Employee Equity: Too Little?
avc.com
avc.com
My sense of it is, it's good to give generous equity to keep the team's skin in the game, so that the ups and downs of the business are meaningful to everyone. And, key team members that really want equity and are willing to do the work to value it, also good. But pro-forma "competitive" equity grants? Pay cash instead.
Incidentally, the odds that the "best" engineers getting 10% of startups at signup are actually the best developers is, I don't know, something like 𝛆.
What I find help with it is give them as much information as possible and be there to answer any question they may have.
If you're giving away generous stock option grants you want to make sure they are as educated as possible about their value as opposed to some companies where they'll be secretive about the actual outstanding shares issued and other preferences that could hurt employees grants when a liquidation happens.
Additionally for people who may not value option stocks like you do (as a founder or early team member), we usually offer generous equity grant but also allow employees to swap some of them for a higher pay.
I think employees are grateful when given the ability to pick more pay or more options.
It allows them to put a price tag on these stock options which make these more valuable and tangible.
Sam Altman and others need to put their money where their mouths are - if you want bigger option pools for employees then remove this clause from your term sheets and encourage other investors to do the same. If you think that more employee equity is good for business, then give us more flexibility with the option pool and share the dilution with us. Don't blame us when the real change starts with you.
IANAL, I would expect it's collusion if the startups get together and start agreeing to terms they will accept collectively. But if instead YC, a single entity, uses entrance into its demo day event, as a bargaining chip that can change the conversation around term sheets for the entire industry.
i.e. make this rule: Every investor YC allows into demo day may only offer term sheets that does not require the size of the option pool to be raised until after closing the financing. Instead the size of the equity pool will be negotiated after funding closes and will be based on the amount of dilution both the founders and employees and the VCs think okay with relative to the benefit they receive from a larger pool.
Individual YC companies would still be free to engage with investors outside and after the demo day event and take the less favorable terms where the option pool is negotiated ahead of time.
I totally disagree here.
I don't think you compete with Facebook on comp in this manner. Facebook stock is as good as cash. Stock at a ~A/post A company isn't. Even if you say you'll give this employee $1mil worth of stock, there is a high likelihood that stock isn't going to be worth it.
Don't go after Facebook's top engineers trying to compete with comp until you have the resources to get them, take the money ball approach and find talented people who aren't having the world thrown at them yet, and lure those people away.
The vast majority of startups are business process improvements (think AirBnb, think Uber) where there's no freaking way you'd really need a Carmack on your team.
I disagree with the point about finding talented but under-recognized people. I've seen companies do this, and in this market they will get discovered, it's only a matter of time - and the switching cost of jobs right now is nearly zero. If you're going to lure ridiculously undervalued people away, only to continue to undervalue them (just not as badly), you're going to get a lot of attrition.
I agree with this point, though I don't think that not-offering them 10% of your company is undervaluing them.
I'd like to believe that most people who are undervalued at BigCo's are because they either lack the self-promoting skills, or haven't yet found the right environment to be successful.
I didn't say anything about 10% ;)
This may or may not be what you're suggesting, but I've seen this time and time again in NYC - find someone with talent making $45K in the Midwest and dazzle them with visions of the Big City and... $80K. I've heard of the same things happening in SF as well.
These guys never stay put, once they're in your local talent pool the recruiters will set upon them like sharks. It'll be a few months at most before someone comes in with a price adjustment on your engineer's services.
In this market, with a supply this short, any arbitrage opportunity is going to be highly temporary.
But to your point, yes bringing someone over, only to under pay them is only going to hurt you, as you said--the switching cost is nearly zero, and these days having stints on your resume that are 1-2 year at most, isn't a big deal.
It's not as if Midwestern engineers are unaware that working on the coast is an option. It is almost certainly an option considered and rejected. .
(…off to update my resume…)
Generally RSU terms are 1 year cliff, 4 year vest, so that's an EV of $250k per-year. More if the stock price increases.
I'd imagine that stock grants come as both performance bonus grants and RSU's, and that they come on an annual-semi annual basis.
But yes, golden handcuffs can lead to institutionalization, though that isn't necessarily a bad thing.
I didn't mean the compensation is mediocre, but the work you're doing. I'm sure a lot of brilliant people choose to stick it out for "just 5 more years" over and over again to get more of that $1MM, rather than go off independently and realize their ideas, or join a modest company that works on fresh things.
But it's not unusual for engineers with leverage to negotiate higher equity grants.
1. Facebook and Google are publicly-traded. $1 million in equity at a publicly-traded company is not the same as an equity grant at a startup that is theoretically worth $1 million based on the valuation given to the startup by venture capitalists in its last round. The startup's equity might never be liquid and it's far more vulnerable.
2. Most startups do not have to compete with Facebook and Google on compensation. Most of them can't really afford to. The truth of the matter is that as a startup, if you can't get folks excited about working for you without matching the dollars offered by the richest tech companies, there's something wrong with your value proposition or you're trying to recruit the wrong people.
3. What's the difference between a "top software engineer" and a "software engineer"? Different companies have different needs. This idea that all startups need the best of the best (i.e. the person who Facebook and Google are battling for) and that you can't put a limit on the worth of an engineer ("I am not saying the engineer isn’t worth it") is ridiculous.
Additionally, as hapless notes, the cost of good engineers is the price of business. You could flip it the other way and say that VCs should pony up the $30m and founders give the engineer $1m signing bonus with market wages and no equity. But I think founders would be more squeamish about that then giving up equity that really has little cash value 90% of the time.
BTW, I've never seen a non-founder engineer get 10%. Maybe it happens, but I think its still pretty rare.
Any offer has two sides. The one who offers and the one who accepts (or declines). And I feel like employees need to fully understand what they're getting themselves into. Then they can decide whether what they're being offered is worth it.
The last time I was offered a chunk of equity to work with a start-up, I ran the math and decided it wasn't enough to compete with other opportunities. The start-up wouldn't agree to raise the equity to a point I was comfortable with, so I walked and went on to other projects.
If more employees negotiated -- and negotiated seriously from a place of knowing both their value and the value of the offer -- I feel like we'd quickly get a better sense of how much equity is fair.
Getting a bigger percentage with unfavorable terms that might be used to limit how much upside I can get or nullify the upside entirely matters far more.
I would prefer terms:
* where the exercise window is long (10 years)
* where the employees and the founders have the same conditions in funding rounds or acquisitions. i.e. equal dilution. equal opportunity to take money off the table if that is an option. same triggers (double, single).
* protection against liquidation preferences (honestly this shouldn't even be a thing)
* restricted stock instead of options, with a bonus to cover the tax on it for the year it was issued that is paid out either on the 12th month when the cliff is reached or when taxes on it are due, whichever comes first.
Beyond that, a change in tax treatment for these illiquid assets would be awesome.
You end up having to bring in more and more partners just so people can leave without sinking the whole ship.
This industry moves _way too fast_ for partnerships to really work and convert business equity into cash at the same time.
Fred Wilson seems to be suggesting that founders should indeed hire second-rate candidates if it means they get to keep more of the pie. Maybe he's right.
I notice that only two are considered "variable" in this article: founder and employee.
The fact is, VCs/Investors are becoming less needed than they were 10-20 years ago. Why wouldn't it be logical for their stake to take a hit for the money they put in?
A third option also exists...Investor total share goes down. I personally believe we will see this more in the future.
However, it would possibly be in the VC industry's interest to invest a team willing to create a startup that begins as a town (but owns enough surrounding land to grow into a city) that puts engineers first. Google effectively does this, but it bounded by geography and therefore can't control the cost of living for its employees. It engages with the rest of the world through capitalism while practicing some degree of socialism within the company.
This would allow the VC industry to risk far less while still affording the founders and employees a very high quality of life.
Honestly, I'm surprised we haven't seen Peter Thiel and Co actually bankroll a project like this himself since he is such a proponent of ideas like this.
Isn't that the point? That early employees are worth more than they've historically been compensated?
I doubt Altman is trying to make life easier for VC's like Wilson. My sense is that YC's business model is oriented to disrupt the traditional VC model and more closely align the interests of investors with those of people at the company. Pretty much every financial innovation YC has made has had the effect of pushing the transfer of power from the people working at the company to those providing capital further and further down the road - from YC's taking common stock, to connecting companies with Angels, to convertible note financing, each move has been toward getting capital into companies without payment always being made in board seats.
YC's stated goal is to invest in people over ideas, while founders may be the first order investment, the employees of the companies they fund are still a critical part of that bet. Thinking on the bigger horizon, more equity for employees favors founders whose ability to get things done is less dependent on total control, which almost certainly correlates with the sort of leadership that benefits big companies - and big companies are the outliers that YC is looking for.
To put it another way, a CEO who has experience building consensus among principle and minority shareholders is better prepared to deal with the diverse and competing ownership interests that exist after a company has taken VC.
At least that's my theory of the day.
Maybe this reflects the fact that it's so much easier to get by with less early capital these days. Those early employees are simply worth proportionally more to a startup than they might have been 5-7 years ago.
Most (if not all) VCs require the option pool to be formed before the series A transaction is completed and usually push for a very high option pool to avoid granting more options and dilute themselves in case the option pool is not big enough.
This conflict of interest lead founders to fight the VC to form the smallest option pool possible while VCs want the biggest one. And the non-sense is that most of that option pool will be granted to employees that will be hired after series A.
*Sam Altman actually wrote a short note but didn't expand on it and I think it's a shame.
Why not allow an employee to negotiate for double the chunk for double the length of the grant? That's far more desirable than getting 4 years worth, arriving at year 4 realizing you've succeeded in building a company of true value only to discover that the amount you are re-upped is now at a strike price far greater (that you are responsible for achieving). i.e. you are punished for succeeding if you stay long enough to get re-upped.