How Wizards of the Coast distributed equity as a startup • Hacker News Board

Re: How Wizards of the Coast distributed equity as a startup

#101

Post by STRML » Thu, Oct 23, 2014, 6:51 AM UTC

aetherson wrote: post #55

ryanburk wrote: post #27

Earlier quoted context omitted.

> You should be completely mistrustful of anyone who offers you shares and doesn't tell you the # of shares outstanding. this is an amazingly important point that many people I've seen new to the startup world ignore to their peril. it is too easy to get big eyes when you hear you are getting 50,000 options not realizing that it is only 0.000001% of the company since you don't know # of shares outstanding, across all…

It's maddening, too, because nobody ever just tells you the actual shares. EVERYONE says, "You'll get 50,000 options!" My answer is always, "Okay, and what percentage of the company is that?" and the answer is always, "Um... I'd have to go look it up." Just once, I'd like someone to provide that information for me proactively. It would instantly increase my estimate of their integrity by 150%.

I don't understand how one could not know what percentage of the company that is. It seems wholly irresponsible not to; both from the perspective of the potential employee (who may get too little) and from the perspective of the employer (who may give away too much).

Re: How Wizards of the Coast distributed equity as a startup

#102

Post by baddox » Thu, Oct 23, 2014, 6:54 AM UTC

Qworg wrote: post #70

tptacek wrote: post #65

Earlier quoted context omitted.

How else would you model companies and their staffing?

For new startups? A cult (of personality or of the religious persuasion)? A warparty? A pirate crew? All are good options.

Do you actually have a model for cults, warparties, or pirate crews? The reason the phrase "model a startup as a market" even makes sense is that reasonably well-accepted and well-defined models do exist for markets.

Re: How Wizards of the Coast distributed equity as a startup

#103

Post by jldugger » Thu, Oct 23, 2014, 7:58 AM UTC

NewHermes wrote: post #62

alexose wrote: post #38

The next generation of startups is going to have to address some employee equity problems, I think. This notion that early hires are going to share a small piece of the 10% employee pool needs to stop. Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute i…

Completely agreed. I recently applied to YCombinator and one of the questions asks how you plan on sharing equity. Here was my response: Everything I have seen, read, watched and smelled has made it clear that it is much better to be over generous with equity than to be stingy. With that in mind I plan on following the Sam Altman model as follows: Founder(s): 10% First 10 employees: 10% Next 20 employees: 5% Next 50…

> Besides, what can the gal who owns 10% of Google do that the guy who owns 1% can't?

Vote herself President of the Board.

Re: How Wizards of the Coast distributed equity as a startup

#104

Post by sqrt17 » Thu, Oct 23, 2014, 8:11 AM UTC

uiri wrote: post #56

tehwebguy wrote: post #20

Earlier quoted context omitted.

And there was no vesting

I'm not sure that that's really true. Investors don't vest because they put in capital which is immediately available. Similarly, those contributing capital (either in the form of supplies (e.g. a drafting table) or cash) should get their shares right away. Those who are accepting equity for labour should vest because otherwise they may walk away before all of the promised labour materializes. I think that those who…

Which begs the question, why would you deliberately build a cliff into the vesting process? Why not say, 20000$/yr (or whatever arbitrary amount) at then-current valuation?

As for institutional investment, this would create incentives for the founders (or other equity holders) to exaggerate the valuation of the company. On a different note, this kind of vesting would mean more equity for people who worked for the company while it was growing slowly (and who took on more risks - that's why you give them equity and not hard cash) before seeing exponential growth, and no equity growth for people who joined after the company had reached a stable state.

The next point is, what's whith people who want to disinvest from their position? This is both the case for investors after a company has reached a certain size (e.g. Zappos before they were acquired by Amazon), but it will also be the case when people who get partly paid in equity want out of their position.

Vesting cliffs unilaterally benefit the current equity holders, because it creates a skewed incentive structure where you either should leave at the start or stick it out until the vesting cliff. (And, that's what it was with Microsoft in the 90s/2000s: many people stayed on exactly for the time it took for their equity to vest).

Re: How Wizards of the Coast distributed equity as a startup

#105

Post by shams93 » Thu, Oct 23, 2014, 8:19 AM UTC

mentat wrote: post #93

tptacek wrote: post #47

Earlier quoted context omitted.

Probably not, or that already would have happened. It hasn't. One problem is that a lot of people look at equity grants as a meritorious service award. But that's not at all what they are; they're compensation for risk. Developers look at risk compensation and say, "well, I undertook a lot of risk to work long hours for a lower wage". That's true, but the market prices that kind of risk, and the market cares a lot ab…

> That's true, but the market prices that kind of risk, and the market cares a lot about substitutes, and the typical developer taking basis points for their participation is eminently replaceable by other developers. If all you're hiring with your first employees are replaceable people, you're doing it wrong and will probably fail. Those people not only have to work long hours, they have to work them well. It's like…

With equity in the long run an engineering career looks a lot more like prison or slavery, you are taking all the risk and most often if there's a hiccup you have to live with not getting paid

Re: How Wizards of the Coast distributed equity as a startup

#106

Post by bmajz » Thu, Oct 23, 2014, 8:28 AM UTC

joshu wrote: post #36

benmathes wrote: post #7

"But most of the value in this company came from two things: Richard Garfield creating Magic: The Gathering, and the employees. Not investors. It’s only appropriate that the distribution from the sale reflects that." Hear hear. Investors say that founders and employees are what make startups. I wish the cap tables reflected that.

so how do you propose that change?

This. Having been on both sides of the table (early employee and later a founder), I still struggle with what the right distribution would and should be. There are just so many factors to consider (pivots, investors, acquirers, risk) that it seems unlikely that a simple formula or blanket rule will guide people right. Probably case-by-case basis and a realization that information asymmetry + control in early stage companies leads to a slight, but correctable, favoring of founders/investors' interests.

Re: How Wizards of the Coast distributed equity as a startup

#107

Post by mooreds » Thu, Oct 23, 2014, 8:44 AM UTC

stephencanon wrote: post #72

Qworg wrote: post #70

Earlier quoted context omitted.

For new startups? A cult (of personality or of the religious persuasion)? A warparty? A pirate crew? All are good options.

> A pirate crew? I. Every man has a vote in affairs of moment; has equal title to the fresh provisions, or strong liquors, at any time seized, and may use them at pleasure, ... IX. No man to talk of breaking up their way of living, till each had shared one thousand pounds. If in order to this, any man should lose a limb, or become a cripple in their service, he was to have eight hundred dollars, out of the public sto…

Nice! For others, this is from an actual pirate code: http://en.m.wikipedia.org/wiki/Pirate_code

Re: How Wizards of the Coast distributed equity as a startup

#108

Post by Ntrails » Thu, Oct 23, 2014, 10:00 AM UTC

klochner wrote: post #96

shalmanese wrote: post #95

Earlier quoted context omitted.

> Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? One thing that's never really brought up in these discussions because it's extremely poorly understood is that startup employees are the only ones given options (in the financial sense) and…

> options are always more valuable than the underlying asset How about this deal: for any publicly traded stock you're holding, I'll give you an option to buy an equivalent number of shares at current market price. If the price goes down, your option is worthless but I can still sell the underlying. If the price goes up, I can sell for market price, while you net [market-strike] I enjoy startups. They can be great le…

The difference is in the starting value. You might pay pounds for the underlying and pennies for the option. But no, 1 long option is never more valuable than 1 share.

Re: How Wizards of the Coast distributed equity as a startup

#109

Post by gibybo » Thu, Oct 23, 2014, 11:35 AM UTC

shalmanese wrote: post #95

alexose wrote: post #38

The next generation of startups is going to have to address some employee equity problems, I think. This notion that early hires are going to share a small piece of the 10% employee pool needs to stop. Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute i…

> Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? One thing that's never really brought up in these discussions because it's extremely poorly understood is that startup employees are the only ones given options (in the financial sense) and…

>options are always more valuable than the underlying asset with the degree of premium based on the volatility of the asset.

No, you have this backwards. Options are always LESS valuable than the underlying asset. The degree to which they are less valuable is inversely correlated to their volatility. The more volatile they are, the closer in value they are to their underlying asset.

I.e. a January 2015 call for Apple is currently trading at $4.36 per share. That means despite apple shares being worth $103 each, you can buy options for $4.36 each. If you want a longer term you can pay a bit more. A January 2017 call for Apple is $16.65, still more than 5 times cheaper than the actual share.

What employees get are more like options on the options. This secondary option multiplies the value of the option as you have described, but it also presents really awkward conflicts of interest where employees often end up with their shares reduced or being pushed out of the company altogether (see Skype or Zynga). Even still, it's not clear whether this multiplicative value of the option ever makes it worth more than the underlying stock. It could just make it similar.

Re: How Wizards of the Coast distributed equity as a startup

#110

Post by shalmanese » Thu, Oct 23, 2014, 12:02 PM UTC

gibybo wrote: post #109

shalmanese wrote: post #95

Earlier quoted context omitted.

> Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? One thing that's never really brought up in these discussions because it's extremely poorly understood is that startup employees are the only ones given options (in the financial sense) and…

>options are always more valuable than the underlying asset with the degree of premium based on the volatility of the asset. No, you have this backwards. Options are always LESS valuable than the underlying asset. The degree to which they are less valuable is inversely correlated to their volatility. The more volatile they are, the closer in value they are to their underlying asset. I.e. a January 2015 call for Apple…

I was curious if companies ever did fire employees to claw back vesting so I asked on Quora a couple of years ago: http://www.quora.com/Equity-Compensation/Do-immensely-succes... and apparently the answer is, outside of Skype and Zynga, the practice is rare.