Owning equity in your company should be as common as owning equity in your home

What belongs in common to the most people is accorded the least care: they take thought for their own things above all, and less about things common, or only so much as falls to each individually. – Aristotle *

A major policy goal of capitalist countries in the 20th century was to encourage home ownership. It is widely believed that owners take better care of their homes than renters as they have much more at stake financially. There is also evidence that home owners are happier, healthier, and participate more in civic and political life.

The desire to create an “ownership society” led to some smart policy decisions like the mortgage tax deduction and some bad decisions like hazardously low interest rates that contributed to the housing bubble. Home ownership is a noble goal even if home ownership fueled by excessive debt can be disastrous.

Entrepreneurs figured out a long time ago that the benefits of having equity in your company are similar to the benefits of having equity in your house. Silicon Valley expanded this concept by making it standard to grant equity to non-founder employees. It’s no coincidence that Silicon Valley continues to innovate and create jobs while the rest of the economy is stagnant.

Some people think we are in a startup bubble, and that once the bubble bursts people will run back to the supposed safety of non-startup jobs. I’d prefer to think we are at the beginning of a movement to create a true ownership society, where people own stakes not just in their space but also in their time.

http://twitter.com/Alternate1985 Nick Mango

About 1/3 of US homeowners, own their home outright. I’m going to assume that this third is extremely happy.

http://www.cdixon.org chris dixon

Hope so. Guess it depends on location, location, location.

http://twitter.com/aortenzi Anthony Ortenzi

Do RSUs make more sense than options for that ownership stake than options? I’ve been granted options several times, and only one of those grants is above water due largely to forces outside my control. The company, using Black-Scholes, pretends my total compensation is much higher than it has been, and I’ve got little to show for it, even on paper.

http://www.cdixon.org chris dixon

Generally RSUs are better for employees IF you don’t count short term tax counsequences. ISO options were created precisely so that employees don’t get hit with short term cash taxes before they get liquidity.

http://www.chuckeats.com/ ChuckEats

i guess it depends on your risk appetite. i think RSUs are the reason some larger companies slow down (yhoo, ahem) – it attracts more cautious people who would rather have the sure bet of a $50k yearly bonus than a $500k opportunity down the line.

http://twitter.com/MarkHall123 Mark Hall

I agree Chris! Great post. I think the home ownership / startup equity analogy will prove to even more cogent as startups become more desirable to those who have been ingrained with the ’9 to 5′ mentality. I believe that our society will prosper with the deep-rooted revolution of the innovation that startups provide.

A questions for you: With the startups that you are privy to, are you seeing consistency in founder vesting structures of those startups?

http://www.cdixon.org chris dixon

Thanks! Almost all startups I see have 4 year vesting for founders and employees.

http://unystartups.com Julian Baldwin

Nice post Chris. Agree with the idea we need to create a true ownership society. The number one thing I observe about recent college graduates, many of whom have the option to become first-time entrepreneurs, is they seem to believe they are entitled to a job instead of entitled to create a job. Whatever is needed, be it ownership in a company or something else altogether to help younger persons (myself included) make the switch psychologically, I hope it manages to find its way as part of the ordinary career path for upcoming generations of could/should be entrepreneurs.

http://www.cdixon.org chris dixon

Yeah, I think the “equity mindset” is hard for a lot of people. But Silicon Valley culture (and increasingly NYC) is encouraging it a lot.

Anonymous

Small business equity often doesn’t mean a whole lot though because it’s usually hard to get liquid. Granted many real estate markets suck right now, but still you can usually sell at some price.

http://www.cdixon.org chris dixon

Well, at least at the moment there tend to be a lot more options. Dividends, secondary buyouts, and of course M&A and IPOs.

Anonymous

True only for less than 1/10th of 1% of all the startups or small businesses that people might be able to work for or own equity in. If you are comparing to home ownership where there are millions and millions of home owners and you want to create business ownership at similar scale, you need new ways of monetizing that ownership in order to make it worthwhile. No doubt it’s still great to be an owner, because you determine or help determine the course and success of the business, but turning that ownership into value (especially if it’s a minority stake) is still problematic.

To put it another way, most of the options you cite are only available to “scalable startups (to use Steve Blank’s terminology) while the vast majority of people will only be able to attain ownership in “lifestyle businesses” (again, not a perjorative, but just using Steve Blank’s terminology) – which don’t have these potential liquidity event options.

http://www.wac6.typepad.com William Carleton

Sadly, even within the “scalable startup” category there are regressive trends! It’s uncanny, how many emerging companies seem almost to be managed to a liquidity event that clears investors’ liquidation preferences but washes out the common, including all employee equity. In those cases, C-level management is “taken care of” by management incentive or sales participation plans – but employees with options often have no idea that such things exist; many continue to assume, right up to a sale, that they hold the same currency as the top execs. The other thing happening is that emerging companies are coming up with new impediments to employee liquidity via secondary markets – rights of first refusal aren’t seen as enough of a damper. All of the foregoing said, I think Chris is really talking about an ownership culture, which has to be inculcated and nurtured by the founders through the company’s life cycle. The mechanisms I’m calling out above are arguably vestiges of an older, hierarchical style of financial management.

Kelsey Falter

Chris, as a founder who has employees with equity, there is not much information out there regarding portioning off equity. I get the 20% option pool. I get the first non-founding engineers/developers get between .5-1.5% etc. and that it should be vested. I strongly believe in an ownership society, however do you have any suggestions on anything that advises startups about best practices beyond the first group of employees? All I’ve found is information that says compare what you offer them to what you offered people you already have on board and their skill level.

http://www.cdixon.org chris dixon

If you are venture backed, one reasonable way to do it is to consider the equity as it was valued in the last round. So if last round was $20M post and you are issuing 1% to someone vesting over 4 years, that’s like giving them $20M*1%=$200k over 4 years so 50K per year.

anamax

Actually, the evidence shows that folks who have the habits that make home ownership possible are “are happier, healthier, and participate more in civic and political life.”

In other words, the causality runs the other way.

http://florianfeder.org Florian Feder

Oh. Those habits must be to finance their gas-guzzler through a negative amortization home equity line.
http://www.cdixon.org chris dixon

They supposedly controlled for those variables in the study I linked to.

Anonymous

Interestingly this very argument can be used to promote monarchy instead of democracy: monarch is long time owner who preserves and enhances value of his property, while government official is temporary caretaker who concentrates on satisfaction of personal needs (re-election) at the expense of capital value of the country.

Re motivation, I think it is worth remembering that we as a species flourished only because majority of population was cautious and assured survival (wage) while minority took risks and assured progress (equity).

Re physical things (house), I think using services (as in saas) or sharing between customers (as in collaborative consumption) is more effective way to satisfy ones needs. In most cases.
http://paramountessays.com/ write my essay

Great post!
author has good mind!
Anonymous

I don’t disagree with the overall point of this post, but your statement that “home ownership fueled by excessive debt can be disastrous” doesn’t really square with your statement that subsidizing mortgage debt is smart public policy.

http://www.cdixon.org chris dixon

Well, subsidizing mortgage debt worked for years without creating a bubble. Reasonable people could certainly disagree about what the best policies are.
Anonymous

I disagree – the bubble was primarily driven by a lack of connection between lenders and borrowers.

Writing of your mortgage interest did not lead to the bubble.

Anonymous

The mortgage interest deduction need not have caused the housing bubble to contribute to it. This much is a fact: the mortgage interest deduction artificially increases the value of homes relative to their intrinsic value (i.e., what they would be worth without preferential tax treatment) and relative to the value of other assets. Some people would say this meets the definition of a bubble in and of itself, but even if it doesn’t, it creates the potential for a bubble by providing incentives for people to lever up and buy more house than they should perhaps be buying. During an era with high interest rates (i.e., the 1970s), this potential is mitigated by excessive interest costs, but it becomes more of a threat as interest rates fall (as they did from 1982 until the present time).

Moreover, it’s not clear that the mortgage interest deduction even does what it’s supposed to do, which in the words of Chris is to “help create an ownership society.” Of all homeowners who claim the mortgage interest deduction, only 18% have a household income of less than $50,000 and more than 40% have a household income in excess of $100,000. The reason for this is that standard deduction (i.e., the deduction you get in lieu of itemized deductions even if you don’t own a house) is greater than the value of itemizing deductions for most lower income taxpayers (only 25% of all taxpayers itemize). So even if you think the mortgage interest deduction did not contribute to the housing bubble, it is more of a sop to the rich than a stepping stone for the poor to acquire homes.

Anonymous

We are going to end about arguing about this argument!

You said Chris said mortgage tax relief did not square with sound policy. I disagree, it is a good idea. If you want to cap it based on income (or even value of the property), I like that too.

My argument is that borrowers and lenders should know each other.

http://arnoldwaldstein.com awaldstein

Well stated.

I grew up professionally in valley and have had equity as a part of comp since my very first job. If you don’t have that, there is realistically no way for most people to get ahead. Even with equity of course, you need some winner’s luck.

Seeing a trend in my work now towards ‘lifestyle’ businesses. Intent to generate profit from niche businesses as the long term end goal. And likewise equity/ownership as a profit sharing motivator. A good direction.
http://maxmzd.com maxmzd

Instead of granting equity, what about sharing profits based on productivity and quarterly or annual performance? The John Lewis Partnership seems to be doing quite well for themselves ( http://en.wikipedia.org/wiki/John_Lewis_Partnership ). Carnegie also grew his steel fortune based on his sliding-scale wages (although it should be based on profits, not price of commodities). I like these models because it’s about the workers more than the top brass. Extend the idea of owning the company – and the incentives – to everyone involved.

http://www.cdixon.org chris dixon

I’d call that a form or ownership. Kind of like issuing equity and regular dividends.

Anonymous

My wife works at a global energy company. She is comped on business performance, personal performance and stock grants.

As you get more senior, more of your comp becomes performance and stock based. That’s an effective form of ownership, given the size of the company.

In reality, getting people to care enough is the biggest challenge for any organization and a sense of ownership (and comp that reinforces that) is the strongest thing leadership can offer.

Great theme Chris.

http://justbeyondthebend.com JoeDudas

It’d be nice to see company equity as fuel for responsible home equity practices
Anonymous

An interesting thought, but the numbers may be hard to work.

I know a lot of people who are excited about 5% of the company, but not too many who are excited about .5%.

The next step for them is being a founder – very few people are prepared emotionally, have the experience baed skills or the ability to learn on the fly – so that is a tough one too.

http://www.cdixon.org chris dixon

I’d wager more people in Silicon Valley got rich owning <1% of Google, Facebook, Cisco etc than owning a big chunk of a company they founded.

Anonymous

I just had a 30 something, very bright, technically very strong, people person get deflated on these exact numbers. You will have to trust me that the scope of our idea is large enough to fit your examples.

I think the concept of ownership is tougher to connect to emotionally, for some of the brightest people, when the number is small.

It comes down to fit, I think. here in Alberta, lots of people are in CF petro services businesses that did not require VC level investment. There’s no shortage of rich people, but they are owners in the strongest sense of the word.

Aviah Laor

The deal was flawed in the first place: “Make me a pie, and I will give you a small slice of the pie you baked. In return, you can avoid risk, and get a secure job and work on your retirement from age 20″.

Oooops, the slippery slope: once the talented – yet risk averse – middle class gave a chunk of the pie, why not more? and more?
And here we are. making lots of pies, giving most of them to a few others, alas – with no security and high risk.
Now that’s an opportunity!
http://twitter.com/jasonp Jason Preston

Great post. I just finished reading (an old) book called Liar’s Poker by Michael Lewis, which describes his time at a financial firm in the 80s.

One of the themes that seems to follow the book is that the firm started life as a partnership, where partners and employees had a significant stake from a personal financial standpoint, in the company’s well being. Once the company sold shares publicly, the employees and leadership lost the incentives that really made the systems work, and it was downhill from there.
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http://www.facebook.com/people/David-Velardo/4203535 David Velardo

This post is highly likely to be a major theme of my next startup… I’m a 1x successful entrepreneur currently living in SF. I’m still in the preliminary testing and research phase, but, I’m super excited and passionate about where I’m at and where I’m going. In addition to inducing and riding a trend towards more crowd equity, my current startup “guess” also seeks to resolve some of the surprising, major inefficiencies that exist in an ecosystem as important to our economy as tech startups. Ping me if you are seriously interested and have substantial weight to throw around on either the investing or mind-power side.
http://analytikainc.com/blog/ John R. Sedivy

I hadn’t thought about the “rent vs. own” philosophy in terms of startups but it makes perfect sense. I believe this may be especially relevant in terms of retail services businesses – perhaps if more employees had a reason to care (ownership) service would increase across the board.
Anonymous

I like the post and I think it’s great when employees have a stake in the company they work for–it aligns incentives in a way that should be good for the company, good for the employees, and good for the economy at large. That said, as a policy wonk, I would like to quibble with the line: “The desire to create an ‘ownership society’ led to some smart policy decisions like the mortgage tax deduction…”

It’s actually a pretty questionable policy, effectively making the tax code more regressive than it appears. (It also may have some ancillary effects that contributed to the housing bubble and urban sprawl but that’s more debatable.) Just because you might benefit from a policy doesn’t make it a good one!

Chris Dixon

Owning equity in your company should be as common as owning equity in your home