There's nothing wrong with a lifestyle business, as long as it's run like a business. There can be decent exits (purchases by competitors, private equity, etc). But the employees seldom see a big payoff. In return, you usually get a pretty comfortable work experience.
Startups trade salary and benefits now for maybe huge payoff later. The maybe in previous sentence is important, most startups fail.
Some business are build to stay there, grow and earn enough for founders to make them upper middle class/rich for the rest of their lives. It is different then Facebook like success, but most would count that as successful too.
Now multiply this across dozens of companies. Plus, most startups give options, not equity unless you are a very early employee.
More seriously there is a number of ways of doing this. I would imagine the simplest would be to create a trust and have everyone give their equity and options to the trust.
The bigger issue is how to ensure that people don't game the system. The assets being put into the pool need to be accurately valued so people don't put in what they know are worthless assets. Of course there is there is the reverse situation where those already in the pool undervalue new assets.
Most of the effort of this idea needs to go into setting up the rules so that everyone does the right things and everyones interests are aligned. While I think this might be hard, I don't see anything that can't be solved by some smart people.
Don't get me wrong, it seems like an interesting idea. I would love to have some way for my un-diversified work portfolio to get diversified. But short of creating a sweat equity only market/exchange I don't really know how you'd do it.
Even that has problems because people could fake a startup well enough to gain access to the returns creating a free-rider problem. It's probably easier to cook up a bunch of buzz and interest over an orchestrated 3 month campaign (esp. with a Kickstarter) than to actually do a startup. And since you're faking it you can promise the world and raise huge money from unsuspecting dupes with no intention of (much less a plausible method for) making good on your promises.
If you're fresh out of college, what do you have to lose? You either get underpaid for a few years and learn some valuable lessons (one of which being equity in a startup has a value close to zero) or you get lucky and can retire before you're 30.
You know what I've never heard of being tried? Creating a private business with big enough margins so that the office manager is paid $200K.
Great point.
The best example of this is when RIM was sued by Minformation. After several offers by RIM to settle for around 60-70 million, one of the RIM attorneys said, "I have no idea why they won't accept our offer. You could give every employee of the company $5 million with what we're offering."
When they finally won (and then lost) that $147 million dollar settlement, how much you think the employees saw of it??
Yeah this is an obvious but oft-overlooked fact. As a VC you can manage the high rate of failure of startups by investing in many of them simultaneously.. that's what the whole model is based on.
As an employee, not so much, you're probably doing 2 fulltime jobs worth of work for one single company very likely to fail.
This is why working for shitty pay in return for non-founder equity is a very -EV financial move (I'll allow that maybe it makes sense for some people as a learning experience or whatever). And this is without even getting into the fact that your company could have a very successful exit and your equity could still evaporate due to dilution or outright clawback of options (ala Zynga's pre-IPO moves), or any number of dick moves from the founders/investors.
I believe this, coupled with demand, is what is driving the cost of engineer salaries in the market today. Equity allocations mean almost nothing to candidates -- as they should.
That doesn't mean you get a pass on offering equity; you just have to match it with a market salary.
Even with a 2x liquidity preference, don't you just need to double the invested amount in order to have personally broken even on the VC deal?
Say you have a $10M business (pre-money), and you raise $5m at a 2x liquidity preference, giving up 50% of the company in the process. That would leave you with a $15M post-money valuation. So long as you can use that $5M to turn you from a $15M business into a $20M business, didn't you just break even on the deal?
I'm know it's not an outcome that the VC is looking for, but it would seem to be a fine outcome from the founder's perspective.
My understanding is that even if you take less, so that investors don't have outright controll, VCs will have incentive and substantial power to push small wins toward becoming either big wins or big failures. And they begin that push early, so that it's easy for VC-funded startups to end up in a grow-or-die situation, even if they theoretically might have taken a different path.
Note that there's some selection bias involved. If a VC thinks that the business is only going to be a $20m business, they won't invest. They also won't invest if the founders seem like the kind of people who will stop early. They're in the business of finding 10:1 odds on 100:1 money.
As an aside, it's a little dangerous to do valuation math like that. The valuations at A-round levels are highly speculative. If you take your $10m company and add $5m in cash, in theory it's a $15m company. But it's mainly fantasy. It's very different than a $15m operating business whose valuation is based on revenues and profits.
Your numbers are a bit off compared with what I'm thinking as well - "say you have a $10m business" - that misses the point - he starts the business and there is little to no revenue. He raises a bunch of money but doesn't know if he can create a business that can get bought for $20m. He takes the money and then discovers he has a nice $2m business - but he can't scale it anymore. Because he doesn't have a great growth plan, no one is buying him out for 10x revenue. Thus he's a bit stuck.
The worst part about it - if the company exits at a low value, it's likely to be classed as a 'failure' - even if it is profitable and has happy customers.
It's impossible to know in advance which companies will only scale to a certain size - hence the problem.
I guess the solution is to only take on money when you can show that you have a scalable business that just needs more investment to fly higher.