A Good Way to Grant Equity to Your Employees
firstround.com
firstround.com
Your employer's also the one looking for a talented employee.
This, 1000 times. How can it be 2016 and we are still having this discussion? Particularly with the group on HN, who are generally speaking extremely valuable and highly trained.
If you do not bring value to your employer, you will be fired. That might be a highly liquid, difficult to characterize value, but it is undeniably a value-add.
days == months == launches == rounds in reality.
Unless you had the actual, initial idea, no future team (doesnt matter time) is going to be considered a cofounder. Meaningful equity and terms wont be given out after that standing.
Incoming employees need to realize that -- equity++ means nothing; most should request a reasonable salary.
I see your angle with this, but I've personally seen Co-Founder thrown about as a perk in exchange for lowered compensation when the company is still fresh enough. A person who could add value might be offered to come in as a VP with substantial comp and equity but trades a good chunk of that comp away to be called a Co-Founder instead.
It kindasorta betrays the idea of what a founder is, but somewhat like how time is meaningless by your example, so too can be titles.
> Incoming employees need to realize that -- equity++ means nothing; most should request a reasonable salary.
Yup. Unless you've worked for Palantir. Then your shares are worth their weight in magical fairy dust.
So, a lot?
Sounds like a reasonable offer :D
[definitely what the employers are thinking]
You honestly believe that a first-hire, in addition to receiving a competitive salary + benefits, is also owed >5% equity? No founder of a company with any traction is going to go for that, and no investor of any VC-backed company is going to agree to that either.
Competitive salary for top devs at big companies is reaching $250-350k/year.
If your startup is paying that well then sure it doesn't need to offer a lot of equity.
Most of the startups ive interviewed at over the last year don't even come close so they damn well should be offering a lot more equity to make up for it.
First hires tend to be mid-level aspiring engineers looking for make a name for themselves and get in early but for whatever risk-adverse reason aren't looking for a cofounder type role. They usually need a steady paycheck.
Obviously there's always going to be a balance between equity and salary, but the hypothetical scenario we're talking about here is "first employee" which tends to mean a salaried position with benefits.
Or can't get it - because they don't have the idea to be a cofounder, or don't have the experience to be a CTO. And to address your comment in the higher tier, I never said the salary had to be competitive - in fact when I was a first employee my salary was cut in half (and my salaary was not that high by any stretch beforehand), but my equity was in a few percentage points. So yes, my point stands, if it requires very little capital or risk to found a company, but it's vital that you hire help, I would expect that you give them meaningful equity, especially if they're doing a great deal of the effort and labor to get there. I don't think that's entitled, I think that's being fair to your employees who are busting their ass to make you rich.
Agreed. Which is why they aren't getting co-founder levels of equity. 5% for a key position sounds about right.
But if you want them to go all-in on your startup then you are mad not to compensate them for it.
If you want mis-aligned incentives for a very key position then go right ahead but don't call someone entitled for wanting to be compensated fairly for the risk and responsibilities.
In less than 3 cities. So to say this as a universal truth is just false.
It is much more risky to join an early stage startup elsewhere. And so equity elsewhere should be bumped even higher to compensate.
Not all developers are equally good at their job, and if we see some getting paid effectively much more than others, the most natural explanation is that the higher paid ones are better developers. Otherwise, why would that startup employees take the deal?
I'm saying it's not being entitled to want high levels of equity as a first employee. It all depends on what you bring to the table.
On HN, please make your (otherwise fine) point without getting personal. It's not hard, and we want the culture here to eschew such things.
Employees get to bounce around from company to company, commanding an ever-increasing salary due to the bubble we're in, and usually get a solid chunk of equity to boot. They work their hours, they take their vacation time, they come on HN and wax about the insensitivity of the open-office floorplan, or that lunch is only catered 3 days a week. They have a never-ending flow of job offers in their inbox and when things aren't going their way, they can simply pack up, walk away (with equity in hand), and move onto the next cushy job. They aren't up late at night worried about how they're going to make ends meet the next day, their biggest concern tends to be whether they embrace the latest JS framework or wait the three months til it's supplanted.
I'm sorry if you've encountered founders that treat their employees like shit, but dammit, most of us do our best effort to take care of our employees with competitive salaries, excellent benefits, fair equity amounts, and frequent profit-sharing bonuses. We don't take lofty profits, we invest it right back into the company so we can hire more people and provide better accommodations. But if we come across as thinking we should eventually reap the benefits of a successful company: you're goddamn right we do, we earned it.
And on a similar note, unless federal laws change, I refuse to ever work for a company with fewer than 15 employees again (unless they're a defense contractor), as companies of that size are exempt from the EEOC and from the requirement to provide health insurance (and as someone who dealt with both discrimination and a company that refused to give anyone insurance, those are both personally important to me).
I'm currently at a mid-size telecom with ~500 employees, and I'm really happy here. It's both the biggest and the best employer I've ever had.
1) Group health insurance plans tend to have a significant upfront cost and it's extremely expensive per-employee with a small company. Larger companies get better plans and can pay significantly less per-employee. The SHOP [1] plans out there aren't even implemented yet in many states.
2) A logical option that many businesses wanted to do was simply reimburse employees the full cost of their individual health care premiums. It seemed like a good bridge between ensuring they have coverage without getting into the extremely expensive weeds of group plans. But for some absurd reason/loophole, that's actually illegal. And there's a $100/day ($36,500/yr) per employee fine if you reimburse employees for health insurance. [2]
[1] https://www.healthcare.gov/small-businesses/employers/
[2] https://www.irs.gov/affordable-care-act/employer-health-care... Question #1.
Second, I live in Texas. PPOs are no longer offered on the private exchanges here. Unless you have employer-provided insurance, you have to have an HMO, which I refuse to do for moral reasons. Even if it was legal, I wouldn't work at any company whose sole insurance option is to reimburse employees for the cost of individual plans because individual plans are not an option here.
This is simply the result of stingy, greedy owners trying to keep everything for themselves. The company I worked at before the defense contractor was about the same size, but not only did they not provide benefits, but they provided laughably low salaries (I was making $47k/year when recruiters were telling me I should be making $60-65k, and the defense contractor I jumped ship to paid me $65k), refused to provide any equity to anyone except to maybe the first two technical hires, and refused to seek any investment above the angel level because the owner wanted to keep ownership for himself.
If a business cannot afford to properly compensate their employees, they should not be in business. Period. Size isn't an excuse. And that means the <50-employee exception needs to go. And so does the <15-employee exception for EEOC (and some cities, including my own, have the same exception for their local non-discrimination laws).
If you're a small business, you should have three options: 1) offer full benefits and pay a competitive salary, 2) treat your staff as co-founders and give us both equity and public recognition as co-founders, or 3) you close your doors.
[1] including "coemployers" where lots of small employers pool together for a large company plan.
Even if the costs were the same, I live in Texas. PPOs are no longer offered on the private exchanges here. Unless you have employer-provided insurance, you have to have an HMO, which I refuse to do for moral reasons.
(and adding: my previous employer was a tiny company of 12 people, but they had to provide insurance anyway due to being a defense contractor, and I was paying $40 per month for the best insurance I've ever had. The employer I had before that was a startup of the same size and refused to give any insurance or even pay us what we were worth because the owner was stingy, so stingy that he refused to seek VC because he wanted to keep ownership)
How much was the employer paying when you were paying $x/pay period? From my experience, small businesses pay a lot more per employee than large businesses and also tend to only have one option for employees.
Edit: Removing my example as it apparently misrepresents my intent. The gist is I think doing 20% of the work is not the same as delivering 20% of the revenue.
This idea that only those who are delivering revenue directly deserve to be rewarded is asinine.
This is what I'm saying: If a founder builds a business over many months and then hires an employee who can take over 20% of the founder's current workload, that does not mean the employee deserves 20% of the company, IMO. It does not mean that employee is "delivering 20% of the revenue." It merely means the employee is doing 20% of the founder's current work.
Equating percent of current work to percent of equity completely disregards the risks and effort involved in building a sustainable business. Developers tend to overvalue the software assets and undervalue the business relationships and other revenue-producing activities.
Hence my question about how the OP is arriving at their figure.
Equity is granted on a vesting schedule to approximate the future contributions of a person. If that approximation does not accurately represent the reality over time, it should be reviewed and renegotiated alongside performance.
If I write a book, I'm not giving my web designer a percentage of the profit. Yes, my success is contingent on the quality of his work, but he's just one of many offering such a service.
The reason employees are commodities is that they allow themselves to be treated as such.
I understand what you are saying, but there is something extra you are doing as employee #1. You're taking a huge risk not working for Cisco, Oracle, Google, etc...any of the players you know won't cease to exist overnight. The equity is offered because a skilled employee is taking a risk on you(the founder), and investing his time that could be better spent at an established company. That's how I view it at least - if you offer me equity at your FaceAppInGram startup, plus the salary I would expect from other fortune 500 offers - I might be tempted to work for you. Otherwise, there is no sane reason any engineer worth their salt would take the risk.
edit: typo
No, this is not risk. This is opportunity cost.
When referring to finance or economics, risk describes
the possibility that an investment's actual and projected
returns are different and that some or all of the
principle is lost as a result. Opportunity cost concerns
the possibility that the returns of a chosen investment
are lower than the returns of a necessarily forgone
investment.
A VC can lose their cash money investment in StartUpCo. That's risk. An engineer choosing between StartUpCo and Cisco faces a choice between two opportunities. The cost of choosing one opportunity is the other. That's an opportunity cost.
Given a choice between two alternatives, one with high variance and low median return, and another with low variance and high median return, it is perfectly sensible to use the English language (as opposed to investment jargon) term 'riskier' to describe the first alternative, if maximizing return is the goal.
While you could still lose your job at a big company, they are generally more stable with billions in the bank.
Hmm. I hadn't thought of it that way. Thenagain, from what I've heard, A players don't hang around any particular company for more than 3 years since they are always looking to bump their paygrade. And despite what startups may ask for in job ads, they are not exclusively hiring superstar code ninja warriors.
Total salary/benefits at GoogFaceSoft comes out to almost twice as much(seriously) as you'd make at the average SF startup.
It is fine to argue that you should demand fair pat, as long as you realize that you are basically saying that everyone should only work at Google or facebook or Uber.
That's awesome. If it's so easy why are you an employee? You should totally start a company and go from idea to revenue in days with no cost upfront. Then you'll own 100%!
This is doubly true for RSUs, which are liquid the day you get them, not forcing you to stick around waiting for them to be exercisable. As someone approaching such a cliff, I have to say this "continual refresh" practice makes a lot of sense. Wish more companies would think of this. The day all your equity vests (and your total comp now drops, perhaps by a substantial amount) seems like a designed-in "last day".
Here's a "Good Way":
- Lock-in percentages instead of number of shares. Real dilution protection - not handwavy vague reassurances.
- Vest shares over quarters not years.
- ISOs that convert to NSOs after employee leaves OR RSU's with the company paying the tax bill.
- Termination protection
Anything less is scraps of a lottery ticket.
I'd trade a reasonable % every year over a mythical pie in the sky exit one day. Yeah, I understand it is nice to dream owning a yacht and sail the world one day, and that is worth some something (in other words the ability to dream about it is important and people will get into situation to be able to do it). But I am more of a boring pragmatist and would rather have a bit less but more predictable reward every year or month instead.
Profit sharing does have a long history in more traditional industries though.
Ok agree, that was the obvious bit I missed. I never really worked for startup, so wasn't familiar. So idea was silly, makes sense now.
> Most technology ventures less than 5 years old
Well you're right there. So it was a dumb idea.
Note - this isn't 100% accurate as options that are not in the money still have some value but the idea is more upside than downside.
Is this true? Dilution of this magnitude, on average?
Is there a more diplomatic way of saying that? Employees aren't in a position to question the "generous privileges" or "large equity stake" they are being offered.