How much would you pay to own an undisclosed percentage of my house?
I just got an email from a friend describing the interview offer process of a mutual friend joining a technology startup. The newly minted employee has an offer but they won’t tell him how many shares are outstanding. He was told what percentage of the “employee pool” he was getting, but not the overall percentage. What exactly is included in the “employee pool” is a question – is it just unissued options, is it akk issued and unissued options, is it all common shares including founders???
As I’ve said before when talking about stock options (see this post), it is impossible to evaluate your grant without knowing how many total shares are outstanding. Proof by analogy: how much would you pay for partial ownership of my house? I can create an “investor pool” which represents some ownership of my house. For $50,000, you can own 10% of the investor pool. Sorry, but I am unable to disclose how much of the ownership of my house will be assigned to the investor pool. Please contact me if you are interested! I don’t expect to sell much of my house this way; why should I expect employees to be excited about options offered in the same manner?
Not only does the lack of data make it hard to evaluate the stock grant, but the lack of transparency is concerning as well. One of the things that makes startups great is a team working together towards a common goal. For me, a big part of creating that is giving the team a lot of transparency about the company they are building. I view the employees in an early stage company as stakeholders, and as investors in a sense: they are investing their time, their passion, and their reputation in the company. To not share basic information, especially at an early stage, demeans that investment and undermines the sense of team.
Will my friend still join? Maybe. There’s a lot to like about the opportunity. But the lack of data and the lack of transparency is a red flag. At a minimum, it’s caused an extra round of digging/assessment. As an employer, why would you want to give a potential recruit a reason to question your offer?
— Max
Max Schireson's blog 
This kind of reminds me of that “in it to win it” discussion we had some time ago, but slightly sketchier.
-XC
Yes, in that case the issue was employees needing to read the fine print. They should have read it, but nobody should have put tricks in there.
In this case, he isn’t even getting the data to make an informed decision. A classical economist would argue that the company is costing themselves money: if you don’t give someone sufficient information to properly value an asset, they will tend to undervalue it. Thus they aren’t getting proper value for the options grants they are making because employees undervalue them in the absence of information.
A cynic would argue maybe the grants are even crappier than folks would fear in the absence of information.
I don’t disagree with your general point though about being a little more clear about what/how they are trying to structure it.
However, there is a more charitable spin on the employee pool versus absolute numbers. I have no idea what stage this company is at, but it is not impossible that they would have an funding round without certainty yet on what the final participation, terms, etc would be.
I think the salient question would be directed to the CEO: “is your equity participation also defined as a percentage of the employee pool?”
The even more charitable way to view it (though unlikely) is that they are expressing it in terms of a percentage of the employee pool and that their goal is to have an employee pool that will be a fixed percentage of the as-converted common equity (i.e. the intend to do options reloads for employees as they experience fundraising dilution).
You may know something of the Company, however, and have already discounted any charitable interpretations based on that knowledge however! I certainly know some companies like that, too.
Great to hear from you after way too long out of touch.
The issue I have is the lack of transparency. Is the employee pool 40% of the total stock or 2%? Depending on what is meant by “employee pool” it could be either. So you really don’t know how much you’re getting as of that point in time. I agree with you that the future fundraising is an uncertainty, but it is usually an equal uncertainty for all participants (employees/founders/existing investors).
That said I very much doubt the intention would be to protect employees from dilution. The dilution has to come from somewhere; if the investors increased ownership doesn’t come from the employees it comes 100% from the founders and that is very non-standard.