There's a bit of fuzzy math going on here. The equity formula is measured in terms of annual salary but stock actually vests over 4 years. So for the senior team member, they're actually getting 12.5% of their salary in stock every year.
If you assume the fabled 10X exit, the home run exit which makes the portfolio for investors, then that means the senior exec basically gets about double his salary as a reward for the exit (taking into account further dilution). For a "key function", a 10X exit represents a 20% bonus.
I don't see why they should be higher - he's talking specifically about employees. People who were not founders, but were hired and draw a salary. Risk vs. Reward - if you want the huge blockbuster exit bonus, get in at day 0 and suffer the pain of starting up, rather than come in with a salary and the like.
The formula doesn't address a (common?) case: people joining an early stage startup sometimes (often?) accept lower pay than they could get somewhere else in exchange for equity.
Given that the formula for number of shares is based on annual salary, you're double-screwed in that case: not only you get paid less but you also get less shares because of that.
Or am I mistaken in my assumption that early stage startups pay less than stable, successful companies like Google, Yahoo or Cisco and attract people mainly with a promise of shares that some day might be worth a lot?
It's a great point that the approach you take for the first few key hires is different from the longer-term approach. With my 1990s vc-funded startup Intrinsa, we took a similar approach: looking at percentages for the first handful of employees during our seed funding, and then in terms of estimated value of the equity once we closed a multi-million dollar funding round.
Thinking of it in terms of "brackets" as Fred does also makes it easy to explain to new and current employees, so creates a feeling of fairness across the different organizations as things scale.
Not at all. These are senior-level positions and you need to get good people there. If you value them less than other positions, you'll get second-class hires -- which will cause huge problems going forward.
They're not getting that kind of equity upside from not-startups.
Note that you are valuing them more than folks who are actually producing the first version of the product. Do you really think that the VP of HR is more essential than a lead engineer?
If you assume the fabled 10X exit, the home run exit which makes the portfolio for investors, then that means the senior exec basically gets about double his salary as a reward for the exit (taking into account further dilution). For a "key function", a 10X exit represents a 20% bonus.
These numbers seem pretty underwhelming to me.