equityI understand that there is no clear cut answer here.
Based on everything I read most of early employees (let say employees #5-#10) are granted maximum 1-2% of equity. Even this is quite extraordinary (something like that is granted for very senior people).
I do the math and getting following. In the bad case, the equity worth zero (so it’s not interesting to discuss and calculate). Let’s go over positive case. Taking into account that equity is granted early it will be diluted in round A,B,C…). Let say, it will be diluted twice.
As result, this early employee will be having let say 0.5% of a company. Let say the company exits for $100M (which is nice exit). The employee will get $0.5M before tax. And this is spread over 4 years, which means additional $120k pretax a year.
Sure. It’s not something to sneeze at. However, it’s not a game changer (a person won’t be able to retire or anything like that). And taking into account that we were talking about senior people, they can go to some public company with nice package (higher salary and options which an be sold) and zero risk and achieve something comparable or they can go to pre-IPO, round D-E company, get let say 0.05% and get similar outcome with way higher probability.
My question is. Why the industry end up with such numbers? They look a little bit low. Surely, it works unbelievably great for once in a decade companies (Google, Facebook, Microsoft). It works great even for once a year company (as example Splunk, FireEye). However, the math doesn’t well for good (but not great exits).
I agree with blunders. The first few employees are the ones that create the idea behind the product and in many cases, make the product something feasible. Depending on how much they have to give up to finance the operations, they are the ones who are entitled to all of the equity and retain most of it.
Once a company grows beyond 2-4 employees, the new hires will be for specific roles that target specific skill sets. They are not expected to be one of a kind individuals that create new products and in a way are more generic, at least more generic than the initial founds responsibilities. Even though the company is small and these new hires will have many responsibilities, it still will be for a specific skill set and they will have a stated salary with little risk of losing that within 12 months. The company can go bust, but they only lose their salary.
The initial founders have to give up a salary and in many cases personally guarantee loans for the company to get an initial backer and this risk is why they take in the most equity.
The early employee equity is low for another reason - it gives the founders more flexibility to reward the new employees that do very well and can grant them more options down the line. If the 5th - 10th employees all received 5% upfront, then much less of the company would be available for the company to offer to other employees as it grows, aside from just diluting everyone. Further, it protects the company in case these employees leave and the ones that fill in the void should be able to earn some equity stake.
Unclear what you expect, or more importantly, the logic used to define those expectations. Having an issue with the status quo and the reasoning behind it is of much less value in my opinion than a well structured case supporting what you want; which appears to be that you want employees #5-10 getting granted more than 1-2% of equity.
Assuming all employees got an even share in the company and existing shares were diluted as new employees were added AND their were no other stackholders, then a single employee in a 10 person company would have 10% of the company.
Fact is that the 10th employee has much, much less risk that the others; still very high in the absolute sense, though on a relative basis, the first employees would have had orders of magnitude higher levels of risk.
Case in point is that unless a new employee bring millions of dollars of value to the company day one, saying that the 10th employee should get more than what I see as a generous amount of 1-2% shows a fundamental lack of understanding in both the company’s value and the employee’s value to the company.
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