Founders usually treat the option pool like gold, as they should. Options represent the stock of a company and if you think that stock has real value, generally the thinking is you shouldn’t hand it out like candy. Recently an article in Business Insider highlighted one CEO that bucked that trend: the CEO and founder of Chobani “announced on Tuesday that every full-time employee of the yogurt company would receive an ownership stake. That portion, now owned by about 2,000 employees, could be worth up to 10% of the company.” The CEO/founder has taken a different approach to options and it’s not the first time we’ve seen the method employed successfully.
Recently we looked at a successful startup with 50+ employees whereby every employee had options with a 4 year vest and 1 year cliff. Not including founders, the ownership for each employee ranged from 0.01% to 0.91% with an average of 0.10% and median of 0.02%. In total, the 50+ employees own ~7% of the business. Aside from making the cap table much larger (which doesn’t matter), what were the other effects?
-The company’s employees are incredibly loyal. Even at positions where turnover is expected to be greatest, employee retention is phenomenal in part because they own equity.
-The company’s employees are extremely productive. The employees want to work hard in part because they own upside. Asa result, revenue/employee is high and the business was able to reach profitability on very little capital relative to peers.
-Employees work for below market salaries. Because they love where they work and feel like they have upside, even though the company is located in a high cost city, employees are working for below market wages. In their view, the equity ownership is part of their compensation, so they’re willing to take lower salaries. As a result, the company has been able to conserve cash.
The article on Chobani goes on to state that it’s a private company “estimated to be worth $3 billion to $5 billion two years ago. When it sells or goes public, the average employee could receive a payout of about $150,000. Because the shares granted vary based on tenure at the company, some employees could receive as much as $1 million.” Indeed granting options to every employee can be expensive if you’re successful, but then again, if you’re successful, it really doesn’t matter that you gave up some upside especially if your employees helped you get there.
The old mantra of being stingy with options isn’t wrong, but as you can see, the new mantra of giving options to all employees may not be wrong either.