How do you define “FAIR” when it comes to what you and your coworkers receive for your labors? At our May 4 Meetup, we told the story of two startups to illustrate some of the difficulties in Equity Allocation and assigning Compensation levels.
With Don and David as fictitious founders of “The Solex Agitator” and Tom and Seth as hired employees, we illustrated:
- Founders can overestimate the value of an idea that has not been actualized
- Conversely founders can underestimate the amount of work needed to bring a concept to market, therefore may undervalue the work of others brought on board.
- Not all efforts and contributions are equal. A system of equity allocation needs to reward over-achievers and handle under-achievers.
- Ambiguous and un-managed expectations can lead to trouble, such as vague promises of “we’ll take care of you when we strike it rich…”
Here are a few more problems you might have seen with compensation:
- Compression: competition for a particular job increases, driving up the cost, so when a new person is hired, they may come in at a compensation level higher than those already in the company.
- We all get the same exact raise. There is no merit incentive in this scenario.
- Are the compensation formulas rational or fair when you factor in variables such as: years of service, experience, educational level, job level, etc
With Elizabeth and Scott as fictitious inventors of the Walk-a-Matic, the story introduced a book worth reading, “Slicing Pie” by Mike Moyer. Elizabeth and Scott learned from Slicing Pie:
- Statically allocating percentages of ownership at the beginning of a venture is like slicing a pie before it is baked, and does not allow for surprises or changes of course.
- Allocating percentages of ownership after a large equity event often leads to trouble, because most will not agree on the value of each others efforts.
- The best strategy is to allocate equity as the venture goes along.
- A system of equity allocation should be dynamic so changes in direction and surprises can be handled intelligently.
Join us for the upcoming AlignedWorks meetup on July 13, 2019 to see how the Walk-a-Matic team implements a Slicing Pie Dynamic Equity Allocation strategy!