The more amusing (or disturbing thing) is that we have created an environment where, practically speaking, investors have less risk than everyone else. We were just hit with one of the largest global disasters of the past century last year and the immediate reaction was flood equity markets with $3 trillion to prop up financial markets. Owners of capital cannot lose.

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.

The best part is that he sold the franchise and donated $100M to Georgetown University so that his wife wouldn't get as much of the divorce proceedings.

Saul Katz is the east coast Frank McCourt. Many years of mismanaging the Mets. Suspicious involvement with Bernie Madoff. All floated a long with generous debt finance. Sold the team last year for $2.4B

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

> 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.

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.

And thus… the system isn’t flawed? We can criticize the system and the rich without needing to apologize for it.

You’re right. The “system” is flawed. The poor knowingly enrich the wealthy and then whine about it. Seems to be happening more and more nowadays.

What is the alternative? Give up on all sports teams? Give up on all goods altogether?

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)

I think the point is that if the team got more valuable while he owned it, it certainly wasn't from his contribution. Maybe that money should go to the people who actually did the work that made it more valuable.

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.

First, this isn't true. The MLB operates like socialism for the owners. The value of the television contracts are overwhelmingly due to a very small number of franchises, but the revenue is split between all owners to subsidize markets with small fanbases. So you don't need to directly support a specific team for the owner of that team to get rich anyway. This is effectively why rich people bother to buy teams like the Marlins and Rays, gut the entire roster, get by paying the minimum payroll the league collective bargaining agreement allows playing to empty stadiums with no fans, and sell for a profit anyway.

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.

When I said "your", I was really talking about the group "lifelong Los Angeles Dodgers fans", and you seemed to include yourself in that group.

However, you raise a good point that people in the same group exhibit different behavior and values.

> 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.

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.

| 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...

This presumes that early employees are getting a fair shake. In many cases they are being sold a lottery ticket with a value of only a few thousand dollars even when the company sells/IPOs.

Isn't that exactly what "risk" means in this context? Sometimes you get very rich (see the early google/microsoft employees), usually you get nothing or almost nothing. If you don't want to play the lottery there is nobody forcing you to work at startups.

If you were promised 0.1% of the company and the company ends up worth $0, that's just the risk of taking equity.

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.

Yes, if you don't know the rules of the game you will often lose because you did not see some (legal) move coming. Investing is the biggest game in the world and big boy rules apply. People who are unable or unwilling to learn how options and startup equity work should not take payment in equity, because they will get cleaned out as predictably as a drunk guy at a poker table.

At the end of the day, any business partner can choose to screw you. VCs/Investors have additional protection by way of retained legal council, clawback clauses and occasionally debt based positions and liquidity preferences.

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.

Only of they are paid partly in equity. If they are getting a lower comp package than FAANG because of intangibles they value highly (perhaps developing skills FAANG will pay more for later) that's their choice.

> Sometimes, those workers are paid below market rate

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.

You are the ultimate check on that. If the compensation package makes the startup not attractive compared to staying put, you should stay put.

It’s up to the startup to put the offer to you, but up to you whether to take it.

Oh, totally agreed 100%. I’m just saying that there is a way to value a time investment that is on par with what financial investors are buying into. It doesn’t need to be some hand-wavy idea of who’s ‘risking’ more due to the unknown chance the startup might fail, and it doesn’t need to speculate about who would be hurt worse. It can be a purely fair and financial idea for early devs; their stock compensation value is the discrepancy between what the startup pays and what their market rate is.

I'd be fine with it not matching exactly. I'm willing to pay some amount of opportunity cost in lost comp elsewhere as an investment in the company. I'd just like the ROI on that investment to not be like 5-10x worse than a VC's.

I’m also fine with it not matching exactly. In fact, I have only ever accepted offers where it doesn’t match exactly. :) But, one thing to keep in mind is that the value of a time investment in a company naturally goes down over time as the company grows larger, and as the company is able to pay more competitively. Investors will get a larger stake because of when they put the money in, all up front. Devs typically won’t get the same stock compensation dollar for dollar, only because the time investment is spread out. My time during the third year might be measured against a company with a much higher valuation than my first year there.

> based on today’s valuation of the stock.

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...

It’s not that tricky, because the investors are getting a valuation. The money I risk/invest/forego now because it’s a startup maybe ought to get the same valuation the investors are getting, that’s all.

I really agree with your point. I don't see how most startups could make competitive offers with unicorns/FAANG, unless it was for non-monetary reasons like a promotion.

Give out way more stock options, so that the pay is the same risk-adjusted.

Early stage startups should be showering employees with high risk equity and paying less cash compensation. This saves the company money and allows them to hire better talent. Having highly skilled engineers/bizops/designers/sales staff who are incentivized to make the company successful is a huge win.

Not just early stage startups. Any startup that's competing with FAANG for talent should be competitive with FAANG on compensation, on a risk-adjusted basis. Which means if there's a successful exit, everyone makes more than they would have than if they had just worked at FAANG. Early-stage employees should make a lot more, and later-stage employees should make somewhat more.

I'm not really sure how options should be valued, and I haven't negotiated from a position of have a ton of unvested equity. But if an engineer got extremely lucky by joining the right startup, say Coinbase, leaving early might mean giving up a few million in unvested equity.

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.

so the key question here is what a "mid-level" engineer can do for your company early. An engineer with 5 years of experience at FAANG will easily make ~200-250k, competitive scaling startups and public companies will compensate equivalently withing ~30% in liquid compensation.

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.

Thank you!

Because there are considerably more jobs outside of FAANG then within it.

> It’s not that tricky, because the investors are getting a valuation

That works ok in theory if you are signing a contract at the same time a round is finalizing... otherwise it remains tricky.

Without the investment funds, where is the startup getting the funds to pay you 100k/year? Some startups take a while to hit big and the only source of funding is investors. Fair or not, there’s a power imbalance and ignoring that seems foolish.

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.

Loans still exist. They didn't magically disappear with the rise of venture capital.

Have you tried to obtain a loan for a startup? I recommend you go try to bootstrap it without collateral & the bank is just happy to eat the loss when it doesn't work out.

I think everything you said is true at face value, but do you have a viable alternative proposal? Do you prefer to believe that financial investment is riskier than time investment, and do you want to preserve the status quo where there’s a power imbalance in favor of money investors? I’m suggesting a way to value an employee’s time investment in a startup that doesn’t depend on speculation or subjective discussion of who’s taking more intangible “risk”. Employees and investors are both sacrificing the same thing to participate: money.

> 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.

So I'm missing your point. If you forego $100k/yr of stock options to work at a startup, you're hedging your risk. You're still getting healthcare & a regular paycheck (even if it's less). This directly impacts the company's runway (i.e. your "100k investment" looks like a cost to the company. Don't forget that once you're past the seed round (where the company is literally making nothing), you're looking at multi-million dollar rounds where the minimum check size is maybe low-to-mid six-figures. That's also the point where employee compensation starts to rise btw so your sacrifice is largely meaningful just to you (not to mention that you are getting compensated well anyway in the success scenario, but less than those that took a bet with 0 hedge).

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.

Again, all true statements, but I’m still not hearing any suggestion or viable alternative for how to value an employee’s equity, or how to grant stock. What are you suggesting? How would you grant stock as a founder? Have you started a company before?

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.

I think you’re hand waving away that money is a store of value, and indirectly of time spent. The money investors have also came from them creating value by doing some activity. It doesn’t materialize independently. And it is still a risk to lose that money that they earned by trading their own time in the past.

Another term for VC is risk capital. A diligent investor will only put what they can safely risk into the market. While your correct that money indirectly represents time, you’re overlooking the incremental utility of money. An investor logically values each incremental dollar less, purely evidenced by the fact they were willing to risk it. An employee on the other hand will turn those funds directly into shelter/food/health.

Seems like a false equivalency to value investment assets at the same level as the money you need to survive.

You're saying that rich people should be paid less, a smaller multiple of what low paid workers get. You can make that debate, but it's not "equity vs wages".

Someone getting paid $100M but no "equity" isn't worse off than someone getting paid $100M of valuated equity (ignoring liquidity discount blah blah)

It is 100% equity vs. wages. That’s how a financial statement works. Revenue – COGs – G&A – Taxes & Interest = Net income. That net income moves to the balance sheet as retained earnings. The higher the COGs & G&A cost the lower retained earnings and the lower the retained earnings the lower proportion of equity.

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.

The more relevant factor IMO is not time vs. money but the proportional risk. A year of my time is a much larger fraction of my net worth than the typical VC's investment is a fraction of their net worth.

This is a Marxist labor theory of value argument, disregarding market forces. For a different supply-demand function, labor could get paid far more than investors (imagine a 0 interest rate environment while inflation is happening.)

Well, sort of. There's an argument to be made that people should realize how much better a deal VCs are getting and stop settling for worse ROI. Part of the problem is exactly that supply is high, possibly because of a lack of knowledge/negotiation leverage.

Labor supply is high because it is forced to be high, in a way that capital supply is not. Investors can stop investing and simply live on their hoards, or even a tiny fraction of their hoards. Laborers cannot stop laboring and do the same.

That explanation seems off? (Anyone who has enough to live off of can just do that, witholding both their capital and their labor.)

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.

Yet investors have made a fortune over the last year while there’s interest rates below inflation.

>I think you’re hand waving away that money is a store of value, and indirectly of time spent.

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.

Thanks for this comment. You've clearly outlined something I've been trying to convey for years, especially to people who read too much Taleb: "skin in the game" cannot be a purely financial concept, otherwise it fundamentally misunderstands the notion of "risk".

"Financial risk" is a proper subset of "calculable risk" which is a proper subset of "risk".

Your moralizing a non moral argument. 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.

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.

I think the big difference is that worker time can’t be saved in the same way that capital can be. While capital will lose value over time to inflation, it still holds most of its value if it is not spent (and there are very safe investments that can be used to hold even more of its value across time) An investor can choose to hold their capital for a better investment at a later time.

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.

> Your moralizing a non moral argument.

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.

You are justifying a system with the system itself. Why does it have to be hard to access capital? Worse that hard, why is there a very very tiny number of (undemocratic, unaccountable) people deciding who gets to access capital?

Why couldn't we think of a more democratic way of allocating credit/capital/finance to people and businesses?

Playing devil's advocate:

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)

> It's losing your job + struggling strongly to find another one (considering loss income while searching, stress, ...).

This is what severance clauses are for.

> Or workplace injury / death.

This is what insurance is for.

That was exactly my point. They are part of your compensation package. Surely there is a risk that the severance is not enough to cover for coping with a depressed job market.

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.