Wanted to start a discussion on this topic and see what advice people can provide for employees when it comes to equity. We have noticed a large amount of equity agreements come across our service lately for review, so wanted to start a discussion to provide guidance and get some of the larger questions out in the open.
Joel Spolsky's Stack Overflow answer to this question is to date the best single explanation of this issue I've read:<p><a href="http://answers.onstartups.com/questions/6949/forming-a-new-software-startup-how-do-i-allocate-ownership-fairly" rel="nofollow">http://answers.onstartups.com/questions/6949/forming-a-new-s...</a><p>Also: keep your eye on the ball. When a software company gives equity to an investor in exchange for money, most of that money is going to employees anyways; salaries dominate the expenses of tech companies.
After working for a start up for a while, a couple of other things that would make equity far more attractive compared to Google paying $80k/yr more in total compensation:<p>1. Non-expiring options on leaving the company. Many SV companies have options expire in a couple of months after leaving. Some have them expire immediately upon firing.<p>This does remove some of the Schrödinger's golden handcuffs effects of equity, but start up equity is not liquid. It can be tough to expect someone to put a significant chunk of their savings into a company and deal with the tax BS just to purchase equity so they can move on. Much of the stress of start up equity I've realized comes from the non-liquid nature of the stock and the fact you don't have control over the company. Many companies want to completely control second market behavior when private, which removes even more liquidity. Much of the stress will just go away if I could keep the options.<p>2. A consistent pattern in working for various companies is giving the stock & employment contracts after hiring. From now on I'm making it a condition of accepting an offer to receive all contracts, stock contracts, proxy agreements, etc that I would be asked to sign. If you have a surprise call option on purchased stock, no way I will work for that company.
So this happened to me...<p>I am 3rd layer share holder, and also the 3rd employee. I got 4%. There was a 4th and 5th layer employees added, each about 1.5 years apart. 4th got 30%, 5th also I think got 4%.<p>Now when the economy really crashed in 2009 we had a couple of months of temporary 20% pay cuts (not getting contracts trying to bootstrap, IOU when we get $ again). Since then we have had more pay cuts sometimes as much as 40% for a month or 2, and once we had a 100% cut for 1 pay period.<p>We are an s-corp, when there is profit we get payments (and subsequent tax bills for our share of profit), so these aren't stock options. However, is it right that everyone shares the pain on the same level (x% across the board temp pay cut) but has a very great difference of reward possible? Is this normal?
This is a good blog post with lots of helpful information and some good numbers to start making some educated guesses.<p>That being said: Please take your super slow loading popup of doom off of your blog. I don't want to have you spam me for my info the second I hit your page, and, no, I don't care how many more people sign up.<p>Yes it's effective, but it's also rude.<p>Edit: Capitalization removed.
I don't think equity is a good way of paying employees. There, I said it. I know this is contrary to Silicon Valley wisdom, but I've studied the alternatives and I think I'm right on this one.<p>Profit sharing (a larger percentage, but annually dispersed rather than permanent) is a much better method of upside compensation. I actually think that typical equity allocations in VC-istan fall into the uncanny valley and become demotivators. A nickel (0.05%) of a 50-person company isn't ownership. It's a consolation prize (severance) if your job is sold away in an acquisition.<p>Also, I think startup equity exacerbates the inequalities. Let's say that a software engineer (someone who does actual work) makes $120k while some politics-playing non-technical VP (who doesn't show up half the time, but the CEO likes him) makes $150k. That's unfair, but it's not going to stop people who are otherwise enthusiastic about their jobs. They'll find it mildly annoying but get back to work and forget about it in a couple of days. Replace those numbers with 0.05% and 1.0%, however, and you get a different story.<p>You could release all the salaries at a VC-funded startup and it wouldn't stop work. If the equity table came out, the engineers would all leave on the same day and it would be chaos. That's why the cap table is hidden (a disgusting practice when one considers that equity is billed as ownership; by the way, someone should totally Wikileaks a bunch of startup cap tables.)<p>I don't even think it's meaningful to consider yourself an owner-- at all-- of something if you don't get to see the capitalization table or interact directly with investors. I'd rather have a market-level salary, to be blunt. There are levels of equity that justify the typical startup's pay cut, but no (non-founding) engineer in Silicon Valley gets anything close to that.<p>I worked out how to make profit-sharing more fair: <a href="http://michaelochurch.wordpress.com/2013/03/26/gervais-macleod-17-building-the-future-and-financing-lifestyle-businesses/" rel="nofollow">http://michaelochurch.wordpress.com/2013/03/26/gervais-macle...</a> . It can be done, but it requires a dramatically different style (one less vampiric) than a typical organization.
We are just sorting out equity/option scheme for our first employee, so this was a good read, and completely agree with the first statement about owning 100% of a company where staff are not invested!!
There's a big pitfall that isn't mentioned: the equity doesn't grow in value, perceived or real.<p>Savvy and experienced employees will consider equity at an early-stage startup to be a lottery ticket. Most startups will never experience a liquidity event, and, on average, the windfall from liquidity events is relatively small. There are a number of things that <i>most</i> employees can't effectively protect themselves against (dilution, liquidity preferences, etc.). None of this means that these employees won't negotiate the equity package, but they won't trade salary and benefits for equity either.<p>Many if not most employees, however, are not savvy or experienced. They hope and expect that their equity will grow significantly in value, and consider it a big part of their compensation package.
Some employees are so confident in the future value of the equity that they are willing to negotiate their salary down to "maximize" their equity, almost as if it was a cash equivalent.<p>As a result, equity has become an attractive retention tool for early-stage startups, and one that is <i>seemingly</i> cheaper than alternatives that require cash. And equity can be very effective so long as employees believe their equity has value, is growing enough in value and that the odds the equity will be liquid in a reasonable timeframe are good.<p>If and when that belief starts to fade, however, equity can become a significant source of low morale and employee attrition.