Tenure-Based Ownership – A distributed equity model for worker ownership
ianmobbs.com
ianmobbs.com
I’m not saying that maybe early employees might deserve more equity, but to suggest that contributions in year 2 of a startup are somehow equal to those of the first year is laughable to me. Maybe strictly from coding contributions, but there’s office space, culture, vision, etc. If it was that easy, that person joining would have started their own.
A fixed amount is distributed every year, split between team members more or less evenly. This means that the 1 or 2 folks who join early get a big chunk of equity, and everyone else gets less while the early employees continue to accrue shares. The benefit of a system like this is that it allows you to be transparent.
This is outside of executive hires, where equity is used for a different purpose (namely aligning the financial success of the company with the financial success of the individual).
All that said, I don’t believe startup equity is valued by tech workers older than 25. We’ve all been burned enough to have looked up the stats and realize that upwards of 75% of startups will never experience a liquidity event, and for those that do a multi-million dollar exit is a lot like winning the lottery — with similar odds. Most folks just end up with a bunch of out of the money options or some penny stock that’s not worth the trouble of selling.
The reality is that there are no objective, consistent metrics which map risk to equity or effort to equity, all we have is cultural norms, pretending otherwise is a self-serving narrative.
Starting a company can easily be a 70-100% paycut.
If someone took a paycut that large for 1% of a company that was just a terrible and I don't think representative decision of a first employee.
if i work for 2 years and get paid 50K then i should own more than the person who works one year and got paid 100K.
I'm not necessarily sure if this is the best way of doing it or not, but I appreciate the viewpoint. I've thought about how best to manage company ownership in a worker owned cooperative, but I haven't settled on a personal answer.
We seem to have forgotten the lessons of the 19th C. and the abuses of Standard Oil and the rest of the robber barons.
I'm sorry, but it reminds me of a joke about a physicist tasked to optimize a dairy - "for a perfectly spherical cow in frictionless vacuum..."
>While we will never get to perfect competition, even moderately competitive markets avoid most of the problems of rent seeking and monopoly abuse.
Well, at the core of capitalism lies a positive feedback loop that allows people with a lot of capital to more freely invest long term than those with less capital, and forces people who barely get by to accept worse deals in order to survive. As I see it, the more people own capital, the more likely an average person is to be on both sides of asshole deals, which is slightly better. Unlike fixing competition by legislation, it doesn't put so much power in the hands of people who get to decide where "honest competition" ends and "underhanded tactics" begin (for example where just being better than competition and protecting your trade secrets ends, and vendor lock-in begins).
I'm aware that it's also a "spherical cow" solution and I'm not sure if that would actually fly in real life (coops seem to pop up here and there from time to time, and none has revolutionized the world) and perhaps your solution is more robust in that it targets the market forces that shape companies, instead of trying to build something against them. I guess that if I ever get around to trying my wet dream of staring a tech coop, I'll be sure to post it here.
You phrase this as if it's an either/or. Correct me if I'm wrong, but you, or any other owner, are currently perfectly free to experiment with other ownership models in your own company.
What have you thought about? My email is in my profile
- You have to have Coase in there somehow. When is a new line of work a new entity? Seems to be something to do with internalizing costs, the friction of negotiating externally, and as part of that the difficulty of valuation.
- Say I'm a pro athlete. I hire a physio and a permanent PR rep to handle my social media. Now I'm in minority? Valuation has to come into it somewhere.
The problem fundamentally is how to pay people what they're worth, which in itself is a nebulous thing. Tying to some specific measure like time spent might be very wrong across different fields. The current "solution" which I'll grant is not entirely satisfying is that everyone just negotiates. If there's an amazing manager he talks everyone else into giving him a large slice of the pie. If there's a recent grad he gets a little bit, but gets his foot in the door.
The proposed model, I think is best of large companies with lots of workers - say a factory, where most people bring in roughly equal amounts of value. The high value people could negotiate earning ownership at 5x or 10x the base rate, for example.
The big point is that there is a massive space of possible ownership models and exploring them is a very interesting exercise. In fact, experimenting with such models is an excellent way of exploring and understanding how much value different people in a company bring and what they are worth.
This... does not comport with the available evidence. Workers in the US right now do not have a lot of power relative to the height of US unions. And saying the US is near "full employment" is a parlor trick of how you define who is and who isn't in the labor force, which is why we can have stagnant wages while being near "full employment" for some time now.
You can very easily overpay or underpay new hires in equity if you adopt this system. It seems to make it more difficult to find the correct amount.
A firm could pay everyone the exact same salary, regardless of role or responsibility. But that doesn't quite work out in the real world with resource scarcity.
Slicing pie has a much more realistic set of methods
based on the principle that a person's % share of the equity should always be equal to that person's share of the at-risk contributions.
The method has been road tested by dozens of startups and I'm in the midst of using it for a new startup and find it to be quite approachable.
If you are interested in some research behind optimizing cooperative systems, check out Shapley Value.
Shapley Value assigns a unique distribution (among the players) of a total surplus generated by the coalition of all players. The Shapley value is characterized by a collection of desirable properties
>Say you’re a solo founder. You’ve worked full-time on your company for a year (4 quarters). You hire your first full-time employee after 1 year (4 quarters). After their first 3 months (1 quarter), you own 83% (5 quarters / (5 quarters + 1 quarter)) of the company, and the employee owns 16% (1 quarter / (5 quarters + 1 quarter)).
This completely ignores risk. let's say I've launched a startup on my own and after 1 year of work I am now hiring employee number 1. Presumably if I'm hiring anyone I've found some product market fit. So why does employee number 1, who is presumably earning a salary (something that the founder was not doing) and is joining a startup that is somewhat proven, deserve an amount of equity proportional to the time they have spent in the company?
It also ignores the motivation for many to start their own business. The obvious one is to be rich, another is for control and independence. Why would someone seeking these things give up such a large amount of equity?
If you want 16% equity in a company that you have not founded on your own, you need to either have been part of the team from the start (when the idea was not proven, and thus have taken the same risk as the founders) or you need to bring something that is transformational for the company to the table (sales, management, connections, technical knowledge).
That's unlikely to be the case (barring a company that is on the brink of failing).
The people who join a start-up early are rarely the people who make it successful, scalable or growable. In fact, the early people are often to blame for terrible decisions that could have been avoided by paying real compensation to people with greater skill.
Person A might work at a company for 1 year and meritocratically accomplish more than Person B who has been in the same job for 5 years. Person A’s contributions might immediately be vastly more vital to the company. This happens all the time.
This is all to say nothing of how tenure will become an issue of political favorites, luck of the draw regarding layoffs or project assignments, etc.
In addition sometimes value added to the company isn't realized until months later. And sometimes hard work doesn't add any value to the company.
Also, timing matters. Getting the company off the ground is much more risky and much more demanding than joining when it's smooth sailing.
Anyone interested in this should check out an existing model that's been going for decades already: a workers co-op. https://en.wikipedia.org/wiki/Worker_cooperative
Having read some of the comments here; I can guess a lot of the objections and honestly the answer to most of them is going to be "Yes, that's the point". It's a totally different model. It's not for everyone and that's fine.
But they come with many advantages (disadvantages too, to be honest, but doesn't everything?). Do google it and spend some time reading up on it if your interested in this question.
"that's the point", what's the point? I don't see why anyone starting their own business that is not firmly entrenched in whatever ideology the author has would ever consider implementing this.
Not only is it damaging to the business (what venture capitalist would ever invest in a business operating under such a model?), it's also directly damaging to the founder who after 4 or so years wont even be in control of the company they've dedicated so much to found.
When a founder decides to abandon their office job what they really desire is to work at a business that is run by a committee of employees and power in that committee isn't determined by merit and skill but by TENURE. /s
But then you strongly talk about a startup, looking for V.C. funding with strong founder ethos. That's also an ideology. And if you want to do that, go ahead - this clearly isn't for you.
But a lot of people don't want to do that. And that's why workers co-ops were started in 1844 and have been going strong since - granted, a small fraction of the market - but a successful small fraction that has survived and is clearly not going away.
I'd just suggest people read up on them before dismissing this. And sure, I get that the majority of HN readers probably are going to decide this is not for them. But other people do like them, and have made a success of them, so if your interested at all in the original question, do check them out.
Wanting to raise money is an ideology? It's better to describe it as a practical way of expanding a business.
> But a lot of people don't want to do that. And that's why workers co-ops were started in 1844 and have been going strong since
I just looked it up and there are an estimated 400 coops in the US with around 7000 employees total. This does not qualify as a lot. Almost nobody with the desire to create and run a business wants to run a business this way.
Also you missed the most important criticism, which is why is tenure of all things being used to decide who gets how much equity?
it most certainly is. with all the startups i was involved in the decision whether to raise money from VC or to bootstrap ourselves in other ways always came down to the believes of the founders. practical considerations hardly ever mattered.
That way you'd still be compatible with venture capital, quarantine the hours worked dilution to the pool and you can treat founders differently to employees if you want by having founders shares outside the option pool.
In finance, we already have a lot of innovations, thanks to the significant reduction of the transaction/contract-enforcement costs. I guess that is why it has not happened in other fields like employment contracts or partnership agreements. The designing and enforcement costs of any innovative contracts are just too high (considering you have to hire a layer to confirm all those changes and when you have to sue someone for violations).
Co-ops being people who like to share, you should find plenty of examples online - here's one for UK co-op companies, for instance: https://www.uk.coop/developing-co-ops/model-governing-docume...