[blennon]

Startups also like options because they believe it creates an "ownership mentality" among its employees. I believe this is mostly true.

I think equity compensation is also a selection mechanism. If I'm running an early stage startup, I want everyone to have a stake in the game. Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me.

One of the struggles of offering equity to employees is finding a mechanism that has no taxable value upon issue, benefits from capital gains, and is legally sound.

One option is to organize as an LLC and offer a profits interest. These can be issued with $0 taxable value and benefit from the upside of the company. They can vest, and once vested they can participate in the gains of the company (including distributed income, not just a sale). I believe these are inherently more fair to the employees because there is no golden handcuff. They don't need to be exercised and once they're vested, you can walk away with them. On the downside, they are a little more cumbersome to set up.

[state_less]

I'd prefer plain old stock without restrictions and a larger proportion of it.

I think we ought to target a controlling interest for the employees (i.e. employees own over 51% of the company) and shareholders vote on the weight of their shares, like they normally do.

In sum, I'd rather see a founder worth $100 Million and 999 employees worth $900k than a $800 Millionaire and 999 employees worth $200k. And I actually think this would have an important impact on the economy by balancing out the income inequality. In other words, not only would we see far more ~$1 Millionaires, but also more $100 Millionaires because now the money is moving faster with all the fresh Millionaires buying goods/services.

[blennon]

The problem with plain old stock is the tax implications. Suppose you join my company when our last round valuation was $10M. Let's also say you negotiated 1% equity. If we granted you 1% equity, you would have a $100,000 tax liability. We just gave you something worth $100,000 so you have to pay taxes on it. You'd be crazy to be willing to pay taxes on risky equity that's theoretically worth $100,000. The company won't pay your taxes for you either. That's a huge waste of money. That's why stock options exist, to give employees the upside and minimize the tax liability.

[warcher]

As somebody who's founded a couple companies, there just aren't enough people with the appetite for risk and drive needed to manage a controlling interest in a company.

And on an economic level, if the net compensation level, including crushing levels of stress and overwork, was so bad between founders and employees, you'd see a lot more founders until the system balanced itself out. And you do not. Most real good engineers just want a fat paycheck and a clear delineation of responsibility. Trust me, a senior valley level salary and not riding that ride is a good gig.

That said, the side of the bread with the butter on it is pretty clear. The reasons for that are less clear until you've done it, but nobody's standing in your way-- you want to be the daddy/get really rich, found a company.

[pbecotte]

Come now, you believe that more people don't found companies because of the stress? It seems far more likely that most people don't have the capital assets for that to be an option, except three groups... 1. The very young who have very low expenses, the ones who cashed out already, and the ones who started rich.

[warcher]

Untrue. Also untrue that you need funding-- you can replace funding with a brutal workload and a lot of patience. I did it, ask me how, haha.

I mean, don't get me wrong, you are gonna sign up to be broke. For a while. A lot of people have kinda boxed themselves in with a very comfortable middle-to-upper-middle class lifestyle that closes a lot of doors via their household burn rate. That's not the system being out to get you, that's a perfectly valid life choice that you and you alone are responsible for.

[warcher]

Not that there isn't a whole industry revolving around bleeding you white, keeping you chained to the oars by debt until you're no longer useful. Those issues are orthogonal.... I think.

[state_less]

One reason you don't see founders is that, it is so brutal. The odds are stacked against you. Even if I buy lotto tickets with a positive expected return, the variance can make it untennable/unworkable. One would hope the VC comes in and smooths this situation out some, so that more people participate. You're going to have a lot of brilliant people going down dead ends on no fault of their own, why not cushion the blow? Give entrepreneurs, yep give, the money to them to make their product. Let them own >51% of the company. Offer to pay them fully in their own shares or some split between the fund shares and their own company to cushion the blow. If I'm starting a company, I'd take my own shares mostly but I'm not arrogant/foolhardy enough to put my chances of success equal or greater than a whole pool of my peers. I'd bet some of us will be successful, I just don't know who.

To answer another response on this thread about taxes, if it were in fact market value, I'd sell the shares like any other share and pay the taxes owed.

Note: I know there are issues surrounding the number of private owners a company is permitted and other regulations. I'd simply invite a corporate lawyer to take a stab at it. Maybe a large holding corporation that would be public and issue shares to you related to your stake in startup sub corp(s) (akin to paychex, trinet, etc...)

[warcher]

More and more I find myself reasoning about competitive advantage and stuff like that-- whenever I put up with something really unpleasant, I think "Hey, how many of my competitors did I just shake off?"

If everybody got funded, I think the market would just devalue ownership of a company, since, with the barriers to entry knocked down, it wouldn't mean as much. Think about the erosion of the market value on a college education over the years.

[gech]

There are plenty of people, especially on here, that want to maintain the ever widening gap between the many and the few. You make a great point about how more even distribution would increase the participation in the economy leading to more activity naturally.

[pascalxus]

Employees should have ownership over the responsibilities of their jobs, anything more is just altruism.

When a company or overly aggressive recruiter tries to sell me options, that aren't worth anything yet, like it's a billion dollar lottery ticket, that's a big Red flag for me. It says something about the culture of the company.

[JimboOmega]

While the math of options value may not always work out, the mindset - that I'm a real part of this thing - is why I got attracted to startups to begin with. Feeling like I own a non-negligible part of it is part of that feeling.

When companies act like that's not the case, whether in terms of compensation or in other ways... it really turns me off. For instance, at one ~10 person startup I worked at, it was common for "Senior Staff" to have closed-door meetings and try to keep us totally in the dark on what was going on, BigCo style.

I need to care about my company, and to feel like my company cares about me. Them letting me have a small slice of it is part of that equation. Acting like they can totally shaft me on cash compensation as a result... well that doesn't work, of course!

[DrAwdeOccarim]

Yes, exactly. The start-up I joined did this with a fair vesting schedule. Now I own actual stock in the company without having to pay any cash to take ownership of them. One issue we've found, though, is that early employees have less of a reason to stay on once they become vested. With options, as long as they're employed by the company they don't have to exercise. If they leave, they have only a short period of time before they have to come up with the cash to buy their shares.

One other downside is that an LLC can't go public, so if the company decides to go that route they'll have to reorganize to a C-corp. Of course the lawyers love this because the paperwork required is significant.

[m-j-fox]

> Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me.

But that says a lot more about you than it does about them. Everyone is different and judging from this thread, many believe equity is bullshit for reasons unrelated to their work ethic or team spiritedness.

[maerF0x0]

Remember that people having a stake in the game (and not current cash) gives incentives for early liquidity. That could be a bad deal for all involved (except the acquirer). If your staff/founders are going broke before the greatest gains in value of the options, they will still have to push for liquidity event before the optimal time.

[jboggan]

More than cumbersome to set up, they are extremely cumbersome to amend.