Equity as a competitive advantage

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.