Risk Matches Equity Rewards

A framework for determining employee equity based on risk-sharing and compensation trade-offs.

Core Philosophy

• Equal risk equals equal reward
• Equity should be tied to employee's willingness to take financial risk
• Different businesses require different equity models

Key Components of the Framework

• Business Type Consideration

  • Some businesses warrant equity distribution
  • Others are better suited for pure cash compensation
  • Decision based on potential exit (sale/IPO potential)

• Compensation Trade-offs

  • Employees can choose between:
    • Higher salary with no equity
    • Lower salary with equity upside
    • Many prefer cash/comfort over equity (especially outside Bay Area)

Risk Alignment Requirements

• Employees must have skin in the game
  • Must write a check for equity
  • Personal loans guaranteed by assets
  • Risk amount should be meaningful but not ruinous
• Common Failure Patterns
  • Employees using company money without personal risk
  • No dilution impact on employee
  • No consequences for bankruptcy
  • No downside exposure

Implementation Guidelines

• Always make equity participants write a check
• Structure personal loans with reasonable guarantees
• Ensure there's a feeling of potential loss
• People feel losses more than gains
• Risk must be proportional but not destructive

Incentive Structures

• Various models available:
  • Percentage of growth above baseline
  • Stock price milestone payments
  • Custom targets based on individual motivation
• No perfect universal structure - must be customized