[nwenzel]

When people talk about startups and equity, they often talk about the “risk” of joining a startup. For me, as a founder, the equity portion of a comp package isn’t about the risk. I’m curious to know what HNers (often with very passionate thoughts on the topic) think of my theory.

There is risk at companies of all sizes. Also, the idea of a single career in your lifetime isn’t a reality, so the “risk” of a losing a job is really the risk of losing it without notice. Compensation for that risk would be something like one month of pay, not illiquid certificates that might or might not become cash someday.

Employees can also change jobs voluntarily. But the idea that their employer should get a percent of their future earnings as compensation for that risk would be ridiculous.

I believe equity comp is because employees have two jobs: 1) execute on their day job, 2) build the systems, processes, culture, and institutional norms of the company. Basically, the equity component is added to the cash component because building a company takes long-term thinking and because it’s a ton of work.

I’m curious to know if others think about equity comp having a purpose other than to offset risk. Thanks!

[saas_co_de]

From an economic perspective I don't think equity can be a very strong motivation for individuals.

As an individual your work may be totally optimal and yet the equity may be worthless for a thousand reasons that have nothing to do with your work. Consequently, a rational person will not see equity as being much of an incentive.

If you take that a step further you are giving up equity in your company but all of the smart people are valuing it at zero when they are assessing your comp offers so you are giving it away for nothing in return. Since this employee equity didn't create any value for the company it is only rational that if your company becomes successful you make sure the employees don't really get anything out of it, which is usually what happens.

[avip]

My boring POV as an employee: My incentives are "aligned with the company" regardless of options. I want what I do to succeed, I want the people around me to succeed.

I treat options as another piece in my overall "compensation". I assign it a value of 0$. If there's the option to swap options for cash in a contract I take it with three hands.

[regularfry]

Those two jobs are just one job. You still have to do all those things in an established company, and it's often harder because you're swimming against the momentum of an established system. Any place that values continuous improvement will see all those things constantly changing.

[ThrustVectoring]

Equity comp can align incentives on the rule-enforcement level. Like, without equity, your coworker slacking or otherwise harming the company doesn't really affect you. With an equity grant, you're more interested in making sure everyone is working well towards making the company better off.

To be honest though, it's a pretty weak effect with the amount of equity granted. The equity grant gives an outsized amount of narrativium for its dollar value.

[auxym]

I understand that the risk, in many cases, is the salary difference between a startup and a more established company that can pay higher wages.