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Introducing Progressive Equity – Increase employee ownership as company grows

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

#71

Post by ChuckMcM »

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

The whole discussion of money at this scale is ridiculous.

This is the dusty trap door. Just so you know, getting rich is "weird"[1] for a lot of people. You can see examples of it in lottery winners, movie stars, and tech employees.

Of course some folks tie their net worth to their self image. This is, in my experience, both common and a moral hazard. But that said, the more interesting thing is that people in a company have opinions about other people in the company, and during a 'liquidity' event (aka IPO or sale) there can be a lot of drama and angst around the internal metrics people are carrying around in their head and the monetary reward that gets paid out.

You need only imagine someone in your company, who you have a very low opinion of their contribution, become $FU rich while you see only a modest change in your personal net worth. I have seen that dynamic break people.

[1] And oddly getting 'un rich' as many did during the dot com explosion is less weird.

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

#72

Post by aceperry »

pacaro wrote: post #66
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…

A friend who worked at MS from the mid '90s when it was at least apocryphally common for employees to “call in rich” claims that this is a good thing. The assholes leave, the people that you want to work with stay. When the compensation model at MS shifted away from equity (because of an essentially flat share price) in the '00s, then it became correspondingly more valuable to game the promotion system, and so the as…

Sounds like not enough assholes left.

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

#73

Post by eridius »

gcb0 wrote: post #70
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…

> slashes returns by half for founders > have little impact on founders really?

The premise here is that extra money over the "financial independence" limit has a relatively low impact on the recipient. It's obviously not zero, but that extra money given up by the founder will have less of an impact on them than the impact it will have on every single employee that gets part of that money. To make up an example, if a founder gets $500M instead of $1B, but 500 employees get an average of $1M each, then the impact on every single employee is probably much greater than the impact on the founder (multiply that by the number of impacted employees and it's an even bigger difference).

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

#74

Post by nissimk »

What about eliminating all of the risks that employee stock holders own:

  Dilution
  Liquidation preference
  Change of control
Investors get terms to protect them from these scenarios, but employee stockholders do not.

If your market salary is x and startup wants you to work for x-y cash + z equity/options/rsu, then there should be multiple scenarios in the contract when z shares will deliver you y * time worked in cash.

The thing that is so messed up is that in an actual liquidation event employee salary payable is the most senior level in the capital structure. If you are getting people to trade part of their salary for funny money it's better to have more scenarios where they are made whole than more scenarios where they hit the jackpot.

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

#75

Post by harryh »

moe wrote: post #10

I like that I can actually understand this program and don't feel like it was carefully designed to rip me off. Unlike the usual jungle of capped/uncapped notes, dilution, vesting schedules, option pools, pre/post valuation, etc...

This doesn't get rid of any of those things.

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

#76

Post by mahyarm »

foysavas wrote: post #67
mahyarm wrote: post #6

I wonder how the tax consequences work with this.

For educational purposes only and not legal advice: This incentive plan is structured as restricted stock units that are paid out as shares upon an IPO or trade sale (called in the doc, the "Initial Vesting Event"). Tax laws in the U.S. will impose ordinary income tax on the fair market value of such shares when they are issued, which for clarity, is at the Initial Vesting Event. --- For the record, I am a bit peeved…

It's a good thing to know. Many employees who wanted to move on from companies find their stock options a financial penalty vs a financial benefit because of things like AMT.

Now if there was a way to do this and get the long term capital gains tax rate vs. the ordinary tax rate. I can't think of any without paying the IRS before hand to buy your options or doing some sort of strange cyclical loan program with investors.

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

#77

Post by beambot »

gcb0 wrote: post #70
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…

> slashes returns by half for founders > have little impact on founders really?

He's referring to the marginal utility of money [1], where $1 means more to a person with $100 in the bank than it does to the person with $100M in the bank.

[1] http://en.wikipedia.org/wiki/Marginal_utility

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

#78

Post by davemel37 »

I really want to believe in this idea and I really wish human nature and greed weren't relevant to this discussion...but this is one of those ideas (like communism) that looks great on paper but are destructive in action.

Just watch the final table of the world series of poker and you'll see what I mean. The guy who comes in second place or for that matter ninth place becomes a millionaire, yet he feels crushed and robbed by the few ahead of him.

People are generally terrible at being happy with what they have and the age old maxim is still true that he who gets $100 wants $200.

All these folks being taxed...even if they agreed initially will feel robbed by the recipients and resent them, and who knows how messy it might get. People are weird when it comes to their money.This will especially rear it's ugly head when peoples shares on paper cross their financial freedom number on paper prior to a liquidity event. (I.e. by each round of financing and a valuation is set.)

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

#79

Post by plumtucker »

zkhalique wrote: post #34

Has anyone read the book Slicing Pie? What do you think of the scheme presented there, with the "Grunt fund"?

I wrote Slicing Pie!

The problem Andrew is trying to solve, I think, is the core problem with fixed equity splits that give certain people an unfair share. The Slicing Pie model allocates equity fairly so no one person would have a disproportionate amount unless they made disproportionate contributions.

If you used this model with a traditional fixed split you would spread out the wealth a bit. If you used it with the Slicing Pie model you would be breaking a perfectly fair split.

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

#80

Post by plumtucker »

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…

It's impossible to determine risk in a startup. Later participants may be entering a higher-risk situation than early participants. Startups are too volatile

http://www.slicingpie.com/the-magic-of-mutipliers/

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