I say small risk, because the worst case scenario is that we fail in a year or two and then that person will likely have no trouble going back to the crazy high comp at FAANG. So the biggest downside is some opportunity cost and a few years of yes lower financial cost but without a devastating lifestyle change if we're paying decent base salary.
On the chunk of equity, I had a cofounder walk away early so I'm a little burned on the subject. You're right that the letting go before vesting is an issue, I think maybe rethinking the cliff to something like a 6 month rather than a year could do better there. Full disclosure, we do have a mildly backloaded vesting schedule (20-23-27-30) to encourage staying longer, but I think a crazy backload (like 10-15-25-50) creates toxic incentives on firing people before the equity hits.
I think essentially my (and the investor's) worries about that employee stem from a belief that a founder typically has a different level of emotional commitment than even very dedicated early employees. Obviously not always but often. Which means that even if it's a theoretical risk that the founder walks early with a hefty chunk, it's less likely.
On owning less than half, I actually tried to write a clause like that (I vote by proxy for employees who own less than a given percentage individually) into the term sheet. It was rejected by the investors. I'd love to have a board representative for the employees as we expand. I've actually considered a seat that has to be a non-exec employee that would rotate in every 6-12 months. Something to consider when we have more seats for sure.
With all hires I've been clear on how much we've raised, how many shares exist, who are the investors in rough proportion, rough estimate of runway, and milestones we have to hit to get the next round. I'll think about careful ways to share the information as we go down the road. One difficulty is that it's hard to judge how people react to these numbers. If I've got 6 months runway left, how many people look for the exits? And what does it say about me that I'm not sure about being honest about that? I'm honestly really torn.
On unlimited PTO and time I sense that there's a larger, "will you abuse my home life and time?" undercurrent. On the accounting, I don't know the details but I'm told it's more than just the price of the PTO, it's the way it complicates backend accounting. Maybe I should dig more.
One way I think I could mitigate the concerns and that I've considered are as follows:
- guaranteed 1 company holiday per month, if there's no official holiday in that month we'll designate one monday or friday as off.
- 1 week off in the winter 1 week off in the summer as scheduled company shutdowns. The nature of our business is not live, "keep the website running" so we have flexibility there.
I've also set a tone with all my employees that we don't burn out here, lets find schedules that work. We shouldn't be burning the midnight oil and weekends all the time. If we are, we need to rethink our objectives or staffing. Maybe setting the above two benchmarks would also set that tone. Maybe this is idealism, but I think we can do it. I guess we'll find out!
Your 3 day work week sounds interesting, will think on it a bit. We would need to have a good mutual understanding of what milestones we want to hit on what timeline, but could be doable with the right people.
I hear you on the many ways things go wrong. I can't predict that, and sadly layoffs can happen. I think you can do those humanely but it's awful and I hope we'll avoid it, though likely if we're around long enough we won't.
On the investor/founder vs employee split though, I have common stock, just like every other employee. We rise and fall together, though yes investors can have a liquidation preference. In those cases, my strike price was better but that's the only way I'd be treated differently than an employee. I see no reason to change that, and I think if secondaries happen (and my investors typically don't do those) they should be open to all in proportion to their ownership of the company.
The stock comp at FAANG is basically unbeatable and I'm convinced is designed to distort the startup ecosystem. The only thing I'd say as risk is this:
"We're going to pay you a decent base, you're not gonna struggle. If we go big, you'll have a nice upside, and you'll have done it building something cool from the core. If we go medium, you'll probably not make as much overall as a FAANG, but you'll get to build something cool that mattered and was more directly tied to you personally. If we fail after a few years, then worst case you've worked on something cool, and FAANG will take you right back."
It's strongly tied to us building something cool to work on AND that while building it we don't abuse you. It sounds like I have to find ways to convincingly make that promise.
1.) More than 3 months expiration gets tricky legally and I'm not sure it's actually fair. At that point I'm told we can't grant them as ISOs, they have to be NSOs or RSUs which could have poor tax profiles. Investors are also not keen, because you're basically giving free optionality that pretty much nobody else has. Essentially a 10 year exercise window means you get to just wait and see and only put in money when it's a sure thing. You don't even need to put in time if the option is vested. This while others who come later likely can't benefit from the same treatment (because the awards will be taxable as NSOs, and at that point more than trivial in paper value), and while investors and founders have put in cash to purchase the shares.
2.) Early exercise we have offered and will continue to offer. It's tricky because those have to be NSOs as well, but it's totally something we do. We have given signing bonuses (I hate doing this as a general rule, but it's what we have to do to get the talent), could look at making that more tied to the early exercise in some way. Again I'm not sure how the tax side plays out for the employee though. Generally this is something I support, glad to see it'd be helpful.
3.) I'm not sure what restrictions we have but I think we do restrict secondaries. For very early stage companies it's hard to write these promises of future purchases down, there's too much uncertainty on how they plays out over the long term. It can spook investors to have non-standard clauses like this, and the lawyers get very upset which means they charge us more money. That said, it's worth thinking about how to accomplish the same outcome.
Keep in mind we are paying a decent base salary. It's actually strange to me how the compensation market in the bay area essentially discounts base pay because FAANG have had insane stock trajectories. When we recruit in other markets base pay is the main negotiating point, not equity.
Thanks for the feedback, this is helpful!
It's entirely possible for our investors to recover their money, and for me and the employees to make $0. However it's not possible for me to make something and the employees to make $0.
One small wrinkle is that my strike price was microscopic because of when the company was incorporated, whereas the strike price for an employee is merely very low, so there could be some outcome differences there.
I'd be willing to boost the options pool, but I'm not sure I'd be willing to do so right now for a few reasons.
1.) I don't trust that someone isn't going to come in, get offered a large chunk of equity (lets say it's 10%), and leave after 2 years with 5% of the company. In many ways that would be unfair to a future employee who works with us for a longer period of time and gets dramatically less equity. This could be solved with highly backloaded option grants (I've been thinking about doing this), but I suspect you wouldn't be interested if 8 of the 10% vests over years 5 and 6 or years 5-8 either.
2.) At previous startups I've worked, there are often follow-on grants that mitigate dilution for employees upon fundraising events. As a founder, I definitely won't get such a grant until I'm close to fully vesting. If we take some of the sting out of dilution, then that effectively is growing the option pool over time.
3.) I currently have 50.1% of the company. Had I cofounders, we would together own 50.1% of the company. This is helpful because it allows me to make some decisions without relying on our investor (who's been lovely so far, but still). Later, that will change, but at that point we'll have more infrastructure.
On accounting/books, I don't know if I can do that. I've never seen it done across the org, though I'm happy to show senior management rough projections and our current burn.
Unlimited vacation is an accounting construct. The pain of having to deal with accrued days vacation is not worth the hassle for a small company. When we have better financial infrastructure, maybe we'll revisit.
A lot of this sounds like I need to foster some trust in my potential hires that I'm going to take care of them more than anything else.
Regarding the equity, how would a long or highly backloaded vesting schedule work for people in your shoes?
The corporate charter, and the bylaws of the corporation are all explicitly governed by Delaware law. These documents control what powers different share classes have regarding corporate ownership and operation.
TLDR: Delaware law is almost certainly the controlling law regardless of where the shareholder lives.
I fully recognize it's easy to say now, and I hope I stick to it when given the chance.
More interesting than currently easy promises is: how do you interview the founders to maximize the chance that they're not greedy assholes?
These seem like fair offers, but often I'll get, "actually I'm really a cofounder so I should be getting double digit equity." That's fine, except
1.) I have 15% of the company in my option pool, so no I can't do that unless I effectively want to give nothing to everyone after that person.
2.) At the risk of sounding aggrieved: I spent all of my savings to get this off the ground and funded, am taking a far below market salary, and you want to get that sort of equity with none of that risk? When I'm pretty sure you wouldn't be talking to me if I didn't have a nice war chest?
What should someone in my position be doing to entice top notch people to join us? Yes it takes a leap of faith that what we're doing is interesting (please trust me that it is), and that someday stock worth 10s or 100s of K will be worth 100s or 1Ms.
But if nobody is willing to take that leap, then companies like mine and many others will die. If it's all about cash and comfort, then FAANG will have won and innovation will slow.
I'm really willing to listen, what can I do to solve this dilemma of a necessarily limited option pool AND inability to say, "yeah my stock is provably worth $100s a share and I can pay 75-90th percentile of market base."
I'm exploring starting a company (based in California) and have fortunately gotten some strong interest from an initial funder. The company would be in a sector where securing funding is essential to even getting to a MVP, but I can do a little exploration with my own funds. Given that there's a good chance of securing funding, or at least pursuing funding in the next few months, how should I...