[jabzd]

Absolutely. I'm a co-founder of an less than 10 employee company. I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us. Otherwise, salaries are intended to be at or above market.

In other words, I care more about getting good talent with those "realistic worldviews" than attempting to pull the wool over the eyes of those that get caught up in the type of thinking of planning purchases when they win the lotto because they bought a ticket once.

If only more startups worked that way, instead of leveraging those types of individuals to get more hours at below-market pay because everyone is an "owner." It's almost criminal...

[7Figures2Commas]

> I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us.

Your stock grants are not a bonus/retention plan simply because you believe your cash compensation is at or above market. Pre-IPO stock grants are a lottery ticket. Period.

Here's an exit scenario: your company sells for $50 million after four years[1]. Assuming no dilution and no liquidation preferences, an employee with 0.25% earns $125,000 pre-tax, the equivalent of a $31,250/year bonus that was never guaranteed and deferred for four years.

Why would you think this to be a strong driver of retention for in-demand employees with "realistic worldviews"? In today's market, your best employees can probably get 50-100% of that hypothetical annual bonus in real cash just by switching jobs.

[1] Your company isn't likely to have a liquidity event, but if it does exit, the value of the event is likely to be $50 million or under according to exit data in recent years.

[jabzd]

Absolutely and totally agree on all points. Your $50 million is the exact number and breakdown (except on a 3 year timeline) I use for candidates that have made it far enough into the interview process such as having an offer on the table or have asked during the process how we approach equity.

> In today's market, your best employees can probably get 50-100% of that hypothetical annual bonus in real cash just by switching jobs.

I did not mean to imply that is the only bonus plan. Cash bonuses and significant raises generally yield an additional 20% of pay over the course of a year. We absolutely have to combat the switching of jobs yielding that in raises, especially as we are a software engineer heavy organization.

It's more that we don't want to not offer stock grants/equity at all just because they suck or are a lotto ticket. Especially in order to reward long term employees in an additional way. We more or less say "here's this lotto ticket, pretend this doesn't exist for now." The retention aspect may kick in if we appear to be nearing a sale event, but on day one means nothing.

[kzhahou]

Your startup has fewer than ten people, and the grants are .1-.25%. Let's say it sells in three years for $50m, with no further dilution because you never hired more or took more investment.

He gets $50-$125K. How much equity do you have yourself as founder? 50% ($25 million)?

What do you dream of doing with your millions once you exit? What do your employees dream of doing with their hundred thousand or so?

[jabzd]

We are a 7 year old company. I have only ever had one candidate find a problem similar to the point you are making. Most understand that the risk profile makes a world of difference for a profitable company now versus 7 years ago where skipping payroll for the co-founders was common.

Your math is slightly off in assuming that the .1-.25% carries for the bulk of the ten, but your point valid all the same as a potential concern for individuals.

We often struggle with being labeled a startup due to our age and risk profile, but due to our size, we accept it! Ha.

[7Figures2Commas]

Why even offer equity at all? If you're profitable and able to offer cash bonuses and raises, why not use alternative retention tools? Do you offer a 401(k) with generous company match? Do you have a profit sharing plan? Profit sharing into a 401(k) can be especially appealing.

While I obviously don't know anything about what your company does and what its financials look like, if I was a prospective employee, the fact that you're sub 10 employees at seven years in would lead me to conclude that you're not the kind of high-growth company for which 0.1 - 0.25% equity has any chance of translating to a really big payout. So why pretend? I'd find it far more appealing if your compensation package was realistic/honest about where you're at as a company.

[jabzd]

401(k) is something we are planning on early next year, yes.

As for the seven years in with 10 employees, definitely valid point. However, I always make sure to point out to candidates that we were 3 employees 2 years ago and are now getting significant traction with bigger clients. We are in an extremely slow moving B2B industry so it takes significant time to get that initial traction. It is very much a referral based sales process and potential customers like to bucket themselves based on size. Effectively, we've had to work our way up the food chain to get to the bigger fish. We expect to be 20 by the end of next year, so it carries more weight now than it would have 2 years ago. This is the same reason we even foresee a sale event in the next 2 - 3 years with the growth we've had over the last 18 months.

Perhaps that's stockholm syndrome speaking (kidding) :p

[potatolicious]

Disagree and agree at the same time.

It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example.

That being said, you're right - the problem here is that startups in general are only willing to pay "market" for base salary, ignoring that good engineers can get completely liquid equity at major companies worth as much as, if not more than, the level of equity being offered to startup employees.

In your typical "$X base + $Y equity" startup offer, only $X is competitive. You can likely get $Y (or more) from an established post-IPO company where the comp is (almost) as good as cash.

$Y in pre-IPO, illiquid, risky early-stage equity is not worth the same thing as $Y cash in hand.

[7Figures2Commas]

> It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example.

Most early-stage startup employees can't get liquidity on secondary markets, either because there's no demand for their company's stock or they are subject to transfer restrictions.

When looking at the big picture, proponents of equity as an effective bonus/retention tool will have to explain why most vested options go unexercised.

[potatolicious]

Fair, this is also why I'm very leery of options in general. RSUs seem more financially complex for the company, but also more equitable for employees

It seems patently bullshit that early-stage employees, whose contributions are disproportionately large to the success of the company, are generally completely unrewarded on the equity side because of lack of liquidity, and cost of exercising options. It seems like a cheap way to cheat people out of what they rightfully earned.

[mahyarm]

Options are not bad if they didn't come with expiry dates. Especially the 90 days after not working expiry date.

[walshemj]

exactly one huge UK company's last share save plan last year paid out over £100k tax free over the last 5 years.

And that is the options everyone in the company gets and had no risk