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Introducing Progressive Equity – Increase employee ownership as company grows

blog.detour.com

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Re: Introducing Progressive Equity – Increase employee ownership as company grows

#51

Post by cyrusradfar »

birken wrote: post #46

Here is an example I made to help me understand it. 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. 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% And there are 5,000 employees of the company Before After Fou…

Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real

http://kapuno.com/conversation/bblc6nqbe6qte

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#52

Post by andrew »

doublerebel wrote: post #48

Unique, glad this is being shared. I'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. Also, could the…

In principle, I love the idea of weighting the distribution of an employee equity pool away from up-front grants and toward follow-on grants. It solves what I think is an even bigger challenge of equity grants, which is that someone's financial outcome is largely dependent on a guess you make about their impact before they've even worked a day.

In practice though, I think it's hard for a lot of companies, because unless you're planning on having a larger % of the company in the employee equity pool in the long-term, you're basically robbing from the size of the up-front grants to feed the follow-on grants. So when you give your employee his or her offer letter, you'll say, "I know this is less than what you're getting at other companies, but if you perform better than 50% of the employees here, you'll end up getting more than what you'd get from other companies." A lot of employees are just going to go for the sure thing, making recruiting harder.

At Detour we do give big follow-on grants, but we can do that because our employee option pool is like 45% or something, which we can only do because I'm funding the company, so it's not really a replicable model (while progressive equity is, I think).

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#53

Post by largote »

ucaetano wrote: post #17

Wouldn't this have the effect of changing the risk/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. If everything else remains the same, people would be less willing to take risks and join early stage companies, instead try…

Definitely agree, one way to balance this would be to have each person be counted for each day/week they have worked there, so If I've been around for 2 years before the IPO I'd have 104 weeks that would get distributed to, whereas someone who joined a month before the IPO only has 4.

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#54

Post by [deleted] »

ucaetano wrote: post #49
andrew wrote: post #38

Earlier quoted context omitted.

I recommend setting the financial independence threshold high enough that normal people will feel like anything beyond it is useless anyway. So there's no real downside unless you have your heart set on spawning a couple of Foxcatchers. And there's tons of upside.

And how much would that be? $100M? Which would generate a few M USD per year of disposable income?

[deleted]

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#55

Post by baddox »

andrew wrote: post #38
ucaetano wrote: post #17

Wouldn't this have the effect of changing the risk/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. If everything else remains the same, people would be less willing to take risks and join early stage companies, instead try…

I recommend setting the financial independence threshold high enough that normal people will feel like anything beyond it is useless anyway. So there's no real downside unless you have your heart set on spawning a couple of Foxcatchers. And there's tons of upside.

It's not just that the reward for joining early is smaller than it used to be. It's also smaller compared to joining later. The marginal utility of money is actually what's causing the problem. If I can join a company late with very little risk and a much higher chance to make a few million, I'm probably much less incentivized to join a company early with the risks associated with that.

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#56

Post by mattj »

cyrusradfar wrote: post #51
birken wrote: post #46

Here is an example I made to help me understand it. 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. 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% And there are 5,000 employees of the company Before After Fou…

Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real http://kapuno.com/conversation/bblc6nqbe6qte

heads up, your math is a little buggy - 1% of $90b is $900m, not $90m

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#57

Post by cyrusradfar »

mattj wrote: post #56
cyrusradfar wrote: post #51

Earlier quoted context omitted.

Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real http://kapuno.com/conversation/bblc6nqbe6qte

heads up, your math is a little buggy - 1% of $90b is $900m, not $90m

FRACK! Fixing, now. Thanks :)

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#58

Post by tinco »

Perhaps it'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.

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?

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?

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're going to be paid a bonus that's 3 times their salary for the next 5 years.

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#59

Post by yid »

tinco wrote: post #58

Perhaps it'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. 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…

> If I were a 4th level worker at your company...and suddenly the kicker pool rewards me with a couple of million, I might seriously consider quitting.

This is precisely why equity vests over time instead of being awarded as a one-time event, and generally why the best employees are given regular equity refreshers.

You could quit when you hit that $1m mark, but on the other hand, if you stay for another N years, you might make even more. That's the thinking they're trying out here.

If you're really worthwhile to the company, your progressive equity refreshers might even be superlinear -- so you stand to make significantly more than what you've already made as an incentive to stay.

Re: Introducing Progressive Equity – Increase employee ownership as company grows

#60

Post by cespare »

cyrusradfar wrote: post #51
birken wrote: post #46

Here is an example I made to help me understand it. 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. 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% And there are 5,000 employees of the company Before After Fou…

Ah, great minds think alike. We were doing the same thing at the same time. I backtested the process against Facebook's IPO so it could feel a bit more real http://kapuno.com/conversation/bblc6nqbe6qte

Besides some math errors (I checked D'angelo's number and got about $348M "tax", not $23M; Zuckerberg's checked out though) -- I don't understand this:

"Although the model may seem fair on the onset, it can be criticized the same way we criticize a flat tax. Those at the threshold are "punished" the most."

It seems to me that because it's a "progressive" tax this criticism doesn't apply.

Edit: math checks out now, I think

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