
The Pirate Game - nostrademons
http://en.wikipedia.org/wiki/Pirate_game
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nostrademons
Via Reddit.

I submitted this because the incentives are very similar to those involved in
startup equity, and the resulting proportions are roughly the same. Startups
must choose how to divide the pot (i.e. equity) with each new hire. Each
employee can then a.) accept the proportion, working hard to make the startup
succeed or b.) reject it, slack off, and make them _all_ walk the plank.
There's another complication in that a pirate's coworker may catch him at b.)
and tattle, forcing him and just him to walk the plank.

Why does this work like the pirate game, where only the senior pirate walks
the plank? Well, think about why the senior pirate ends up with all the loot.
It's because he's able to play the remaining pirates off each other: he can
get away with offering 0 to pirate B, because he knows that B will be outvoted
by the pirates that B is about to screw over. Similarly, a shirking employee
is "outvoted" by his peers in a startup, who stand to gain handsomely (even if
the founders take the lion's share) if the startup succeeds. They have a
strong incentive to tattle on any shirker, which forces the shirker to work
hard or get nothing. 0.1% of the company is a lot more than 0, even if the
founder gets 50%.

This game also explains a lot of other accumulated startup wisdom, such as:

Why founders typically own 10-25% of the company each, while individual
employees start at 1.5% of the company and decrease exponentially. Each new
employee has decreasingly less ability to make the whole company walk the
plank, and so the founders can get away with giving up less equity.

Why your first 10 employees are the most critical hires, and should be self-
motivated hackers who want to see the startup succeed for its own sake. At
this point, the startup has little peer pressure: if the founders are off
negotiating a business deal, there's nobody to tattle on the workers, so if
the founders own 80% of the company and each worker owns 1%, there's a strong
incentive for them to goof off en masse. If, however, you have 10 people that
don't care that the founders are making 10 times as much as them, then they
will tattle on the next 10 hires that want to shirk, letting you give those
hires very little equity.

Why tolerating a single shirker often kills the whole startup. Employees see
that they will not lose their 0.1% if they shirk, and they figure that working
hard so that the founders get 90% of the reward isn't worth it.

Why big companies are incapable of getting anything done. As the company grows
and equity gets diluted, the options granted to any one employee become
minuscule. Thus, employees have more to gain by making friends with their
fellow shirkers than turning them in and boosting the stock price, and a
culture of mediocrity settles in.

Why certain big companies have managed to avoid this. There are two basic
approaches, carrot and stick. The "stick" approach is used by Intel and GE,
and consists of firing the bottom 10% every year. Employees figure that $60K
salary is better than $0 salary, even if they aren't sharing in the company
upside while the CEO makes $100M. Unfortunately, this approach often means the
company loses out on promising new hires who don't want to work in this
environment. The choice for them isn't $60K or $0, it's $60K and the constant
threat of being fired or $55K and decent working conditions.

The "carrot" approach is to give really generous cash bonuses for performance
- often 2-3x the normal salary. This is used by Nucor and Goldman Sachs.
Employees will not only work hard if it means the difference between $40K and
$130K, but they're more likely to tattle on underperforming peers who bring
their group productivity down.

