Being Fair With Equity

I met with a friend last night who is considering a role in a pre-Seed stage startup that she was excited about.  She had a lot of great questions about how she should structure a negotiation for coming on board.  I gave her the answers I had from my experience, but wanted to dig into the topic a little this morning to see if there are some good guideposts out there to leverage.

It turns out Joel Spolsky pretty much closed the book on this topic with this response.  I wish I had this five years ago, so I’m sharing it here in the hopes that it helps someone else along the way.

I’m not going to repeat Joel’s entire framework here (you should go read his response), but I will call out a few points that resonated with me:

  • His ‘risk-layer’ approach is the right way to think about equity. The 2-3 people who start out with a blank page are taking all of the early risk and are entitled to the largest share of equity. If you are coming into a startup with a salary, you are probably not in that first risk layer and shouldn’t have an expectation that you are.  At the same time, if you are the first ‘non-founding’ employee and you’re a catch, you should think about that second layer and what you feel is the right amount to ask for.
  • The notion that ideas are essentially worthless is a great point, and this is a movie I’ve seen a number of times in the past.  It’s not that ideas are worthless, nothing could happen without them, it’s just that they aren’t worth valuing in terms of founding equity because it’s too difficult to assign value to them, and outcomes will be 99% determined by execution.
  • All equity (founders included) being subject to their equity vesting is a great idea.  To be perfectly honest, I’ve never, ever seen this and I don’t think it will ever become the rule, but it’s a really smart idea.

Most importantly, the theme on fairness and transparency really resonated with me.  Fairness, above everything else, is the most important piece of this equation.  Not that everything in these negotiations has to be perfectly ‘fair’, but in the end everyone needs to feel that they were treated fairly and with respect.  The probability of success from early stage to liquidity event is so, so low and the only thing propelling the company forward is the team.  If great people feel that they’ve been treated unfairly, they will bolt when a better opportunity comes along.  The subject of equity can be the most important conversation you have with your employees, be transparent and be fair.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s