The Myth of Equity as Motivation | Hacker News Reader

The Myth of Equity as Motivation

rkoutnik.com

80 pointsRKoutnik34 comments

>To be exact - equity in a startup does not incentivise an employee to work longer or harder.

I never got the impression startup founders fooled themselves into thinking that. The 2 big reasons for granting equity to lower level employees are not directly related to expecting weekend work:

1) Recruiting. Equity acts as an offset to compensate for below-market salaries --or-- make the job comparable to wealthier companies like AmaFaceGoo that have perks (massages, chefs, etc) and prestige/stability. Mature companies like them no longer offer equity of significance because the early rocket ship growth to mint millionaires is gone.

2) Retention. The equity is vested over several years and act as "golden handcuffs"

I just don't see evidence that startup founders are so naive as to believe equity (the existence of it or the amount) has a direct cause & effect on working extra hours.

There have been studies done on linking compensation to motivation (Dan Ariely "Predictably Irrational", etc) that shows how money can have a negative effect on employee performance. Even if startup founders are not familiar with that research, it seems most already have a sixth sense that money is useful for solving certain problems (recruiting against BicGo, retention) but has limited power for other behaviors (working longer).

Author here. I too, thought that the idea of equity encouraging overtime was foolish until I met several founders promising great success (via equity, of course) if only I worked incredibly long weeks. One even said "If you don't want to work 100+ hour weeks, don't think about responding"

This is a horrific thought. Burnout is a very real thing (as well as career stagnation). I hope we can realize that some founders & managers still think this way.

As to said studies, did you notice the one I talked about near the end? It showed a counterpoint to Dan Ariely's work (which isn't nearly as clear a parallel in this case).

I'm still amazed anyone wants code in their codebase written by someone on the second or third 100+ hour week. I remember two weeks of 80+ hours as a consultant and the code written at the end was not my best.

I'd be horrified if anyone receiving a pitch like that didn't utter a bark of derisive laughter and add the person to their spam filter. Those are 'I can't get a job anywhere else' sort of terms.

>One even said "If you don't want to work 100+ hour weeks, don't think about responding". This is a horrific thought.

Rest assured they are shooting themselves in the foot.

This is exactly it, recruiting and retention.

As far as retention goes, especially for early employees: technically, you're going to be dealing with all of the bullshit the founders built into the system, and probably handling growing the team and installing processes. If you don't have some actual real stake in the value that you're creating, you are going to get jaded as the inevitable annoyances of being a startup take their toll.

Part of the reason that it's particularly annoying is that it is trivial to see the value you are adding to the company. You've added some kind of project planning and management. You've added CI/CD practices. You've added a testing culture. You've imposed interfaces and documentation to onboard new developers and isolate implementation changes from the rest of the system.

So, unlike a founder or a later hire, you see exactly how much better things are going to be from that dark age. And so, you're going to be pissed off when you only get like 0.5% in pre-dilutive shares.

At least we should be thinking about something like an engineering commission or profit share or something for early engineers.

EDIT: This is also especially important because you want your senior engineers to be encouraging a culture of "work smarter, not harder", and they'll naturally be disadvantaged if judged in terms of the bright-eyed youths that'll work all weekend correcting the mistakes of that week, and be praised for their effectiveness.

> As far as retention goes, especially for early employees: technically, you're going to be dealing with all of the bullshit the founders built into the system, and probably handling growing the team and installing processes. If you don't have some actual real stake in the value that you're creating, you are going to get jaded as the inevitable annoyances of being a startup take their toll.

Yeah, I worked at a young startup for almost 3 years, and one of the reasons I quit was because they would neither pay me market value nor give me equity. I made about 3/4 of what everyone told me an engineer of my experience in my location should be making. Hell, I didn't even get health insurance, and the company made a point of hiring most new people as contractors, so they got around Obamacare's 15-employee rule. The company was a year old when I was hired, so I was too new to be considered one of the founding members, but I was still one of the early employees, and I got to create a whole bunch of systems that were integral to the company's operation.

Over time, I got more and more bitter and jaded, and it was affecting my work. I wrote the software platform, and I was our DevOps infrastructure, but all I could think about was that not only did I get paid like shit, but they didn't value what I did enough to offer me equity. It upset me deeply that they would value me so little when I built huge parts of the company from the ground up, and I lost a lot of sleep over it. I already had a huge amount of stress in my life (this was all while I was transitioning from male to female, and I've struggled with depression for decades), and this made it all worse. By the time I quit, I had lost all motivation, and my boss was threatening to fire me because I hadn't been coming up with enough new software to write (he had stopped giving me assignments weeks before that, mind you: I think he was looking for a reason to get rid of me).

There were other reasons I was bitter, too. For example, management treated my transition horribly, and they stood by and did nothing while I was subjected to humiliation for months by building management. It ended when I got the city involved, and I had to do 100% of the work on that myself (and, even then, our CEO almost sabotaged the city's case, because he ran his mouth off on some things where he didn't know what he was talking about). Another was one senior architect making godawful design decisions and being a manipulative, condescending, immature manchild when interacting with others. My boss gave him 100% free reign and treated him as an equal (this despite my boss being the Director of Software and a founding member) and dismissed any and every criticism about him just because the guy was an old friend of his for years. That drove one of my co-workers, who was one of my best friends at the company, to quit, and then my boss proceeded to slander him behind his back just because he had the gall to criticize my boss's friend. In fact, I suspect that the reason he suddenly stopped giving me new assignments and then began threatening to fire me for not doing enough work was because I finally had enough and told him my complaints about his friend. It is entirely within his personality to go out of his way to railroad people who have offended him. Oh, and then there was the total lack of planning or release engineering, despite my best efforts to come up with written proposals on what to do...

I stayed as long as I did because a) my immediate co-workers were wonderful people I'm glad to call "friend", and b) I had come to believe that I was worthless and that I deserved to work at a company that treated me like shit. [Edit: to be fair to them, I'll add c) I actually enjoy doing this kind of work (platform/DevOps), and I really believe in their product. They make the kind of product that, if it takes off, will change a lot of people's lives for the better, and I wanted to be part of it.]

Ultimately, I started looking for a new job, and I took the first offer I got, just to get out of there. Since the new year, I now work at a 20-year-old company, I get paid what I'm worth, I'm insured, and I'm pretty happy here. Still, even after being gone for a few months, the bitterness came back last month when I found out I owed an extra $400 on taxes because I was uninsured thanks to that company. They really did a number on my mental state.

I'm really sorry to hear that. :(

It's funny because if they hire you early it's because (presumably) you have skills they need to grow, but at the same time most are oblivious to the fact that they're still learning business.

Such is the plight of the startup NCO.

The details of the argument are a bit off base because the argument conflates returns on capital with wages. In order for Bill to earn $1200 from his equity over the weekend, the value of the company has to increase $240,000. By being on the equity side of the equation, Bill sees $1200 of value regardless of whether he works or not. .

Going even further, good equity outcomes are entirely discontinuous from hours worked. Bill's equity doesn't necessarily only increase on the weekend, it can increase throughout the time he is at work, while he is at home sleeping or off on vacation.

The article really doesn't capture the nature of free-lancing either. 16 hours of billable work a week means some number of hours identifying leads, closing prospects, and getting paid. Finding regular freelance work in regular weekend only chunks is a non-trivial exercise...unless fortune smiles upon you. And if fortune is smiling upon you, perhaps the equity is a better place to direct her grace. Clients who will give you six months to get one month of work done are rare. Those that won't cancel half-way through are even rarer.

None of which is to say that most employee equity deals I read about in Ask HN are particularly good. The one's that are are several percentage points in addition to a good salary. People are motivated to work by equity only when they are outsiders. Smart capital strives to earn money without working at all.

>> Engineers that can add a quarter of a million dollars to a company's value in a weekend don't charge $75/hr. World-class engineers like that usually end up...

Anything can add a quarter million dollars to a company over the weekend. A news story. A celeb endorsement. A new feature. Engineering input is so divorced from perceived value in the startup world (AFAICT) that I wouldn't rule much out.

Equity is an odd one but if I was to be one of your first few employees, working hard to create your product, putting my creative as well as technical skills directly into your success... Damn right I want some equity. It's very different from working on an established product for an established company.

This actually wouldn't be too hard. First, lets consider that a quarter million is not a lot for a company. Also, if the company has a significant reach, or has significant expenses there is potential here to move the needle. If you have a company that has millions of users and you manage to earn or save a few cents per user (say, drive down the bandwidth cost) you can make a quarter million in profit for the company in a weekend. That said, if you have an employee who can make in one weekend twice what you're paying them in a year, they should probably be compensated with more equity.

I have a bit of a different perspective because my equity turned out to be much more valuable than my salary, but even before that I was heavily motivated by equity.

First of all, you are framing the discussion in the context of doing extra work over the weekend. That is entirely separate from how equity motivates a person. For example, I had a lot of equity in a company and almost never worked the weekends because I don't like working on the weekends. But having equity did change what I worked on, and in many cases this involved doing projects that were annoying but the best thing for the company (like recruiting, the most annoying thing in history).

Second, equity is a lottery ticket, and it is a long term lottery ticket. You really can't think about it in a short term way. You just have to say... given my equity, if the company is worth a lot of money in 3-5 years will my equity be worth something.

If you think about it on a per-hour basis, when the company is small the numbers are going to be stupid. But on the other hand, if the company becomes extremely large the numbers are going to be stupid on the other direction. What if another 0.1% of valuation increase made you an extra $50k? Should you work 24/7 because of that?

Equity is really best thought about in years, and salary is best thought about in terms of hourly or weekly. Though equity and salary are paired together on your offer letter, they do really serve completely different functions. Also in practice the vast majority of the money you make from a startup is only going to come from one of them, so you should really try to calculate their values independently.

I think the methodology of Koutnik's argument is defensible, but not necessarily reflective of the actual decision most people go through to work that 40th-80th marginal hour.

As others have noted, equity helps with recruiting...especially when the employer provides a handy "illustrative" table of how much that 0.5% slice will be worth, fully vested, at a variety of valuations. Once people sign the dotted line and are full-time employees, however, I think the following is a more accurate depiction of how people think through the "work over weekend" decision:

- Will refusal get me fired or decrease my opportunities to work on things that are important to this company?

- If so, how bad are those outcomes? If you haven't even hit your vesting cliff, leaving feels like it would be pretty bad -- both for the loss of shares and for how it'll look on your CV -- not gonna be fun fielding questions about why you left Wuzz.ly after only seven months when you're interviewing for either a new job or funding for your own venture.

In addition to the gravitational effects on one's psyche of anticipating financial loss and unpleasant future conversations, there's something else at play: many young engineers (not all, but many) have never experienced anything approximating real, painful failure -- and are terrified of it. They've glided from top of their high school class to StanCalMIT Mellon, have been wooed by multiple employers at several points in their still-young lives, and have inferred from that experience that if a job doesn't work out, they've done something wrong. This aversion to "staining the white tuxedo", as Conan O'Brien once put it, ultimately holds back their potential.

The purpose of equity is to align interests and unite people in a common cause. Alignment is a powerful driver of success. Pushing people to work harder is counterproductive, cargo cult management, and a good sign to go work somewhere else.

Several comments here criticize the distribution of equity in many startups. Yes, inadequate equity grants have an inadequate effect. A startup should bring in the very best people and giving them outsized equity grants.

Equity is the risky bet 401k substitute (FN1). It would be great if I could trade equity with other engineers to slightly lower the risk of the "all in one company" issue.

It is a myth that I can work longer or harder on demand. If I do have extra energy, I spend it keeping my skills up to date or working on personal side projects (which also keep my skills up). I am definitely not going to work extra for equity just like when I get a 10% raise, I'm not planning on working 10% more time.

FN1: I'm not kidding myself -- I invest post-tax money into mutual funds at Vanguard for retirement.

>It would be great if I could trade equity with other engineers to slightly lower the risk of the "all in one company" issue.

That's a fantastic idea. It wouldn't really be possible to trade equity without the companies permission, but you could probably trade percentages of future earnings from that equity.

I am guessing ESO Fund is going for bigger fish but maybe one day they'll target the smaller fish. Biggest problem I'm guessing is valuation but if that problem can be pushed to the two parties (the two engineers) doing the swap...

>> It would be great if I could trade equity with other engineers to slightly lower the risk of the "all in one company" issue.

Yeah, one thing I never understood is that people consider it normal to go "all in" as employee but a big no-no in terms of investing. As an employee I AM investing when I get the equity by working there and taking lower-than-market salary. No one questions or protects me from making that decision. Yet if you want to BUY equity for some startup, you are not allowed to do unless you are Accredited Investor. I think thats just not fair.

I've always thought that equity was motivation for joining a startup more than motivation to work hard once you've joined. It serves as a way to make up for a lower salary both directly—potential money is still, virtually, money—and as an excuse for yourself.

There is often a lot of mental and social pressure against taking lower-paying jobs, and equity is a handy way around that which helps you make the plunge if you have other reasons for joining (culture, product, technology... etc).

So I, at least, wouldn't be surprised if equity doesn't get you to work harder or longer, but does help you join the startup at all.

"This equity is provided in order to align incentives."

That leaves out the other - probably more significant - reason - it's provided because it can increase the (real or perceived) value of compensation packages without spending scarce cash.

"Lack of equity might cause an employee to feel left out and/or poorly compensated." ... uhh... or they might not have joined the company in the first place?

Equity is not a huge motivator but it's necessary in the current market because of the relative lack of cash and focus on future growth instead of present value of startups. An average engineer's long term value is easily 250k+ but most startups simply can't afford to pay that amount because a lot of that value the engineer is building won't be realized until a few years later. So a startup may instead offer $150k salary and 100k equity. No engineer in his right mind should take a $150k total comp job in Silicon Valley--to get full value (which is only fair to yourself), you can either work for a large corporation that will pay you $250k yearly income between RSU and salary or work for a startup that will pay you a smaller salary plus presumably the difference in equity.

I would much rather just take a 250k salary than a 150k plus equity if available, but I'll settle for 150k salary and 100k equity (per year) if I believe in the company and it has other appealing non-financial rewards for my service compared with megacorp.

The only time that I have seen equity increase worker output is for relevant companies inside a valuation/exit bubble. There, equity produced remarkable alignment even among folks who hated one another.

The other thing that I'd add is that the fact that startup employees now make near-large-company cash packages suggests that the job market has radically devalued equity.

This article does not actually address the cause and effect relationship between equity and employee motivation. From the title and introductory paragraph, it seems as though the author will talk about what actually motivates employees, and how common perception of employee motivation is a myth.

However, the article simply does some math to show that equity SHOULDN'T motivate employees, and never talks about whether or not it DOES motivate employees. Even if the numbers don't work out in a developer's favor, that doesn't necessarily mean they do the calculations up front and and totally rationally.

People still buy lottery tickets despite the poor odds, and developers will continue to be motivated by equity even if it is irrational.

Equity is an investment, and like any investor you need to be smart it. You should evaluate how your investment (stock options) are doing on a regular basis (quarterly or semi-annually) with your management or CEO. Ask the tough questions, talk about metrics/milestones, talk about growth, talk about future prospects. Evaluate and re-evaluate.

If you believe in the company, where it’s going, and the company has the numbers/growth to back-it-up, your equity can be extremely lucrative and life-changing

But it’s only lucrative if you’re willing to go the distance (3-7 years). Over this time, you should receive multiple grants and can build significant ownership in the company (along with earning a market salary)

I'm tired of titles worded this strongly while having no substance. This title is what you expect for some exhaustive rebuttal but there is nothing.

It's just excessive. Just like that one "Against Kahneman" article a few months back. Give me a break.

A lot of time equity is seen as motivation to take a risk (joining a startup and not an established and stable company).

There is (in my short experience) a feeling of "building stuff" at start ups that a lot (but not all) big companies lack.

If equity as a motivation/incentive to work harder were a myth, you'd have examples of people getting rich from equity who actually didn't care about it. ("I didn't think my equity was worth anything and I didn't value it at anything or work harder because of it, so I was pleasantly surprised when I became a millionaire during the exit/acquisition - came as a surprise to me!".)

Do these stories exist? I've never heard of it.

Equity is a great motivation (for the employer). Since it takes years to vest, they can bring people on for under-market wages, then fire them before vesting.

But hey, what would I know about that.

Nice post Randall!

The perception that many people have about the Valley is that these clueless young engineers are either bad at math or forgot to ask how many shares were outstanding, and that's why they throw down 60-hour weeks with a sub-1% slice. From my experience in the Valley, that isn't it. Most of these young engineers (accurately) perceive that their likelihood of getting rich of their tiny option allocations is very low.

What the clueless young engineers tend to overestimate is their likelihood of being a founder in the next go 'round. They're smart enough to realize that their option grants won't make them rich, but they think that if they work 70 hours per week, they'll be promoted rapidly and getting personal introductions to investors, from the CEO, inside of two years. Of course, that's rarely how it happens. If everyone could hop into the founder ranks just by working hard, who would be left to be the employees on 0.05%? The Valley doesn't mislead young people about their equity grants (because that would be illegal) so much as it tends to mislead them about reporting structure, project allocation, and expected career trajectory. Consequently, you have a lot of startups where on a team of 10 people, you have 6 people who think that they're the boss (because of implicit promises made to them in the hiring process).

During negotiations with a startup once, when I asked about the number of shares outstanding (and, thus, what percentage I was being offered), they told me: "Don't think about it that way..."

But: that's the only way I can imagine thinking about it.

I was being offered, say, 0.1% of the firm. If it ends up being valued at $100M at acquisition, that means my stake is worth $100K. Assuming we go public and it's a $500M valuation, my stake would be worth ~$500K (assuming no dilution, which probably isn't realistic).

I can see why they didn't want me to look at it that way. They were asking me to take a pretty large reduction in my annual compensation because of the equity...unfortunately, the equity they were offering me wasn't going to be very valuable even in the optimistic case (and that's ignoring the substantial risk that the equity could also end up being worth nothing, or considerably less).

Yeah. The founders I know who got funded just talked to the right people, tried random emails to investors, family friends introductions, networking events accelerators to get connections

I don't think you get that just being an employee. You just have to do it. Founders may not be particularly skilled or experienced, they just talked to the right people.

It's a bit of a scam that theyre selling employment as a way to get those connections really. The last thing they want is theyre employees going off for their own startup.

After I left a company and was speaking with them about exercising my vested options, they flat out refused to tell me how many shares were outstanding. In writing via email. I don't know if that's kosher or not, but I can't be the only one to have an experience like that.

That's unusual but it's also incredibly sleazy on their part. I've seen a lot of evil and cagey shit and even I'm surprised by that move.

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