Zero to One_ Notes on Startups, or How to Build the Future ( PDFDrive )

VESTED INTERESTS
Startups don’t need to pay high salaries because they can offer something better:
part ownership of the company itself. Equity is the one form of compensation
that can effectively orient people toward creating value in the future.
However, for equity to create commitment rather than conflict, you must
allocate it very carefully. Giving everyone equal shares is usually a mistake:
every individual has different talents and responsibilities as well as different
opportunity costs, so equal amounts will seem arbitrary and unfair from the start.
On the other hand, granting different amounts up front is just as sure to seem
unfair. Resentment at this stage can kill a company, but there’s no ownership
formula to perfectly avoid it.
This problem becomes even more acute over time as more people join the
company. Early employees usually get the most equity because they take more
risk, but some later employees might be even more crucial to a venture’s
success. A secretary who joined eBay in 1996 might have made 200 times more
than her industry-veteran boss who joined in 1999. The graffiti artist who
painted Facebook’s office walls in 2005 got stock that turned out to be worth
$200 million, while a talented engineer who joined in 2010 might have made
only $2 million. Since it’s impossible to achieve perfect fairness when
distributing ownership, founders would do well to keep the details secret.
Sending out a company-wide email that lists everyone’s ownership stake would
be like dropping a nuclear bomb on your office.
Most people don’t want equity at all. At PayPal, we once hired a consultant
who promised to help us negotiate lucrative business development deals. The
only thing he ever successfully negotiated was a $5,000 daily cash salary; he
refused to accept stock options as payment. Stories of startup chefs becoming
millionaires notwithstanding, people often find equity unattractive. It’s not liquid
like cash. It’s tied to one specific company. And if that company doesn’t
succeed, it’s worthless.
Equity is a powerful tool precisely because of these limitations. Anyone who
prefers owning a part of your company to being paid in cash reveals a preference
for the long term and a commitment to increasing your company’s value in the
future. Equity can’t create perfect incentives, but it’s the best way for a founder
to keep everyone in the company broadly aligned.