Chris Dixon and Fred Wilson provide a very special kind of bad advice on the topic of equity grants in startups. Now, Dixon and Wilson are both very smart and very successful, and what they say about equity grants is absolutely true, so the advice is not bad due to its supporting expertise nor its substantive merits. The advice is bad because nearly everyone who attempts to use this advice will use it to their own harm, and the few folks who cannot be harmed by this advice have already lived a life full of preparation and savvy choices.
Dixon emphasizes that the most important thing about equity grants is the percentage of the capitalization granted, and Wilson adds that the implied valuation of the grant (number of shares times share price of most recent financing) is also useful. While these things are true, my objection is that the probable audience for this advice is composed of prospective startup employees, and the use that they will make of this advice is to try to choose a job based on the value of the equity grant.
This is a bad idea for two reasons. First, valuing an equity grant is only secondarily about determining the percentage of the company – it is primarily about determining the exit value of the entire company, an exercise at which professional investors in the field routinely fail. (Fred himself will tell you that 2/3 of venture investments in a successful fund will break even or lose money.) If you are thinking about joining a startup, and you have 2 choices, you are very unlikely to have any rational basis for believing that 0.1% of one startup will be worth more or less than 0.2% of the other.
Second and more importantly, if you want to work in a startup, you should not choose where to work based on compensation. You need to pick the project and the people that get you most excited, period. Without a belief in the mission and an authentic fit with the team, you will not be successful anyway, so any compensation will be a waste of your time and their money. If you have other employment options, you should explain that to the place you want to join, and if they want you they will make the comp work within their range, and you should accept. Or, if you simply want to work at the place where you will be paid the most, you should not work at a startup. (Don’t be offended, this isn’t a test of character or a judgment of your soul – if you’re not a startup person, that doesn’t make you any worse or better than the people who are.)
Dixon actually gives really good advice in his post, for those who are paying attention: “If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own - don’t join the company!” As I’ve said before, the reason to have a detailed conversation about equity comp with your manager is to test management’s clarity and forthrightness in general – not because you have any hope of making a correct equity valuation.
I would be willing to bet that neither Dixon nor Wilson has ever made a choice of company to join or invest in based on equity percentage. They made their choices from their interests in the market, the product, the team – and then later, after a decision to join/found/invest has essentially been made, they did some optimization around the equity. Choosing the other way around is about relying on luck, not successful choices and preparation.
[Bully for you if you know the reference for the title of this post!]