[dperfect]

This makes sense from an investor’s perspective. My objection to IPOs is not so much financial, but more about what it does to a company’s internal culture. Having been at a company that went through an IPO, I saw how that culture shifted - almost overnight. You had employees that once cared about doing their best at their jobs to ones that focused only on how their contributions would affect the public stock performance (which can overlap, but often doesn’t). Every time the stock price took a (short-term) hit, employee morale suffered. It was as if a large LED stock ticker were installed on every desk, constantly reminding employees that this is the new key indicator that matters above all. It was obvious even among upper management; discussion went from big picture, somewhat ambitious ideas to short-term thinking, centered on how to show good numbers in the next quarter with obvious, incremental adjustments (like pushing more ads rather than developing more interesting products and features).

The funny thing is, the company didn’t actually need the funds raised in the IPO. They had an almost endless supply of interested private investors pouring in money regularly, and the company’s CEO (in private) admitted that they never wanted to do an IPO. It was only necessary in order to appease the expectations of early employees who had been promised a big payday for the shares they were offered instead of competitive salaries. I understand why that was done in the company’s early days, but there ought to be a better way to reward/incentivize early employees that doesn’t rely on the fickle and myopic nature of publicly-traded stock.

[vkou]

> I understand why that was done in the company’s early days, but there ought to be a better way to reward/incentivize early employees that doesn’t rely on the fickle and myopic nature of publicly-traded stock.

The IPO is the carrot that you're dangling ahead of early employees many years prior to getting to that point.

When you've gotten to a state when you're ready for an IPO, they are expecting to actually get that carrot. You have no leverage or new incentives that you can give to an early employee after you IPO. If they are sticking around after, you're either drowning them in money, or they are doing it as a courtesy.

So, your alternatives are to ask them nicely, or give them a boatload more money to stick around.

> They had an almost endless supply of interested private investors pouring in money regularly

It sounds like they were interested in pouring money in to grow the business, not to reward early employees. (Which is perfectly reasonable.)

This is why you're finding the two things at odds with eachother. As an employee in a pre-IPO company you have a much smaller small amount of leverage for any sweat equity you put in, compared to someone who paid real dollars for their equity. Your interests aren't aligned with your investors, and their interests aren't really aligned with yours, outside of one thing - you both want to get to a point where you can cash out, via IPO.

[dperfect]

> The IPO is the carrot that you're dangling ahead of early employees many years prior to getting to that point.

Yes, that's essentially what I'm saying, but I wonder if there aren't some better alternatives to incentivize early employees when cash is scarce. Maybe (just off the top of my head) something like a contract to pay the employee a set dollar amount (with interest) at an undetermined point in the future, and it must be paid before any profits can be distributed to owners (there could be other triggers as well). This would be in addition to the employee's salary, which is likely to be at below-market levels when the company is still young.

It could come with additional features similar to a vesting schedule, but essentially it would (1) give the employee a known dollar amount of compensation contingent on the company's future success, (2) allow the company to remain private (if desired) while still delivering the "carrot", (3) avoid the need for an option pool, and (4) avoid the issues I described in my earlier comment. After some or all of that amount is paid to an employee, the difficulty in keeping the employee around is no different, but at that point (where profitability allows for the payout), a company is more likely be in a position to offer/renegotiate competitive salaries in the first place.

Then again, a lot of founders/owners probably don't want something so concrete because of course they benefit from being able to attract talented people at a discount by offering a tiny bit of equity and the dream of becoming a millionaire when the company IPOs or gets acquired. Heck, I've been there - on both sides of the conversation. But the truth is, a lot of people are realizing that equity isn't usually worth what a founder thinks it is, so that's becoming a less effective bargaining chip as time goes on.

[vkou]

Hollywood does this sort of thing. It's a complete and utter scam.

Films that bring in hundreds of millions of dollars from the box office consistently manage to post up zero-dollar profits. (Screwing anyone who lacks the leverage to have demanded a percentage of revenue, as opposed to a percentage of profits.)

And yet, somehow, the funders keep bankrolling 'profitless' sequels after sequels.

As bad as the 1/9/90 split of outcomes for startups is for employees (1% of a good exit, 9% of slight profit/break-even, 90% of a loss), transitioning to your model will destroy the upshot of the 1%, and make the 9% even more contingent on your employer and funders not engaging in Hollywood accounting.

What you propose creates a colossal incentives for investors to turn the 9% case into an (on paper) 90% case - because otherwise, they'd be on the hook for a very large number of backdated salaries - the obligations for whom magically disappear if you structure the 9% case as a profitless exit.

[dperfect]

I'm familiar with how residuals work (and sometimes go unpaid), but in my opinion that's not a flaw in the idea itself, but rather a question of regulation and/or better legal work (in the contracts) to prevent studios from exploiting loopholes.

Earlier in my career, I was the victim of similar shenanigans when it came to startup equity (promises of equity that never materialized), so it's not like the traditional path to IPO precludes deception and exploitation. My point is, with proper legal boundaries, a system of compensation with increased transparency is fairer than the current one that essentially uses a startup lottery to attract employees.