Introducing Progressive Equity – Increase employee ownership as company grows

Here is an example I made to help me understand it.<p>Say SuperAwesomeStartup had a system like this, and the threshold was an ungodly high amount of 50 million dollars. The company IPOs and is worth 100 billion dollars.<p>Founder X owns 10%, Founder Y owns 8%, Founder Z owns 6%, Early Employee A owns 1%, Early Employee B owns 0.5%, Early Employee C owns 0.25%<p>And there are 5,000 employees of the company<p><pre><code> Before After Founder X 10B 5.02B Founder Y 8B 4.02B Founder Z 6B 3.02B Early Employee A 1B 525M Early Employee B 500M 275M Early Employee C 250M 150M Amount Distributed to each employee: 12.72B &#x2F; 5,000 = 2.5 million each on avg </code></pre> That is awesome. Though obviously very very few companies ever become worth 100B, it is a great example of how spreading the wealth from the founders makes little impact to them and a massive impact to everybody else.

This is really interesting, and I always like rethinking of equity distribution--since it&#x27;s so lopsided currently.<p>Some questions off the top of my head<p>- Since employees leaving don&#x27;t receive from the kicker pool. Doesn&#x27;t this incentivize people who are unhappy and want to leave to stay? There are some benefits to this, but seem like a ton of costs too (and part of what Pinterest&#x27;s change was addressing)<p>- How is the kicker pool redistributed? Equally or along the lines of people&#x27;s current distributions of equity?<p>- Curious if you have opinion on where the threshold should be set? And if it eventually makes sense to do tiers of thresholds? Or if you think the simplicity makes it make sense not to.<p>But think this sounds like a great thing, and would love to hear updates on it as it develops.

That&#x27;s a great idea! You&#x27;re in kind of a unique situation, so I&#x27;m trying to figure out to what extent this idea can apply to your average startup.<p>What were the reasons the Groupon board opposed your original proposal to redistribute equity? This time around, what type of pushback did you get from your lawyers and investors?<p>Second, consider the &quot;median&quot; startup raising a series A or B--not necessarily a rocket ship with a lot of negotiating power, and not necessarily a famous founder. Do you think progressive equity would raise concerns from your typical series A&#x2F;B VC?

Wonderful to see this new idea.<p>But Andrew: instead of inventing this new model, why not achieve the redistribution by changing the percentages of the well-understood system. So instead of, say:<p><pre><code> 50% founder, 35% investors, 15% option pool (i.e., all employees combined) </code></pre> Something like:<p><pre><code> 20% founder, 35% investors, 45% option pool</code></pre>

Unique, glad this is being shared. I&#x27;ve always looked towards the Wealthfront Equity Plan of Early Evergreen Grants [1] as a good example. It is arguably more performance-oriented than this Progressive Equity. I really like the concept of giving everyone financial independence, but it must take the right combination of culture, investors, and valuation to make it more motivating than it is inhibiting.<p>Also, could the redistribution of equity at the time of sale have more cost in tax obligations than earlier redistribution?<p>While I really appreciate the legal docs, the truth is in a longer description that remains easily comprehensible. I think the main barrier to most of these alternative equity structures is a lack of understanding from all parties.<p>[1] <a href="https:&#x2F;&#x2F;blog.wealthfront.com&#x2F;the-right-way-to-grant-equity-to-your-employees&#x2F;" rel="nofollow">https:&#x2F;&#x2F;blog.wealthfront.com&#x2F;the-right-way-to-grant-equity-t...</a>

I like that I can actually understand this program and don&#x27;t feel like it was carefully designed to rip me off.<p>Unlike the usual jungle of capped&#x2F;uncapped notes, dilution, vesting schedules, option pools, pre&#x2F;post valuation, etc...

If anyone has questions about how this works, let me know!

It&#x27;s dynamic range compression for equity!<p>Audio compressors have features such as &quot;soft knee,&quot; which gradually eases into compression over the threshold. Easing into the threshold might be a beneficial complication to the idea of Progressive Equity.

I don&#x27;t know if the mechanics work out (designing legal structures like this is super-tricky), but the idea is wonderful. Do you think it&#x27;s possible to implement this in an existing (post-series A but pre-unicorn) company, or does it have to happen before the company takes on significant funding?

Perhaps it&#x27;s a bit evil for me to suggest this, but I have the feeling that distributing that much wealth to so many employees in these super exits that they might not be inclined to work any longer.<p>If I were a 4th level worker at your company implementing some important but invisible part of the core product, and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting. Who wants to be a middle class salaryman in (pretty shitty) San Francisco when they could be a comfortable upper class person in almost everywhere else in the world?<p>Imagine running Facebook, and 50% of your 3200 employees suddenly earns $2M (for perhaps 2 years of work). How will your company suffer if even 10% of those immediately quit their jobs?<p>That looks like a possible catastrophe to me. A simple solution would be to make the kicker pool a bonus pool that just pays out the due amount linearly over 5 years. No one will be thinking of leaving if they&#x27;re going to be paid a bonus that&#x27;s 3 times their salary for the next 5 years.

This is very cool. One thing I&#x27;ve also wondered about is letting talent adjust compensation on floating scale between $$$ and equity... also, as in &quot;earn-in&quot;! I thought this could be an great way to attract high-impact team members.<p>It&#x27;s tough sell to leave a high-paying stable job for a risky lower paying job... but what if you could adjust your salary and &quot;earn-in&quot; more equity... It could lower the burn and align interests better. Thoughts?<p>Also, can I get paid in Megadonks ?

Andrew isn&#x27;t comfortable posting Detour&#x27;s threshold, and i respect that, but for anyone actually thinking about using this in another company, a threshold must be chosen -- so what are other people&#x27;s thoughts on what a good threshold might be?<p>I&#x27;ll start with an estimate. i think i saw a retirement savings calculator somewhere suggest that one should try to save ~$2 million by retirement per person(!) (sounds a little high to me at first but i guess that&#x27;s only $75k&#x2F;yr for 26 years of retirement, assuming you dont make any money on investments). So if one wants to provide for themselves and a spouse, that&#x27;s $4 million. Moderately fancy homes in very expensive areas can be around $5 million. So $10 million would provide for two people and a nice house in an expensive area (we havent accounted for children yet but somehow i bet you could get by on $10 million, after all, most people do). We havent yet accounted for taxes (income taxes on the initial payment (~50% including federal and state?), and also ongoing property tax on the house), so lets say $25 million, which is the threshold used by <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=9337915" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=9337915</a> . This sounds like a lot but my sense is that for the threshold number youd rather overshoot than undershoot, and some people may have more expensive tastes than others; in fact it may even be too low.<p>$25 million is not that far off from the $50 million threshold used by <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=9337837" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=9337837</a> .<p>So, what do others (not Andrew) think; would $25 million or so be a good threshold to use if one were actually doing this?

What about eliminating all of the risks that employee stock holders own:<p><pre><code> Dilution Liquidation preference Change of control </code></pre> Investors get terms to protect them from these scenarios, but employee stockholders do not.<p>If your market salary is x and startup wants you to work for x-y cash + z equity&#x2F;options&#x2F;rsu, then there should be multiple scenarios in the contract when z shares will deliver you y * time worked in cash.<p>The thing that is so messed up is that in an actual liquidation event employee salary payable is the most senior level in the capital structure. If you are getting people to trade part of their salary for funny money it&#x27;s better to have more scenarios where they are made whole than more scenarios where they hit the jackpot.

If this doubles the chance of a unicorn, then everyone involved comes out ahead. Nice system

I worked for a company a few years back that followed a similar idea. We had a bottom line for operating costs (salary, benefits, rent, utilities, other general expenses) plus a flat 25% being invested back into the company. Everything else left over at the end of the month was distributed to the employees based on their roles. It took a while to iron out. At first we had issues as the money was rolled out as a quarterly bonus, which caused a lot of tax to be taken off the top. It changed a lot over the first year, and ended up being abandoned in favor of giving consistent raises.

Has anyone read the book Slicing Pie? What do you think of the scheme presented there, with the &quot;Grunt fund&quot;?

This is great, though one key practical challenge: in most cases only founders will really be &quot;taxed&quot; in a meaningful way, so it requires that founders want to and decide to do something that loses them some serious $$ (as noted in answer to the second FAQ).<p>While I believe the additional upside presented to employees will have a positive impact re: incentive alignment and motivation, it is TBD if the gains realized by the founders will exceed the cost to the founders - I think that will be required before massive adoption (probably the biggest challenge here is measurement of that impact).<p>Still, hopefully some just-plain-nice founders do this, and I hope it gets them a great team and great success.<p>Even without mass adoption, it would be awesome to see this get adopted by other companies who (like Detour) were started by already-exited founders who are on a second (or third&#x2F;fourth&#x2F;fifth) project - there are actually a lot of them, so hopefully enough are gracious enough to experiment with this AND achieve success so that there is a sound basis for adopting this more widely (of course the trade-off might not be in the progressive equity’s favor – and while I’m making caveats, serial entrepreneurs generally do better than the first time entrepreneur for a bunch of other reasons like experience&#x2F;connections, so it will be hard to determine&#x2F;quantify what portion of success can be attributed to progressive equity and not to other factors…still hope they give it a shot anyhow).

I like the innovation here. If it catches on it will be interesting to see how the market values a company where a far larger slice of the employees are going to be financially independent. This arrangement doesn&#x27;t really seem to be in the shareholders&#x27; interest.

&quot;This definitely happened at Groupon - and by the time it was happening, it was too late to fix.&quot;<p>When is it &quot;too late&quot; to set this up? Does it have to be set up around the time initial shares are allocated (a&#x2F;k&#x2F;a company incorporation)?

I wonder how the tax consequences work with this.

This formula is a way to unwind an unfair equity split. It is common for founders to take a disproportionate chunk of equity at the outset of the venture even though they may not really deserve it.<p>The Slicing Pie model ensures that each person on the team has exactly what they deserve to have. This would avoid unfair splits at the end that would need to be readjusted.<p>Here is an article about how it works: <a href="http:&#x2F;&#x2F;www.slicingpie.com&#x2F;how-to-use-a-dynamic-equity-split-program-so-everyone-gets-what-they-deserve&#x2F;" rel="nofollow">http:&#x2F;&#x2F;www.slicingpie.com&#x2F;how-to-use-a-dynamic-equity-split-...</a>

How do you think this idea would combine with the Pinterest 7 year stock option idea? Both seem like good ideas that benefit the employees.<p>I assume that the Progressive equity would only be applicable to current employees of the startup.

This looks like Mike Moyer&#x27;s Slicing Pie<p><a href="http:&#x2F;&#x2F;www.slicingpie.com&#x2F;" rel="nofollow">http:&#x2F;&#x2F;www.slicingpie.com&#x2F;</a><p>He might not be as successful in promoting it but it is trying to solve same issue.

I think this is a very important cultural step to do. We believe that the first people to do something should be valued the highest. But taking out all the other people who come afterwards they also might not have succeeded. Therefore it&#x27;s really an open argument who should be valued how much for his participation.<p>I also really like the idea of that, even as Founder number 1. Having a healthy, fair and equal relationship to many capable people might also be worth more to founders than another million bucks.

One better solution would be to use something similar to the UK concept of the EBT (employe benefit trust) and gift your shares to the employees collectively.<p>This is used by Coops to handle the owners shares in a tax efficient way (cooperators in the jargon).<p>You might want to look how coops are structured in the USA before trying to invent your own scheme

Plans like this sound cool, but I think it would be helpful to make a visualization so people could see how the payouts change for different exits, thresholds and % redistributed. Visualizations are an easy way to reduce uncertainty so people understand what they&#x27;re buying into.

I really want to believe in this idea and I really wish human nature and greed weren&#x27;t relevant to this discussion...but this is one of those ideas (like communism) that looks great on paper but are destructive in action.<p>Just watch the final table of the world series of poker and you&#x27;ll see what I mean. The guy who comes in second place or for that matter ninth place becomes a millionaire, yet he feels crushed and robbed by the few ahead of him.<p>People are generally terrible at being happy with what they have and the age old maxim is still true that he who gets $100 wants $200.<p>All these folks being taxed...even if they agreed initially will feel robbed by the recipients and resent them, and who knows how messy it might get. People are weird when it comes to their money.This will especially rear it&#x27;s ugly head when peoples shares on paper cross their financial freedom number on paper prior to a liquidity event. (I.e. by each round of financing and a valuation is set.)

This is essentially a way for founders to sell new employees a fraction of their lottery ticket, aka a risk transfer, aka insurance. It would be easier to assess this plan with traditional economics tools if it were stated in those terms.

Okay this is a really cool concept. I&#x27;m going to read over the paperwork to make sure I understand this but if it&#x27;s what I think it is I love it and will totally use it when I start my startup. Thanks!

What about people who joined early vs those who just joined?

Wouldn&#x27;t this have the effect of changing the risk&#x2F;return balance? For those joining your company early on, the risk would remain the same, but the return would fall sharply (by ~50%), while for those joining late in the game, the risk would remain the same, but the returns would increase a lot.<p>If everything else remains the same, people would be less willing to take risks and join early stage companies, instead trying to join near-IPO ones, where you can get a disproportional payout from minimum risk.<p>To maintain the same risk&#x2F;return profile, you&#x27;d need to pay much higher fixed salaries to early employees and lower to late employees, which would probably drive the startup bankrupt on the early stage page.