We’re thrilled to announce the 2018 Capshare Private Company Equity Statistics Report! We will be mining the report for lots of ongoing content and blog articles so stay tuned. But this year, we created an entirely new set of data to help you best motivate your employees using equity.

When we founded Capshare we noticed a harmful myth common among startups. It was the idea that just by giving an employee startup equity, “making them an owner,” you were setting them up for massive wealth if the startup succeeded. Sadly, it often isn’t true. Exhibit A is something we call the “Ground Floor” effect here at Capshare.

PerEmployeeGroundFloorEffect

Slide 24 from the Capshare 2018 Private Company Equity Statistics Report

This graph shows the median ownership stake that startups give out to employees at various stages.  Since ownership is directly linked to wealth in startups, it shows that most of the real wealth-creating potential of a startup for employees goes away quickly.

But don’t be too concerned just yet. It turns out equity ownership is still a hugely motivating part of your employees’ compensation. And it turns out that sharing the right kind of information can actually motivate your employees even more. We’ll show you how to do that in this article.

Feel free to skip to any of the most relevant sections below:

The Power of Upside

“Stay hungry. Stay foolish.”–Steve Jobs

There’s something powerful about simplifying big ideas to a few words. I’ve always loved mottos like the one from Steve Jobs above that do this. The ancient Greeks pioneered a type of motto called Hendiatris where they used three words to convey one big concept. You’ve probably seen this quite often:

  • The motto of the Olympics: citius, altius, fortius (faster, stronger, higher)
  • Veni, vidi, vici (I came, I saw, I conquered)
  • Reduce, reuse, recycle
  • The motto of France: Liberty, equality, fraternity
  • The Survivor motto: Outwit. Outplay. Outlast.

Thinking about these mottos made me ask: What would be the best 3-word motto for an entrepreneur? For me, it would include the concepts of ambition, hustle, and tenacity. And the motto of a typical startup would include experimentation, growth, and upside. (I’d love to hear your ideas in the comments!)

That last word–upside–has particular importance for entrepreneurs. Most entrepreneurs know “upside” by a different name: equity. You’d be hard-pressed to find a word with more importance to entrepreneurs than equity.

Equity is the reason that most founders choose a career with very high risk. The promise of equity fuels ambition, hustle and tenacity. It’s the upside that drives a startup’s growth and experimentation.

One of my good friends described the day he first got shares in his company as a highlight in his career. He said it was the first time he “felt like an adult, a real player at the company, an owner.”

That feeling is what every startup management team wants to give to each team member.

At Capshare, our passion for equity sometimes even unites us with our competitors. For example, I appreciated a compelling blog post that Henry Ward, the CEO of Carta, recently wrote on the importance of equity and income equality.

My favorite quote in Henry’s article is this:

When the Traitorous Eight founded Fairchild Semiconductor in 1957 they did it for equity. Their decision to leave Shockley Labs, where they received a salary, to start a company where they also received equity broke the mold. Robert Noyce, co-founder of Fairchild Semiconductor recalled: “Suddenly it became apparent to people like myself, who had always assumed they would be working for a salary for the rest of their lives, that they could get some equity in a company … that was a great revelation and a great motivation.” Today it is unimaginable for a tech startup to not issue equity to employees.

Henry goes on to talk about fairness. He says that if you don’t own equity, you are like a modern-day serf that cannot break into the wealthy equity-owning class. In his view, the solution to income inequality problems in the world is to make more people owners.

He ends with this vision:

Carta is about creating more owners. To map and expand the ownership graph, democratizing ownership in the process. To reduce income inequality by expanding the ownership of productive assets. To pull more wage-earners out of the debt stack and into the equity stack. To make 7 billion people part of the landowning class.

That’s where his vision takes a hard fork from ours.

The Current Way Most Startups Motivate: The Startup Equity Myth

“I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity.” –Oliver Wendell Holmes

It’s laudable to want to solve the world’s problems with equity. But startup employees shouldn’t break out the confetti when they get 10,000 shares. And equity software probably won’t liberate the world’s “serfs” either.

The problem with Henry’s vision is that it’s naive at best and hypocritical at worst.

Here’s why. Will granting equity to more people really pull 7 billion people into the landowning class from “serfdom”? Will it really help with income inequality and fairness?

Nope. It will make it worse.

On a macro level, successful startups make income inequality far worse by greatly favoring “a small group of successful individuals by amplifying their talent and luck.”

75% of startups fail. And only a few of the 25% that don’t fail are big successes. Most people think the chance of a big success for a startup is around 1 in 100.

Founders in successful startups become much more wealthy than most other people in the world.

But even on the micro level–within a successful startup, the startup tends to enrich only a relatively small group of shareholders. Check out this chart:

LorenzCurves

Slide 25 from the Capshare 2018 Private Company Equity Statistics Report

What you are looking at is the median equity distribution of over a thousand startups from Capshare data in what is called a Lorenz Curve.

Click here to get our complete report. In the complete report, you will find:

  • Lorenz Curves for startups, founders, and employees by stage
  • Valuation benchmarks
  • Fundraising benchmarks
  • Dilution and option pool benchmarks
  • A lot more

This curve shows that startups distribute the wealth they create in a starkly unequal way. The top 10% of shareholders control just about 75% of the wealth-making potential of the typical startup.  If a typical startup had 100 shareholders, the top 10 shareholders would own about 75% of the company.  The other 90 would split the remaining 25%.  And remember VCs and investors (not just employees) make up a good portion of the top 10%.

So we can be sure that merely giving people equity isn’t going to save the world or solve income inequality.

LorenzCurve

Paul Graham said it best:

Almost by definition, if a startup succeeds, its founders become rich. Which means by helping startup founders I’ve been helping to increase economic inequality. If economic inequality should be decreased, I shouldn’t be helping founders. No one should be.

This is why we need to do a better job in technology of not drinking the startup Kool Aid and thinking through the real implications of our businesses on people’s lives.

Sadly, there is “sugar-coated cynicism” that pervades certain parts of the tech industry. It’s this: “I’ll care a ton about income inequality (or some other global problem) just as soon as I’m done setting up my monopoly.” Or worse: “I’ll pretend to care about income inequality (or some other global problem) while behind the scenes I’m making it worse.”

When we started Capshare, it was common for many startups to try to “wow” a new hire with an offer of several thousand, or several hundred thousand shares of equity in the startup. They would claim or hint that this grant had the chance of creating financial freedom for the recipient.

Behind the scenes, those who really understood how equity works had a much different understanding. They knew that the company would have to sell for billions of dollars for those shares to have any kind of real meaningful impact on the new hire’s life.

That’s what we call The Startup Equity Myth.

One of the main reasons we started Capshare was to tear down The Startup Equity Myth and replace it with the truth.

Even if it’s hard, giving people the truth is the right thing to do. And, as we’ll discuss, it turns out the truth is the most effective way to motivate your employees.

A Better Way

equity
[ek-wi-tee] noun, plural eq·ui·ties.

1) the quality of being fair and impartial

2) the value of the shares issued by a company

—from Google search ‘define equity’

Startup execs should remember the word equity has another, often overlooked definition: fairness.

After working with thousands of companies, we’ve found that the companies that inspire unparalleled loyalty in their employees offer equity compensation that feels fair and generous.

It’s obvious that perpetuating The Startup Equity Myth will only lead to more inequality but how can you optimize fairness? Does it mean you have to give everybody the same amount of equity?

We don’t believe optimal fairness means equal distribution of equity. It’s pretty obvious when you think about it. Should a brand new hire at Airbnb get the same amount of equity as the original founder?

Obviously not. But even if that was fair, it’s not what’s likely to happen. Capshare’s data shows that startups are not creating an equal distribution of equity. They create more wealth inequality than just about any form of business.

If fairness is not an equal distribution of equity, then what is fairness at a startup?

In our opinion, startups should reward based on value created. This is already a requirement for startups at a macro level–if a startup doesn’t create value in its market, it will literally die. At the employee level, startups should reward employees that create the most value.

It’s not always easy to agree on who is creating the most value, but that doesn’t mean we shouldn’t strive for it.

Top 8 Ways to Motivate with Equity

As we wrote this article, we brainstormed as a management team the best ways we’ve found to motivate fairly with equity. We limited ourselves to ideas that felt fair, honest, and even generous without resorting to The Startup Equity Myth.

Being honest may mean that you can’t promise every new hire that their options will make them millionaires. (But some companies absolutely may be able to honestly promise that to some.)

Being honest in this way about your company’s equity value has many positive side-effects including:

  • Motivating you as a founder to work harder so you can honestly believe that the employees you care so much about will receive a much bigger equity payout.
  • Employees will trust you more. Most things that sound too good to be true are. By being honest, employees that care more about the truth will be attracted to your company as opposed to those looking for a get-rich-quick scheme.
  • Being honest with employees will help them think like an owner. They will see that if they want to increase the value of their shares, they will need to create a lot of value.

Also, remember The Startup Equity Myth doesn’t mean that your company’s equity is worthless. Your equity could be worth a lot! Risk may make equity worth little now but a lot in the future. It’s a gamble but it’s one that you and your employees can influence through hard work.

In our experience, this kind of honesty and fairness drives big positive results. It tends to foster better negotiations, more trust, higher performance and loyalty from your best employees.

Here are the top 8 ways you can honestly and fairly motivate your employees with equity at your company.

#1 Give Your Employees Reasonable Knowledge of Relevant Equity Facts

We can solve a lot of the fairness problem by having fair compensation negotiations with our team members.

We believe you can get it mostly right by using an IRS definition of fairness. The IRS defines fair market value as follows:

“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

The IRS says fairness occurs between two parties when there is no compulsion and both parties have the right data. So you can be fair by engaging in arms-length compensation negotiations with your employees (with no compulsion) where both parties have reasonable knowledge of relevant facts. This works for founders, co-founders and VCs as well as for the new hire you plan to bring on tomorrow.

In the world of equity compensation, “reasonable knowledge of relevant facts” includes information about most recent stock valuations, liquidation preferences, waterfall analysis, dilution, business strategies, execution, and realistic estimates of exit prospects.

At Capshare we’ve built tools for all of this:

You can then use one of our strategies for sharing this kind of information with your employees.

At Capshare, we had regular update meetings where we would share general business facts and then we would share more individualized equity data in one-on-one conversations with employees.

You might wonder if you are empowering employees to negotiate against you. The answer is yes. But this will create TRUST. And in our opinion, trust is the foundation of a successful business. “Winning” a negotiation based on withholding key information will only create distrust.

#2 Avoid Dead Weight on the Cap Table

So much depends on getting equity right at the outset. Starting out wrong can make your company feel inherently unfair and unmotivating from the beginning. Just talk to a founder trying to start a company where her co-founder owns half, but never does any work.

Worse, getting equity wrong at the outset can make it much harder for your to get funded by an investor.

Here’s some bad news: You aren’t going to get it exactly right. Almost every cap table ends up with some dead weight.

The good news is that there is a lot you can do to minimize the potential for dead weight. The first is to grant shares with vesting to as many of the early founders as you can. You can also consider setting up an option pool and being thoughtful about how much you want to reserve for future employees. This will allow you to spread out the wealth creating potential in your startup to a larger group.

#3 Do Regular Fairness Reviews

At Capshare, once every six months we would bring the management team into a room and do an equity fairness review for everybody on the cap table.

Often someone would initiate these conversations because an employee asked for more equity but we also proactively held these meetings and issued additional equity even to those who didn’t directly ask for it.

When I was a young VC, Bob Barnes who was the founder of a company called Zonder, showed me how he did his equity fairness reviews. At first, it seemed weird to me but when I became a CEO, we used the same process.

Bob would sit in front of his cap table and triage his employees into three groups. The groups represented the amount of money each group would get in the event of a successful exit:

  1. Enough money to never need to work again.
  2. Enough money to buy a house.
  3. Enough to buy a car.

He would then look at each person on the list and say things like, is it fair that if we succeed, Person X would only get enough money to pay off a car? Is it fair that Person Y would get enough money to pay off a house? He would also compare relative equity stakes. Is it fair that if I become independently wealthy, Person Z would only be able to pay off his car?

This kind of reasoning helped us at Capshare to make sure we felt like everybody would be treated fairly if the startup succeeded. When this process pointed out problems, we would try to proactively correct them by granting more shares to the appropriate person.

#4 Benchmark for Generosity

Try as you might, your definition of fair is likely biased in favor of the early founders and early employees. So it’s a good idea to strive for generosity with your company’s equity. Plus, being generous helps to create an awesome startup culture.

This doesn’t mean you have to grant the same amount of equity to everybody, but it does mean you can try to spread the equity out a bit more than usual.

Capshare has built a tool that will allow you to compare your equity distribution among all shareholders, just founders, or just employees to a sample of 1,000+ similar startups. We use the concept of a Gini coefficient to create a score for your company. You can then compare your score to hundreds of other startups at similar stages.

We did this for Capshare and this is what we found. Remember lower is better.

GiniDistributions

Slide from Capshare Equity Fairness Benchmarking Report

If you want to benchmark your company’s equity fairness, just contact us and mention this article. After we upload your cap table, we’ll provide you with a customized fairness report that contains:

  • Your company’s Lorenz Curve
  • Your company’s Gini score
  • A breakdown for how fair you are at the overall company level, among founders, and only looking at employees (excluding investors)
  • All the data will be broken down by company stage from no preferred to Series Seed, A, B, C, etc.

#5 Make Offers with Varying Equity Levels

One way to make your startup equity feel more fair is to give every new hire an offer that has varying equity levels. At Capshare, we would often discuss salary and equity ranges with a potential like this:

“We’d like to give you an offer for between $80 and $100K in salary and an equity stake between 0.25% to 0.5% of the company’s fully-diluted stock. If you choose a higher salary, we would offer a lower equity stake. If you choose a lower salary, we would offer a higher equity stake.”

This allows employees to choose their own compensation plan based on their desire for risk and reward. This minimizes the potential that they will feel unfairly treated. It also forces them to think like a founder and make the same trade-offs founders do all the time. Founders make a similar decision every time they dilute themselves to raise more money or pay themselves higher salaries. Lastly, it helps you see what motivates that employee most.

#6 Allow Employees to Buy In

Another thing you can do is to offer employees the ability to buy shares in the company. At Capshare, we offered a restricted stock purchase plan (we called it an RSPP) as part of our push to profitability. This basically allowed employees to buy more equity by foregoing some of their salary.

It had a massive positive effect on our company. It had the added benefit of allowing those who felt they had missed out on the “Ground Floor Effect” to dramatically increase their equity stakes. They were very happy they did.

You can read more about how to create your own RSPP (including all of the relevant docs) here.

#7 Shift from Equity to Other Forms of Comp Over Time

One way to be fair with your employees is to recognize that the amount of equity available for new employees (as a percentage of the total shares available) goes down dramatically as your company grows.

This is what we call the “Ground Floor” Effect. The chart below shows the median percentage of equity given out to all founders and employees at startups by stage.  As you can see Series A and B companies give out about 1/4th the total amount of a startup that still hasn’t raised a preferred round.

GroundFloorEffect

Slide 23 from the Capshare 2018 Private Company Equity Statistics Report

The Ground Floor effect means it gets harder over time to give employees enough equity to “pay off a house” for later stage companies. But remember, the value of the stock later stage companies grant to employees is lower risk. So it might be worth more than the stock of an early-stage company.

Also, some “rocket ship” startups grow in value so quickly that even though they give out smaller and smaller equity stakes, the increased value of those equity stakes offsets the small size of the grant. Keep in mind this is the exception, not the rule.

You should teach your employees that the later-stage stock you are giving them is both valuable and lower risk.

Stock is just a form of compensation. And all compensation has a value. So, as you get bigger, you can start increasing salaries to offset some of the lost upside of early-stage stock grants.

#8 Eliminate Systemic Bias

We can’t finish an article on the importance of equity fairness without talking about systematic bias.

The ability to leave a company and get a better offer is one of the best checks against unfair treatment at a company. But what if the entire world is biased against you because you come from an unfavored class or minority?

The world is slowly getting better at becoming more fair but there is still a lot left to do. There are many resources you can find to help your company avoid these biases. As an example, Capshare recently took the Parity Pledge to make a small effort to combat systematic bias.

Capshare’s Vision

We started this article by talking about The Startup Equity Myth. It turns out The Startup Equity Myth is alive and well today. We tore the myth to shreds by showing that startups actually don’t help to distribute wealth equally. They enrich very small groups of people.

It’s always easier to tear something down than it is to build something up. But at Capshare we want to build a brighter future for the world’s startups.

Here’s the cool part.

We have found again, and again, that startup employees ultimately want to work for people they trust. Feeding your employees The Startup Equity Myth might work for a short while…but in the long run, it’s destined to fail. When you take a chance and give your employees the truth (including the power to negotiate against you), you’ll find that you can both rise to the challenge and find fairer ways to compensate. It turns out that this kind of radical candor combined with generosity is a recipe for motivated employees.

At Capshare, we’ll cheer for you when you give your first employee stock. But we’ll throw you a party if you follow the 8 steps above to make your equity grants as motivating as possible.

At the beginning of the article we talked about mottos. Steve Jobs’ motto was “stay hungry, stay foolish.” Capshare’s motto is and always will be “to empower, educate, and enrich the world’s shareholders.” We’re not a perfect system yet, but we’ll never quit until we create the most empowering, educational, and enriching equity management system in the world.  That’s how we are making equity more equitable every day.

We hope you enjoy this year’s Private Company Equity Statistics report! Let us know what you think and what you’d like to see next year!