There is no reason that labor and time couldn't build equity, it's just that our current system favors those who use capital to build wealth over those who need to sell their time and labor to build wealth.
A common reason I hear for the fact that investors get more equity is because of the "risk" they take on, as if losing some money is the only risk on the table should a business go under. What is ignored, or outright dismissed, is the risk borne by those who invest their time and labor in a business for little to no equity.
When a business goes under, the employees have just lost their abilities to feed themselves, keep a roof over their heads, see doctors, buy medicine and provide for their families.
Workers sacrifice time that they can never get back working for one business when they could have spent that time working at another. While money invested can be earned back, employees can never earn their time back. Sometimes, those workers are paid below market rate while they help make a business successful, but don't see much or any equity as a result.
It seems to me that there is more risk on the shoulders of employees than those of investors, and they should be compensated accordingly.
Even before these last few years of craziness, what I will never be able to get out of my mind is the story of Frank McCourt. I'm a lifelong Los Angeles Dodgers fan. He bought the team from Fox in 2004 and proceeded to treat a storied franchise in the nation's second largest city like it was his personal credit card. He didn't even use his own money to make the purchase. It was entirely with loans. He then proceeded to spend 8 years gradually bankrupting the organization until the league kicked him out and forced him to sell.
What was his loss? Nothing. The team sold for 8 times what he originally paid, not because of anything he had done, but just because television contracts for the entire league had become so much more lucrative over that time. The man put up $0 of his own money and made $2 billion by being one of the worst team owners of all time and making the organization he owned literally bankrupt.
I will never again in my life accept these econ theory gibberish about all the "risk" faced by business owners. If you own a salon or a restaurant or something, fine, I accept you might actually be out on the street. But if you're the right class of person that the banking system has accepted into the club, you can get infinite loans to buy whatever you want with no collateral, drive a business into the ground while spending the bulk of your time with hookers and blow, and make out with billions anyway.
And what about your part in this play? The brand is valuable because of its fans. I assume you continued to support this brand, and by extension, this man you seem to despise. People like yourself directly contributed to his wealth — you might just as well not have.
I think the point people are making is that the system in general is so rigged and there are so many bad actors that it’s basically impossible to find something else that is more ethically managed while getting a very similar good/service/whatever.
Do I support the US giving Israel billions every year that then gets used to kill and rule over Palestinians? Nope but I still have to pay my taxes! If I decided to not pay because of that, I’d go to jail. So even though I’d like to not support such a system, the effects of not supporting such a system are too much of a cost for myself. (In the same way for others with goods or services or whatever - penalty for non-participation in whatever is too high)
They aren't saying the team shouldn't exist, or be more valuable. They're saying he shouldn't get the reward, just because he was the capitalist at the top.
Second, I haven't lived in Los Angeles for a long time and have never bothered to pay for any sort of subscription service that allows me to watch the games anyway because they tend to air well past my bedtime, so no, the value of MLB and LAD television contracts is not in any way directly contributed to by me personally.
However, you raise a good point that people in the same group exhibit different behavior and values.
Yes, but that's always the risk of working at any company (and it's a risk the investor may also have if the company goes under). You can typically just get a new job and get these things back.
I think an even more compelling argument here is the one of opportunity cost when working for a startup vs big FAANG company.
Early startup tech employees not only invest their time but also lose out on real money they would have earned at another (bigger) company.
Isn't that by design? With greater risk comes the potential for greater reward. If someone doesn't want the startup risk, they can choose to pursue a job at FAANG. If your goal is to minimize risk, then choose a job as a schoolteacher or the post office. That's the nice thing about freedom of choice.
https://www.linkedin.com/pulse/charlie-ayers-made-millions-c...
If you were promised 0.1% of the company then some financial shenanigans with 'dilution' or 'liquidation preferences' mean the company gets acquired for $200,000,000 and you don't see any of it, then you got taken for a fool.
An employee will simply never have access to that, the fact that it's been normalized for founders/investors to actively attempt to confuse and fool employees will simply drive skilled employees out of startups.
I like this justification above all the others; it seems both fair and easy to reason about. If I quit a $200k/yr job to work at a startup for $100k/yr in cash comp, then my time investment, or risk, is $100k/yr, and my stock compensation should reflect that financial value based on today’s valuation of the stock.
It’s up to the startup to put the offer to you, but up to you whether to take it.
This is the tricky part, especially if you are very early.
Really what you want is the (statistical sense) expected value of the equity be something like the opportunity cost, for it to make sense for you. But until the company has been around for a while and through a few rounds, valuation is mostly a fantasy...
That's a lot of equity if the startup treats that lost income as if the engineer had invested that amount in the last fundraising round. Options instead of stock, common instead of preferred shares, and risk adjustment should all probably increase the equity amount. I'm not sure that most startups would give mid-level engineers millions in equity.
If that engineer instead works for 100k and takes 100k in illiquid equity which may or may not be worth something in 10 years, they are losing well over a million dollars in opportunity. Given that 5 more years at a top-tier firm would double their compensation they could easily be giving up multiple millions. To be employee #5-50 this individual should be getting an equity option that would reasonably be worth millions in an exit scenario for it to make sense.
Most startups simply aren't competitive for this mid-level engineer given current compensation practices. Which leads to a sub-selection of talent for those who for various reasons aren't willing or able to work at a firm willing to pay that level of compensation. Bear in mind, if the engineer had liquid equity from a public corporation they would be able to leave equity in hand after 4 years.
Whether this is a problem or not is an interesting question for startup CEOs. Generally I've found success in software is more closely correlated to the quality of employees than the quantity, and historically companies with generous compensation practices seem to be the successful ones.
That works ok in theory if you are signing a contract at the same time a round is finalizing... otherwise it remains tricky.
Also, the view you have is biased to the rare success scenario. In the failure scenario, the employee comes out ahead since they at least got some amount of their investment back.
Also not all investors are created equal. Some investors are strategic partners who can help grow your business. They forgo a salary because they provide advice and a social network the founder can tap into at critical junctures. That’s extremely valuable in some cases. Not all investors play that role (or play it well) but it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.
> the view you have is biased to the rare success scenario [...] the employee comes out ahead since they at least got some amount of their investment back.
Maybe you didn’t understand my suggestion, because the cash compensation is not a return on investment. If you forego $100k/yr for stock options, and the company goes belly up, you lose that amount. The cash compensation is keeping you from making a larger investment, it’s a hedge against risk. Cash paid counts against the time investment. Your suggestion is the same as saying the investors come out ahead because they had money in the bank that they didn’t invest.
FWIW, what I’m suggesting comes from experience both as a founder and as a dev participating in a startup. As a founder, realizing that I don’t need to have debates about what skills or status someone is bringing to the table was helpful in negotiations. As a founder and dev, using time as the metric gives me a framework for thinking about stock compensation that can be applied to everyone in the company equally, and gives both parties room to negotiate. As a dev, valuing my time this way allows me to choose my level of risk, as long as the company is open to paying more or less cash, which several in my life have been. And best of all, as a dev, valuing my time this way typically ends up with a higher number than a random offer of some amount of stock where it’s hard to decide whether to accept it because it’s not linked to my effort.
> it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.
This is spot-on, and really goes to my point. It’s better to take that idea off the table completely, because there is no valuing contributions beforehand, and no fair way to measure it after the fact - if there’s a way to even measure it at all. Everyone in the company is investing something than can be measured and weighed fairly between people. The people who end up contributing more will enjoy faster promotions, longer tenures, greater chance of success, so they do end up compensated. But it’s a bad idea to try to let people argue about their contribution or value in non-measurable terms, and a bad idea to commit to paying for that before the contribution is made. I know this from experience, letting someone talk me into believing their contribution would be huge, and granting a large stock package, only to find out later when it couldn’t be changed that they were not the heavy hitter they made themselves out to be.
I'll note that nothing is actually stopping you from saying "sorry, no I don't want to work at your startup but would you take a 100k investment instead?" & becoming an investor yourself. You get to choose which role you want to play so why is "but I put time equity into it & didn't get rewarded the same" a fairness axis? You have access to all the information at your fingertips. To me if you're unhappy with a particular outcome that depends on which side of the equation you were on, that has to do with your own decision making ability/negotiating ability.
My point is that there is a reasonable and fair metric and strategy by which to grant stock, and that this metric is not based on subjective and speculative and unmeasurable ideas about someone’s supposed risk and/or future contribution to the company. You’re making all great points, but none so far have been reasons not to grant stock according to a simple formula that considers the company’s valuation and the employee’s non-cash-compensated time investment. The top comment I replied to was referring to a subjective notion of “risk” on the part of investors, and that’s what I’m responding to by pointing out that investors and employees are risking exactly the same thing, especially if the employees do what you said here and evaluate what role they want to play the same way the investor did.
Seems like a false equivalency to value investment assets at the same level as the money you need to survive.
Someone getting paid $100M but no "equity" isn't worse off than someone getting paid $100M of valuated equity (ignoring liquidity discount blah blah)
The premium equity achieves is largely as result of leverage – not value*. Employees might generate 100% of the revenue but get zero credit for the growth rate. In a book value sense both seem pretty even, but we don’t value growth companies at book… We value them with a DCF model (or a different model that takes into account future earnings). At T+0 you’re probably neck and neck, but as soon as you step into T+1, T+2, etc. the equity side will get credit for income it hasn’t earned yet while the wage earner is left the same (for the better or worse).
*related to my parent comment and the diminishing utility of money. Equity investors can afford to be choosey because they have wealth = aka options.
But anyway I meant supply of labor for startups specifically. Like, people are too willing to forgo FAANG comp for low equity numbers at startups.
Not if it's as a result of natural capital gain, dividend on shareholdings, interest, inheritance or rent.
In those cases it does materialize independently of time.
Taxes are typically lower if you didn't labor for your money too. Probably because large political donations are not typically made by people who worked for their money.
"Financial risk" is a proper subset of "calculable risk" which is a proper subset of "risk".
I do believe that premium is probably a bit higher than it should be because it used to be EVEN HARDER to get that capital so people are pointing out the slightly outdated examples of cost in order to gain negotiating leverage.
In the end our time and money have no intrinsic value, but try asking a friend to help you move and then try asking your friend to loan you money to hire movers and see which they are more likely to do.
For a worker, however, every minute of labor is use it or lose it... it isn’t like a worker can look at the available jobs and say “nah, I think I’ll just save up my time for now and wait for a better opportunity to spend my labor hours”. You can’t wait a few months and then trade all those months of labor for more money later.
I'm responding to a common moralizing argument:
> > A common reason I hear for the fact that investors get more equity is because of the "risk" they take on
> Its simply harder to get access to someone else's capital than someone else's time. So people can charge a premium for the capital.
That's just another consequence of our current system favoring those with capital. There's a glut of capital, it's just allocated in manners that favor asset owners over those who work for a living.
A more democratic approach to capital access wouldn't necessarily have to tip the scales in favor of those who already have it.
Why couldn't we think of a more democratic way of allocating credit/capital/finance to people and businesses?
But the employee's time is a replenishable resource (1 second per second).
The Total risk is not losing your job. It's losing your job + struggling strongly to find another one (considering loss income while searching, stress, ...). Or workplace injury / death.
An investor, while facing low to none risk of workplace injury / death, can permanently lose the investment and won't recover it ever (hopefully the investor hedges it with other investments)
This is what severance clauses are for.
> Or workplace injury / death.
This is what insurance is for.
Investors operate outside of these parameters. When it works out well , lucky you; but if it doesn't work you lose. The parameters to make this a worthwhile venture must be set so that the reward is higher than when you risk less.
If you’re a VC harping on comp, spend your energy calling out frauds. Now that would be an actual public service.
It is entirely unreasonable to ask for a percentage of the company which can never be diluted by a future fund-raising round. Doing so just telegraphs that you don’t know how venture funding/corporate finance works.
Not only reasonable, but you really should. If they won't answer it's a bad sign.
I've seen this done, for what it's worth. Both contractually and ad-hoc.
Also, does anyone know of a good primer on equity founders/early employees/later employees should expect/require so they don't get totally taken advantage of? It turns out experience is an expensive teacher.
https://www.holloway.com/g/equity-compensation
It's complicated and there's a lot of gotchas I wish I had known. You can read up but if you are considering any of these I would find someone who has navigated the space (and has likely been burned).
This is from ~7 years ago, but my backweighted Amazon RSUs were balanced by a signing bonus, and another signing bonus a year later. Roughly, my total comp would be similar each year if AMZN stayed the same price, so it felt fair.
Overall, I considered the Amazon approach fair. But then I never considered the sign on bonus nor RDIs as part of my everyday salary, for me it was rather a bonus to be put away to be used when absolutely necessary. Allowed me to boot strap since Oct. 2019. Unsuccessfully so but that has hardly anything to do with Amazon.
Given that the year 1 cash could be used to buy stock if I really wanted, it didn't seem an unreasonable approach to comp to me.
Fuck Amazon. I'll never work for them.
Fun fact: timing internal transfers with review cycles, especially the mid-year one employees are hardly ever informed about, can avoid getting PIPs. In the first 6 months a new department doesn't review employees (at least didn't back the day) and in year one people don't get PIPs. So switching departments after the first full review, but before the mid year one, avoids being PIPed mid year. And the first end year review. The second end year review in the department hardly ever results in a PIP, so one can change again departments before the upcoming mid year review (the first with a real risk of being PIPed). Rinse and repeat. Took me too long to figure that one out so. In hindsight, I know quite a few people who managed to pull that off. Of course being part of a feed-back rings also works wonders.
Plenty of people work here and get filthy rich. They stay because they create immense value at scale.
Sounds like sour grapes to me. I doubt you'd pass our interview.
I wonder if it has to do with cases where their "salary ceiling" would otherwise make the offer wildly uncompetitive for experienced people.
If the Board and/or the VCs ever get uncomfortable with the % of the company that is owned by ICs, they will just print more shares of stock.
And don't get me started on preferred shares. Has any IC ever gotten those?
Imagine I give you $1M for 10% of your business. You now own 90% of a business that has $1M in assets. You easily sell the whole business for $900k (giving away $100k to the buyer, basically), give me back my 10% * $900k = $90k, and keep the remaining $810k for yourself.
Preferred shares are a mechanism for preventing you from immediately liquidating my capital. An investment of time can't be liquidated as easily, so preferred shares are generally only for those making liquid investments.
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It seems there are probably other mechanisms for dealing with this problem, but this explanation makes _some_ sense.
This is horrible at pre-IPO unicorns like Stripe. One year vesting could cost normal employees millions if the company blows up.
Sure, the stock might not move much, or it can go down. A temporary dip means good performers are more likely to get larger refreshers to get tc up to market rate. And if pay is your driving motivation you can switch to a new job.
Even at 10B, lots of millionaires are created unless all hires were made at high valuation. I was getting 1m/yr at 5B and I wasn’t even that early of an employee or high up. Expand that same company to 100B? Everyone would be getting millions out of it - even the lowest ranking employees.
Of all things in the equity world this certainly doesn't seem especially evil, but what I can't stand is the half-hearted framings of this as good for employees. If you're deciding you want to keep more equity for yourselves, fucking say so.
And I would never want my employees to value their stock based on our 409a price, we (like all startups) do all we can to keep that number as low as possible!
Job market for IC is most of the time quite easy if you are technical, developers are usually spending 2 years at a company. I don't see C-level people switching companies on a whim and work one company for many years (not everyone is Elon Musk).
Once you have C-level on your CV good luck finding job again on lower level or the same level but different company. My boss is in it for life with current company, I can put my notice tomorrow and I walk away like I never worked there.
Why? As an employee I'm taking on nearly 0 risk. Maybe if they are paying me poorly I can see the argument where I'm "investing" more time/work into the company that I am being paid for and that difference should be made up with equity but otherwise this seems divorced from reality.
It's an investment by the employee. Coinbase is being cheap and it will come back to bite them. Odds are they don't care for the lifetime of the company since they're so tied to bitcoin's success.
I'm not sure how you are pricing things. FAANG stock comp is guaranteed money; You can sell it as soon as it vest for exactly the amount you signed for. Startup equity, not so much (there's no guarantee that a liquidity event will ever happen for starter).
Unless you are working in a lower tier market where stock comp isn't the norm.
You can argue that employees are fungible, but so is investor money, and frankly I'd rather take random money than random programmers.
When you are simple employee it is still better to get your paycheck and invest on your own in other companies. As a IC level employee mostly you can invest your paycheck freely. C-level guy before buying some stocks/investing probably has to go via lawyers/legal so he also is has lot less options for diversification of his investments.
You are also making such statement looking at successful companies, there are loads of companies and C-level people who were invested for life in it and company went under.
If you are IC you should get market rate salary, don't settle for less, invest it in other places. I don't accept equity as a compensation, I want market rate salary and the rest I will handle myself.
Let investors keep their risk, I don't want any of that, because you know not every company is successful.
On a more general note though, golden handcuffs can benefit the employee just because they are a guarantee. There's no possibility of future faking when it's up front and signed into a four year vesting schedule (e.g. "we'll give you a few percent next year but we need to get through this raise first").
If you only get the FMV from something like Carta, is that "enough"? I mean, it tells you nothing about the % at all. You can guess that the strike price will fit within a band (greater than 4, less than 35, likely around 17)
My, if only there were an economic philosophy based on that. Some kind of "social"-ism...
Do not support investor-focused comp models like backweighted vesting (Amazon) or outright fraud like a start-up giving you a stock offer with no percentage or no 409A.
Employees deserve high-quality equity on par with investors. The OP’s suggestion is a major step back in one of the greediest economies in history. Complete non-starter. Don’t let this guy live in your thoughts rent-free.