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Assign equity retroactively?

Startups and businesses assign equity up front by default; maybe this is backwards? Just as retroactive payments (in $) might be a better form of payment, so too retroactive equity (in %) might be a better way to assign credit/impact/ownership.

Pros of equity splits up front

  • Everyone knows what they’re getting into
  • Great people are excited by the idea of having a lot of upside in a project

Cons of equity splits up front

  1. Initial negotiation process is painful
    • Total equity feels like a fixed pie (you’re haggling over shares of 100%), but fixed-pie mindset may be deleterious
  2. Hard to change after it’s set
    • Early employees famously get a bad deal, accepting eg 60% of the risk of a founder, but only 10% of the outcome
    • Even for founders! One reason I left Manifold is that I felt that the org could not properly compensate me for my time
  3. 2 leads to more of 1
    • Because these things are hard to change, it feels very high stakes
      • Sure seems it’d be better to not have so much of it be fixed

How retroactive equity could work

  • Re-evaluated at set cadences, eg yearly
    • Vesting is a very basic version of this. “are you still working? if so, get some equity”
    • Performance bonuses for CEOs have targets and OKRs
    • Stock grant renewals for FAANG employees have a bit of this
  • One approximation: over the lifetime of an org, every time slice of the org should get equal credit?
    • Simple
      • Simplicity is good! Often times not worth nitpicking and more important to get everyone to do the thing. Again, abundance mindset wrt project, not fixed-pie
    • Breaks down when there are certain inflection points though?

How is the equity split? “who decides?”

  • Usually, the “boss” of the person working there makes the call?
  • Harder when there isn’t really a boss
    • CEOs kind of have a board of directors
  • Could have a collaborative process
    • E.g. weighted input based on how much existing ownership the parties have?
  • Eg Alice, Bob, Charlie are starting a startup.
    • The default way to split founder equity is evenly (33% each vesting over 4 years). At a $10m premoney valuation, $830k/yr or $70k/mo.
    • or with some acrimonious hard conversations for some unequal splits
  • Could have more collaborative processes
    • E.g. Instead of $830k/y of equity, founders get $400k/y, and the remaining $1.3m/y in equity is retroactively divided
    • Year 1: Alice/Bob/Charlie write down their fair splits, take the average
      • e.g. average might end up
    • Year 2: Alice/Bob/Charlie write down fair splits, gets weighted
  • Translating between $ and %
    • Retroactive funding typically quotes in $
    • When valuations go up over time, % is more valuable
    • % provides better longterm incentive alignment
    • $ are more fungible

Case studies

  • Manifold
    • 80% founders, 20% option pool
    • Vesting monthly over 4 years
  • Manifest
  • The Curve
  • Manifund
  • Codebuff
  • Manifold Love

Other considerations

  • Difference between assigning equity to org vs employee?
    • By default, orgs own the IP, brand that the employee creates while there
    • Not sure if this is a good default
  • When to spin out a subproject?
    • Manifest vs Manifold
    • Mox vs Manifund