This is why I always recommend to individuals that when a startup offers equity in lieu of cash compensation to ask every financial/equity question imaginable. (what are you valued at today? how much investment have you taken? what's been diluted? etc etc)
People don't like to have that conversation because they think it's inappropriate. However, it's more inappropriate for a founder to tell you that you're getting equity in lieu of compensation and explain nothing about the value of that equity and potential future value of that equity based on the current state and future state assumptions.
90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like, and even if they had a list of them, they'd have no clue about how to interpret any of the results, or how to tell if the company is feeding you BS.
I mean, I was the first employee at a startup, involved with fund raising, and then founder at a startup, and even I would have a hard time with that.
Not to mention that even if you have a very solid understanding of what things are like when you get hired, it can all change dramatically in subsequent fundraising.
This is just one of many instances where the employee/employer relationship is heavily biased against the employee. And unless clear disclosure requirements understandable by the average worker are put in place, it'll stay that way. As an employee, your options are inscrutable lottery tickets which value can be redefined in many ways at many points in time, and there's not much you can do against that.
> 90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like
Totally - I've been thinking about actually putting on a "equity master class for engineers looking to join startups" type seminar in the bay area if people are interested.
You mean biased agains the employee? Anyway, I guess the obvious thought is that situations of information asymmetry like this are not really biased against anyone but just lead to worse outcomes for everyone. Startups would prefer to compensate in equity, but the value of their equity is depressed because potential employees can't tell how much it is worth. I suspect the obvious thought is right although maybe it could be bad for employees if they systematically tend to overvalue equity. (And then it would work against even the rare employee who can tell how much it is worth because he or she will have to compete against a bunch of suckers.)
I completely agree. An employee should be optimizing for maximum salary, the equity should just be considered a token reward.
If founders and investors really want to align their goals with employees, then start handing out rev share, otherwise, the employee is just deluding themselves.
I just don't accept equity in lieu of compensation. There's far too many ways to screw you over.
The only thing I would value is participation in a trust designed to make it as difficult as possible for the founder to receive cash from their ownership stake without paying out to all minor participants. "If he's worth $1B, I'm worth $1M" is something I can value.
Commonly set up? Depends on what you mean by "like this" - for this exact purpose, probably not at all. Enforceable? Absolutely. The entire point of a trust is to give out flows of cash to beneficiaries while restricting certain rights you may not want those beneficiaries to have. Usually this is more along the lines of "can't use the assets to pay down debts" than ensuring that the wealth generated from founding a start-up gets distributed fairly.
I remember one time negotiating an offer with StartupXYZ and they claimed a bunch of things about their stock options (company valuation, overall stock package value, etc). When I asked them various questions about the options, in particular the total amount of shares available, about class, etc, they told me "we can't share that information".
The last time I was interviewing was my first experience at evaluating non-public company offers. My recruiter at Docker setup a 30+ minute phone call just to explain what each of the terms meant, and helped me research and understand the offer much better.
People don't like to have that conversation because they think it's inappropriate. However, it's more inappropriate for a founder to tell you that you're getting equity in lieu of compensation and explain nothing about the value of that equity and potential future value of that equity based on the current state and future state assumptions.