Sam Altman wrote a great piece a few days ago on founder equity. He has some excellent points around exercising options and tax treatment structure that deserve more discussion, but I want to talk about the percentage of a company that goes to non-founders.
Specifically, non-founders should be getting more equity. As Fred said, perhaps the market will slowly adjust to this. But if I were starting a company today, I would use my option pool as a competitive weapon.
Over the last five years we’ve seen valuations of startups go up. According to Pitchbook, valuations are up 14% at the seed stage, and 12% at A rounds, in just last year alone. Valuations are at a 10 year high, but the amount carved out for an employee option pool has stayed relatively static for the last 15 years at 10-15%. Meaning that the spoils are going to the founders.
If the market is driving valuations up, so be it, but I don’t believe it benefits either the Founder or the employee to have an order of magnitude higher compensation in just one level of company hierarchy. While we are starting to see some very minor adjustments, someone who is aggressive could likely take advantage of the general timidity of founders to give up their equity.
To get ahead of the issue, a founder would have to have the stomach to not play small ball and simply increase their option pool by a couple percentage points. If I were starting a company today I’d consider an option pool of 25%, 35%, or even 50%. Would that be incredibly dilutive to the founder? Absolutely, and I don’t profess it’s for everyone in every startup situation. But in the right one, it could be a great recruiting tool and even culture building message.
I don’t want to overstate equity. I personally believe the cause, not the compensation, should be the first reason you are picking anything. But highly competitive hiring usually involves talking to someone who has a couple options that they are weighing. And if they are inclined to believe in you, then at the very least there would be a pretty clear message about how much faith you are putting in them.
The news broke today that Oculus is joining Facebook for $2 billion, and we couldn’t be happier for Palmer, Brendan, Nate, Laird and the amazing crew over at Oculus. Working with a team like this on a mission like this is why you work in, invest in, and love startups. As Santo wrote about, we fell for this company hard from the first moment we saw them.
There will be lots of stories about what this means for Facebook, Oculus, and the world of virtual reality but I think mostly about how this team has executed so incredibly well while carving a very unique path every step of the way.
These guys are the epitome of a missionary company trying to bring a truly amazing product to the world. That missionary nature has allowed them to ignore much of the standard startup ethos and follow their hearts in several ways that defy convention.
1. Don’t be afraid to be small - Oculus started as an ambitious hobby project, and they have fought hard to not lose those roots. A lot of startups try to look bigger than they are, but Oculus has taken a different track by just being transparent about their position.
I was sitting at The Creamery coffee shop a couple months ago with a friend, who without much segueway started raving about a local company called The Juice Shop. “Have you tried their A+ Deep Green juice? Life changing!” I was of course open to try it but their nearest location was in Cow Hollow, and so I resigned myself to likely forgetting this recommendation by the next time I was in the neighborhood.
Not to be deterred, my friend whipped out his phone and 10 minutes later a Postmate walked into the coffee shop where we sat and delivered our juices. I’ve been a regular of The Juice Shop since then.
When people talk effusively about Postmates it’s often stories like this. From the point of view of the customer this is another example of your phone as a “remote control to the physical world,” much like Uber or HotelTonight. Postmates is also often described as Kozmo, probably the most beloved of the late 90s flameout startups, only with a business model.
For a firm like Spark where we guide ourselves by the product, the strength of the experiences Postmates generates is incredibly compelling. We’ve seen the type of businesses those reactions can build. But the long term effects on the supplier side are actually just as interesting.
I’m in the process of closing a new investment right now and getting to know this CEO has been a particular joy. There is a long road ahead, but it’s a great sign when we can start off just being honest with each other.
As an entrepreneur I got terrible advice on how to relate to investors from fellow founders. One CEO described his “attachment method” of overly communicating to create the sense of ownership that would make a VC keep giving them money. Then another would tell me to never give the slightest detail of the business because it just gave them the ammo to think they can control you. The problem with these approaches is that they assume there is some formula for how to win at managing an investor.
A CEOs relationship with an investor is exactly that, a relationship. And just like there is no “paint by numbers” template on how to interact in a marriage there is not a single right way for the CEO - VC relationship.
Aileen Lee wrote a very interesting piece on Techcrunch where she lays bare some of the analysis she has done on “Unicorns” - or startups that have entered the $1b club.
It’s a rarified club, to be sure. In fact, it’s enough of a rarified club that I would call into question any conclusions one would assume by Aileen’s analysis. The long version of why this is not a good idea was the subject of my last post, but the short version is this: 39.
The starting data set is 39 companies, and perhaps it’s a bit more than that as people expand the list, but it’s a pretty small number no matter what. A number that small is just hard to reach any definitive conclusions with.
Anyone who has done a controlled study has seen many situations where the first 10 results you get point in the exact opposite direction of the later conclusion. For instance, right now the conclusion is that nearly half of the co-founders in “Unicorn” companies have worked together in school. But, if the four unicorns from this year happen to have met after college, then that number could drop to 40%.