
Introducing Progressive Equity – Increase employee ownership as company grows - andrew
http://blog.detour.com/introducing-progressive-equity/
======
birken
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
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)

~~~
fragsworth
It looks like the average employee at Facebook would have received $4.5
million.

Once the IPO happens and you pay your employees $4.5 million, their $100-$200k
salary doesn't seem worth much anymore. What actually would have happened to
Facebook, if they did this? Is it possible that the company collapses, while
too many employees quit so they can do their own thing, or retire? Would they
have had to double or triple everyone's salaries to keep them on board?

I could see it being a disaster. It could also significantly de-value a
company's IPO (or sale) because the investors would see this as a massive
risk. At least until it's been tested with a company that IPOs.

~~~
vidarh
I remember working at a large company years back, where I was told the story
of some pre-IPO ops guy that was still hanging around despite clearly not
needing the money.

Some more recently hired SVP brought him with her on a trip to various offices
as her go-to guy to make sure she wasn't bullshitted when discussing a
specific project with the local teams. He had often brought along on trips
like this in the past because of years of experience he had with the company
infrastructure.

To be nice, each time she would offer to get her PA to book the flights and
hotels, so he could benefit from her ability to get them booked into better
rooms than the standard policy would allow for his role. Each time he'd
politely declined.

Finally she pressed the issue and asked why he didn't want the better rooms.

Turned out he'd done well enough out of the IPO that he soon afterwards had
decided to buy apartments near the local offices in the 5-6 cities across
Europe where the main subsidiaries were, so he'd not have to stress with
packing etc. when travelling there.

------
kak9
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
> 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
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
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.

------
ucaetano
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.

~~~
ryandrake
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
Because people won't generally buy high risk low return investments.

~~~
venomsnake
Zynga?

------
brandonb
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?

~~~
wilsynet
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
> it's difficult to go back in time and re-write the employee stock plan.

As well it should be.

------
kzhahou
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

~~~
andrew
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.

------
doublerebel
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-t...](https://blog.wealthfront.com/the-right-way-to-grant-equity-to-
your-employees/)

~~~
andrew
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).

------
moe
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
This doesn't get rid of any of those things.

~~~
alxndr
Could it reduce (or simply eliminate) the need for more complicated ownership
sharing schemes?

~~~
harryh
No.

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

~~~
im2w1l
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
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.

------
coffeemug
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
That's a great question. I'll ask my lawyer and report back.

------
tinco
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.

~~~
pacaro
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...

~~~
aceperry
Sounds like not enough assholes left.

------
roderickm
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.

------
tropchan
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
+1 to Megadonk as the currency of choice for my next job.

~~~
noonespecial
Yes and is 1000 Megadonks a Badonkadonk?

~~~
tropchan
HAHAHAH!!

------
bshanks
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?

------
nissimk
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.

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

~~~
marssaxman
What does "the chance of a unicorn" mean?

~~~
austinsharp
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/)

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

~~~
plumtucker
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.

------
joshjkim
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).

------
jim-greer
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.

------
twakefield
"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)?

------
mahyarm
I wonder how the tax consequences work with this.

~~~
foysavas
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
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.

------
plumtucker
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-...](http://www.slicingpie.com/how-to-use-a-dynamic-
equity-split-program-so-everyone-gets-what-they-deserve/)

------
devNoise
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.

------
desireco42
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.

------
erikb
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.

------
mauricemir
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

------
flipside
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.

------
davemel37
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.)

------
jessriedel
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.

------
BinaryIdiot
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!

------
cleung2010
What about people who joined early vs those who just joined?

