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.
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
The whole discussion of money at this scale is ridiculous.
This is the dusty trap door. Just so you know, getting rich is "weird"[1] for a lot of people. You can see examples of it in lottery winners, movie stars, and tech employees.
Of course some folks tie their net worth to their self image. This is, in my experience, both common and a moral hazard. But that said, the more interesting thing is that people in a company have opinions about other people in the company, and during a 'liquidity' event (aka IPO or sale) there can be a lot of drama and angst around the internal metrics people are carrying around in their head and the monetary reward that gets paid out.
You need only imagine someone in your company, who you have a very low opinion of their contribution, become $FU rich while you see only a modest change in your personal net worth. I have seen that dynamic break people.
[1] And oddly getting 'un rich' as many did during the dot com explosion is less weird.
> You need only imagine someone in your company, who you have a very low opinion of their contribution, become $FU rich while you see only a modest change in your personal net worth. I have seen that dynamic break people.
You probably shouldn't work in the tech industry if that upsets you :-)
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.
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.
Presumably this already happens to a large extent. It hasn't seemed to had much effect on the trajectory of companies like Facebook and Google. Someone doing a PhD in Econ should write a paper about the effects of people leaving post IPO.
Good point about adding risk to the IPO.
edit: BTW working at companies like Facebook and Google is pretty good from a lifestyle perspective so I'm guessing most wouldn't leave.
> Is it possible that the company collapses, while too many employees quit so they can do their own thing, or retire?
The excruciating burden of going to work is almost non existent if you can say fuck off at any moment. A lot of folks there do lots of interesting and fun stuff.
While you could see some run away I would suppose that the numbers will be small if you have good corporate culture and policies.
These are well known risks and investors can simply demand a commitment. It is a very easy conversation to have with your employees. "Hey, if you sign this 2 year commitment we get like 10% more valuation". Everybody decides for themselves if it's worth it and the more people sign the better the valuation. And since everybody has more stock they have more interest to do it; You can also legally provision stock lock ups after IPO for 2 years or so, everybody does it. Also you can dilute the stock to allocate the 10% which represents the expected valuation hop. Then award the extra stock to those who sign. This is legal, but it's a lot of paperwork to make sure nobody can dispute the true value of the retention policy.
The employees get free prepared food etc, a consistent routine that suits their engineer mind, lots of vacation, flexibility to choose their own hours, leadership roles (and unlimited mobility) to choose their own work, until they retire and become angel investors. And they get a little greedy, so they need a few more years income before they retire at 40 and the hot startup becomes and over the hill bicgo.
You don't cash in straight after an IPO, most of the time the current owners of shares have to wait X amount of time before they can sell shares. I guess this help keeping the company stable.
Besides some math errors (I checked D'angelo's number and got about $348M "tax", not $23M; Zuckerberg's checked out though) -- I don't understand this:
"Although the model may seem fair on the onset, it can be criticized the same way we criticize a flat tax. Those at the threshold are "punished" the most."
It seems to me that because it's a "progressive" tax this criticism doesn't apply.
Flat tax is a policy that some advocate in the US where there aren't tax brackets and everyone is basically required to pay, for example, a flat 30% tax. In Andrew's case, he says 50% of all proceeds that are greater than the financial freedom limit. That means if you have 1B over you pay $500M and if you have $10M over you pay $5. That $5 million may seem like it has more of an impact to the latter person.
Thanks for the illustration. Andrew or whoever is interested in propagating this concept should consider throwing together a few examples and a calculator on a website so people can play around with the numbers.
This is super innovative and cool - provided it holds up legally and with the IRS. (I gather it's meant to be a tax-efficient approach.) I sympathize with Andrew's motivation because as a founder, if my company made it big, I would want all the employees to do well. I always figured in that case I would just pay them out of pocket and take a huge tax hit to make it happen.
On the other hand, as a founder who has not yet "made it", an extra 50% hit on top of the 50% the taxman will take, is way more than I can stomach. The potential for outlandish wealth is part of what motivates me, even though I would be fine with much less. But the percentage and threshold can be adjusted to find numbers that should be suitable for anyone.
One thing that I'm not clear on and I didn't read through all the legalese is on what basis the "taxed" amount is redistributed to the remaining employees. If it's based on share vesting like a normal system, it sounds like it wouldn't change the distribution much. If it's an even split it sounds potentially unreasonable, for instance, to give 2.5 million an employee who joined 2 weeks ago.
Either way cool stuff and I'd expect something like this to become standard in Silicon Valley.
The premise here is that extra money over the "financial independence" limit has a relatively low impact on the recipient. It's obviously not zero, but that extra money given up by the founder will have less of an impact on them than the impact it will have on every single employee that gets part of that money. To make up an example, if a founder gets $500M instead of $1B, but 500 employees get an average of $1M each, then the impact on every single employee is probably much greater than the impact on the founder (multiply that by the number of impacted employees and it's an even bigger difference).
He's referring to the marginal utility of money [1], where $1 means more to a person with $100 in the bank than it does to the person with $100M in the bank.
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.
> - How is the kicker pool redistributed? Equally or along the lines of people's current distributions of equity?
Along the lines of current (fully vested) distribution. So if there are three employees - Lisa, Erin, and Aaron, and Lisa has 5%, Erin has 2% and Aaron has 3%, then Lisa would get 50% of the kicker pool.
> Curious if you have opinion on where the threshold should be set?
I do have an opinion, if the 18 year old version of myself heard it, he'd want to punch the 34 year old version of me in the face, so I'm going to let you guys figure out your own number and not put myself in a position of defending a position that I'm semi ashamed of anyway.
> And if it eventually makes sense to do tiers of thresholds? Or if you think the simplicity makes it make sense not to.
We decided to keep things simple treat financial independence as a binary state, but you could definitely do tiers if you wanted to.
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.
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.
If you want to reduce the "golden handcuff" effect, then you can keep an account of each employees 'kicker shares', but continue to issue shares on an x every time period basis. This causes inflation in the currency of 'kicker shares'. If you stay on continuously, then you keep your percentage of the kicker. If you leave, then those shares you earned slowly deflate in value.
You could even recognize higher risk of earlier employees by issuing special shares which have some mechanism by which if they leave, those shares may still deflate, but at a slower rate than later ones. e.g. for every time-period distribution of shares, these shares receive some fraction of the new distribution.
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?
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.
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)
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.
If the founders goals are to achieve a satisfying outcome ("financial security"), they would have to achieve a 2.5x bigger exit under scenario 2 than scenario 1. Andrew's new system retains scenario 1's "ease" of achieving a satisfying outcome for the founders while allowing the other employees to reap more of the benefits if the company grows further.
It's a structure supporting the idea that the first $X million are pretty important for the founders (or anyone, really) but the next $XXXm aren't as big of a deal and can be spread around somewhat, hopefully increasing the total number of people who hit $Xm within the company if it becomes huge.
If you made that change only, you'd presumably still end up allocating the remaining 45% in a way that skewed heavily towards early hires. On the other hand, this system allocates the unicorn value to much later hires as well.
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.
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).
If I'm an employee above the distribution threshold, doesn't this incentivize me to leave early (ideally right before the distribution event) rather than get my shares redistributed?
Is it really the best way to incentivize people to do a good job, the future possibility of a large exit, and that they'd get an additional share?
I like the idea of something being pre-determined, set from the get-go, however as you mentioned different individuals have and bring different value and have different impact in the company. Does it make sense for high impact people to get a 1 megadonk increase, along with a low impact employee?
There's another model I was hoping to be able to explore, though I don't have a lawyer nor could afford putting the resources towards writing any draft for it - which takes more of a convertible notes with a cap -- you give employees higher equity initially, so if the company doesn't do as well then those employees gain more, and that equity comes with a cap - so say it's 2.5% of the company with a $5 million cap and that employee has agreed they'd be happy with that outcome. The company exits for $1 billion which would require a lot more effort from a lot of people - save if it's some automatic viral scaling company with only a small team, e.g. WhatsApp with ~35 employees before selling to Facebook ... under this model then employees 30-35 in WhatsApp scenario could gain $100s of millions of dollars for very little time and energy invested?
If an early employee leaves, they don't get to participate in the kicker pool. Suppose it takes a company 10 years to have a significant liquidity event. In the timespan, it's very likely key employees join & leave and don't best a stake that would achieve financial independence. Shouldn't these employees also have access to the kicker pool? A relevant example here is Quora, where several very key engineers have left but (I'm assuming) wouldn't achieve financial independence in an IPO. Isn't this system a bit predicated on a high growth company that hopes to IPO within a few years? What might help is giving option/shareholders access to the kicker pool so long as they don't liquidate otherwise.
Is this something you implemented from the incorporation at Detour or only later on as the company started to grow? Seems like this level of complexity when the company is still incipient could be too much mental overhead.
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.
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.
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.
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?
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.
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...
> If I were a 4th level worker at your company...and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting.
This is precisely why equity vests over time instead of being awarded as a one-time event, and generally why the best employees are given regular equity refreshers.
You could quit when you hit that $1m mark, but on the other hand, if you stay for another N years, you might make even more. That's the thinking they're trying out here.
If you're really worthwhile to the company, your progressive equity refreshers might even be superlinear -- so you stand to make significantly more than what you've already made as an incentive to stay.
There are tons of people in SF and the valley who work even though they have enough money to retire right now. If this was a big problem, we would have found out about it years ago.
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?
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 . 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.
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.
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.
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.
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.
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).
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.
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.
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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.
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.
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.
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.
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
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.
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.)
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.
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!
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.
I recommend setting the financial independence threshold high enough that normal people will feel like anything beyond it is useless anyway. So there's no real downside unless you have your heart set on spawning a couple of Foxcatchers. And there's tons of upside.
It's not just that the reward for joining early is smaller than it used to be. It's also smaller compared to joining later. The marginal utility of money is actually what's causing the problem. If I can join a company late with very little risk and a much higher chance to make a few million, I'm probably much less incentivized to join a company early with the risks associated with that.
Definitely agree, one way to balance this would be to have each person be counted for each day/week they have worked there, so If I've been around for 2 years before the IPO I'd have 104 weeks that would get distributed to, whereas someone who joined a month before the IPO only has 4.
It's impossible to determine risk in a startup. Later participants may be entering a higher-risk situation than early participants. Startups are too volatile
The thesis/argument in support of "Progressive Equity" would be that the risk/reward balance is still skewed strongly towards founders (and to a much less extent early employees).
One's position with respect to this thesis would determine whether you believe this equity structure is a step forward or not.
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.
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
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.