Homesteading
I read this concise response from Joel Spolsky the other day on the best way to divide ownership of a startup:
Discussion:
http://news.ycombinator.com/item?id=3489719
General points:
- Startups are organized into pyramids with early arrivers receiving larger shares of ownership (Joel calls them layers, which work like stripes in the military - more seniority, more stripes).
- Ownership is mainly decided by risk (the greater the risk, the greater the ownership).
- The next deciding factor is monetary contribution (the greater the investment, the greater the ownership).
- After that comes time (the earlier a person arrives, the bigger the slice of the pie).
- Finally comes representation (the fewer people in your layer, the larger your share).
His main takeaway:
“The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.”
So let me get this straight. The two guys who started the company own half of it and the people who do the actual work get some fraction of however much is left, split over hundreds or thousands of people? Which gets progressively smaller as the company matures until after some point an employee can be reasonably certain he or she will receive stock options worth essentially nothing? And let’s not forget the investors, who own the other half we don’t see, whose workload consists of mainly skimming profits.
Yup, sounds like capitalism.
***
While I generally appreciate his insights and contributions to the tech world (I use Stack Overflow everyday), I find this post unsettling. It reeks of 20th century philosophy. Actually more like 19th. He did a brilliant job of summing up contemporary best practices to fairly compensate those involved. As long as those people are the founders, wealthy investors, or suck ups.
My main takeaway?
Don’t ever, ever, ever work for an established company. At least not one that used to be a startup. Which is basically all of them.
And not because of the inherent unfairness of the corporate structure. But because the best and brightest perpetuate it. Whether you work your way up through a company, find yourself in a position to start one, or even amass enough wealth to fund one, by the end of it you will almost certainly be feeding into the same mindset that virtually assures a difficult struggle and smaller piece of the pie for others. This is almost by definition anti-progressive.
My experience, the few times I’ve worked for others, is that businesses are kingdoms and employees are serfs. It doesn’t matter how skilled a person is, how creative, how motivated, effective or committed. In the end, your stake in the company works like binary. If there are 4 levels, the most you could hope for is 1/16th, split with a hundred other people. But really it’s worse than that. As far as I can tell there are really two levels, 1 and 0. The owners own 100% and the rest of you get, well, the rest.
Let’s take a typical small business doing $2 million in sales using a roughly 25-30% markup to bring in potentially $500-600,000. After taking into account returns, theft, breakage and other losses, let’s assume a 15% margin so $300,000 in cash flow to play with each year. Let’s say each owner invested $25,000 for 20% down on a $250,000, 10 year bank loan to start the business. There are all kinds of ways to arrange it but this is what I’ve seen for your average mom and pop shop:
Profit:
- $100,000 = $50,000 x 2 owners
Salary:
- $100,000 = $25,000 x 4 employees
Expenses:
- $50,000 rent on 2400 square feet at $20 per square foot in small town USA
- $25,000 bank loan payment
- $25,000 advertising, credit card fees, vehicles, utilities etc
Do you see what I see?
- rent is twice as high as any employee’s salary.
- the bank loan is higher than any employee’s salary.
- landlord/bankers now getting 3/4 of what all employees receive combined
- advertising and other expenses are also higher than any employee’s salary.
- bank just got another 3% cut (of gross!) for credit card fees
- for the cost of a single year of employee income, an owner gets 50% ownership.
And maybe something you haven’t considered:
If employees work on a 25% commission, that means they earn $3 for the business for every dollar they are paid. That means the 4 employees earned $300,000 to cover the main operating costs of inventory, breakage, theft and other expenses that I didn’t explicitly cover.
In a single year, the employees have already contributed over 6 times the capital investment that the employers put in in the first place.
Yet they receive no ownership.
There are more problems with the authoritarian hierarchical structure and brutality of working 2000 hours a year in a situation where most of your civil liberties like free speech go out the window that I don’t even need to get into. I’m only talking dollars, and it’s already hopeless.
This is an intolerable situation for hackers and entrepreneurs who could very easily start their own businesses. Ones with no overhead for brick and mortar, bank loans or even advertising.
And what do you know, that’s exactly what they are doing. We’re seeing a widespread rejection of the “workplace” as industrialization gives way to automation and an information economy. Unemployment is high for a reason.
There is a land rush happening during this second tech bubble. Only the property is virtual and the freedom is real.
The people left behind in jobs are like the huddled masses of the old country, the ones trapped in cities, unwittingly subjecting themselves to a menial life of servitude, never glimpsing the frontier or tasting its freedom.
But it breaks my heart that the rugged frontiersmen of today are every bit as ruthless as a century ago. Sergey Brin is worth $17 billion of Google’s $185 billion market cap. If you split that up over the 20,000 employees, they’d each receive almost a million dollars each. He and other owners cost their employees a fortune. He has more in common with robber barons like John Rockefeller than entrepreneurs like you or I. I’m not trying to be hard on him specifically. He has some good qualities. But I think perhaps his priorities have changed. Same with Mark Zuckerberg. I think that once hackers reaches a certain level of largess, their days of positive contribution are over and they become freeloaders.
Look around at the successful tech giants of today. Do you see your value system represented? If you had a million dollars, what uses would you put it towards? I invent things, so I have a hundred world-changing ideas that Google will probably never do. I’m not sure if their 20% time would be enough for me to manifest them. I need a team to work with, I need resources. A million dollars would go a long way. Employment? Not so much.
***
I have a different vision of the future, a decade or two from now. I like to think my system is fairer. Risk, time and money are phantoms. For me, meaning is everything. Self actualization. Helping others. Triumph. Let’s paint a picture of your average mom and pop shop, small town USA, in the year 2025:
- Prefab structure built at 1/2 today’s prices out of solar-kiln baked earth and recycled materials, owned not rented, 0% interest loan paid to the city instead of the bank.
- $25,000-$35,000 savings
- Solar power and hydroponic garden run by roomba bots on the roof, utilities and food provided for free.
- Solar electric vehicles, especially bikes and mopeds, costing under $1000, providing practically free transport.
- Employees living a few blocks from work or even above/below work because they don’t hate their jobs.
- Free daycare, preschool a few blocks away like in Europe, community pool, rec centers etc.
- Electronic cash system, transaction fees made pointless by free fraud prevention system backed by the FBI (which it already is. what do your credit card fees pay for really?)
- $25,000 savings
- Employee-owned, unionized business, equity handed out by contribution, not money or time. 6 employees paying a $250,000 loan is just $42,000 per employee, which at 25% commission takes just half a year to raise (75% of the $100/hr the service industry charges is just over 1000 hours).
- Remember that fully vested means fully free. you own your stake in the business. no more boss. one person, one vote.
- Successful coworkers contributing ideas that save or earn the company tens of thousands of dollars per year vest immediately.
- Since money is no longer such an important objective, vested employees often opt to vest other employees to give them a shot to work on their world-changing ideas at their full potential.
- The $300,000 margin quickly grows to $500,000, millions of dollars and beyond, eliminating the need for outside investors who contribute nothing besides money. venture capitalists hired as consultants instead.
- since money flows like rain and the consumable needs of today are mostly met, money begins to seem less valuable (see: Finland).
- no more retirement. fully vested by the first year of work also means residual income for life. why quit doing what you love when you have all the money you need? prospering research into curing cancer, traveling to the reaches of the solar system, passing on wisdom to the young and postponing death.
What I’m amazed that people fail to see is that our current economic model is the way it is for a reason. It’s exclusive. A handful of people sit on top while the rest of us work, by design. It’s as unfair as it can possibly be to the vast majority of us. In the same way that it’s perceived to be fair by the people on top.
The average employee is looking at a lifetime of work - 30 years or more, to buy into ownership of a business that the owners put just one year’s wages into. It’s so incredible to me that nobody sees this. Or does but does nothing about it.
Which is why I don’t work for businesses anymore. Working with people on the other hand - now that’s a whole different story.
Join me on Twitter @zackarymorris
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