On Equity

David Choe made buck by painting murals for Facebook in exchange for shares. Charlie Ayers had a similar lucky break when he worked as a chef at Google. These examples create false expectations from share pools.

The game mechanics of the share pool are very clear.

The employee commits to a few years of service (kinda like Davy Jone's Flying Dutchmen, but with consent). The company gets the employee's loyalty until they vest. If they do, they gradually receive a few shares.

This equation is more likely to tip against the employee: The employer gets their upside upfront and 100% of the time while the employee plays a lottery where they might see their upside in 10 years.

For employees, said upside is not even what it's made out to be.

If you have 1% of a company (which is around what a typical early hire might receive), and it sells for a billy, your 1% is worth 10M. That's great. That's Lambo money. If the company sells for $20B like Figma, now you can afford a condo in Lisbon 🍉

But it doesn't work like that.

Every funding round gets you diluted by 20-25%. So you're lucky to have a third of your equity by the time you exit. In practice, a fifth is more likely. Now you're driving your Lambo very slowly.

Tax authorities get a hefty cut as soon as you exit (If you don't plan it right).

Simple, flat-rate, state-sponsored grand theft 😘. Now you're back at the BMW dealership like the rest of us.

Petty calculations aside, the key insight is that companies that sell for large sums usually employ people who already command the highest echelons of the pay scale. For those people, these numbers aren't much.

In simple terms, companies that pay a senior engineer $70k don't sell for a billy. Unicorns pay their leaders (the people who are likely to hold significant stock) ludicrous salaries. So when those employees exit, their cash prize is only a low multiple of their current income, a far cry from the image we're sold.

Thus, for an employee, this only works if they get something very close to their fair market value with the added bonus of some equity. But in practice, many founders push for the discount:

"We can't pay that much but we'll give you 0.25% equity". In my opinion, that's a bad deal, perhaps even unethical because there's an element of deception at play.

Share pools motivate people. But a better approach for startups in my opinion is to look for self-motivated people, the real creatives, the tinkerers, the makers.

Finding these hidden gems and nurturing them is a primary function of a founder in my opinion.

Startups are great because they are full of energetic creatives who like to make 8hit around other energetic creatives. That's enough motivation for many of us. Sharing equity with employees should come from a place of fairness. It shouldn't be dangled like a small, unlikely carrot.

You can make a great living working at a startup. But the only way to make serious dough is to strap on a pair and found one.