Employee Equity: Too Little?

Sam Altman, who is now running YC, has a good post on employee equity that has been making the rounds this weekend.

He makes four observations about employee equity:

– employees don’t get enough

– the requirement to exercise quickly upon leaving is painful

– the tax treatment of options is closer to salary than stock

– companies don’t tell employees enough about their stock and related information

I generally agree with the latter three points. But I am not sold on the first point. We have seen some of our portfolio companies make very large grants to early employees and that ends up hurting the founder’s stake because investors factor all of the shares that have been issued into the valuation they offer.

This issue is getting particularly visible in silicon valley where the value of a top software engineer has risen considerably in recent years. Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it. She is. I am just pointing out how dilutive employee equity is becoming in silicon valley. We are seeing similar things happening in NYC and I imagine they are happening elsewhere.

Since I started in VC, the percentage of a company that non-founder employees owned was always in the 15-20% range after the team is fully built out. In recent years, I have seen that number creep up to the 20-25% range and if you extrapolate current trends out a few years, it could easily be 30%.

So I guess what I am saying is that this is a market we are participating in. And this market is becoming very competitive and a lot more transparent. The benefits of both of those things are accruing to the employees and they are getting more and more equity as a result. Sam may be looking in the rear view mirror with this first assertion. I think like many things, the market will take care of this problem. It already is.