NY venture capitalist Fred Wilson has an interesting blog post about various approaches to employee equity being considered by some of his fund’s portfolio companies. For now, he comes out in favor of granting stock options instead of restricted stock or other forms of equity. The last few lines reveal some of his investing approach:
Employee equity is a critical factor in the success of the venture backed technology startup world. It has created significant wealth for some and has created meaningful additional compensation for many others. It aligns interests between the investors, founders, management, and employee base and it has a very positive influence on this part of the economy. We strongly encourage all of our portfolio companies to be generous in their use of employee equity in their compensation plans and I believe that all of them are doing that.
VCs and founders will continue to debate how to allocate the dilution when an option pool is increased, but in the end Fred’s point is an important one – equity is a tool that can help keep key players invested (literally) in the success of a startup. There are fun and exciting aspects of working for a startup that have nothing to do with equity, but the potential financial upside from stock or options can be a useful motivating factor to help employees get through the many less-than-glamorous tasks needed to build a successful company.