
A Good Way to Grant Equity to Your Employees - acjohnson55
http://firstround.com/review/The-Right-Way-to-Grant-Equity-to-Your-Employees/
======
acconrad
A good, but insufficient way to grant equity to employees. The fact is in
2016, startup founders take considerably less risk than they did a decade ago.
You can go from idea to revenue in _days_ , with essentially no cost upfront.
If you hire me weeks or months later as employee 1, and I'm delivering 20% of
the revenue, but as a first employee I get 2-5%, this will piss me off, and it
should piss off every early-stage employee who works for _tenths or hundreds
of one percent_. Unfortunately, I'm not sure how we can make institutional
changes to ensure that the wealth is spread out a bit more, but it's something
I will consider when I start my own company some day.

~~~
meritt
Man, you've got an absurd sense of entitlement and self-worth.

You honestly believe that a first-hire, in addition to receiving a competitive
salary + benefits, is also owed >5% equity? No founder of a company with any
traction is going to go for that, and no investor of any VC-backed company is
going to agree to that either.

~~~
sheepmullet
> You honestly believe that a first-hire, in addition to receiving a
> competitive salary + benefits, is also owed >5% equity?

Competitive salary for top devs at big companies is reaching $250-350k/year.

If your startup is paying that well then sure it doesn't need to offer a lot
of equity.

Most of the startups ive interviewed at over the last year don't even come
close so they damn well should be offering a lot more equity to make up for
it.

~~~
meritt
Engineers making $300k/yr aren't interested in first-hire jobs over at the
latest "Uber for X" YC-backed company. There will be exceptions, certainly,
but that's going to be incredibly rare.

First hires tend to be mid-level aspiring engineers looking for make a name
for themselves and get in early but for whatever risk-adverse reason aren't
looking for a cofounder type role. They usually need a steady paycheck.

Obviously there's always going to be a balance between equity and salary, but
the hypothetical scenario we're talking about here is "first employee" which
tends to mean a salaried position with benefits.

~~~
sheepmullet
> the hypothetical scenario we're talking about here is "first employee" which
> tends to mean a salaried position with benefits.

Agreed. Which is why they aren't getting co-founder levels of equity. 5% for a
key position sounds about right.

But if you want them to go all-in on your startup then you are mad not to
compensate them for it.

If you want mis-aligned incentives for a very key position then go right ahead
but don't call someone entitled for wanting to be compensated fairly for the
risk and responsibilities.

------
ryandrake
> 4\. Evergreen: These grants, which are appropriate for all employees, start
> at an employee’s 2½-year anniversary and continue every year thereafter. The
> idea is you don’t want to wait until the employee’s initial grant has been
> fully vested to give a new grant because by that time the employee will
> evaluate new opportunities.

This is doubly true for RSUs, which are liquid the day you get them, not
forcing you to stick around waiting for them to be exercisable. As someone
approaching such a cliff, I have to say this "continual refresh" practice
makes a lot of sense. Wish more companies would think of this. The day all
your equity vests (and your total comp now drops, perhaps by a substantial
amount) seems like a designed-in "last day".

------
dreamdu5t
Granting number of shares instead of percentages gaurantees that employees
will get screwed by dilution. Vesting shares over 4 years means most employees
won't get much, since employees often last only one or two years. Options mean
most employees lose their equity before a liquidity event, or otherwise pay
thousands of dollars for a lottery ticket. In general, employee equity is a
joke.

Here's a "Good Way":

\- Lock-in percentages instead of number of shares. Real dilution protection -
not handwavy vague reassurances.

\- Vest shares over quarters not years.

\- ISOs that convert to NSOs after employee leaves OR RSU's with the company
paying the tax bill.

\- Termination protection

Anything less is scraps of a lottery ticket.

------
rdtsc
I find options confusing. How about this instead - a contract with the
employee saying they get disbursed a % of the annual profits. If company does
well they get a % of the profit. If it does badly (loses money) that year they
get 0. Is that stupid? Seems simple so probably is stupid... But it would seem
to incentivize the employee to make the company more profitable.

I'd trade a reasonable % every year over a mythical pie in the sky exit one
day. Yeah, I understand it is nice to dream owning a yacht and sail the world
one day, and that is worth some something (in other words the ability to dream
about it is important and people will get into situation to be able to do it).
But I am more of a boring pragmatist and would rather have a bit less but more
predictable reward every year or month instead.

~~~
rfrey
Most startups make very little or no profit while they grow. They're often
sold long before they turn a profit. In those cases a % of profit would be
worth 0 while equity could be worth quite a lot.

Profit sharing does have a long history in more traditional industries though.

~~~
rdtsc
> Most startups make very little or no profit while they grow.

Ok agree, that was the obvious bit I missed. I never really worked for
startup, so wasn't familiar. So idea was silly, makes sense now.

------
maerF0x0
IMO this should mention that trading salary for equity will not be met with a
cliff. Imagine accepting a lower salary for equity, only to have the founders
"pivot" months later leaving one without salary OR equity (thanks to the
cliff) .

------
arcanus
Does HN have a strong opinion on RSUs vs. stock options? The article makes a
peripheral mention of this but otherwise does not address it.

~~~
mathattack
It depends on the maturity of the company. If you want everyone going for
broke, options are better because there's no downside if the company goes
under. If you want people to be more conservative, RSUs are better because
they balance downside and upside. So companies aiming for home runs are better
serviced by options, while companies looking for predictable quarterly
earnings are better served by RSUs.

~~~
sickrumbear
Could you clarify your point about no downside if the company goes under? If
the options are underwater then you get nothing, yet if you have RSUs, they'd
be worth whatever a share of the company is worth (liquidity because of
public/ private notwithstanding)

~~~
mathattack
When you get options, your starting point is effectively zero because the
strike price usually is zero. So if the stock goes down, you are still at zero
- you just don't exercise the option. You have upside but no downside. If you
have an RSU, you have the same upside and downside - 1 for 1 with the price.

Note - this isn't 100% accurate as options that are not in the money still
have some value but the idea is more upside than downside.

------
dalbasal
" _Wealthfront Equity Plan should result in approximately 3.5% to 5% annual
dilution.. ..most public technology companies increase their option pools by
4% to 5% per year, so the proposed dilution is well within the reasonable
range._ "

Is this true? Dilution of this magnitude, on average?

------
omouse
Why not just be a co-operative and really be meritocratic and fair?

~~~
erichocean
In the US at least, you can do that if you want. Go for it!

------
doki_pen
Until companies start having longer exercise periods after employment ends,
options have close to no value.

------
cloudjacker
> The only reason not to implement the Wealthfront Equity Plan is greed, and
> greed seldom leads to a good outcome.

Is there a more diplomatic way of saying that? Employees aren't in a position
to question the "generous privileges" or "large equity stake" they are being
offered.

~~~
sidlls
Without arguing the merits of the Wealthfront plan, "greed" is about as
diplomatic as it gets in this scenario. It applies to both sides. However
there is an information and cultural bias asymmetry that puts the company in a
much superior position. As a result the equity and compensation issue is
ultimately seen as the company taking advantage of employees in an unfair way.

