This strikes me as idealist and disconnected from reality. This is how some engineers think they should be paid without ever seeing the other side.
- the first year has a lot more risk than future years
- often, you pay yourself less when starting out
- raising money is hard
- finding your first customers is hard
- building from zero with no paying customers is much harder than adding features or reimplementing
- quitting your job is hard
I’m not saying that maybe early employees might deserve more equity, but to suggest that contributions in year 2 of a startup are somehow equal to those of the first year is laughable to me. Maybe strictly from coding contributions, but there’s office space, culture, vision, etc. If it was that easy, that person joining would have started their own.
I don’t know how others have done this; but when I’ve been involved in the past we have set aside a percentage of ownership to be distributed over the first few years of operation.
A fixed amount is distributed every year, split between team members more or less evenly. This means that the 1 or 2 folks who join early get a big chunk of equity, and everyone else gets less while the early employees continue to accrue shares. The benefit of a system like this is that it allows you to be transparent.
This is outside of executive hires, where equity is used for a different purpose (namely aligning the financial success of the company with the financial success of the individual).
All that said, I don’t believe startup equity is valued by tech workers older than 25. We’ve all been burned enough to have looked up the stats and realize that upwards of 75% of startups will never experience a liquidity event, and for those that do a multi-million dollar exit is a lot like winning the lottery — with similar odds. Most folks just end up with a bunch of out of the money options or some penny stock that’s not worth the trouble of selling.
Also not taking a salary should be rewarded much more because you are not just not getting paid you are actively going into the negative / red personally
This comment strikes me as idealistic and disconnected from reality. It idealizes the mythos of risk/reward/effort for founders while minimizing the risk and effort of later employees. Founders work very hard, but I know people at Apple who work harder. Founders take financial risks, but I know people who've taken pay-cuts an order of magnitude larger than bootstrap costs to get 1% of a company that ultimately failed.
The reality is that there are no objective, consistent metrics which map risk to equity or effort to equity, all we have is cultural norms, pretending otherwise is a self-serving narrative.
I've never held public office, yet I'm perfectly justified in complaining about politicians. I've never played football, yet I'm perfectly justified in yelling at my team's players on the tv. What's the point of your argument?
I believe alternative forms of ownership aren't discussed nearly enough. As we see more wealth become concentrated in the hands of fewer people, and with new companies being one of the sources of wealth creation, we need to re-evaluate our current system of corporate ownership and ask if it is really what's best for society.
I'm not necessarily sure if this is the best way of doing it or not, but I appreciate the viewpoint. I've thought about how best to manage company ownership in a worker owned cooperative, but I haven't settled on a personal answer.
> we need to re-evaluate our current system of corporate ownership and ask if it is really what's best for society
You phrase this as if it's an either/or. Correct me if I'm wrong, but you, or any other owner, are currently perfectly free to experiment with other ownership models in your own company.
I have occasionally thought that for worker cooperatives, equity that decays over time might be interesting. That is, shares are still liquid and can be held by non-workers and former workers, but they gradually expire. New shares would only be issued to current workers; one could set this rate and the decay rate to get a desired result. No idea if this has been tried or not.
I don't know whether it's legally possible to decay equity. Equity is seen as property, so once it's granted you can't just revoke it. You can expire or revoke options, but options themselves don't grant any right other than buying or selling the underlying asset. You could do something like a maturing bond, where it grants payout rights, but that doesn't give equity. You can just plan on a constant level of dilution, ala Bitcoin, but that doesn't ever actually remove previous ownership.
I am concerned we are missing the forest for the trees when we worry about ownership. The issue of wealth concentration is caused by a lack of competition in the market - what we need is less focus on billionaires and more on trust busting. In a market with strong competition you don't get billionaires.
It's always more profitable to rent out means of production than to do any actual work. (capital gains cannot be explained purely as the reward for the work of managing said capital, this was was pointed out by Adam Smith). Fairer distribution of ownership means fairer distribution of income.
Not in a market with perfect competition. While we will never get to perfect competition, even moderately competitive markets avoid most of the problems of rent seeking and monopoly abuse.
We seem to have forgotten the lessons of the 19th C. and the abuses of Standard Oil and the rest of the robber barons.
I'm sorry, but it reminds me of a joke about a physicist tasked to optimize a dairy - "for a perfectly spherical cow in frictionless vacuum..."
>While we will never get to perfect competition, even moderately competitive markets avoid most of the problems of rent seeking and monopoly abuse.
Well, at the core of capitalism lies a positive feedback loop that allows people with a lot of capital to more freely invest long term than those with less capital, and forces people who barely get by to accept worse deals in order to survive. As I see it, the more people own capital, the more likely an average person is to be on both sides of asshole deals, which is slightly better. Unlike fixing competition by legislation, it doesn't put so much power in the hands of people who get to decide where "honest competition" ends and "underhanded tactics" begin (for example where just being better than competition and protecting your trade secrets ends, and vendor lock-in begins).
I'm aware that it's also a "spherical cow" solution and I'm not sure if that would actually fly in real life (coops seem to pop up here and there from time to time, and none has revolutionized the world) and perhaps your solution is more robust in that it targets the market forces that shape companies, instead of trying to build something against them. I guess that if I ever get around to trying my wet dream of staring a tech coop, I'll be sure to post it here.
Certainly interesting to think about new forms of ownership, but there's some issues with this idea.
- You have to have Coase in there somehow. When is a new line of work a new entity? Seems to be something to do with internalizing costs, the friction of negotiating externally, and as part of that the difficulty of valuation.
- Say I'm a pro athlete. I hire a physio and a permanent PR rep to handle my social media. Now I'm in minority? Valuation has to come into it somewhere.
The problem fundamentally is how to pay people what they're worth, which in itself is a nebulous thing. Tying to some specific measure like time spent might be very wrong across different fields. The current "solution" which I'll grant is not entirely satisfying is that everyone just negotiates. If there's an amazing manager he talks everyone else into giving him a large slice of the pie. If there's a recent grad he gets a little bit, but gets his foot in the door.
Such an ownership model is certainly not suitable for the examples you bring up. One simple modification that might work for the pro athlete case is that the athlete always owns 70% of the company, and the rest of the team get ownership based on time spent. Or you could even allocate percentage ownerships to each division of the company. The PR team gets 15% divided amongst themselves based on time spent, the health team gets 10% etc, where the percentages are based on some notion of the value generation by each team.
The proposed model, I think is best of large companies with lots of workers - say a factory, where most people bring in roughly equal amounts of value. The high value people could negotiate earning ownership at 5x or 10x the base rate, for example.
The big point is that there is a massive space of possible ownership models and exploring them is a very interesting exercise. In fact, experimenting with such models is an excellent way of exploring and understanding how much value different people in a company bring and what they are worth.
> As America gets closer to full employment, workers are suddenly finding themself with the most power they’ve had in decades.
This... does not comport with the available evidence. Workers in the US right now do not have a lot of power relative to the height of US unions. And saying the US is near "full employment" is a parlor trick of how you define who is and who isn't in the labor force, which is why we can have stagnant wages while being near "full employment" for some time now.
There was just a Planet Money podcast episode (#917 'Quit Threat') that gives some evidence of the opposite. Namely, that the status of near-full employment is giving unions more power, to the point of renegotiating two-tier contracts before the contract ends. It's not absolute across all unions but does seem to indicate more employee power as unemployment numbers decrease, even after acknowledging your point that there isn't an exact definition for "full employment"
This won't work very well in practice. You need to pay a new employee a market rate, and if equity is going to be a part of that, it depends more on the value of the company than the tenure of its employees.
You can very easily overpay or underpay new hires in equity if you adopt this system. It seems to make it more difficult to find the correct amount.
I don't think tenure based systems are excellent examples for growth, innovation, productivity or excellence when compared to more free market competitive merit oriented systems.
A firm could pay everyone the exact same salary, regardless of role or responsibility. But that doesn't quite work out in the real world with resource scarcity.
This approach treats time as the only factor in determining the fair distribution of equity.
Slicing pie has a much more realistic set of methods
based on the principle that a person's % share of the equity should always be equal to that person's share of the at-risk contributions.
The method has been road tested by dozens of startups and I'm in the midst of using it for a new startup and find it to be quite approachable.
If you are interested in some research behind optimizing cooperative systems, check out Shapley Value.
Shapley Value assigns a unique distribution (among the players) of a total surplus generated by the coalition of all players. The Shapley value is characterized by a collection of desirable properties
The author doesn't provide any reason why this should be done. I'm going to assume it's some sort of ideological and moral (under some ethical frameworks that are not widely used) justification.
The employee shortage that currently exists has not reached the point where people could make demands like this.
>Say you’re a solo founder. You’ve worked full-time on your company for a year (4 quarters). You hire your first full-time employee after 1 year (4 quarters). After their first 3 months (1 quarter), you own 83% (5 quarters / (5 quarters + 1 quarter)) of the company, and the employee owns 16% (1 quarter / (5 quarters + 1 quarter)).
This completely ignores risk. let's say I've launched a startup on my own and after 1 year of work I am now hiring employee number 1. Presumably if I'm hiring anyone I've found some product market fit. So why does employee number 1, who is presumably earning a salary (something that the founder was not doing) and is joining a startup that is somewhat proven, deserve an amount of equity proportional to the time they have spent in the company?
It also ignores the motivation for many to start their own business. The obvious one is to be rich, another is for control and independence. Why would someone seeking these things give up such a large amount of equity?
If you want 16% equity in a company that you have not founded on your own, you need to either have been part of the team from the start (when the idea was not proven, and thus have taken the same risk as the founders) or you need to bring something that is transformational for the company to the table (sales, management, connections, technical knowledge).
This is a disastrously stupid idea. How are you going to attract talent after a few years when inevitably the people who were willing to join a start-up early to treat it as an experiment / fun project have engineered you into catastrophe & you have to hire people who expect real compensation and provide professional quality work outputs?
The people who join a start-up early are rarely the people who make it successful, scalable or growable. In fact, the early people are often to blame for terrible decisions that could have been avoided by paying real compensation to people with greater skill.
Person A might work at a company for 1 year and meritocratically accomplish more than Person B who has been in the same job for 5 years. Person A’s contributions might immediately be vastly more vital to the company. This happens all the time.
This is all to say nothing of how tenure will become an issue of political favorites, luck of the draw regarding layoffs or project assignments, etc.
in theory this works but there's a flaw: hours worked. How many hours worked isn't the same as much value someone has added to the company or how much work they've actually done.
In addition sometimes value added to the company isn't realized until months later. And sometimes hard work doesn't add any value to the company.
I understand the idea, but how does salary play into this? A founder providing all the money, paying a market salary is supposed to also give his first employee 16% of the company after 3 months?
Also, timing matters. Getting the company off the ground is much more risky and much more demanding than joining when it's smooth sailing.
> With that, how can we distribute ownership of a company to the many, instead of the few? How can we cement worker power and ownership for decades to come?
Having read some of the comments here; I can guess a lot of the objections and honestly the answer to most of them is going to be "Yes, that's the point". It's a totally different model. It's not for everyone and that's fine.
But they come with many advantages (disadvantages too, to be honest, but doesn't everything?). Do google it and spend some time reading up on it if your interested in this question.
> "Yes, that's the point". It's a totally different model. It's not for everyone and that's fine.
"that's the point", what's the point? I don't see why anyone starting their own business that is not firmly entrenched in whatever ideology the author has would ever consider implementing this.
Not only is it damaging to the business (what venture capitalist would ever invest in a business operating under such a model?), it's also directly damaging to the founder who after 4 or so years wont even be in control of the company they've dedicated so much to found.
When a founder decides to abandon their office job what they really desire is to work at a business that is run by a committee of employees and power in that committee isn't determined by merit and skill but by TENURE. /s
> "that is not firmly entrenched in whatever ideology the author has"
But then you strongly talk about a startup, looking for V.C. funding with strong founder ethos. That's also an ideology. And if you want to do that, go ahead - this clearly isn't for you.
But a lot of people don't want to do that. And that's why workers co-ops were started in 1844 and have been going strong since - granted, a small fraction of the market - but a successful small fraction that has survived and is clearly not going away.
I'd just suggest people read up on them before dismissing this. And sure, I get that the majority of HN readers probably are going to decide this is not for them. But other people do like them, and have made a success of them, so if your interested at all in the original question, do check them out.
> But then you strongly talk about a startup, looking for V.C. funding with strong founder ethos. That's also an ideology.
Wanting to raise money is an ideology? It's better to describe it as a practical way of expanding a business.
> But a lot of people don't want to do that. And that's why workers co-ops were started in 1844 and have been going strong since
I just looked it up and there are an estimated 400 coops in the US with around 7000 employees total. This does not qualify as a lot. Almost nobody with the desire to create and run a business wants to run a business this way.
Also you missed the most important criticism, which is why is tenure of all things being used to decide who gets how much equity?
it most certainly is. with all the startups i was involved in the decision whether to raise money from VC or to bootstrap ourselves in other ways always came down to the believes of the founders. practical considerations hardly ever mattered.
I wonder if this could be more easily adopted by Silicon Valley style startups if this ownership was of what would normally be the employee option pool rather than the whole company.
That way you'd still be compatible with venture capital, quarantine the hours worked dilution to the pool and you can treat founders differently to employees if you want by having founders shares outside the option pool.
This is definitely a problem worth more innovations. But it should be kept in mind that the core idea of coming up with such a model is literally to design a contract. By recognizing that, it becomes evident that the contract must benefit, and be voluntarily acceptable, by both counterparties.
In finance, we already have a lot of innovations, thanks to the significant reduction of the transaction/contract-enforcement costs. I guess that is why it has not happened in other fields like employment contracts or partnership agreements. The designing and enforcement costs of any innovative contracts are just too high (considering you have to hire a layer to confirm all those changes and when you have to sue someone for violations).
Ownership is more about control that sharing the profits. So after a few years the staff can fire the founder? nice. We must be getting to the top of this bubble.
One option would be to set up a trust, backed by a lending bank, that would purchase an amount of the company for the purpose of eventually selling the stake to the workers. This is how most companies transition towards worker ownership with ESOPs.
I’m not saying that maybe early employees might deserve more equity, but to suggest that contributions in year 2 of a startup are somehow equal to those of the first year is laughable to me. Maybe strictly from coding contributions, but there’s office space, culture, vision, etc. If it was that easy, that person joining would have started their own.