[birken]

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

    Founder X            10B      5.02B
    Founder Y             8B      4.02B
    Founder Z             6B      3.02B
    Early Employee A      1B       525M
    Early Employee B    500M       275M
    Early Employee C    250M       150M

    Amount Distributed to each employee: 12.72B / 5,000 = 2.5 million each on avg

That is awesome. Though obviously very very few companies ever become worth 100B, it is a great example of how spreading the wealth from the founders makes little impact to them and a massive impact to everybody else.

[cyrusradfar]

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

[ChuckMcM]

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.

[wlievens]

> 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.

You probably shouldn't work in the tech industry if that upsets you :-)

[fragsworth]

It looks like the average employee at Facebook would have received $4.5 million.

Once the IPO happens and you pay your employees $4.5 million, their $100-$200k salary doesn't seem worth much anymore. What actually would have happened to Facebook, if they did this? Is it possible that the company collapses, while too many employees quit so they can do their own thing, or retire? Would they have had to double or triple everyone's salaries to keep them on board?

I could see it being a disaster. It could also significantly de-value a company's IPO (or sale) because the investors would see this as a massive risk. At least until it's been tested with a company that IPOs.

[vidarh]

I remember working at a large company years back, where I was told the story of some pre-IPO ops guy that was still hanging around despite clearly not needing the money.

Some more recently hired SVP brought him with her on a trip to various offices as her go-to guy to make sure she wasn't bullshitted when discussing a specific project with the local teams. He had often brought along on trips like this in the past because of years of experience he had with the company infrastructure.

To be nice, each time she would offer to get her PA to book the flights and hotels, so he could benefit from her ability to get them booked into better rooms than the standard policy would allow for his role. Each time he'd politely declined.

Finally she pressed the issue and asked why he didn't want the better rooms.

Turned out he'd done well enough out of the IPO that he soon afterwards had decided to buy apartments near the local offices in the 5-6 cities across Europe where the main subsidiaries were, so he'd not have to stress with packing etc. when travelling there.

[rajacombinator]

Presumably this already happens to a large extent. It hasn't seemed to had much effect on the trajectory of companies like Facebook and Google. Someone doing a PhD in Econ should write a paper about the effects of people leaving post IPO.

Good point about adding risk to the IPO.

edit: BTW working at companies like Facebook and Google is pretty good from a lifestyle perspective so I'm guessing most wouldn't leave.

[venomsnake]

> Is it possible that the company collapses, while too many employees quit so they can do their own thing, or retire?

The excruciating burden of going to work is almost non existent if you can say fuck off at any moment. A lot of folks there do lots of interesting and fun stuff.

While you could see some run away I would suppose that the numbers will be small if you have good corporate culture and policies.

[vladimirralev]

These are well known risks and investors can simply demand a commitment. It is a very easy conversation to have with your employees. "Hey, if you sign this 2 year commitment we get like 10% more valuation". Everybody decides for themselves if it's worth it and the more people sign the better the valuation. And since everybody has more stock they have more interest to do it; You can also legally provision stock lock ups after IPO for 2 years or so, everybody does it. Also you can dilute the stock to allocate the 10% which represents the expected valuation hop. Then award the extra stock to those who sign. This is legal, but it's a lot of paperwork to make sure nobody can dispute the true value of the retention policy.

[sukilot]

The employees get free prepared food etc, a consistent routine that suits their engineer mind, lots of vacation, flexibility to choose their own hours, leadership roles (and unlimited mobility) to choose their own work, until they retire and become angel investors. And they get a little greedy, so they need a few more years income before they retire at 40 and the hot startup becomes and over the hill bicgo.

[vincentperes]

You don't cash in straight after an IPO, most of the time the current owners of shares have to wait X amount of time before they can sell shares. I guess this help keeping the company stable.

[blazespin]

The flip side is that you can attract a heluva lot of superstars this way pre iPo

[cespare]

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

[cyrusradfar]

Flat tax is a policy that some advocate in the US where there aren't tax brackets and everyone is basically required to pay, for example, a flat 30% tax. In Andrew's case, he says 50% of all proceeds that are greater than the financial freedom limit. That means if you have 1B over you pay $500M and if you have $10M over you pay $5. That $5 million may seem like it has more of an impact to the latter person.

Does that clarify it @cespare?

[mattj]

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

[cyrusradfar]

FRACK! Fixing, now. Thanks :)

[rajacombinator]

Thanks for the illustration. Andrew or whoever is interested in propagating this concept should consider throwing together a few examples and a calculator on a website so people can play around with the numbers.

This is super innovative and cool - provided it holds up legally and with the IRS. (I gather it's meant to be a tax-efficient approach.) I sympathize with Andrew's motivation because as a founder, if my company made it big, I would want all the employees to do well. I always figured in that case I would just pay them out of pocket and take a huge tax hit to make it happen.

On the other hand, as a founder who has not yet "made it", an extra 50% hit on top of the 50% the taxman will take, is way more than I can stomach. The potential for outlandish wealth is part of what motivates me, even though I would be fine with much less. But the percentage and threshold can be adjusted to find numbers that should be suitable for anyone.

One thing that I'm not clear on and I didn't read through all the legalese is on what basis the "taxed" amount is redistributed to the remaining employees. If it's based on share vesting like a normal system, it sounds like it wouldn't change the distribution much. If it's an even split it sounds potentially unreasonable, for instance, to give 2.5 million an employee who joined 2 weeks ago.

Either way cool stuff and I'd expect something like this to become standard in Silicon Valley.

[gcb0]

> slashes returns by half for founders

> have little impact on founders

really?

[eridius]

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).

[beambot]

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

[hackerboos]

If each employee received $2.5 million on average, how many would stay?

I think it's awesome to distribute money between employees like this but wouldn't it have a devastating effect on the company?