1) This risks pricing the common, which is bad. It certainly isn't the same as preferred, due to superior rights (liquidation preference most seriously)
2) In general, you should discount equity vs. cash because equity, even granted today, is illiquid. Even if you claim you're willing to buy it back at any given time for the then-current market price, you're better off motivating employees by giving them equity than cash, all things being equal -- the employee can improve the value of the equity through work, but can only in the most absurdly indirect way increase the value of cash itself (by tearing up other cash...)
In practice, I love what Palantir does (or did; I know about this from Ari Geller on Quora, not directly). You basically get 3 discrete offers e.g. -- $130k/500 shares, $100k/1k shares, $85k/3k shares. It's essentially a way to reveal your preference and beliefs about the company (although, Palantir is now so big that an individual's contributions don't materially move the price.) (I'd personally be WTF at someone who picked the $100k/1k; either extreme would be defensible, but I'd generally prefer to hire the 85k/3k person, unless I knew he had high cash expenses like kids in school).
> This risks pricing the common, which is bad. It certainly isn't the same as preferred, due to superior rights (liquidation preference most seriously)
The common/preferred issue is a good criticism and I have added a paragraph partially addressing it. For your convenience, here it is:
This issue deserves more thorough treatment but as a temporary remedy, I’d offer up this solution: unbundle the liquidation preferences and other preferred terms from the underlying equity. Instead of an investor purchasing preferred shares, they would purchase common shares and separately purchase rights or swaps to synthetically realize the economic exposure of the preferences. Since the investor would be purchasing the synthetics at their theoretical market value, the increase in the company’s cash would equal the increase in its liabilities. Therefore, this transaction, theoretically, would not have any effect on the dilution or value of the equity held by any of the founders, employees, or investors.
>unless I knew he had high cash expenses like kids in school).
Thats the rub for us older startup joiners... I had two options at my current company, and while the spread was very small as compared to your Palantir example - because I have high kid expenses I chose less stock but higher wage...
Although, I'd prefer if they looked at the discussion going on over employee equity, with only 20 employees thus far, their option package are nowhere near even what people have been throwing out for discussion :(
See, I think that its really unfair to offer employees these options with the high cash one being the "wrong" choice. people have expenses and there's nothing wrong with choosing less risk in favor of cash up front. It doesn't mean that you "don't believe" in the mission or any bullshit like that.
One motivation behind this model is exactly people in situations like yours. Your liquidity needs should be cyclical. The IE model fully supports taking varying amounts of cash each month and getting something approaching a fair-valued amount of equity each time.
I actually think investors put enough of a premium on equity vs many employees that a reasonable case can be made for very tight equity distribution, using something like this proposed model, and periodic cash bonuses.
I actually have an even weirder idea for equity in big companies -- each class of incoming employees gets founder shares in a company comprised of hires. (Per month, per team, not sure); essentially like a PEO. Company buys that entity giving employees a capital gain related to their group's contribution at purchase time. Standard 4/1 repurchase on the founder shares within that group.
I like the fundamental idea. However:
1) This risks pricing the common, which is bad. It certainly isn't the same as preferred, due to superior rights (liquidation preference most seriously)
2) In general, you should discount equity vs. cash because equity, even granted today, is illiquid. Even if you claim you're willing to buy it back at any given time for the then-current market price, you're better off motivating employees by giving them equity than cash, all things being equal -- the employee can improve the value of the equity through work, but can only in the most absurdly indirect way increase the value of cash itself (by tearing up other cash...)
In practice, I love what Palantir does (or did; I know about this from Ari Geller on Quora, not directly). You basically get 3 discrete offers e.g. -- $130k/500 shares, $100k/1k shares, $85k/3k shares. It's essentially a way to reveal your preference and beliefs about the company (although, Palantir is now so big that an individual's contributions don't materially move the price.) (I'd personally be WTF at someone who picked the $100k/1k; either extreme would be defensible, but I'd generally prefer to hire the 85k/3k person, unless I knew he had high cash expenses like kids in school).