> In startups, why do the founders receive such a disproportionate percentage of equity?<p>There is a really straightforward answer to this - equity isn't distributed according to a theory of value and nobody ever claimed it was. I own some equity in the Australian company CSL. It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value theory. Even on the basis that people anticipated my buying of that equity - I bought in because I believed the value had already been created.<p>Who gets equity isn't based on value, it is based on power and who has it right now. Value is for working out whether you, the valuer, should make a trade or not.
This thinking is almost exactly how most pricing works in derivative markets and is the real breakthrough in the original Black/Scholes/Merton model[1] that has been reproduced many times since. They showed how you could replicate the payoff from a European-style option by hedging using the underlying and a risk-free instrument (under certain unrealistic assumptions, notably constant vol and the ability to trade in continuous time). Their argument was that since the payoff of the two things (holding the option and performing this hedging strategy) was the same, the price must be the same, and that produced the famous Black-Scholes formula, which is a closed form price for the hedge portfolio under those assumptions.<p>Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same.<p>[1] <a href="https://www.jstor.org/stable/1831029" rel="nofollow">https://www.jstor.org/stable/1831029</a>
Otherwise known as the Shapley value [1], which also takes into account the interaction between participants.<p>> The Shapley value is the average marginal contribution of a feature value across all possible coalitions. [2]<p>EDIT: There are efforts to decompose that attribution of value into Synergy, Redundancy and Independence components [3], which I believe could also have meaning the context of business.<p>[1] <a href="https://en.wikipedia.org/wiki/Shapley_value" rel="nofollow">https://en.wikipedia.org/wiki/Shapley_value</a><p>[2] <a href="https://christophm.github.io/interpretable-ml-book/shapley.html" rel="nofollow">https://christophm.github.io/interpretable-ml-book/shapley.h...</a><p>[3] <a href="https://arxiv.org/pdf/2107.12436.pdf" rel="nofollow">https://arxiv.org/pdf/2107.12436.pdf</a>
There might be some phenomenon he is pointing out here, but his logic in doing so makes no sense. Even his internal logic makes no sense.<p>He starts out by talking about the value of a product (commodity) determined by the labor theory of value. Then he jumps to how much someone is compensated in salary. Then he jumps to a company's value and the ease at which someone at the helm can raise capital.<p>In terms of comparing two systems of value, this is jumping all over the place. How value is added to a specific nascent commodity going through an assembly line is a different thing than the ability of one person versus another to raise capital and how that affects a company market cap and is different than what they should be compensated.<p>People like Eugen von Boehm-Bawerk wrote well-reasoned arguments against the labor theory of value, which might be right or wrong, but at least they have a clear line of reasoning. This piece talks about value but jumps all over the place. There might be an interesting phenomenon being pointed to, but there is no well reasoned argument.
The problem I have with this is that it presupposes that you can change 1 thing and view the difference. What if the only reason a company is successful is because of a unique idea that 3 people came up with together? Are each of them worth 100% of the company- take any of them away and it’d be worth nothing. Any company or endeavour is made up of complex interactions of many different people it’s impossible to differentiate with respect to just one variable.
Labour theory isn't wrong for the reason he states. Causing people to work harder isn't actually a problem with the theory. It's wrong for other reasons.<p>The moneyball theory of value is not terrible, is actually pretty sound. But this kind of analysis works well in a context like sports because there's only so many players in a team and the team is basically just struggling in a win or lose world against other similar teams. Your wins come from someone else's losses.<p>The sports metaphor is also applicable because sports are reproducible. It's the same little world over and over again, with the same people. And there's just an enormous amount of stats to back up or reject some hypothesis. Goalkeeper is good or bad? Let's check how many shots he faced and what quality they were.<p>In the general market this is not the case. The firm only launches its first product once, in a world where you don't get to repeat the conditions. We also do have a history of each contributor's actions. Basically it's very hard to make comparisons.
One thing that is important here is whether the counterfactual is the marginal employee, or nobody.<p>In the sports roster case, a soccer/baseball team would be in trouble if they lost one of their average-talent players if they didn't have anyone on the pitch but there might be a plentiful supply of low-cost players willing to work for a similar amount.<p>This means that the counterfactual of 'lose average player and replace with noone' suggests that the player has a very high counterfactual theory of value, but 'lose average player and replace with similar average player' suggests that the counterfactual value is not high.<p>There might be a star player such that they are not replacable by anyone, or by anyone also able to demand a high salary from an alternative team, and they would have a very high value according to both counterfactuals.<p>It seems to me that many sports teams operate with the 'similar average player' counterfactual.<p>I think you could draw analogies to businesses and employee pay.
<i>> In startups, why do the founders receive such a disproportionate percentage of equity?</i><p>Because on day zero, 100% of the company must be owned, and the founders are the only ones there.<p>Equity to founders isn't handed out based on an arm's-length negotiation, or on the basis of work done.
I can believe it's useful as an unscaled relative measure but I can't see it having absolute value. It's totally contextually defined. And in the case of McAfee had net negative value over time. Or perhaps Bernie Madoff is a better example.
This is a restatement of marginalism.<p>Essentially: what is the <i>marginal contribution</i> of some factor X. Including the case where X is some individual contributor.<p>The question Dave Perell asks needs to be augmented by one other: What is the cost, and value, of an alternative input factor?<p>If X provides 100 units of value at 20 units of cost, and Y provides 90 units of value at 9 units of cost, <i>then the net advantage is to utilise Y (net benefit: 81) rather than X (net benefit: 80).<p>Of course in the real world, neither benefits nor costs are quite so readily assessed, but the principle remains: you want to account for both the </i>productivity* AND the <i>cost</i> of the input or contributor.
Not really counterfactual theory, but opportunity cost. The cost of retaining the CEO to most of the shareholders (even a consensus of them) is high because they can’t realistically install a new one.<p>Opportunity cost gets conditioned on the investor. If you’re a maker, or a player with leverage on the board or something, your opportunity cost is different.
Isn't the first paragraph of this article what every introduction to the labor theory of value says it is not?<p>This is the "mud pie" argument. You may disagree with the theory but please check what it is first .
This seems like a roundabout way of saying something that seems fairly anodyne: A F500 CEO doesn’t provide 1,000x the value of a rank-and-file employee, they’re just (debatably, IMO) 1,000x more scarce.
This doesn’t account for frequentist past looking vs Bayesian future looking value. At some point, the value created by an individual is no longer what it used to be, but ownership compensation persists, while cash compensation tapers off.
The <i>labor theory of value</i> is an old marxist economic theory which is not used by serious social scientists in their field.<p>The modern approach is called <i>the opportunity cost</i>, and by definition <i>is</i> a counterfactual scenario. It is triggered by a <i>choice you actually have</i>. Otherwise it's called science fiction.<p>This article does a very average job at explaining the whole thing... Even the Elon Musk example is not accurate. The value of Tesla in the ''without Elon'' scenario is wrong, because in that case Elon would be *replaced* by another overconfident nerd. Just think of Apple without Steve Jobs ; he got replaced by something different, and the firm is still standing strong today...<p>Good counterfactual thinking is super important, but I do not feel that the author is a master of the art.
Startup valuations have nothing to do with theory of value. Theory of value, like the marxist labor theory of value are theories about the metaphysical status, origin an mechanisms of value. It is an explanation of value in general not a heuristic people would use to evaluate things. If labor theory is right (and it isn't) the answer of why founders get so much more is because they are exploiting the other guys working there.
Tesla <i>would</i> exist without Elon Musk. Elon Musk literally simply just bought the company, along with the right to call himself the "founder". Sure without Elon Musk Tesla might be more accurately valued, IE valued significantly less, but it's unclear how much social value is actually created by his showmanship.
There's a difference between exchange value and use value.
>Elon Musk provides another example. Today, Tesla is worth more than $1 trillion. Without his will and personality, Tesla probably wouldn’t exist.<p>Yes it would. Mark Tarpenning and Martin Eberhard founded Tesla. They were later forced out by Elon.<p>They were arguably quite poorly compensated for their part in starting this company.<p>This speaks to the fundamental problem with this theory - it's all very well saying that Elon is worth his money because Tesla would be nothing without him, but what if it actually <i>would</i> have been wildly successful without him and he mostly rode the wave with his $6 million series A investment?<p>Of course, you cant prove what "would" have happened, you only know what actually did, so your valur is measured by whomever tells the most compelling story.