wow -- the founders are going to make out like bandits. No outside funding means no dilution.
If giving an employee 1% of equity improves acquisition valuation by 2%, then it was probably a good move, as the remaining shareholders got 1% more than they would have otherwise.
It gets less intuitive with multiple people: what to do if one founder owning a valuable small business adds a salesperson and a UI guru, each of whom adds 10x the valuation to the company?
The main problem with equity is that it is extremely difficult to value how much a person will increase a future valuation by (ignoring complications with voting rights etcetera).
An aside as an engineer founder, I have always thought of accepting stock instead of wages is more like gambling.
1. You are concentrating your risk instead of diversifying.
2. As a minority shareholder in a private company you have virtually zero choice over any critical decisions, and the other shareholders have financial incentives to screw you.
3. You may influence technical outcomes, but even there you often realistically have limited financial incentive to improve profits. Unless you are an early employee, the amount of work you need to do to increase valuation by 10% is probably actually not worth the extra effort you put in for the $ you might get out.
4. Most people grossly misprice equity - ordinary shares are worth much less than the preferential shares an investor gets. Even though you are investing the equivalent of cash, you don’t get preferential shares. This is misrepresented everywhere, and certainly a startup has no financial interest in telling you the truth.
5. It is a high risk investment. That is fine for a VC which can spread their risk over many investments to get the industry average. It is a bad bet individually because even if you could invest your time in 10 startups, your variation in profit is still high. (Assuming one in ten startups is successful, which I highly doubt). Even VC funds are OK with ‘high’ variance because LPs are usually looking for diversification (especially non-correlated diversification with the rest of their portfolio), and the VC partners still get their tidy 2% even if the fund tanks.
6. Engineers usually seem to believe that they can pick a winner to join. VCs with decades of experience fail all the time, so the majority of engineers are just fooling themselves (or more truthfully, being fooled).
Of course, if the startup ever goes public, you'll make out like a bandit on that amount of stock! But more likely, as you say, you'll be left with only the cash component.
If the two options were rationally considered equal that would mean the missing $50,000 NPV of the employee’s salary would be paid by future investors once they bought the shares. Either in an IPO or in this case by the acquiring company.
Options are also a method to retain and incentivize talent, but they’re certainly a form of funding.
I hate this selective criticism; for goodness' sake, she was the CEO of reddit -- a company with ethical controversies every other week, but she attacks MailChimp? Give me a break.
From reading the room I’d say Ellen Pao is typically seen as a minor villain around here. Definitely not a hero.
There is no substance to the objection. They aren't entitled to anything, they didn't negotiate anything, and they shouldn't get anything. Her argument is akin to saying that the Uber driver that dropped me off at the gas station is entitled to part of my lottery winnings because the ticket I bought happened to have the jackpot numbers.
The position is both logically inconsistent and severely asymmetrical—we are only talking about this because MailChimp did have a successful exit, not because they failed miserably (as literally hundreds of startups do on a yearly basis). Even as a staunch capitalist, I'll be the first to say there are plenty of problems with corporate tax law, offshore tax havens, money laundering, etc.
But this ain't one.
At a point in time before Mailchimp was clearly a success (and thus equity would actually be worth something), most engineers would jump at a salary-over-equity compensation scheme because it's common knowledge (at least around here) that equity is a lottery ticket that usually doesn't pay off.
Anything else and you're a chump. Since there are a whole lot of employee #50, and #35, and #110s out there apparently many people really don't know what they are getting into.
From a strict compensation perspective, you are probably right, but even then, it is probably less stark than it was ten years ago, what with seed rounds and series A sizes being so massive that salaries are a bit more reasonable at this stage too.
As another commenter pointed out, there was obviously a fair agreement here: work for Mailchimp at X salary and no equity, or don't. Nobody was forced into anything, and if no equity was offered, then I'm sure the salaries had to be competitive in the market. Nobody would be stupid enough to work for them otherwise.
https://twitter.com/Shubham/status/1437532055173226499
Ellen Pao sucks. Didn't she fire a Reddit employee who had cancer?
That is the thing, we are seeing an extreme negative view of basic capitalism, people tend to believe founders and capital have no value believing in a socialist utopia where by all the workers get an equal share of the "means of production"
They have no reason to be unhappy and MailChimp doesn’t owe them anything other than the salary and profit sharing that was promised. Regardless of who the new owners of MailChimp are.
There are multiple other possible motivations for Ellen’s post other than criticism.
and this is why i'm against unions in tech - the people like she will be the bosses.
This is not some great injustice or a company acting in any kind of morally questionable way. In fact, it would be more accurate to say that in the grand scheme of things (not just the tech bubble), offering equity to employees is the exception, not the norm.
Selling to Intuit is not fine by me - and i consider it morally questionable in both senses of the term.
If they had gone public instead, Intuit could just as easily have bought up all the shares and reached the same end goal.
I'm not too sure what on earth "late stage capitalism" means but I do know that my little firm trundles on quite happily and works slightly better for the extra incentive that directly contributing equals directly earning. We have never insisted that shareholders need work extra hours or whatever. I kick people out of the office if they work too late. Work life balance is important.
Is offering or not offering equity something that can be considered within the realms of "morally questionable"?
A business is a business and a contract is a contract. When you take up employment within a business, you engage with a contract. If the contract offered is not one you like, you are not obliged to accept it. The last two sentences are rather polarised and I accept that the real world is rather more nuanced when you consider individual cases.
Can you really call a mutually agreed equity arrangement as "morally questionable"? You might as well describe working for a salary as morally questionable too. Anyway, whose morals are we considering and what standards do they espouse? Morals don't live in a vacuum nor do morals stay attached to a single concept. Your "morals" may well not be the same as mine!
We (my little company) are quite boring, rather small and won't ever feature in a how to take over the world, unless 10^-3 unicorn suddenly becomes exciting.
I wasn't criticizing people like you (although this thread does seem to have hit a nerve). I was critizing the assumption that you are morally culpable (or indeed praise worthy) for how you run your company.
You are able to be a good boss and that's great. In fact it's probably good business to be. But you could just as easily have been born the inheritor of a sweatshop garment factory in Bangladesh and unable to make a profit unless you employed children under appalling conditions.
The economic conditions dictate the possible relationships with employees. As profits decline (late stage capitalism) in different economic sectors the options narrow.
In the future your economic sector may become the target of a wave of consolidation. If a competitor starts buying up all the competition and adopting a more aggressive business model with lower prices you will be forced to adapt.
It's called Microsoft 8) Oh well, this MD rocks Arch Linux on his laptop and workstation. I put up with Exchange thanks to Evolution (and recently: Kmail.) I login via winbind-nss and leave a trail of Kerberos tickets wherever I go.
"I was critizing the assumption that you are morally culpable (or indeed praise worthy) for how you run your company."
Sorry, I read your comment differently.
Maybe they could have gotten some great employees by giving out more equity. Or maybe they tried and couldn't find them so they sold.
>Founded in 2001 and based in Atlanta with offices in Brooklyn, Oakland, Vancouver, London, and Santa Monica, Mailchimp has 1,200+ employees
Sending email must be much harder than I thought.
Add in all the usual ops, customer support, business to business client management for bigger accounts, marketing, and so on and its not hard to see how it can need quite a lot of people.
If they would've been more generous with equity (even at the expense of base salaries), I think we would've been high-fiving each other when the sales team closed a huge deal instead of cursing them under our breath and plotting our escape.
* they do allow employees to buy options with a portion of their salary and included a 5% stock option a few years ago.
https://www.brownadvisory.com/us/theadvisory/qsbs-tax-exempt...
https://news.bloombergtax.com/daily-tax-report/bidens-propos...
If Ben and Dan split it 50/50, that's $6b each and they would each be looking at $1.2b in capital gains tax.