
Is It Possible to Achieve Equitable Equity for Startup Employees? [audio] - joeyespo
http://a16z.com/2015/08/12/equity-models-and-experiments/?
======
hapless
It's not about what's equitable, or fair, or "reasonable." It's about what the
market will bear.

Individuals with a realistic worldview, a little background information, and
the ability to do simple math will conclude that startup equity offers are
typically worthless. The fractions of the company are too small, the
protections given to founders and investors too large.

Startups are not getting the best talent with these compensation packages. And
the people doing the hiring don't care. They clearly do not want any better
than what they're getting. If there were unsatisfied demand for better staff,
we would see more compelling offers.

Hiring irrational optimists, the math-impaired, and folks who fail to do basic
research on the field seems to be working out OK.

~~~
ditonal
I still meet a ton of engineers, who while being surprisingly analytical in
other aspects of their life, think their worthless equity packages are worth
something. Some people don't even know what percentage their shares represent.
They definitely don't give enough thought to dilution, liquidation preference,
lack of voting rights.

I'll say it over and over again - if you're asked to take a total compensation
cut i.e. turn down public stock or salary from an established company to take
options at a startup _you are an investor_. In fact a bigger portion of your
net worth and income is invested then the typical VC's portfolio. And yet you
don't get voting rights, you get screwed by liquidation preference etc, and
the standard response is "well, you're not an investor, so you don't get
preferred shares."

Engineers are often hilariously bad at finance and even worse at negotiation.

~~~
rjbwork
I asked about the value of my shares. They're subject to dilution, and the
company won't tell me what % of the company they represent, nor the board-
evaluated value of the company. Thus I have to consider them entirely
worthless until proven otherwise.

~~~
potatolicious
I think sama had something good to say about this:
[https://twitter.com/sama/status/628713105824964608](https://twitter.com/sama/status/628713105824964608)

I would walk away from that situation. Any startup that's unwilling to do
everything Sam outlined above is IMO not worth my time.

Hell, refusing to answer something as simple as "what percentage are these
shares worth"?! I'd run, not walk, away from that one.

If you want to encourage workers by making them investors in the company, then
treat them like it.

~~~
rjbwork
Meh. I generally enjoy what I'm getting to do here, and the options were
unexpected when I accepted the offer, so I'm not really upset at it, per se.

~~~
potatolicious
If the work is interesting and such, sure, but my take is that beyond simply
being unable to value your own equity, behavior like this suggests lack of
maturity in the founders and implies amateur-ishness.

Having been around the startup block a few times now, there are some tells
that are definitely warning signs for me.

The most ridiculous are things like demanding a NDA to even discuss the
company. If a founder asks for a NDA just to have coffee, I am out - in my
experience it's a 100% indicator of someone who has no idea what the fuck
they're doing.

Secrecy around valuation, options pool, etc, are less damning but still very
much a yellow flag when it comes to how they treat employees and how much
experience the founders have. In general I find that inexperienced and
immature founders tend to focus on secrecy in the wrong places (and
conversely, lack of secrecy where it matters).

~~~
dasil003
> _If a founder asks for a NDA just to have coffee, I am out - in my
> experience it 's a 100% indicator of someone who has no idea what the fuck
> they're doing._

Indeed. I've seen this countless times, even occasionally in SV where people
should know better. Starting a company is really really hard. It's
fundamentally about deciding where to channel your energy when you have a
completely green field but only enough resources to execute on 0.01% of your
ideas. The focus must be pinpoint and relentless to even have a chance. The
idea that the risk of someone stealing your idea is worth devoting _any_
mental energy to indicates that you don't have your priorities straight. Hell,
even in a worst case scenario where you have a great non-obvious idea, _and_
someone steals it, if you want an NDA so you can sue them then you're
essentially betting on their superior execution capability.

Run don't walk from this kind of hot air balloon.

~~~
potatolicious
Yeah. Personally it feels like people who are obsessed with the security of
their idea are also the ones who over-value ideas over execution.

And ultimately a startup is nothing but relentless, on-point, highly competent
execution.

But in any case that may be ascribing psychology where there is none.
Invariably though the founders I meet who are like that are also very
inexperienced and 100% of the time have never built a product before, which is
probably why they value idea over execution.

------
mrmcd
I made a googledocs spreadsheet that modeled various equity payouts after
doing a bunch of research to evaluate a job offer from a fresh Series A
startup:
[https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4...](https://docs.google.com/spreadsheets/d/1L-hwCRXKDwmOPqXCwQo4DM1cERYSgBIHM6Sp_Mye1Gc/edit?usp=sharing)

You put in your shares as a percentage, the cost to exercise, and the
opportunity costs of taking the job for 4 years (or whatever the vesting
period is.) It spits out a grid of the various payouts for various exit prices
and funding round dilutions. Feel free to clone and play with the numbers or
hack on it for your own needs.

Ultimately I ended up passing on the offer because they were pretty stingy on
the equity, and wouldn't budge. The amount they offered would've had to be an
exit well above 100M to be a "good deal" versus what I was giving up, even
without considering the risk of it failing completely.

------
jeremysmyth
As far as I'm concerned, Joel Spolsky wrote the canonical answer to this sort
of question at a Stack Exchange site that has since closed, but the answer is
reproduced here: [http://money.stackexchange.com/questions/26337/what-to-
ask-f...](http://money.stackexchange.com/questions/26337/what-to-ask-for-on-a-
business-partnership)

In short, here are the two key points:

> The founders should end up with about 50% of the company, total. Each of the
> next five layers should end up with about 10% of the company, split equally
> among everyone in the layer

> What happens if you raise an investment? The investment can come from
> anywhere... an angel, a VC, or someone's dad. Basically, the answer is
> simple: the investment just dilutes everyone.

He gets into more detail on specifics, e.g. vesting, early employees who don't
take salary, and investors taking a large stake.

(The podcast gets more into the sort of problem that plagues unicorns, but
let's be honest: This sort of problem won't affect more than a handful of
people reading this, if even, and a situation that rare won't be covered by a
podcast or stackexchange answer even by someone as special as Spolsky or
Horowitz)

~~~
kzhahou
Under this "canonical" answer, ONE of those layers owns as much as the rest of
the company combined. By some curious phenomenon, this outsized layer belongs
to... the person who invented the scheme. What a twist!

Founders should own as much as every single other contributor and investor,
combined?? They should keep several orders of magnitude more than all the
other professionals that give years of their life, and make important
decisions and breakthroughs? Only greed and self-importance justifies this
outlook.

The company's first non-founder employee takes a HUGE risk. He joins when no
one else has taken that leap of faith. He joins maybe a few weeks after the
founders started up. He takes a huge financial hit, foregoing that fat salary
and bonus of the established company. And without those first employees, there
will not be enough product or progress to show, to recruit the next batch.
Derek Sivers explains this best in his First Follower talk [0]. That
employee's reward? A percent (if he's a good negotiator). Compared to the
founders' 50%. How equitable!

[0] [https://sivers.org/ff](https://sivers.org/ff)

~~~
ryandrake
I'd argue that in many cases, employee #1 takes a much, much greater risk than
the founders.

Now, before someone "disproves" my point by showing a counter-example, I'll
admit this doesn't apply to all founders in all companies, but founders tend
to have plenty of money to fall back on. That cushion is what allows them to
be founders. If the business fails, well, kinda sucks for them--they
potentially lost a chunk of it, but they're not homeless. They'll dream up the
next idea and go at it again. Because they can afford to.

Employee #1 on the other hand, is working for a living. They're likely
dependent on their employer. They're foregoing a more lucrative salary
somewhere else, not to mention savings, 401k's, health insurance. They need to
make rent next month. If the business fails, they're scrambling to find
another job ASAP. Sure, in terms of "raw number of dollars", they're not
risking as much as the founders, but in terms of financial security/stability,
future earnings, and career growth, they're taking a huge risk. Shouldn't
their reward be commensurate with this risk?

~~~
fleitz
It should be, which is why they should quit and become founders, which is why
everyone is a founder these days rather than employee #1

~~~
kzhahou
The old Factory Owner's Defense.

~~~
fleitz
Well, then start a business and give all your equity away, it worked for Bobs
Red Mill.

It's like people who complain about how much garbage men/some other shitty job
make but then don't become garbage men.

------
delinka
I get paid a good salary. I also have options. _Options_ to buy some fraction
of the company. Those options could be a bonus if a Desirable Event occurs.
Otherwise, I'm still being paid very well to do what I do on a daily basis.

If you've been offered a _decreased_ salary and shares to compensate (or
[$DEITY forbid] options) for the lack of salary, then negotiate or politely
decline.

------
brandonb
This is a really good podcast--I love the idea of progressive equity, and Ben
and Andrew do such a thorough job of talking through the implications on
employee motivation, secondary sales, pro-rata vs flat, ...

Has anybody aside from Detour implemented progressive equity so far?

------
MCRed
I just heard about this the other day:
[http://slicingpie.com](http://slicingpie.com)

Not sure if it works or not.

I think the current trend of 4 year vesting with a 1 year cliff (and 0.1%-0.5%
for very early engineers in startups less than 7 people, as it seems on
angel.co job postings) is totally messed up. It seems every startup wants to
you take a $40k salary cut at least and isn't giving you equity anywhere close
to that value (even optimistically, though it really should be at net present
valuation. EG: If your last funding round was an incubator which put in $20k
for %5, then your valuation is $400k, and each year that engineer gives up
$40k in salary, he should get %10 of the company... until you do another
round, at which the $40k will buy less of the company. But nobody is doing
that...)

Don't even get me started on the one year cliff. Can you imagine any other
investor in a startup taking a one year cliff? "Ok, we'll take your venture
capital, but you're going to vest and it's got a cliff. If you act like
jackasses in the first year we're going to cut you off and you get nothing"

Here's the magical thinking: Somehow investor dollars are more "real" than
employee sweat, or lost salary the employee gave up to come work there.

Hell, if they pay you %60 of a market salary and then give you %40 as deferred
salary, you should still get probably %4 of your salaries value in equity to
compensate for the risk that the deferred salary will never be paid.

And why don't startups use deferred salary? Just each funding round, pay off
some of the deferred salary. Make the interest on deferred salary something
like %5. You're gonna grow a lot faster than %5 right?

Oh, that's right... Companies don't use deferred salary because Investors
don't want the company to have liabilities-- investors want the first place in
line when the company gets liquidated.

More magical thinking-- their dollars contributed by pension funds and tied to
"you must pursue the higher risk strategy, we don't care if it destroys the
company" pressure is more "real" than the salary employees give up to do the
actual work.

I'm far from a unionist, but I blame founders for putting up with this kind of
employee hostile thinking. Look to bright lights like Basecamp and Github--
you don't have to sell your soul to start a company. Bootstrap and it will let
you treat your employees well. And then if you do want to take VC money, like
Github did, you can do it on your own terms, not theirs.

Too many founders seem to come out of an incubator (which is coaching them for
demo day- seemingly the whole point of many incubators) thinking that their
purpose is to get VC money. IT's not. It is to build a business. VC money is a
loan that is an ongoing drag on the business (even more expensive when you
consider the advice of VCs.)

~~~
bankim
Never ever take a salary cut when moving from established company to a
startup. In fact engineers should also take into account bonus, 401k match
that will not be typically offered at a startup. No wonder most friends I
speak to are more attracted to tech unicorns that have higher probability of
success than early stage startups and can match or offer higher base salary
than established big companies.

~~~
bwah
This, exactly.

In this bubble, if you are joining a funded startup you should not take a
below market salary, period. If the bubble bursts, your equity won't matter
anyway.

If you are taking a salary cut because you are joining a pre-funded or seed
stage company, you better be getting near founder level equity.

------
rajacombinator
Cliffs on Ben Horowitz's take on it?

