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.
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.
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??
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.
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.