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0 pointsMalcolmDiggs11y ago0 comments

As much as I appreciate being called a "financial moron", I think you may have missed the point of my comment. The whole point, in regards to OP's question, is that equity is SUPPOSED to motivate a team to get to Facebook levels.

If you took 10m of funding and exited for 100m your VCs will NOT be happy, they need you to hit it out of the park to balance out all the losers in their portfolio. Similarly, your engineers who are taking less-than-competitive wages should not be happy, your founders should not be happy. Everybody's interests should be aligned, and focused on getting spectacular returns, not simply good ones.

We're saying the same thing. It's either worth a TON of money, in very very rare cases, or it's really not worth considering as part of your compensation package. Getting even a 6-figure cashout after taking a 5-figure paycut for 10 years isn't necessarily even a break-even for you. You might have LOST money on that deal. As such, the equity is NOT there (and shouldn't be interpreted) as a cash-like form of compensation. It is not that. It is motivation for you to get the company to Facebook status. That's all it is. So, back to OP's question: why give so little? Because if the company gave you more, you would be tempted to build a 100m company, and that's just not gonna cut it. Instead, many companies would rather motivate a larger group of people to want it to be a Facebook-level enterprise someday.

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5 comments · 3 top-level

nhayden11y ago· 2 in thread

It sounds like the point of the equity isn't compensation - the point is to align the employees to the same goals as the VC.

MalcolmDiggsOP11y ago

I would say that's exactly right. Unfortunately, it's almost always framed as compensation. Which I think is ridiculous...since you have such a low chance of getting value out of it at all.

nhayden11y ago

Thanks for your response, it's very helpful and answers this question I've never understood.

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jnbiche11y ago

> We're saying the same thing.

No, we're not. You're saying that there's little difference between 0.1% and 1% equity, since a big exit is a low probability event.

I'm saying there is a big difference between 0.1% and 1% equity, precisely because a big exit is a low probability event. One (0.1%) is almost always meaningless, the other (1%) can be meaningful in several different scenarios.

However, if you want to emphasize the motivation part of the arrangement, founders need to realize that offering an early engineer 0.1% or (God forbid!) 0.05% will have exactly the opposite effect that what they intend. The engineer will see people doing much less than s/he is to grow the company given 5% or 10%, and s/he will feel resentful and underperform. If you're a founder and you're giggling because you've hired this pretty good engineer for a low salary and only gave up 0.05% equity, then you're giggling at yourself, because your engineer hire will work resentfully for a few months and then run and grab the first reasonable job offer that presents itself, right at your most critical hour.

So founders need to either award their first engineer or two a reasonable amount of equity, or just forget the whole thing. But realize that if you chose that route, you'll obviously need to offer a market salary to recruit even remotely-qualified candidates.

brudgers11y ago

Equity allocation is not about the VC's interests to a first approximation in the same way that getting VC funding is not a marker of success for a company, just a milestone. A founder's double digit percent of a $80 million exit is a good exit. And if each of four founders gets 18% or each gets 14% because there was an additional 16% allocated to equity for hiring doesn't change that qualitatively.

When a company is structured and run primarily for the interests of VC, shared interests have already flown the coop and it's about picking through the bones hoping for some meat.

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