Y Combinator's Sam Altman to Founders: You Get Too Much Equity
Y Combinator's new chief Sam Altman has an idea that you're not going to like: In a recent blog post, Altman writes that founders should get less equity, not more, and that founder equity should take longer to vest. Altman also argues that employees should get more equity, that they need to be better educated about stock and option grants, and that the tax treatment for options is often unfair.
Altman's distaste for the status quo is striking, as the entrepreneur who took over as president of Y Combinator after Paul Graham announced his departure from the accelerator he co-founded in February. But it's even more telling that he's not the only powerful investor pushing for change.
At an on-stage session at TechCrunch Disrupt NY on Tuesday, Brian Pokorny and David Lee, both managing partners at SV Angel, added their own support for the idea that founders get too much equity, too soon.
At most companies, founders' stock vests over a four-year time horizon, with a one-year "cliff." The one-year cliff means that if a founder leaves after less than one year, he or she owns none of the company. After a year, 25 percent of the founders' stock generally vests. After four years, all of it is generally vested.
But Altman notes that it generally takes a lot longer than four years to build a company, and lately that time frame has been expanding.
David Lee, speaking at TechCrunch Disrupt NY, backed Altman's suggestion that founders' stock should have a longer vesting period. And instead of vesting an equal share of stock each year or month, a smaller amount of stock could vest in the early years of the company, with a greater percentage vesting in later years. "The one-year cliff creates an incentive to stay, early. Why not create an incentive to stay late?" asked Lee.
As for the share of equity going to employees, here’s an excerpt from Altman's blog:
"As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10 percent in total to the first 10 employees, 5 percent to the next 20, and 5 percent to the next 50. In practice, the optimal numbers may be much higher.
One problem is that startups try to have very small option pools after their A rounds, because the dilution only comes from the founders and not the investors in most A-round term sheets. The right thing to do would be to increase the size of the option pool post-A round, but unfortunately this rarely happens--no one wants to dilute themselves more, and this leads to short-sighted stinginess much of the time."
This is silliness, he says, because boards can increase option pools whenever they want.
Pokorny, also speaking at the event with Lee, noted that in companies with only one founder, those on the founding team will generally get more equity than if the company has two or more co-founders. He also thought the option pool for employees could stand to be increased.
Of course, lawyers and founders both have a vested interest in the current arrangement. But with big-name investors involved, it wouldn't be surprising to see a change.