> Give them a realistic estimate of the risk they're taking, and the value they can get.
Herein lies the problem. Founders are uniquely well-placed to evaluate the risk, and uniquely psychologically motivated to evaluate optimistically.
Because of that, founders sell equity dear.
If the generous equity offer is reasonable, then would be reasonable to make two offers, one with only cash and one with generous equity, in an "I cut, you choose" scenario. If a company has taken funding and isn't willing to do this, then employees are being asked to take risks that the financial backers are not willing to take themselves.
Again, you make it seem very cut and dry. It's not.
Suppose my startup is current worth $100m. According to you, I should be able to sell 0.5% of it for $500k and give that to the employee, or offer them that 0.5% directly, right?
Well, no. I can definitely offer them that 0.5% since I control the equity, but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".
Ever been close to a startup raising money from VCs? It simply doesn't work that way. VC investment is a big, complex package deal. They're not just going to accept whatever shares you give them, and pay you. They have their own idea of how much equity they want, how much they're willing to pay for it, how much besides equity they want (control of the company, seats at the board, various forms of preferred stock and other guarantees, etc).
Then you're way beyond the stage any of this conversation is about... But let's say you said a smaller number.
> Well, no. I can definitely offer them that 0.5% since I control the equity,
... no you can't. You can grant equity out of the option pool, which you defined in collaboration with your investors. If you want to grow the pool you're going to have to talk to them first. You don't have free reign to dilute the investors away at will.
> but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".
Well sure, not on a daily basis. You have to raise a round of funding, obviously. Hopefully you don't do that too often, but when you do, you make sure to raise enough to pay your employees a fair salary until the next round.
If you can't raise a round of funding, then your stock is worth nothing and the employee should consider it to be worth nothing.
> Ever been close to a startup raising money from VCs?
> You can grant equity out of the option pool, which you defined in collaboration with your investors.
Obviously I'm simplifying here, but overall yes, it's far easier for a startup to give equity than cash, for the reasons I mentioned.
Especially if I'm an early stage startup, maybe after a small seed round, I will surely have enough options in the pool, or investors lenient enough to let me issue these extra stock in the unlikely case I'll need them.
> I have raised money from VCs.
So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.
At a $6M seed stage valuation, 1% in equity (vesting over four years) is worth the same as $15k in salary.*
Which is harder for a founder to authorize, 1% in equity or $15k in base salary? Honestly $15k salary sounds a whole lot easier and cheaper to me.
$105k in salary converts to 7% in equity. So if you want to hire than $400k Googler you're going to be paying them $200k salary and 14% equity.
An entire option pool is typically 20% or less.
The only reason giving away equity seems so much easier than cash is because you can trick people into taking far less of it.
* Disregarding the fact that the valuation is based on preferred shares while the equity grant is common shares, which only makes the equity grant even more worthless.
> So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.
That's literally the entire point of raising a VC round?
Yes, I'm eliding a lot of complexity, in that you can't just take the equity and sell it to the bank or to your VCs. However, you as a founder have some control over how much you raise and at what valuation. So the fact that you can't make that decision at the time of hiring is certainly true, but you are making those decisions when you decide to raise a round (or not).
That's why I restricted my final remark to companies that have taken funding. Of course there are a lot more moving parts than I let on, but if a company has taken funding and would rather keep their funding than their equity, then it makes sense to think carefully about why that is before buying that equity with, potentially, years of your irreplaceable life.
Herein lies the problem. Founders are uniquely well-placed to evaluate the risk, and uniquely psychologically motivated to evaluate optimistically.
Because of that, founders sell equity dear.
If the generous equity offer is reasonable, then would be reasonable to make two offers, one with only cash and one with generous equity, in an "I cut, you choose" scenario. If a company has taken funding and isn't willing to do this, then employees are being asked to take risks that the financial backers are not willing to take themselves.
[Edit: removed something about a typo]