I'd counter the idea that equity is purely symbolic (speaking as a startup employee myself). Equity on a vesting schedule, for example, is better understood as a carrot to get the employee to work for a longer period or under less immediately gratifying conditions than they might be able to score at another firm. If you are a startup that needs to develop long-term workers with lots of implicit knowledge about how to do things, or are trying to poach experts who could otherwise demand wages you can't afford right now, you can just pay them to stick around and grind it out for four years.
My vesting schedule of 50,000 shares kicks in next April and will dispense 12.5K shares at that point and about another 1K shares every single month afterwards. Right now the share price is around $2.50, but will probably be at least double that by the time vesting starts if my employer doesn't go under (which seems very unlikely right now).
The psychological effect is to get the employee to grind loot boxes: I might be on my fourth six-day week in a row and could put in my two weeks' notice tomorrow, but if I keep going for another month I'll get a $5-10K loot box in addition to my salary that I wouldn't get if I went to work for Megacorp. It would be foolish to dismiss the psychological angle, because the 'soft factors' are most of what make jobs good places to work or crappy places to work. I've had weeks with only about 10 hours of real work that were absolutely agonizing because we had broken equipment and everyone was just sort of stewing, and 55-hour weeks of much more objectively demanding work that were easier loads to carry because there was a feeling of a good job well done at the end of the day. "People don't quit jobs, they quit bosses," etc. etc.
But, you could construct a pay schedule with identical expected payoffs, using cash. Equity pay can also be explained as getting around credit market constraints, but it doesn’t make sense as making it individually rational to invest in productivity improvements.
Yeah, but if you're a startup you probably don't *have* the cash! My employer is in hard tech and recently raised a medium seven-digit round. Most of that will go to equipment; on a good day I burn through my daily pay and then some on equipment/capex, and on a bad day I might be the witness or indirect cause of another four figures on top of that. (Thankfully it looks like bad days are going to decrease in frequency now that we've got the cash on hand to buy sturdier replacements, but still.)
In other words, you *could* construct a pay schedule with identical expected payoffs using cash...if you had the cash. If you're not doing that, it's because you have a finite amount of cash and it's better spent on other things.
The obvious counter is that this situation should never happen because employees shouldn't be any more informed about the company's prospects than investors are, and if you can get employees to work for equity then you would be able to get the equivalent amount of cash for investors. But this can't be the case--if investors knew as much about the fundamentals of what they're investing in as the founders do, they would just do it themselves or hire the founder directly. I'm not sure where the paradox is?
I'd counter the idea that equity is purely symbolic (speaking as a startup employee myself). Equity on a vesting schedule, for example, is better understood as a carrot to get the employee to work for a longer period or under less immediately gratifying conditions than they might be able to score at another firm. If you are a startup that needs to develop long-term workers with lots of implicit knowledge about how to do things, or are trying to poach experts who could otherwise demand wages you can't afford right now, you can just pay them to stick around and grind it out for four years.
My vesting schedule of 50,000 shares kicks in next April and will dispense 12.5K shares at that point and about another 1K shares every single month afterwards. Right now the share price is around $2.50, but will probably be at least double that by the time vesting starts if my employer doesn't go under (which seems very unlikely right now).
The psychological effect is to get the employee to grind loot boxes: I might be on my fourth six-day week in a row and could put in my two weeks' notice tomorrow, but if I keep going for another month I'll get a $5-10K loot box in addition to my salary that I wouldn't get if I went to work for Megacorp. It would be foolish to dismiss the psychological angle, because the 'soft factors' are most of what make jobs good places to work or crappy places to work. I've had weeks with only about 10 hours of real work that were absolutely agonizing because we had broken equipment and everyone was just sort of stewing, and 55-hour weeks of much more objectively demanding work that were easier loads to carry because there was a feeling of a good job well done at the end of the day. "People don't quit jobs, they quit bosses," etc. etc.
But, you could construct a pay schedule with identical expected payoffs, using cash. Equity pay can also be explained as getting around credit market constraints, but it doesn’t make sense as making it individually rational to invest in productivity improvements.
Yeah, but if you're a startup you probably don't *have* the cash! My employer is in hard tech and recently raised a medium seven-digit round. Most of that will go to equipment; on a good day I burn through my daily pay and then some on equipment/capex, and on a bad day I might be the witness or indirect cause of another four figures on top of that. (Thankfully it looks like bad days are going to decrease in frequency now that we've got the cash on hand to buy sturdier replacements, but still.)
In other words, you *could* construct a pay schedule with identical expected payoffs using cash...if you had the cash. If you're not doing that, it's because you have a finite amount of cash and it's better spent on other things.
The obvious counter is that this situation should never happen because employees shouldn't be any more informed about the company's prospects than investors are, and if you can get employees to work for equity then you would be able to get the equivalent amount of cash for investors. But this can't be the case--if investors knew as much about the fundamentals of what they're investing in as the founders do, they would just do it themselves or hire the founder directly. I'm not sure where the paradox is?