what-they-deserve/ http://www.slicingpie.com/how-to-use-a-dynamic-equity-split-...
roderickm 11y ago
It's dynamic range compression for equity! Audio compressors have features such as "soft knee," which gradually eases into compression over the threshold. Easing into the threshold might be a beneficial complication to the idea of Progressive Equity.
flipside 11y ago
Plans like this sound cool, but I think it would be helpful to make a visualization so people could see how the payouts change for different exits, thresholds and % redistributed. Visualizations are an easy way to reduce uncertainty so people understand what they're buying into.
mauricemir 11y ago
One better solution would be to use something similar to the UK concept of the EBT (employe benefit trust) and gift your shares to the employees collectively. This is used by Coops to handle the owners shares in a tax efficient way (cooperators in the jargon). You might want to look how coops are structured in the USA before trying to invent your own scheme
erikb 11y ago
I think this is a very important cultural step to do. We believe that the first people to do something should be valued the highest. But taking out all the other people who come afterwards they also might not have succeeded. Therefore it's really an open argument who should be valued how much for his participation. I also really like the idea of that, even as Founder number 1. Having a healthy, fair and equal relationship to many capable people might also be worth more to founders than another million bucks.

376 points by andrew 11y ago

Andrew isn't comfortable posting Detour's threshold, and i respect that, but for anyone actually thinking about using this in another company, a threshold must be chosen -- so what are other people's thoughts on what a good threshold might be? I'll start with an estimate. i think i saw a retirement savings calculator somewhere suggest that one should try to save ~$2 million by retirement per person(!) (sounds a little high to me at first but i guess that's only $75k/yr for 26 years of retirement, assuming you dont make any money on investments). So if one wants to provide for themselves and a spouse, that's $4 million. Moderately fancy homes in very expensive areas can be around $5 million. So $10 million would provide for two people and a nice house in an expensive area (we havent accounted for children yet but somehow i bet you could get by on $10 million, after all, most people do). We havent yet accounted for taxes (income taxes on the initial payment (~50% including federal and state?), and also ongoing property tax on the house), so lets say $25 million, which is the threshold used by https://news.ycombinator.com/item?id=9337915 https://news.ycombinator.com/item?id=9337915 . This sounds like a lot but my sense is that for the threshold number youd rather overshoot than undershoot, and some people may have more expensive tastes than others; in fact it may even be too low. $25 million is not that far off from the $50 million threshold used by https://news.ycombinator.com/item?id=9337837 https://news.ycombinator.com/item?id=9337837 . So, what do others (not Andrew) think; would $25 million or so be a good threshold to use if one were actually doing this?

andrew 11y ago

If anyone has questions about how this works, let me know!

im2w1l 11y ago
I guess you give the same amount of kickers to every employee. Wont the kickers then be too diluted to be worth anything? I haven't done the math, just a feeling.
- michaelochurch 11y ago
  It doesn't seem like it. My read is that 50% of the windfall is distributed evenly and 50% is distributed according to the existing equity disbursement. It's like a basic income. It's designed so that in a company of N employees, no one gets less than 1/2*N of the payout. It's a great idea because it means that average employees will actually be motivated by the equity; let's be honest, 0.05%, vesting over 4 years, of a 100-person company isn't enough to motivate anyone except for a starry-eyed young kid on his first startup. If Silicon Valley ever wants to grow up and remain innovative, that's the sort of thing we'll need. A 0.05% slice is just a bonus and, compared to Wall Street, a pretty weak one.
vasilipupkin 11y ago
I am a little confused. Why would you continue diluting the employees? don't they get heavily diluted by subsequent VC rounds already ?
aqme28 11y ago
If I'm an employee above the distribution threshold, doesn't this incentivize me to leave early (ideally right before the distribution event) rather than get my shares redistributed?
loceng 11y ago
Is it really the best way to incentivize people to do a good job, the future possibility of a large exit, and that they'd get an additional share? I like the idea of something being pre-determined, set from the get-go, however as you mentioned different individuals have and bring different value and have different impact in the company. Does it make sense for high impact people to get a 1 megadonk increase, along with a low impact employee? There's another model I was hoping to be able to explore, though I don't have a lawyer nor could afford putting the resources towards writing any draft for it - which takes more of a convertible notes with a cap -- you give employees higher equity initially, so if the company doesn't do as well then those employees gain more, and that equity comes with a cap - so say it's 2.5% of the company with a $5 million cap and that employee has agreed they'd be happy with that outcome. The company exits for $1 billion which would require a lot more effort from a lot of people - save if it's some automatic viral scaling company with only a small team, e.g. WhatsApp with ~35 employees before selling to Facebook ... under this model then employees 30-35 in WhatsApp scenario could gain $100s of millions of dollars for very little time and energy invested?
allanca 11y ago
Is this something you implemented from the incorporation at Detour or only later on as the company started to grow? Seems like this level of complexity when the company is still incipient could be too much mental overhead.
choppaface 11y ago
If an early employee leaves, they don't get to participate in the kicker pool. Suppose it takes a company 10 years to have a significant liquidity event. In the timespan, it's very likely key employees join & leave and don't best a stake that would achieve financial independence. Shouldn't these employees also have access to the kicker pool? A relevant example here is Quora, where several very key engineers have left but (I'm assuming) wouldn't achieve financial independence in an IPO. Isn't this system a bit predicated on a high growth company that hopes to IPO within a few years? What might help is giving option/shareholders access to the kicker pool so long as they don't liquidate otherwise.

cleung2010 11y ago

What about people who joined early vs those who just joined?

brandonb 11y ago

That's a great idea! You're in kind of a unique situation, so I'm trying to figure out to what extent this idea can apply to your average startup. What were the reasons the Groupon board opposed your original proposal to redistribute equity? This time around, what type of pushback did you get from your lawyers and investors? Second, consider the "median" startup raising a series A or B--not necessarily a rocket ship with a lot of negotiating power, and not necessarily a famous founder. Do you think progressive equity would raise concerns from your typical series A/B VC?

RussianCow 11y ago
> Do you think progressive equity would raise concerns from your typical series A/B VC? I don't have any experience with VCs, but from the FAQ at the bottom: > ...it's designed so investors remain unaffected, but you're welcome to try and get them to opt-in. So I don't see why VCs should be concerned given that they will be unaffected by this system. I could be missing something, though.
wilsynet 11y ago
If Mr. Mason had proposed the progressive equity plan to the board at Groupon, the board may very well have agreed (it doesn't really impact the investor), but he would have had to get buy-in from the rest of the employees too (or risk revolt and lawsuits). It's fine that everyone agree to this up front as they join the company, but it's difficult to go back in time and re-write the employee stock plan.
- spacehome 11y ago
  > it's difficult to go back in time and re-write the employee stock plan. As well it should be.

kak9 11y ago

This is really interesting, and I always like rethinking of equity distribution--since it's so lopsided currently. Some questions off the top of my head - Since employees leaving don't receive from the kicker pool. Doesn't this incentivize people who are unhappy and want to leave to stay? There are some benefits to this, but seem like a ton of costs too (and part of what Pinterest's change was addressing) - How is the kicker pool redistributed? Equally or along the lines of people's current distributions of equity? - Curious if you have opinion on where the threshold should be set? And if it eventually makes sense to do tiers of thresholds? Or if you think the simplicity makes it make sense not to. But think this sounds like a great thing, and would love to hear updates on it as it develops.

JoshTriplett 11y ago
> Doesn't this incentivize people who are unhappy and want to leave to stay? So does any other kind of "golden handcuff" stock option or time-vested stock grant.
- kak9 11y ago
  Agreed. But to different degrees. In its current form this would be the strongest--since you can never leave if you want any of those shares. Also, consider this. Someone who joined one month before IPO would get more from the kicker than someone who worked for years and then left 1 month before IPO.
  - nathan_f77 11y ago
    Yep, I think that's a big problem. It shouldn't matter if you're still at the company when the redistribution happens, it should just be based on how many shares you own.
- digikata 11y ago
  If you want to reduce the "golden handcuff" effect, then you can keep an account of each employees 'kicker shares', but continue to issue shares on an x every time period basis. This causes inflation in the currency of 'kicker shares'. If you stay on continuously, then you keep your percentage of the kicker. If you leave, then those shares you earned slowly deflate in value. You could even recognize higher risk of earlier employees by issuing special shares which have some mechanism by which if they leave, those shares may still deflate, but at a slower rate than later ones. e.g. for every time-period distribution of shares, these shares receive some fraction of the new distribution.

pg_is_a_butt 11y ago

so dumb. define "grows". you went from 5 people to 500 and took on $100,000,000 of debt plummeting the stock price? employees get percentages of the company, and as the company is worth more, that percentage is worth more. you're fixing a problem that doesn't exist with a new problem.

mahyarm 11y ago

I wonder how the tax consequences work with this.

foysavas 11y ago
For educational purposes only and not legal advice: This incentive plan is structured as restricted stock units that are paid out as shares upon an IPO or trade sale (called in the doc, the "Initial Vesting Event"). Tax laws in the U.S. will impose ordinary income tax on the fair market value of such shares when they are issued, which for clarity, is at the Initial Vesting Event. --- For the record, I am a bit peeved that the word "tax" is being used to describe aspects of this plan, as it may make looking up actually startup tax matters harder.
- mahyarm 11y ago
  It's a good thing to know. Many employees who wanted to move on from companies find their stock options a financial penalty vs a financial benefit because of things like AMT. Now if there was a way to do this and get the long term capital gains tax rate vs. the ordinary tax rate. I can't think of any without paying the IRS before hand to buy your options or doing some sort of strange cyclical loan program with investors.

Quanticles 11y ago

If this doubles the chance of a unicorn, then everyone involved comes out ahead. Nice system

marssaxman 11y ago
What does "the chance of a unicorn" mean?
- austinsharp 11y ago
  Unicorn usually refers to a company valued at >$1 billion[1]. So if a scheme like this increases the odds of massive success enough, then the average return to everyone (even those 'taxed') under this progressive scheme would be higher than with a normal equity scheme and the reduced chance of a world-changing exit. [1] http://fortune.com/unicorns/ http://fortune.com/unicorns/

moe 11y ago

I like that I can actually understand this program and don't feel like it was carefully designed to rip me off. Unlike the usual jungle of capped/uncapped notes, dilution, vesting schedules, option pools, pre/post valuation, etc...

harryh 11y ago
This doesn't get rid of any of those things.
- alxndr 11y ago
  Could it reduce (or simply eliminate) the need for more complicated ownership sharing schemes?
  - harryh 11y ago
    No.

BinaryIdiot 11y ago

Okay this is a really cool concept. I'm going to read over the paperwork to make sure I understand this but if it's what I think it is I love it and will totally use it when I start my startup. Thanks!

deleted 11y ago

[deleted]

coffeemug 11y ago

I don't know if the mechanics work out (designing legal structures like this is super-tricky), but the idea is wonderful. Do you think it's possible to implement this in an existing (post-series A but pre-unicorn) company, or does it have to happen before the company takes on significant funding?

andrew 11y ago
That's a great question. I'll ask my lawyer and report back.

ucaetano 11y ago

Wouldn't this have the effect of changing the risk/return balance? For those joining your company early on, the risk would remain the same, but the return would fall sharply (by ~50%), while for those joining late in the game, the risk would remain the same, but the returns would increase a lot. If everything else remains the same, people would be less willing to take risks and join early stage companies, instead trying to join near-IPO ones, where you can get a disproportional payout from minimum risk. To maintain the same risk/return profile, you'd need to pay much higher fixed salaries to early employees and lower to late employees, which would probably drive the startup bankrupt on the early stage page.

hkmurakami 11y ago
The thesis/argument in support of "Progressive Equity" would be that the risk/reward balance is still skewed strongly towards founders (and to a much less extent early employees). One's position with respect to this thesis would determine whether you believe this equity structure is a step forward or not.
ryandrake 11y ago
Where is it written that returns should necessarily so heavily be tied to risk? Many enterprises are structured this way, but there's no law that says it must be so.
- harryh 11y ago
  Because people won't generally buy high risk low return investments.
  - venomsnake 11y ago
    Zynga?
- cauterized 11y ago
  Because it's the only way to incentivize people to take that risk?
- 11y ago

jim-greer 11y ago

I like the innovation here. If it catches on it will be interesting to see how the market values a company where a far larger slice of the employees are going to be financially independent. This arrangement doesn't really seem to be in the shareholders' interest.

devNoise 11y ago

How do you think this idea would combine with the Pinterest 7 year stock option idea? Both seem like good ideas that benefit the employees. I assume that the Progressive equity would only be applicable to current employees of the startup.

kzhahou 11y ago

Wonderful to see this new idea. But Andrew: instead of inventing this new model, why not achieve the redistribution by changing the percentages of the well-understood system. So instead of, say: 50% founder, 35% investors, 15% option pool (i.e., all employees combined) Something like: 20% founder, 35% investors, 45% option pool

pcl 11y ago
If you made that change only, you'd presumably still end up allocating the remaining 45% in a way that skewed heavily towards early hires. On the other hand, this system allocates the unicorn value to much later hires as well.
sadface 11y ago
If the founders goals are to achieve a satisfying outcome ("financial security"), they would have to achieve a 2.5x bigger exit under scenario 2 than scenario 1. Andrew's new system retains scenario 1's "ease" of achieving a satisfying outcome for the founders while allowing the other employees to reap more of the benefits if the company grows further. It's a structure supporting the idea that the first $X million are pretty important for the founders (or anyone, really) but the next $XXXm aren't as big of a deal and can be spread around somewhat, hopefully increasing the total number of people who hit $Xm within the company if it becomes huge. I like the idea.
andrew 11y ago
The benefit to founders of progressive equity is that at a smaller exit they still get a big return. It's only when the numbers get huge, as they often seem to be doing these days, that progressive equity kick in. Like a progressive tax system.

joshjkim 11y ago

This is great, though one key practical challenge: in most cases only founders will really be "taxed" in a meaningful way, so it requires that founders want to and decide to do something that loses them some serious $$ (as noted in answer to the second FAQ). While I believe the additional upside presented to employees will have a positive impact re: incentive alignment and motivation, it is TBD if the gains realized by the founders will exceed the cost to the founders - I think that will be required before massive adoption (probably the biggest challenge here is measurement of that impact). Still, hopefully some just-plain-nice founders do this, and I hope it gets them a great team and great success. Even without mass adoption, it would be awesome to see this get adopted by other companies who (like Detour) were started by already-exited founders who are on a second (or third/fourth/fifth) project - there are actually a lot of them, so hopefully enough are gracious enough to experiment with this AND achieve success so that there is a sound basis for adopting this more widely (of course the trade-off might not be in the progressive equity’s favor – and while I’m making caveats, serial entrepreneurs generally do better than the first time entrepreneur for a bunch of other reasons like experience/connections, so it will be hard to determine/quantify what portion of success can be attributed to progressive equity and not to other factors…still hope they give it a shot anyhow).

tropchan 11y ago

This is very cool. One thing I've also wondered about is letting talent adjust compensation on floating scale between $$$ and equity... also, as in "earn-in"! I thought this could be an great way to attract high-impact team members. It's tough sell to leave a high-paying stable job for a risky lower paying job... but what if you could adjust your salary and "earn-in" more equity... It could lower the burn and align interests better. Thoughts? Also, can I get paid in Megadonks ?

oaktowner 11y ago
+1 to Megadonk as the currency of choice for my next job.
- tropchan 11y ago
  Bitcoin needs to rebrand as Megadonks;)
- noonespecial 11y ago
  Yes and is 1000 Megadonks a Badonkadonk?
  - tropchan 11y ago
    HAHAHAH!!

desireco42 11y ago

This looks like Mike Moyer's Slicing Pie http://www.slicingpie.com/ http://www.slicingpie.com/ He might not be as successful in promoting it but it is trying to solve same issue.

Saturnaut 11y ago

I worked for a company a few years back that followed a similar idea. We had a bottom line for operating costs (salary, benefits, rent, utilities, other general expenses) plus a flat 25% being invested back into the company. Everything else left over at the end of the month was distributed to the employees based on their roles. It took a while to iron out. At first we had issues as the money was rolled out as a quarterly bonus, which caused a lot of tax to be taken off the top. It changed a lot over the first year, and ended up being abandoned in favor of giving consistent raises.

zkhalique 11y ago

Has anyone read the book Slicing Pie? What do you think of the scheme presented there, with the "Grunt fund"?

plumtucker 11y ago
I wrote Slicing Pie! The problem Andrew is trying to solve, I think, is the core problem with fixed equity splits that give certain people an unfair share. The Slicing Pie model allocates equity fairly so no one person would have a disproportionate amount unless they made disproportionate contributions. If you used this model with a traditional fixed split you would spread out the wealth a bit. If you used it with the Slicing Pie model you would be breaking a perfectly fair split.

birken 11y ago

Here is an example I made to help me understand it. Say SuperAwesomeStartup had a system like this, and the threshold was an ungodly high amount of 50 million dollars. The company IPOs and is worth 100 billion dollars. Founder X owns 10%, Founder Y owns 8%, Founder Z owns 6%, Early Employee A owns 1%, Early Employee B owns 0.5%, Early Employee C owns 0.25% And there are 5,000 employees of the company Before After Founder X 10B 5.02B Founder Y 8B 4.02B Founder Z 6B 3.02B Early Employee A 1B 525M Early Employee B 500M 275M Early Employee C 250M 150M Amount Distributed to each employee: 12.72B / 5,000 = 2.5 million each on avg That is awesome. Though obviously very very few companies ever become worth 100B, it is a great example of how spreading the wealth from the founders makes little impact to them and a massive impact to everybody else.

cyrusradfar 11y ago
Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real http://kapuno.com/conversation/bblc6nqbe6qte http://kapuno.com/conversation/bblc6nqbe6qte
- mattj 11y ago
  heads up, your math is a little buggy - 1% of $90b is $900m, not $90m
  - cyrusradfar 11y ago
    FRACK! Fixing, now. Thanks :)
    - cyrusradfar 11y ago
      UPDATED: The first version had an incredibly bad math error early in my math which ruined the calculation. Honestly, the error ended up to be about 10% but it was egregious to say 1% of a 90 billion is $90M. Thanks to @p45c41 (on Twitter) and many others here for telling me simultaneously.

doublerebel 11y ago

Unique, glad this is being shared. I've always looked towards the Wealthfront Equity Plan of Early Evergreen Grants [1] as a good example. It is arguably more performance-oriented than this Progressive Equity. I really like the concept of giving everyone financial independence, but it must take the right combination of culture, investors, and valuation to make it more motivating than it is inhibiting. Also, could the redistribution of equity at the time of sale have more cost in tax obligations than earlier redistribution? While I really appreciate the legal docs, the truth is in a longer description that remains easily comprehensible. I think the main barrier to most of these alternative equity structures is a lack of understanding from all parties. [1] https://blog.wealthfront.com/the-right-way-to-grant-equity-to-your-employees/ https://blog.wealthfront.com/the-right-way-to-grant-equity-t...

andrew 11y ago
In principle, I love the idea of weighting the distribution of an employee equity pool away from up-front grants and toward follow-on grants. It solves what I think is an even bigger challenge of equity grants, which is that someone's financial outcome is largely dependent on a guess you make about their impact before they've even worked a day. In practice though, I think it's hard for a lot of companies, because unless you're planning on having a larger % of the company in the employee equity pool in the long-term, you're basically robbing from the size of the up-front grants to feed the follow-on grants. So when you give your employee his or her offer letter, you'll say, "I know this is less than what you're getting at other companies, but if you perform better than 50% of the employees here, you'll end up getting more than what you'd get from other companies." A lot of employees are just going to go for the sure thing, making recruiting harder. At Detour we do give big follow-on grants, but we can do that because our employee option pool is like 45% or something, which we can only do because I'm funding the company, so it's not really a replicable model (while progressive equity is, I think).
- deleted 11y ago
  [deleted]

tinco 11y ago

Perhaps it's a bit evil for me to suggest this, but I have the feeling that distributing that much wealth to so many employees in these super exits that they might not be inclined to work any longer. If I were a 4th level worker at your company implementing some important but invisible part of the core product, and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting. Who wants to be a middle class salaryman in (pretty shitty) San Francisco when they could be a comfortable upper class person in almost everywhere else in the world? Imagine running Facebook, and 50% of your 3200 employees suddenly earns $2M (for perhaps 2 years of work). How will your company suffer if even 10% of those immediately quit their jobs? That looks like a possible catastrophe to me. A simple solution would be to make the kicker pool a bonus pool that just pays out the due amount linearly over 5 years. No one will be thinking of leaving if they're going to be paid a bonus that's 3 times their salary for the next 5 years.

yid 11y ago
> If I were a 4th level worker at your company...and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting. This is precisely why equity vests over time instead of being awarded as a one-time event, and generally why the best employees are given regular equity refreshers. You could quit when you hit that $1m mark, but on the other hand, if you stay for another N years, you might make even more. That's the thinking they're trying out here. If you're really worthwhile to the company, your progressive equity refreshers might even be superlinear -- so you stand to make significantly more than what you've already made as an incentive to stay.
twblalock 11y ago
There are tons of people in SF and the valley who work even though they have enough money to retire right now. If this was a big problem, we would have found out about it years ago.
pacaro 11y ago
A friend who worked at MS from the mid '90s when it was at least apocryphally common for employees to “call in rich” claims that this is a good thing. The assholes leave, the people that you want to work with stay. When the compensation model at MS shifted away from equity (because of an essentially flat share price) in the '00s, then it became correspondingly more valuable to game the promotion system, and so the assholes become political and the rest is history...

twakefield 11y ago

"This definitely happened at Groupon - and by the time it was happening, it was too late to fix." When is it "too late" to set this up? Does it have to be set up around the time initial shares are allocated (a/k/a company incorporation)?

jessriedel 11y ago

This is essentially a way for founders to sell new employees a fraction of their lottery ticket, aka a risk transfer, aka insurance. It would be easier to assess this plan with traditional economics tools if it were stated in those terms.

nissimk 11y ago

What about eliminating all of the risks that employee stock holders own: Dilution Liquidation preference Change of control Investors get terms to protect them from these scenarios, but employee stockholders do not. If your market salary is x and startup wants you to work for x-y cash + z equity/options/rsu, then there should be multiple scenarios in the contract when z shares will deliver you y * time worked in cash. The thing that is so messed up is that in an actual liquidation event employee salary payable is the most senior level in the capital structure. If you are getting people to trade part of their salary for funny money it's better to have more scenarios where they are made whole than more scenarios where they hit the jackpot.

davemel37 11y ago

I really want to believe in this idea and I really wish human nature and greed weren't relevant to this discussion...but this is one of those ideas (like communism) that looks great on paper but are destructive in action. Just watch the final table of the world series of poker and you'll see what I mean. The guy who comes in second place or for that matter ninth place becomes a millionaire, yet he feels crushed and robbed by the few ahead of him. People are generally terrible at being happy with what they have and the age old maxim is still true that he who gets $100 wants $200. All these folks being taxed...even if they agreed initially will feel robbed by the recipients and resent them, and who knows how messy it might get. People are weird when it comes to their money.This will especially rear it's ugly head when peoples shares on paper cross their financial freedom number on paper prior to a liquidity event. (I.e. by each round of financing and a valuation is set.)

plumtucker 11y ago

This formula is a way to unwind an unfair equity split. It is common for founders to take a disproportionate chunk of equity at the outset of the venture even though they may not really deserve it. The Slicing Pie model ensures that each person on the team has exactly what they deserve to have. This would avoid unfair splits at the end that would need to be readjusted. Here is an article about how it works: http://www.slicingpie.com/how-to-use-a-dynamic-equity-split-program-so-everyone-gets-what-they-deserve/ http://www.slicingpie.com/how-to-use-a-dynamic-equity-split-...

roderickm 11y ago

It's dynamic range compression for equity! Audio compressors have features such as "soft knee," which gradually eases into compression over the threshold. Easing into the threshold might be a beneficial complication to the idea of Progressive Equity.

flipside 11y ago

Plans like this sound cool, but I think it would be helpful to make a visualization so people could see how the payouts change for different exits, thresholds and % redistributed. Visualizations are an easy way to reduce uncertainty so people understand what they're buying into.

mauricemir 11y ago

One better solution would be to use something similar to the UK concept of the EBT (employe benefit trust) and gift your shares to the employees collectively. This is used by Coops to handle the owners shares in a tax efficient way (cooperators in the jargon). You might want to look how coops are structured in the USA before trying to invent your own scheme

erikb 11y ago

I think this is a very important cultural step to do. We believe that the first people to do something should be valued the highest. But taking out all the other people who come afterwards they also might not have succeeded. Therefore it's really an open argument who should be valued how much for his participation. I also really like the idea of that, even as Founder number 1. Having a healthy, fair and equal relationship to many capable people might also be worth more to founders than another million bucks.