The Employee Equity Project
In the fall of 2010, I wrote a series of nine blog posts about Employee Equity as part of MBA Mondays.
You can read all of them at the links below:
- Employee Equity: How Much? November 22, 2010
- Employee Equity: Vesting November 15, 2010
- Employee Equity: Restricted Stock and RSUs November 8, 2010
- Employee Equity: The Option Strike Price November 1, 2010
- Employee Equity: The Liquidation Overhang October 25, 2010
- Employee Equity: Options October 18, 2010
- Employee Equity: Appreciation October 11, 2010
- Employee Equity: Dilution October 4, 2010
- Employee Equity September 27, 2010
Most of what is in those posts remains valid today.
But the final post, How Much, is very much out of date as the talent market has moved in favor of employees a lot in the past eight years.
That has been particularly true of the top executives and some key talent categories.
Most of the movement has been on the equity side of the comp package.
The How Much post is one of the top posts on AVC.
Though I wrote it 7 1/2 years ago, it was the seventh most popular post on AVC (sixth if you don’t count the home page) in the last year with almost 10k page views.
So I have been concerned that this blog (aka me) is spewing out of date information to a lot of people every day.
And so we are on a mission to fix that.
I have enlisted my colleagues Bethany and Zach on this project and this is what we in the process of doing:
We have collected data on employee equity grants from USV portfolio companies. Many of our portfolio companies use a reporting tool called Advanced HR and through it, we have been able to access anonymized data on every grant that these participating companies have made. Since these are our portfolio companies, we know what their equity is valued at and what it has been valued at over the years. We also understand the context behind many of the outlier grants.
So we have been normalizing the data and bucketing it and looking at distribution curves and understanding it.
We are mostly through all of this work and it is my hope we can publish the data before the middle of May.
As part of that, I will rewrite the How Much post and I will go back and edit the original post with an update section at the end clarifying that the data has changed (a lot).
We also plan to publish a calculator that will help a founder/CEO/HR team understand how to use the numbers we are going to publish.
So stay tuned for this update. It has been a fair bit of work to do this update right and we are excited to get the data out there so all of you can use it.
Comments (Archived):
2010 seems like another era at this point. The Dow was around 11K, April 17, 2010.What a great project and what great value/insight for so many people!
Thank you much for all the efforts!
Thanks for sharing Fred, eager to see the updated info and the calculator.
COOL BEANS, thanks!MBA Mondays were the original reason I became a regular reader/lurker. Then I discovered the myriad of intelligences of AVC community — even the most obscure insights on political processes — and decided it was one of the best places to learn so I stayed.
Thanks for giving a shit to do the hard work on this one.Few have the data set honestly to pull this together.Will be very useful.
Wow – your timing is great. I preparing a talk with the Entrepreneurship Club at St. Thomas here in Minneapolis – noon today. Partner and employee equity is always one of the topics that comes up – and I’ve been pointing at your posts on the subject for years.And, I have to give a shout out to St. Thomas student Meghan Sharkus – twitter.com/ExpressionMed – she just won the business plan competition and has been accepted into a great accelerator program. How cool is that?
I hear the snow was pretty bad last weekend.The only thing I would caution first time Entrepreneurs is to not oversell option value to potential employees.I have seen this and seen the turnover and discord when things didn’t materialize as quickly as possible (which by far is the most common case)I’m not saying to say they are worthless, but I think you have to sell the journey, learning, and growth.The options are there if things really work out to compensate for the effort and success which you contributed to, and are a way to do that financially and legally.You know if things really work out, as an employee you won’t get stiffed.I have seen things come crashing down, when many employees are completely incensed when their options are not worth the tremendous overnight wealth they were promised.
Good advice… also can be a loooooong wait for the payday. My son was a developer for a local start-up, and vested thousands in options. He’s since moved on, and years later he’s sitting on stock that has no liquidity, and until an IPO, no real value.Come to Minnesota, where it is always January 95th!
You know in a very strange twist my Delaware office has become the center of things. So in a strange twist of fate people from MN visit me, not the other way around.I am surprised he still has the stock usually you leave and it goes. This is also a big dilemma.From the company and people still working there perspective do you want somebody that doesn’t work there profiting from the work that the people that are still there doing, while working and making money somewhere else?/From an ex employee perspective: Hey you put in blood, sweat, and tears, and the company wants to take that value away??No easy answers.
their options are not worth the tremendous overnight wealth they were promised.Also a case of hearing what you want to hear when presented with information. There could be a study on this. You put people in a waiting room. Half the people you prime with negative info (on options and what happened to people who lost) and half with positive info (and how much they won). Then someone presents the exact same options in the meeting. [1]Also the contrast principle. We recently stayed at a hotel in Miami Beach. The reviews generally knocked that hotel I would say. My wife had booked it so by the time I had the info I was stuck. Well the hotel turned out much better than expected we were very pleased. The view was awesome. The room was awesome. Amazingly the online hotel pictures weren’t even good. [2] But on the same lines we went to Nobu and were dissapointed and we are not big food people in any way. Our expectations were set very high because of the name.[1] You know the results of that experiment so don’t even bother doing it.[2] I actually liked it so much (in contrast to what I thought) that I didn’t even try to chisle down the bill on departure which I typically always do. Because I intend to return and was just generally very happy…. https://uploads.disquscdn.c…
She did a kickstarter last year:https://www.kickstarter.com…
I’ve been mentoring her for a little over a year – she’s done an amazing job from her dorm room. Subscription based business model, scalable and a nice niche. Not much IP, but defendable at scale… and she’s just a really nice person.
I looked at the site and concluded the IP was an issue. This is the type of business that can be a nice niche lifestyle business (hate that term btw.). However the problem is if it becomes successful she will be steamrolled by others doing the same thing with more and arguably better designs.How should she differentiate herself then? My advice would be to lock up designs and content from notable people and have that be her moat. So let’s say she could get some kids pop icon to make a design or a sports star etc. Then you have something to defend that is unique to you. Of a famous fashion designer however would have to be what kids understand and know about or whatever the age group that buys this. That is what I would do. License things not random art that quite frankly anyone can do.
Most companies should be very careful about restricted stock and vesting. The advice you gave is fantastic for most high growth VC-backed tech companies. However, most businesses don’t fall into this category. For most SMBs, you should look at vesting differently. You need to think about what would be highly unattractive and highly attractive to a potential buyer. If you’re employees all become liquid at the time of acquisition, none of them have incentive to stay with the new company. This is a huge red flag to buyers. They will likely force you to give some new incentives that vest over the following 2 years.Lots of ways to structure these, but you should always have a good percentage of “options” begin vesting upon change of control. Sure, employees may get 1/2 of them at the time of acquisition, but definitely not all.
would love for you to challenge me if i’m wrong. my impression is that this is how VCs and other “advisors” once differentiated and “added value.” they had this dark information that founders and startups didn’t have. posts like this, your Monday MBA Series, Tom Tunguz’s posts, Chris Janz’s posts and so forth make this information more accessible or less asymmetric (See this post here: https://www.cato-unbound.or…as information becomes more symmetric, every intermediary or middleperson (fka middleman) needs to rethink how they add and capture value.
You answered your question in your last sentence.You are right it has changed the game since I started in 1992.One of my huge beliefs is that if you are different the best thing to do is to change the rules of the game. If you look Fred Wilson, Brad Feld, and Mark Suster all have engineering degrees. All dig into products.If you are competing on deal flow (which you are) with finance people that have obfuscated all of their financial knowledge, what do you do?You have found the answer.
I should add, I don’t know if:They set out to do thisJust thought it was the right thing to doStarted doing it realized the power and continued to do it.What I do know is that they needed the platform (blogs) come along to enable it, which is like so many things.
Also like the Dylan song lyrics ‘When you ain’t got nothing, you got nothing to lose’.
Yes, it is easier to disrupt when you are on the outside.But it takes tremendous fortitude, because if you have that type of education you do have something to lose.And there is societal pressure. I know for a fact you and I have experienced that. Not that you care, but it takes fortitude not to care.
You honestly doubt that Freddy & Brad opened the VC kimono by accident?
I never ascribe motives to things I don’t know. They might have started it and then realized it’s power.That is the definition of being a good entrepreneur
Well, I ALWAYS ascribe motive to people’s actions and I am goinnwith me on this one.
“if you are different the best thing to do is to change the rules of the game” – Philip Sugar
This concept has been around since at least 500BC with Sun Tzu writing about it in his masterpiece “The Art of War”War sucks, and there is no true glory.But if you look every great General practiced this concept. George Washington two hundred years ago and Võ Nguyên Giáp recently.When you just slog it out you get battles like our Civil War or WWI where you just burn up your troops.Gandhi and MLK are great examples of non-violent rule changers.
.Military leadership is a very interesting thing as it usually presents itself in times of crisis and, yet, most of a soldier’s time is not spent in crisis, but training for that eventuality.As a military school grad, I spent endless hours studying ancient and contemporary leaders. Every leader of note, had a run of good and bad outcomes. Nobody grades out perfect.I remember studying the Americans and Germans at Kasserine Pass. The Germans whipped the Americans and within a couple of years, the Americans manhandled the Germans easily.Marshall (VMI grad) put Patton (another VMI guy) in charge and changed out all the division commanders – Marshall purged all division commanders over 50-55 before the beginning of the war.When you go out to the Army with all that stuff packed into your skull, you then have to try to execute it in trying situations in which you are the least knowledgeable person in your platoon, but everybody is looking at you when it counts.”What now, Lieutenant?” is a real phenomenon and not everybody survives it.I worked for some guys who never got the long term recognition they deserved — typically full Colonels who had offended somebody who was a kingmaker. The stuff you could learn from a Colonel who’d been in the Army for 35-40 years.I recall with great clarity a 40-year Colonel telling me something about leadership and how to treat troops fairly — “Everybody has an itch that needs to be scratched at some time.”All military theory is interesting until you have to make 50-200-1000 guys work together. Then, it’s really up to you and you alone.The military buildup for WWII was, perhaps, the most successful startup of all time. Three VMI grads were running the show in DC and stood up an 11MM man Army with all their accouterments, trained them to fight, picked the right commanders, and whipped the Japs and the Germans. The Russians deserve a lot of credit.I served with a lot of guys who ended up with 2-4 stars and it’s funny to see who advances.JLMwww.themusingsofthebigredca…
This is a brilliant comment.If you can offer something really unique and valuable to your customers that your competitors do not, double and triple down on it. It can end up defining your very brand.
How much Bitcoin et al are the employees given, or is it just realized indirectly where X owns 2% of company and company owns $Y worth of crypto-assets?
At what point does Equity Grants change from “options” to “dollars”? Series A?
Would be great to also get statistics on equity grants to independent board member, chairman (exec/active), advisors etc – this area seems to have little benchmarks…
~$200k a year. Typically a four year $800k grant that vests over four years. Valued at the last round (not 409a). For companies with less than $50mm of market cap it would be more like 1% of the company vesting over four years
Thanks FredOne other distinction I’ve seen is earlier stage have faster 1-2 yr vesting for more active directors, with premise value is more front loaded, vs later stage where expected more spread long term.Any event, will share if I get any other worthy market inputs.
Fascinating. Disqus could use a save or hilighting feature for pure gold like this.
I am looking forward to this post. It’s an important one for young tech employees to understand potential and tax implication of this flavor of compensation at the early stage of a company.
Hearing the album now, very eclectic.What is your best track?
Lawrence Brass:Damn & DNAMusic with a message verses a beat with Mumble rap sets the rap genre back.Captain Obvious!#UnequivocallyUnapologeticallyIndependent
Caring for the quality and freshness of almost eight year old posts puts you and AVC (and USV) at another level.Waiting in line for the updated, autographed version. 🙂
I’m waiting for the first folio, limited edition, sequentially numbered, signed, connoisseur, collector’s version printed in script characters on parchment and bound in leather with decorative embossing and gold lettering! On each page the white space boundaries should have original scroll work, different on each page and obtained from a crowd contest. Since no doubt comments on those posts have long since been closed, commenters that received up votes get offers to buy the first, low numbered copies. There should be a multi-media edition with music: When first open the book, hear Wagner’s Entrance of the Gods into Valhalla. Then have different music for each page. E.g., somewhere have the J. Strauss Blue Danube and end with the “Ode to Joy” from Beethoven’s 9th Symphony. :-)!
Hey all, one of our newer tools from the LTSE is called Hiringplan.io. It’s a head-count planner with built-in comp benchmark data. Check it out and let us know what you think.
I would really appreciate if, potentially in a separate post, you discussed token grants for employees joining blockchain companies.In many ways new tokens created during an ICO are much more risky than traditional options, but on one hand vested tokens are immediately liquid.I’m really curious what the best practices are on this subject. A mix of options and tokens? All tokens? I guess it’s such a new space that the best practices are still being formalized.
.This will be an interesting project. I love seeing things which are real. I wonder if in the natural selection of y’all investing with a particular philosophy if the issue self-corrects as guided by your bias (in the most positive sense of that word, mind you).Like most things in life, you don’t ever get what you deserve; you get what you negotiate.JLMwww.themusingsofthebigredca…
How often will it be updated?
You know what is a tough one, that I have seen nobody address (could be wrong).Spouse buy/sell agreements, very much related to vesting and options.I have some examples.This is a REALLY hard topic.I was reminded today tax day.This can really screw a company up.I had a contractor that did really good hardscaping work.He flaked out on me. I did not get financially hurt as I had not made the final payment, got his guys to finish.But there was some extra custom antique brick I ended up wanting and saw at my Material Supply company. He had actually paid for it, and after a period of time, they gave me at a great deal as they could take if he did not collect from the yard.I said “well he was great, but then I don’t know what happened”They said, well he had been building that business since he was 15 got married at 45 and got a nasty divorce at 51. All his wealth was in his assets that he made a living from.She took 55% including much of his equipment, shop, and truck. He checked out.This is a tough one. Your wealth is in your business. That $100k wrapped diesel pickup truck?? Your big shop on your acres of land??Don’t know both sides. Don’t know. I know wealth was destroyed.
I actually had not read many of these posts. They were before my time commenting here. However, I will make a comment on the how much entry. The subtle yet most important statement in this post:”The key thing is to communicate the equity grant in dollar values, not in percentage of the company.”This is the most important negotiating point an employee focuses on. Certainly for the first couple of dozen employees, its ALL about percentage. The only thing that I wanted to know when I joined my startups was, what’s my percentage and how does it change in subsequent rounds (i.e. how do I dilute)? This is the REASON employees joins startups rather than traditional big company jobs. VCs and mgmt know that which is why they most often refuse to give it out to the employee, even during negotiations. Its much easier to give them less when they don’t know.
You know what is a tough one, that I have seen nobody address (could be wrong).Spouse buy/sell agreements, very much related to vesting and options.I have some examples.This is a REALLY hard topic.I was reminded today tax day.This can really screw a company up.I had a contractor that did really good hardscaping work.He flaked out on me. I did not get financially hurt as I had not made the final payment, got his guys to finish.But there was some extra custom antique brick I ended up wanting and saw at my Material Supply company. He had actually paid for it, and after a period of time, they gave me a great deal as they could take if he did not collect from the yard.I said “well he was great, but then I don’t know what happened”They said, well he had been building that business since he was 15 got married at 45 and got a nasty divorce at 51. All his wealth was in his assets that he made a living from.She took 55% including much of his equipment and shop. He checked out.There are two sides to every story.But when we talk about equity, how we share, terms on it.This is a big one.
Congratulate me on creating my discussion concerning firearm safety and the First Amendment, PhilipSugar!
In the 10/04/2010 post on dilution, the ownership stakes in pool refresh column are diluted by 3.67% (multiplied by .9633). Anyone know how to get to that number? My thought process for the pool refresh would be to dilute each ownership percentage by 3.33% (the 13.33% pre-money minus the 10.00% existing pool). Is it something to do with the option pool of 10.00% and the dilution of 3.33% somehow contributing an extra 0.33% of dilution? Any help would be much appreciated!
Thanks for updating, really appreciate it! What would be the overlap with this product – https://hiringplan.io/#/about
Is this still on track for mid-May @fredwilson:disqus? I’m very keen to see your take on this ahead of our Series B capital raise.