This is a mobile version, full one is here.
13 February 2018
Most startups don’t have enough cash to pay programmers as much as
they deserve, unfortunately
(or maybe not). Instead of cash, startups give their early employees
shares of stock, which they will be able to either 1)
sell in a few years and become
or 2) throw away and remain nobodies. It’s a
The question, however, is what
is the right procedure, and the optimal algorithm, to transfer those shares to programmers.
When exactly do they become shareholders? What is the formula?
There are a few typical approaches.
One of the most popular is “four years with a one-year cliff,” which means that if they had 50% equity and leave after two years they will only retain 25%. The longer they stay, the larger the percentage of their equity that will be vested until they become fully vested in the 48th month. However, because they have a one year cliff, if they leave before the 12th month, they get nothing. There could be slight modifications to the numbers, of course.
The disadvantage of this approach is that their primary motivation is
to stay in the company, instead of achieving results. This vesting
formula is perfectly aligned with the popular
paradigm and is not beneficial, either to the company or to
Another option is milestone-based vesting, which defines a set of value milestones, each of which unlocks an additional part of the programmer’s equity.
On top of the inability to predict milestones accurately, this vesting formula promotes group responsibility, which, in my opinion, is the least effective way to motivate. Programmers writing Java classes can’t be responsible for the “next round of VC funding,” simply because they don’t have any idea how to make that round happen. It’s not their job, not their responsibility.
You may say that writing those Java classes is exactly how we make the next
round happen, but it’s far from being true, in most cases. We all know that
investments come to those who can
pitch an investor,
not to those who write the best Java code. Thus, the work programmers do
and the “value events” the startup is aiming to reach are pretty much disconnected.
A more logical formula is microvesting, which we practice in projects managed by Zerocracy. It is as simple as that: A company has a valuation, which is set by its founders; let’s say, it’s $1,000,000. A programmer has an hourly rate, say, $40. Thus, when a one-hour fixed-budget task is completed, the programmer earns 0.004% of equity ($40 / $1,000,000). Our software calculates it all automatically, increasing their shares after each completed task.
Using these two variables—valuation and hourly rate—the company can influence programmers’ motivation.
No need to lie to them about big-money milestones or keep them in the office for four years. Just let them be focused on the results they can produce and give them back what they deserve. Incrementally. That’s it.