Re:Ask HN: Single-person company exit
by cperciva on Monday July 11, 2016 @06:38PM
(#12075367)
I think there are some strong arguments in favour of equity grants:
1. Startups face high frictional costs when selling their equity; providing equity grants along with lower salaries may help to avoid cash-flow problems arising from the inefficiency in the market.
2. In a early-stage startup with inexperienced employees, providing equity grants can remove much of the valuation risk from employees' wages; if they do exceptionally good work, they'll automatically be compensated more by virtue of the increased value of their equity. (This also provides an argument for vesting cliffs: If an employee does exceptionally poor work, they can be fired before the cliff and their compensation is effectively reduced to match the quality of the work they performed.)
3. Psychological biases result in people working irrationally hard for companies which they feel that they "own", even if their ownership share is extremely small.
4. In some cases there may be income tax arbitrage advantages.
1. Startups face high frictional costs when selling their equity; providing equity grants along with lower salaries may help to avoid cash-flow problems arising from the inefficiency in the market.
2. In a early-stage startup with inexperienced employees, providing equity grants can remove much of the valuation risk from employees' wages; if they do exceptionally good work, they'll automatically be compensated more by virtue of the increased value of their equity. (This also provides an argument for vesting cliffs: If an employee does exceptionally poor work, they can be fired before the cliff and their compensation is effectively reduced to match the quality of the work they performed.)
3. Psychological biases result in people working irrationally hard for companies which they feel that they "own", even if their ownership share is extremely small.
4. In some cases there may be income tax arbitrage advantages.