
Tenure-Based Ownership – A distributed equity model for worker ownership - ianmobbs
http://ianmobbs.com/projects/equity
======
JOnAgain
This strikes me as idealist and disconnected from reality. This is how some
engineers think they should be paid without ever seeing the other side. \- the
first year has a lot more risk than future years \- often, you pay yourself
less when starting out \- raising money is hard \- finding your first
customers is hard \- building from zero with no paying customers is much
harder than adding features or reimplementing \- quitting your job is hard

I’m not saying that maybe early employees might deserve more equity, but to
suggest that contributions in year 2 of a startup are somehow equal to those
of the first year is laughable to me. Maybe strictly from coding
contributions, but there’s office space, culture, vision, etc. If it was that
easy, that person joining would have started their own.

~~~
iandanforth
This comment strikes me as idealistic and disconnected from reality. It
idealizes the mythos of risk/reward/effort for founders while minimizing the
risk and effort of later employees. Founders work very hard, but I know people
at Apple who work harder. Founders take financial risks, but I know people
who've taken pay-cuts an order of magnitude larger than bootstrap costs to get
1% of a company that ultimately failed.

The reality is that there are no objective, consistent metrics which map risk
to equity or effort to equity, all we have is cultural norms, pretending
otherwise is a self-serving narrative.

~~~
Kinnard
Have you started a company and made it successful?

~~~
iandanforth
No. I've been a part of five startups, one which I founded, three are still
going, one very well, the other two died (including the one I started.)

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my_username_is_
I believe alternative forms of ownership aren't discussed nearly enough. As we
see more wealth become concentrated in the hands of fewer people, and with new
companies being one of the sources of wealth creation, we need to re-evaluate
our current system of corporate ownership and ask if it is really what's best
for society.

I'm not necessarily sure if this is the best way of doing it or not, but I
appreciate the viewpoint. I've thought about how best to manage company
ownership in a worker owned cooperative, but I haven't settled on a personal
answer.

~~~
currymj
I have occasionally thought that for worker cooperatives, equity that decays
over time might be interesting. That is, shares are still liquid and can be
held by non-workers and former workers, but they gradually expire. New shares
would only be issued to current workers; one could set this rate and the decay
rate to get a desired result. No idea if this has been tried or not.

~~~
jdmichal
I don't know whether it's legally possible to decay equity. Equity is seen as
property, so once it's granted you can't just revoke it. You can expire or
revoke options, but options themselves don't grant any right other than buying
or selling the underlying asset. You could do something like a maturing bond,
where it grants payout rights, but that doesn't give equity. You can just plan
on a constant level of dilution, ala Bitcoin, but that doesn't ever actually
remove previous ownership.

~~~
sdenton4
Lease the equity (and associated rights) instead of selling it, and include
the decay schedule in the contract... Seems fine to me?

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lordnacho
Certainly interesting to think about new forms of ownership, but there's some
issues with this idea.

\- You have to have Coase in there somehow. When is a new line of work a new
entity? Seems to be something to do with internalizing costs, the friction of
negotiating externally, and as part of that the difficulty of valuation.

\- Say I'm a pro athlete. I hire a physio and a permanent PR rep to handle my
social media. Now I'm in minority? Valuation has to come into it somewhere.

The problem fundamentally is how to pay people what they're worth, which in
itself is a nebulous thing. Tying to some specific measure like time spent
might be very wrong across different fields. The current "solution" which I'll
grant is not entirely satisfying is that everyone just negotiates. If there's
an amazing manager he talks everyone else into giving him a large slice of the
pie. If there's a recent grad he gets a little bit, but gets his foot in the
door.

~~~
abdullahkhalids
Such an ownership model is certainly not suitable for the examples you bring
up. One simple modification that might work for the pro athlete case is that
the athlete always owns 70% of the company, and the rest of the team get
ownership based on time spent. Or you could even allocate percentage
ownerships to each division of the company. The PR team gets 15% divided
amongst themselves based on time spent, the health team gets 10% etc, where
the percentages are based on some notion of the value generation by each team.

The proposed model, I think is best of large companies with lots of workers -
say a factory, where most people bring in roughly equal amounts of value. The
high value people could negotiate earning ownership at 5x or 10x the base
rate, for example.

The big point is that there is a massive space of possible ownership models
and exploring them is a very interesting exercise. In fact, experimenting with
such models is an excellent way of exploring and understanding how much value
different people in a company bring and what they are worth.

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cwyers
> As America gets closer to full employment, workers are suddenly finding
> themself with the most power they’ve had in decades.

This... does not comport with the available evidence. Workers in the US right
now do not have a lot of power relative to the height of US unions. And saying
the US is near "full employment" is a parlor trick of how you define who is
and who isn't in the labor force, which is why we can have stagnant wages
while being near "full employment" for some time now.

~~~
bumby
There was just a Planet Money podcast episode (#917 'Quit Threat') that gives
some evidence of the opposite. Namely, that the status of near-full employment
is giving unions more power, to the point of renegotiating two-tier contracts
before the contract ends. It's not absolute across all unions but does seem to
indicate more employee power as unemployment numbers decrease, even after
acknowledging your point that there isn't an exact definition for "full
employment"

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fragsworth
This won't work very well in practice. You need to pay a new employee a
_market rate_ , and if equity is going to be a part of that, it depends more
on the value of the company than the tenure of its employees.

You can very easily overpay or underpay new hires in equity if you adopt this
system. It seems to make it more difficult to find the correct amount.

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diziet
I don't think tenure based systems are excellent examples for growth,
innovation, productivity or excellence when compared to more free market
competitive merit oriented systems.

A firm could pay everyone the exact same salary, regardless of role or
responsibility. But that doesn't quite work out in the real world with
resource scarcity.

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jonnydubowsky
This approach treats time as the only factor in determining the fair
distribution of equity.

Slicing pie has a much more realistic set of methods

based on the principle that a person's % share of the equity should always be
equal to that person's share of the at-risk contributions.

The method has been road tested by dozens of startups and I'm in the midst of
using it for a new startup and find it to be quite approachable.

If you are interested in some research behind optimizing cooperative systems,
check out Shapley Value.

Shapley Value assigns a unique distribution (among the players) of a total
surplus generated by the coalition of all players. The Shapley value is
characterized by a collection of desirable properties

[https://en.m.wikipedia.org/wiki/Shapley_value](https://en.m.wikipedia.org/wiki/Shapley_value)

~~~
em-bee
this looks very interesting. can you add some details how that actually looks
in practice? how do you evaluate what each person contributes?

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friedman23
The author doesn't provide any reason why this should be done. I'm going to
assume it's some sort of ideological and moral (under some ethical frameworks
that are not widely used) justification. The employee shortage that currently
exists has not reached the point where people could make demands like this.

>Say you’re a solo founder. You’ve worked full-time on your company for a year
(4 quarters). You hire your first full-time employee after 1 year (4
quarters). After their first 3 months (1 quarter), you own 83% (5 quarters /
(5 quarters + 1 quarter)) of the company, and the employee owns 16% (1 quarter
/ (5 quarters + 1 quarter)).

This completely ignores risk. let's say I've launched a startup on my own and
after 1 year of work I am now hiring employee number 1. Presumably if I'm
hiring anyone I've found some product market fit. So why does employee number
1, who is presumably earning a salary (something that the founder was not
doing) and is joining a startup that is somewhat proven, deserve an amount of
equity proportional to the time they have spent in the company?

It also ignores the motivation for many to start their own business. The
obvious one is to be rich, another is for control and independence. Why would
someone seeking these things give up such a large amount of equity?

If you want 16% equity in a company that you have not founded on your own, you
need to either have been part of the team from the start (when the idea was
not proven, and thus have taken the same risk as the founders) or you need to
bring something that is transformational for the company to the table (sales,
management, connections, technical knowledge).

~~~
sokoloff
The only way employee #1 gets hired under such a system is if they can
increase the value of the company by more than 20% in 3 months.

That's unlikely to be the case (barring a company that is on the brink of
failing).

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mlthoughts2018
This is a disastrously stupid idea. How are you going to attract talent after
a few years when inevitably the people who were willing to join a start-up
early to treat it as an experiment / fun project have engineered you into
catastrophe & you have to hire people who expect real compensation and provide
professional quality work outputs?

The people who join a start-up early are rarely the people who make it
successful, scalable or growable. In fact, the early people are often to blame
for terrible decisions that could have been avoided by paying real
compensation to people with greater skill.

Person A might work at a company for 1 year and meritocratically accomplish
more than Person B who has been in the same job for 5 years. Person A’s
contributions might immediately be vastly more vital to the company. This
happens all the time.

This is all to say nothing of how tenure will become an issue of political
favorites, luck of the draw regarding layoffs or project assignments, etc.

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vbuwivbiu
in theory this works but there's a flaw: hours worked. How many hours worked
isn't the same as much value someone has added to the company or how much work
they've actually done.

In addition sometimes value added to the company isn't realized until months
later. And sometimes hard work doesn't add any value to the company.

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tptacek
I don't understand. I start a company and run it for a year. Then I hire a
developer. 3 months later, that developer owns 16% of the company?

~~~
friedman23
You understand it perfectly and it's as dumb as it sounds.

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luckylion
I understand the idea, but how does salary play into this? A founder providing
all the money, paying a market salary is supposed to also give his first
employee 16% of the company after 3 months?

Also, timing matters. Getting the company off the ground is much more risky
and much more demanding than joining when it's smooth sailing.

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jarofgreen
> With that, how can we distribute ownership of a company to the many, instead
> of the few? How can we cement worker power and ownership for decades to
> come?

Anyone interested in this should check out an existing model that's been going
for decades already: a workers co-op.
[https://en.wikipedia.org/wiki/Worker_cooperative](https://en.wikipedia.org/wiki/Worker_cooperative)

Having read some of the comments here; I can guess a lot of the objections and
honestly the answer to most of them is going to be "Yes, that's the point".
It's a totally different model. It's not for everyone and that's fine.

But they come with many advantages (disadvantages too, to be honest, but
doesn't everything?). Do google it and spend some time reading up on it if
your interested in this question.

~~~
friedman23
> "Yes, that's the point". It's a totally different model. It's not for
> everyone and that's fine.

"that's the point", what's the point? I don't see why anyone starting their
own business that is not firmly entrenched in whatever ideology the author has
would ever consider implementing this.

Not only is it damaging to the business (what venture capitalist would ever
invest in a business operating under such a model?), it's also directly
damaging to the founder who after 4 or so years wont even be in control of the
company they've dedicated so much to found.

When a founder decides to abandon their office job what they really desire is
to work at a business that is run by a committee of employees and power in
that committee isn't determined by merit and skill but by _TENURE_. /s

~~~
jarofgreen
> "that is not firmly entrenched in whatever ideology the author has"

But then you strongly talk about a startup, looking for V.C. funding with
strong founder ethos. That's also an ideology. And if you want to do that, go
ahead - this clearly isn't for you.

But a lot of people don't want to do that. And that's why workers co-ops were
started in 1844 and have been going strong since - granted, a small fraction
of the market - but a successful small fraction that has survived and is
clearly not going away.

I'd just suggest people read up on them before dismissing this. And sure, I
get that the majority of HN readers probably are going to decide this is not
for them. But other people do like them, and have made a success of them, so
if your interested at all in the original question, do check them out.

~~~
friedman23
> But then you strongly talk about a startup, looking for V.C. funding with
> strong founder ethos. That's also an ideology.

Wanting to raise money is an ideology? It's better to describe it as a
practical way of expanding a business.

> But a lot of people don't want to do that. And that's why workers co-ops
> were started in 1844 and have been going strong since

I just looked it up and there are an estimated 400 coops in the US with around
7000 employees total. This does not qualify as a lot. Almost nobody with the
desire to create and run a business wants to run a business this way.

Also you missed the most important criticism, which is why is tenure of all
things being used to decide who gets how much equity?

~~~
em-bee
> Wanting to raise money is an ideology?

it most certainly is. with all the startups i was involved in the decision
whether to raise money from VC or to bootstrap ourselves in other ways always
came down to the believes of the founders. practical considerations hardly
ever mattered.

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arkem
I wonder if this could be more easily adopted by Silicon Valley style startups
if this ownership was of what would normally be the employee option pool
rather than the whole company.

That way you'd still be compatible with venture capital, quarantine the hours
worked dilution to the pool and you can treat founders differently to
employees if you want by having founders shares outside the option pool.

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e3b0c
This is definitely a problem worth more innovations. But it should be kept in
mind that the core idea of coming up with such a model is literally to design
a contract. By recognizing that, it becomes evident that the contract must
benefit, and be voluntarily acceptable, by both counterparties.

In finance, we already have a lot of innovations, thanks to the significant
reduction of the transaction/contract-enforcement costs. I guess that is why
it has not happened in other fields like employment contracts or partnership
agreements. The designing and enforcement costs of any innovative contracts
are just too high (considering you have to hire a layer to confirm all those
changes and when you have to sue someone for violations).

~~~
jarofgreen
It has happened:
[https://en.wikipedia.org/wiki/Worker_cooperative](https://en.wikipedia.org/wiki/Worker_cooperative)

Co-ops being people who like to share, you should find plenty of examples
online - here's one for UK co-op companies, for instance:
[https://www.uk.coop/developing-co-ops/model-governing-
docume...](https://www.uk.coop/developing-co-ops/model-governing-documents)

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rb808
Ownership is more about control that sharing the profits. So after a few years
the staff can fire the founder? nice. We must be getting to the top of this
bubble.

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dmckeon
Suppose an existing company, not a startup, but an Fortune 1000 or so, wanted
to shift to this model going forward. How would they approach it?

~~~
dluan
One option would be to set up a trust, backed by a lending bank, that would
purchase an amount of the company for the purpose of eventually selling the
stake to the workers. This is how most companies transition towards worker
ownership with ESOPs.

