Some tech founders are getting huge pay packages
wsj.com
wsj.com
The measure for founder success is now "able to raise an obscene amount of capital", and not "able to build a sustainable business". Investors should run screaming from SPACs, but they don't, because the sheer inertia of a high valuation brings in the next wave of dumb money, allowing the early investors to cash out. It's a damned Pyramid scheme. We are truly living in the golden age of scams.
It's not like they're throwing tons of cash on him/her.
"Today’s Tech Founders Don’t Just Own the Company. They’re Also Getting Huge Pay Packages." How are these stock awards different to owning the company?
If anything, those stock awards sound less attractive as they should be options at a very high valuation?
In effect, isn't this the same as later VCs reallocating the cap table in favour of the founders (and against earlier investor and employees)?
You're already expecting way too much intelligence from a journalist.
They want to peddle headlines of people doing well playing the speculative economics game
Their article is simply to make it look attractive to keep playing, because of course their owners control a lot of the speculative economy
But please keep going everyone; all the tech stocks I have been buying since Apple at 6-10/share in the late 90s aren’t going to prop themselves up
Why work when you’ll do it for me!
They're talking about companies that are, or are about to become, public - so a stock grant is closer to being cash.
An option to buy something at a certain price isn't the same as just getting the something. As mentioned in the article, ceo compensation consists usually of stock + options (et al.) tied to performance targets.
> In effect, isn't this the same as later VCs reallocating the cap table in favour of the founders (and against earlier investor and employees)?
Sort of, that's the point of the article. Apparently, new founders take on too much early financing.
Getting (a) stock worth $800mm and (b) investing some lesser fraction many years ago that winds up being worth $800mm are very, very different different.
> those stock awards sound less attractive as they should be options at a very high valuation?
They are. (Well, sort of. Robinhood grants RSUs that vest depending on the stock price, with only 20% of the pre-IPO grants vesting at the current price and 0% of the post-IPO grants vesting until the stock price at least triples within the next 8 years [1].)
Getting (a) $800mm in cash versus (b) an option theoretically worth $800mm but which must be held to expiration are very, very different.
[1] https://www.sec.gov/Archives/edgar/data/0001783879/000162828... page 226, Narrative Description of Executive Compensation Arrangements
Doesn't the title say 'pay package'? Stock awards are part of your pay package. Where did you read 'salary'?
It’s not pay, it’s a stock grant or options grant. They are also selecting for amazingly successful companies AND likely companies that didn’t have to raise a ton of money (this dilute founder equity).
It shouldn’t be surprising the founders end up with a big % of equity and massive payouts.
If the companies had failed and the 20% equity was worth $0 and the founder wasn’t getting paid, not sure WSJ would do an article called “Tech founders are left with almost nothing to show for years of work”
This seems similar to a headline that says “Winners of lottery jackpot walk away with huge payouts”. I mean yeah, you only focused on the biggest winners.
If a CEO owns 60% from the beginning, that's already built into the cap table no matter how big the company gets. If they get RSUs as incentives later on, the company is still footing the bill for giving them an $500 million in stock - an asset the company owned that could have otherwise been converted to cash.
The article doesn't do a great job explaining why giving bonuses later is so much more expensive for the company and its shareholders
The last good data I saw (which I believe was 2017?) had median founder ownership at large exit for VC funded startups as something like 11%
When I pull the link it looks like they updated their data to now use ipo specifically. Of 127 ipo’s:
15% median 20% average
https://blossomstreetventures.com/2020/08/05/founder-ownersh...
I suspect that part of this is due to extended timelines to go public. Bezos never got another grant after IPO, but he owned 41% of the company at IPO. Today, it’s more typical for even successful founders to end up with 5%-15%. Taking dilution in the C/D/E rounds and going public at $3b is a different beast than going public after the B (with a huge ownership stake) and growing a public company from $60m to $3b. It makes sense that the successful CEOs who gave more away in dilution end up with end power to demand it back post-IPO.
All narratives about the self-made founder are complete BS. There is no meritocracy at all. That's why privilege is such a big topic nowadays except where the narrative is wrong is that it's not only about race. It's about proximity to the politicians and the money printers. Proximity to the centers of power is the only thing that counts. Successful entrepreneurs are not value creators, they are not contributors to society, they're just glorified courtesans whom, with the approval of their masters, are granted bigger numbers in exchange for loyalty and compliance. Value creation is a thing of the past. It does not get rewarded anymore.
The entrepreneur of 50 years ago has nothing to do with the modern entrepreneur. They are completely different. The system we have today is feudalism but it markets itself as capitalism in order to onboard people.
There is no free market. Central banks and their courtesans pump money into the system to decide all the prices from the top down. They can point the printer in any direction and that's where the entire global economy will go.
But you're actually arguing that the percent of entrepreneurs who are rent-seeking has actually increased over the past 50 years? I really doubt this is true. I especially doubt it over the past few hundred years. At least on that scale, the world seems to be getting more meritocratic, not less. But heck, I don't really know.
You certainly have a point. It's hard to not "make millions" when you're best friends with a top VC, kleptocrat, or even any politician. Read any book about the third world, or any allegations in the first world, and this becomes obvious.
But there does seem to be a lot of meritocracy/business opportunities left for the rest of us. Have you ever started a business?
Perhaps a healthier way to look at this is that, if you really wanted to, you could network your way up there. Because even taking your worldview as truth, you certainly can.
All the ventures where I created value didn't earn me anything, even though one of these ventures was very popular. I only started to earn passive income after I became laser-focused on making money and playing internal politics (I got involved in cryptocurrency). But even then, I could see people who were truly 'crony' succeed by producing even less value. Some people in my cryptocurrency community earn twice as much as I do and they produced absolutely nothing. On the other hand me and my team produced a lot of useful tools which would make waves if people knew about them but the project founders don't promote them. They pretend that me and my team don't exist. Not only did we get 0 funding from project founders in spite of constantly delivering quality products, the founders gave funding to blatant scam projects instead of us; almost as if to rub it in my face. The whole story is long and disturbing. Those people in my crypto community who have been following us closely are quite surprised about how we're being treated. Someone from community was so disillusioned by the situation, they donated $20k of crypto to me before quitting the project (yes someone felt so bad about my situation that they gave me $20k for free). At least it's all playing out in a very public way so I don't feel so alone. It's just very awkward.
We also tried applying to various incubators and reaching out to investors (some outside of cryptocurrency space). Sometimes they seem excited about our project but they alway seem to back out at the last minute for seemingly no reason. It feels as if I'm blacklisted and the tech elite all talk among themselves to decide who to give funding to. Our team has a great track record in spite of never receiving any funding from any major investor so it doesn't make sense why investors are treating us so badly and it feels so coordinated. I used to get more opportunities in the past even though I was far less talented and than I am now and had very little track record. I think the problem is my online activism.
I suspect all my online comments are liked back to my real identity somehow.
A good place to start is with Kohn's "Punished by Rewards", which covers a fair bit of research on how intrinsic motivation is undermined by extrinsic motivation. The people I know who are great at something do it because they truly love it. Whereas the most money-motivated people I meet focus a lot of their attention not on the actual topic, but the getting of money.
For example, you could claim that modern startups don't actually require people who are the best at anything except greed. Look at Uber or WeWork. Neither of those companies has ever turned a profit and maybe never will. But both of their founders walked away rich, rich, rich.
I’d really be surprised if paying top rate for devs isn’t associated with more successful companies but sure, some will waste their investment in the wrong places and some will be trying to artificially enrich themselves, maybe even faking growth numbers which I’d be surprised if it doesn’t happen a lot.
As for me if I’m doing a startup I’d prefer to be more mission driven and keep all of the equity for myself and the founding team or as much as possible.
That doesn't mean they get the "best" people, though. I know good developers who have joined Google, ended up on things where they weren't learning much, and left Google for things that were more challenging. And I've known people who hopped between the various high-profile companies regularly to maximize salary. They were all smart enough, but they aren't people I'd want on my team because what they focused on wasn't the work or the colleagues, but getting the next promotion so they'd look more appealing next time they changed jobs.
Or you could look at the people in finance. I used to write software for financial traders. It was lucrative but soulless and frequently unpleasant. Some of the people I was building for were awful human beings. I left, and few of my former colleagues stayed in the industry. So in my view, finance pays more because to compensate for its flaws.
So I'd agree that on average a better software developer can command more pay than a worse one. But so can people who are more self-confident, more self-promoting, more exploitative, or less interested in things like net value to society, learning things, or working with good people. There are just too many factors to make sweeping statements, especially at the extremes.
Everyone is done pretending to be the “good founder,” that ship seems to have sailed
Define "better." Because it apparently doesn't include reducing carbon emissions [1] or increasing returns [2]. Nor, for that matter, creating and supporting the forum you're on.
[1] https://www.msn.com/en-US/news/topstocks/chevron-plans-big-l...
[2] https://corpgov.law.harvard.edu/2016/12/23/a-successful-case...
Picking and choosing examples that do not generalize to most investors does not refute his point.
There is research on dual-class firms. "Excess insider control is associated with decreased overall [corporate social responsibility] ratings," with the "community and employee dimensions...display[ing] the strongest negative association with excess insider control" in firms not in "the top decile or quartile of firms with respect to their cash and cash equivalents, operating cash flow, and free cash flow" [1].
Outside the limited case of technology company founders and family-owned firms, the evidence is strongly in favor of investor-controlled companies over the alternatives in virtually every dimension of "better."
[1] https://www.sciencedirect.com/science/article/abs/pii/S02784...}
https://corpgov.law.harvard.edu/wp-content/uploads/2016/12/C...
CP was languishing until Ackman fired their CEO in 2011 and put Hunter Harrison at the helm.
Did pay go down? I don't think that's accurate.
Paying a bunch of excess employees, yes, that's not efficient. That's practically textbook inefficient.
Are we really on a forum run by a VC debating capitalism?
VCs destroy capitalism. They force out founders and install hired guns. The VCs and their hired guns break the promises made by founders to their stakeholders. They put insane pressure on growth at all costs. All business ethics are abandoned.
>In 2009, CP was awarded the Governance Gavel Award for Director Disclosure by the Canadian Coalition for Good Governance. Then, in 2011, CP ranked 4th out of some 250 Canadian companies in the Globe & Mail Corporate Governance Ranking.
Enron was named "America's Most Innovative Company" by Fortune for six consecutive years, from 1996 to 2001.
Enron Chief Executive Kenneth Lay received the Marco Polo Award in 1999, one of the highest awards given to entrepreneurs and innovators.
Enron finance chief Andrew S. Fastow received the Excellence Award from CFO magazine in 1999.
If you count all the times a major oil company made a climate-worsening choice because investors demand profits, and then count the choices like the one you point at, I'd expect it would be 99.9% the former.
And I'll note that the link you give does not include actually "reducing carbon emissions". They're promising to invest more in research. How will they pay for that? Selling more oil. So even if they do the research and even if something comes of it, there's no particular reason to think that on net this choice will reduce total atmospheric carbon.
Sorry, do non-market economies have a better track record when it comes to the environment? Eastern Europe says no [1]. Pollution intensity metrics relative to private property rights say no [2].
I cherry picked examples for narrative value. I didn't realize what I took to be an extremist claim--the less influence investors have over private companies the better--had so much purchase.
[1] https://documents1.worldbank.org/curated/en/8074414933055888...
[2] https://mpra.ub.uni-muenchen.de/48717/1/MPRA_paper_48717.pdf
Eastern Europe is (or at least was) worse because the problem -- elites extracting wealth regardless of consequences to others -- was worse there. But it's not like self-interested elites capturing both economic and regulatory problems isn't a problem here. Indeed, in now might be worse here.
The two choices available aren't eco-collapse in the 1980s American greed-is-good capitalism style or the 1980s Eastern Europe totalitarian style. There are more things, Horatio. But if you spend all your time cherry-picking citations to soothe your fundamentalist capitalism feelings, you're not going to see them.
These are separate questions; the solution to greenhouse gas emissions is globally-enforced taxes on emissions with the tax used to reverse the emissions.
For those interested in the topic, I recommend reading "A Lapsed Anarchist's Approach to Building a Great Business". [1] Years ago a grad student went to the University of Michigan to study their large collection of anarchist literature. As a sideline, he started the now-legendary Zingerman's Deli. Over the years, it spun off a large collection of associated businesses, each run by some of the workers. Lots of interesting ideas, ones backed by real-world success.
'1] https://www.zingermans.com/Product/zingermans-guide-to-good-...
Worker-owned companies exist: they're called partnerships. Just add a line requiring all employees be shareholders so the partners can't hire staff. Lots of construction companies are organized like this. (Wholly employee-owned firms were more popular before WWII [1].) I don't see any evidence that they pursued profits less furiously than investor-owned competitors.
ESOPs have been more successful [2]. Outside the domain of highly-skilled artisans, it turns out most employees--like most shareholders--don't want to do the work of being an investor. That results in the sort of clubbiness that will be familiar to anyone who has been involved in small-town politics.
[1] https://heinonline.org/HOL/LandingPage?handle=hein.journals/...
[2] https://hbr.org/1987/09/how-well-is-employee-ownership-worki...
One memorable comment was "I am that early engineer that got nothing" (or similar, may not be exact quote).
Even without just being contrarian, it's worth considering whether bigger founder comp should be the norm. It may even be economically better to provide a founder with liquidity than redistributing cash back to investors where, if it isn't a significant multiple returned, the marginal value of the cash is net-negative.
If as a VC, a founder returns cash to you, you've disappointed your own investors (LPs) who were buying exposure to the game/market the founder was selling access to. It's like giving them their chips back from a roulette table and telling them you didn't play them. They're going to find someone who they can be sure will play them next time.
e.g. if a GP invests 2% of a portfolio in a company for 3 years, and the company gets wound up and returns that cash to the fund, what were the founder and their managers doing that they didn't invest the money to take risks for expected returns?
By returning money, the founder has deprived investors of the magic juice that the founder brings to their market, and has just cost their investors time. Honest and even noble? Sure, but not what you paid for, because elsewhere in your portfolio, some coke addled sociopath who is currently a fugutive from Costa Rican justice is getting acquired for their PMF. It's largely chaotic, and so a pulled punch is value destroyed.
A founder sells a ticket for a game with a chance at a 10x-30x return. Founders are in the lottery ticket kiosk business. When you buy a lottery ticket at a corner store, you don't care how the storekeeper or the lottery company spends it, you care that they are selling you a real and honest ticket to the game.
Investors have cash that needs productive assets that return better than inflation. Founders create companies that are really a localized mini-market game for converting that cash into in productive assets that returns growth. Most of those companies fail, but it's like planting fruit trees that take several years to yield fruit and most don't make it that long. The seeds are only going to survive a season, and if you don't plant them, they're wasted.
The quesiton should be, is higher founder comp necessarily inefficient? I'm saying it would be very hard to tell, because in a high risk venture portfolio with non-linear returns and dynamics, optimizing for frugal founder comp may be as likely to be destroying value in the portfolio as any other arbitrary constraint.
If a founder sells investors control of the company, I'd propose the founder should take a significant cut of the investment as comp, because by taking board control, the investor is paying to limit the founders discretion - and by extension the founders potential performance, and therefore attenuating everyone's exposure to risk and upside.
If you want to use your investment to attenuate the risk and upside of a company, then arguably, yes, the founder should extract a significant portion of that as comp. I'd be interested in the counter arguments to this.
As such, founder comp is really just a kind of corporate salary, with a big potential bonus. As a corollary, that's why current VC backed SV-ish startups are mostly so homogeneous, they're basically just outsourced innovation groups for companies that are out of ideas.
As startups get traction, if the ceo is performing then the balance of power shifts, and they become more like you're suggesting, exposure to that person's vision and impact. But at the beginning, it's basically just a corporate job, and you'd expect it to be compensated at market rates.
(This is largely based on my observation of some startups, I don't mean to say its universal)
Market rates for consultants are also basically double or more what they are for employees, so market rate for a founder should be measured against the median 250k-$1m a company would have to budget to get someone to do the equivalent job of a founder/dev/product-manager from a consulting firm, etc. If as an investor, you have put in $5m to a company you want to grow with an 18-24-month runway to the next round, that the founder is paid 2%, and not 10% of that is probably not positively correlated to the success of the venture.
Pre-revenue, I sympathize with minimum survival low founder salary as it's just a flyer at that point, but the moment there is revenue involved and now you have to grow and scale, founders could be taking a percentage of investment as the price of admission. Money managers who do almost nothing charge 2-3% to manage funds and rake 20-30% of any profit.
Experimentally, I would propose that a founder with skills who is building a tech product should be taking 10% commission and management fee on any investment as direct comp and 20% of the return on it at the very least. Maybe these numbers aren't right, but comparing what a founder does to what a fund manager does should yield some principles for evaluating founder comp.
If as an investor you allocated $10m to a hedge fund for 5 years, you'd be paying 2-300k/year to the manager and lose at least as much to inflation if it were in cash, and then if the next valuation was 3-5x, you'd be returning 6-10m to the founder for your 20-40m net profit. Seems like a lot, but compared to index funds, bonds, or cash that doesn't have that growth profile, that's still a very good deal.
Anyway, just thinking out loud about it, but incentives alignment is a really interesting problem.
On the other side there is over-complicated and bullshit-infested IOHK projects which failed to deliver for years.
Tech could matter a lot.
What does this mean from a taxation perspective? Could it be that "todays tech founders" want to "pay their dues"?
For example - I've heard founders getting bonuses or being able to sell stock in later rounds to stay focused on longer terms, and that CEOs typically get the same salary but more equity than CTOs (YC is unusual in that it encourages equal splits).
Do founders need to be independently wealthy before starting a company?
And that's the way our bought and paid for government wants it, so it will stay that way. It's not about political affiliation, it's purely about the money that pays for the candidates running for office.
Edit: what truly warms the Schadenfreude in my heart here is that this only applies to founders and investors. Rank and file employees are not invited to this particular party. So for the employees to defend this system has so many parallels everywhere else.
The logic for share awards initially was to align the interests of shareholders and managers. The problem here is: you have founders often with supervoting shares, they usually have a huge role in appointing the Board, and they are basically looting everything that isn't nailed down from minority holders.
The big change was Musk's package. When that happened, all hell broke loose. It is a crazy situation because he already has a huge share in the upside of TSLA, but now he is taxing minority holders too.
If anything, this is going to get worse because the rise of passive investing has left the market with essentially no corporate governance escape valves (and, although it is basically verboten to mention this now, changes in "board hiring policies" are having the same effect...if you know, you know...it is not possible to say this explicitly on the internet).
But this is nothing to do with rewarding success or aligning incentives. This is just majority holders who control management and the Board looting non-controlling shareholders. In the cases where this isn't true, for example AAPL, the CEO pay is just wildly out of proportion to the amount of value generated...it is just insane (you are actually seeing tech-oriented PE funds make money from taking public companies private because they are able to gain control over stock-based comp...how crazy is that). Making comp wholly dependent on the share price (as in the Musk deal) is also completely inappropriate because, as a first-year finance student can explain, the stock price is not composed solely of company-specific risk.
Just generally, I don't think executives realise this is going to come back to bite them. I am an arch-capitalist but this isn't capitalism, it is feudalism. The economic system in the US is rigged totally. The level of inequality and unfairness that exists in US society has never been sustained by any society. Executives are creating the machine that will end them.
Yeah stock price as the main or sole focus for rewarding doesn’t make a whole lot of sense.
This is the kind of thing that people will write about in 20 years and be like..."wow, that actually happened, no-one did anything".
I also read he was getting the equivalent of near 1% of the company’s total stock in the first or second award
> he is getting paid 10% of the market cap in a year
So is my previous statement incorrect? Where is he getting $60-90B in a year from?
Here is a link listing his awards so far:
https://observer.com/2020/10/elon-musk-tesla-performance-bon...
It adds up to a bit under $9B when the market cap was more than 2x lower. We are still talking about around 3% of the market cap.
—-
If you mean to say he will get 10% if he meets every tranche. I don’t see why that is such a big deal. Tesla’s absurd market cap is where it is because of him.
> loans..$69bn
Is there any source for this? This seems incredibly insane. A couple billion in loans makes perfect sense. Why would he even want double digit billion dollar loans?
It is a big deal. It is the biggest comp deal of all-time by tens of billions. As I also explained at great length, it makes no sense because he already had a big position in the stock. The idea that you need to pay someone $20-50bn/year to do a proper job when they are already worth $150bn is...grotesque (I am a big capitalist, I am not in the US but, if I was, I would be a socialist...in Austin, you have people living in tents under almost every bridge, and you have Musk cosplaying as a working man in his $50k house in the same city...whilst he is trying to get rid of his $100m in property elsewhere...it is utterly grotesque, it makes no fucking sense, it isn't a meritocracy, it is feudalism...no-one who is as rich as him has ever demanded share awards like this, no-one, it just doesn't happen because no-one who has this much money is actually that greedy...they can't spend it, so what is the point...it is impossible to look at Musk's actions and not think: "there is something seriously wrong with this person").
Tax avoidance. SpaceX. Other self-aggrandizing nonsense projects. Because TSLA is self-evidently overvalued.
> no that is not right
What is incorrect about my $9B figure? I said that was the financial amount when the stock was over 2x lower. In line with your $20B figure.
You didn’t answer how he is getting 10% of the market cap in a single year. The awards are about giving him roughly 1% (1.7m or so shares) each time at a low option price. Obviously dilution will take effect. So how would or did he get 10% of the market cap in a year?
You also didn’t explain anything about the $60B of loans.
> because no-one who has this much money is actually that greedy
Is this why Elon is so upsetting? Because you believe [current] [ultra] wealthy people aren’t that greedy?
The amount of evidence that could go into how insanely greedy and “evil” things incredibly wealthy people do is innumerable. Right off the top of my head I thought of a handful of examples of completely screwed up shit ultra wealthy have done.
You brought up tax avoidance. That is the most un-unique thing that a wealthy Elon can do.
> I am a big capitalist
So I don’t see how this is a big deal especially if you’re a big capitalist in 2021. In what way has the world shown stuff like this won’t happen under the majority of the countries that are some form of capitalism.
What would you want capitalism to do to stop Elon Musk then?
I am not a big capitalist or one at all, so, again, Musk’s stuff doesn’t seem to be a big deal at all. As you said. He’s able to pull off his brand like being the common man really well. Tesla is so highly linked to him. Tesla unlike most explosions of stock values began before the pandemic.
Is there any one who isn’t some extremist or Tesla fanboy to the max who actually thought Musk would be able to meet a handful of the awards in 2020 and on? Or any one that didn’t think Tesla market cap at its current amount was remotely possible to happen in 2020 and 2021?