I like this justification above all the others; it seems both fair and easy to reason about. If I quit a $200k/yr job to work at a startup for $100k/yr in cash comp, then my time investment, or risk, is $100k/yr, and my stock compensation should reflect that financial value based on today’s valuation of the stock.
It’s up to the startup to put the offer to you, but up to you whether to take it.
This is the tricky part, especially if you are very early.
Really what you want is the (statistical sense) expected value of the equity be something like the opportunity cost, for it to make sense for you. But until the company has been around for a while and through a few rounds, valuation is mostly a fantasy...
That works ok in theory if you are signing a contract at the same time a round is finalizing... otherwise it remains tricky.
Also, the view you have is biased to the rare success scenario. In the failure scenario, the employee comes out ahead since they at least got some amount of their investment back.
Also not all investors are created equal. Some investors are strategic partners who can help grow your business. They forgo a salary because they provide advice and a social network the founder can tap into at critical junctures. That’s extremely valuable in some cases. Not all investors play that role (or play it well) but it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.
> the view you have is biased to the rare success scenario [...] the employee comes out ahead since they at least got some amount of their investment back.
Maybe you didn’t understand my suggestion, because the cash compensation is not a return on investment. If you forego $100k/yr for stock options, and the company goes belly up, you lose that amount. The cash compensation is keeping you from making a larger investment, it’s a hedge against risk. Cash paid counts against the time investment. Your suggestion is the same as saying the investors come out ahead because they had money in the bank that they didn’t invest.
FWIW, what I’m suggesting comes from experience both as a founder and as a dev participating in a startup. As a founder, realizing that I don’t need to have debates about what skills or status someone is bringing to the table was helpful in negotiations. As a founder and dev, using time as the metric gives me a framework for thinking about stock compensation that can be applied to everyone in the company equally, and gives both parties room to negotiate. As a dev, valuing my time this way allows me to choose my level of risk, as long as the company is open to paying more or less cash, which several in my life have been. And best of all, as a dev, valuing my time this way typically ends up with a higher number than a random offer of some amount of stock where it’s hard to decide whether to accept it because it’s not linked to my effort.
> it’s hard to estimate the value of investors ahead of time just as it is to correctly evaluate an employees contribution.
This is spot-on, and really goes to my point. It’s better to take that idea off the table completely, because there is no valuing contributions beforehand, and no fair way to measure it after the fact - if there’s a way to even measure it at all. Everyone in the company is investing something than can be measured and weighed fairly between people. The people who end up contributing more will enjoy faster promotions, longer tenures, greater chance of success, so they do end up compensated. But it’s a bad idea to try to let people argue about their contribution or value in non-measurable terms, and a bad idea to commit to paying for that before the contribution is made. I know this from experience, letting someone talk me into believing their contribution would be huge, and granting a large stock package, only to find out later when it couldn’t be changed that they were not the heavy hitter they made themselves out to be.
I'll note that nothing is actually stopping you from saying "sorry, no I don't want to work at your startup but would you take a 100k investment instead?" & becoming an investor yourself. You get to choose which role you want to play so why is "but I put time equity into it & didn't get rewarded the same" a fairness axis? You have access to all the information at your fingertips. To me if you're unhappy with a particular outcome that depends on which side of the equation you were on, that has to do with your own decision making ability/negotiating ability.
