Advancing Equity Compensation & The War For Talent

A data-driven proposal for advancing the frontier of equity compensation at startups in today's increasingly competitive talent market

Talent has never been scarcer, capital has never been more abundant, and outcomes have never been larger. Despite this rapid progression of the technology and venture capital ecosystem, our structural models for equity compensation have never been more stale.

While prior cycles have often shown a moderately clear inverse correlation between wealth creation and risk, as talent markets have intensified, cash compensation disparity across multiple stages has begun to compress, leading to a market where breakout/rocket ship companies are able to materially outcompete more nascent, but still very strong startups for talent.

All of this leads to a dynamic where companies at the early-scaling stages (approximately going from employee 10 to 100) are put in a difficult position for talent acquisition relative to billion dollar startups with an (increasingly common) promise to become $10B+ companies in a matter of years (or months).

As with all markets, as maturation happens, those who are on the "lack of supply" side of the equation must think about which vectors to meaningfully differentiate/experiment on or optimize, in an attempt to win back supply.

With investors, we have seen this progression via an increase of founder friendly terms → pricing in more upside and paying for further growth (resulting in an increase in valuations earlier on the PMF curve) → lowered governance burden at the board and reporting levels.

With crypto broadly we've seen this on the capital market side with longer lockups and less discounts to tokens, and on the talent side with more flexibility in labor market participants and consensus compensation models enabled by tools like Coordinape.

With startups, we saw this with salary parity relative to many other larger companies earlier on in a given startup's lifecycle (which FAANG has attempted to claim back via…even higher salaries) and on the startup vs. startup talent landscape, we must now see a structural progression on compensation, which I believe starts with somewhat materially changing equity compensation for employees at early- and mid-stage startups.

My suggestion for founders that are looking to compete for talent is to take the standard equity compensation model (1 year cliff, 4 year vest, monthly vesting) and move to a shorter term absolute vest with a modified cliff.

At a high level you could break this out into a baseline of shortening the vesting period to 3 years and extending the cliff to 18 months, effectively recognizing the transience and value creation that employees have during this ~10 to 100 employee phase of a company (a time in which your company could easily 5-10x+ in on-paper value in <3 years).

It's my view that this window is the hardest time to hire employees today, thus you could even get more aggressive and shift to 3 year vest 12 month cliff in earlier-stage areas (obviously, there are many levers to pull, including things like tranching equity for executives that command larger grants at these stages, in order to protect against downside scenarios).

Of course over time you could see this begin to create a new type of effect where the Overton window shifts on vesting periods across entire companies (at this point, founders could either market longer-term incentives, or perhaps tie vesting to business milestones like ARR, DAUs, or more advanced metrics).

This possible slippery slope is why many Founders and VCs will likely complain about this proposal (they already have in private conversations), just as they have about all other structural shifts to compensation over time, but let me lay out a more data-driven case.

Allocating Excess Founder Equity Into Employee Option Pools

The core point of the data below is to prove that founders are taking less dilution than ever before, paired with steeper valuation inflections post-PMF (something I talked about at length before), and thus should be fine sacrificing more equity to employees via expanded option pools to compensate for faster vesting of employees. This data does not show the other important part which is, founders are also able to 1) take more secondary than ever before and 2) have larger financial outcomes than ever before, further tilting the economics towards founders relative to any other time in history.

I pulled data from Cooley's Go insights platform (not perfect, but directionally right) for the month of March across a variety of years (I also added some anecdotal data of where I would personally place median round sizes/valuations in 2021). You can play with this data here.

Per the table above, fundraising at median figures for round size and valuation shows that founders in 2021 own more of their company at each round than both 2017 and 2019 figures. Of course, this data can change, but even if you were to meaningfully expand option pools from 10→13% at A, 8→12% at B, and 7-9% at C, founders would still nearly the same amount (or more) of their companies than prior years.

All of this is to make a pointed recommendation to founders that changing the compensation structure ahead of the market (and in face of the inevitable push by some that this is bubble behavior) could lead to a short to mid-term advantage, that then compounds in the long-term, as talent moats can.

The piece of advice I find myself telling founders when unclear forks in the road emerge is often to "make a decision with the idea that if your company fails, you can sleep at night knowing you did what you thought was best".

In a cutthroat talent market, exuberant capital market, and crowded competitive market, you don't want to wonder what could have been had you not taken the extra value founders accrue due to capital markets, and spent it on talent markets moving forward.