Startup Studios & Unearned Equity

I’m an early employee of a company that was started out of a popular startup studio. Me and my team work incredibly hard getting our company off of the ground—doing everything that founders would do—yet the studio owns at least 60-70% of the company, with early employees owning no more than 1% each. The CEO probably doesn’t own a big chunk either, and it’s not like he works any harder than we do to entitle him to his greater share. Outside investors likely own any remaining amount.

Meanwhile, the studio owns an enormous chunk of the company for doing relatively nothing. While they provide office space stocked with snacks, occassional help across design, engineering, etc., and an umbrella brand that helps us in the marketplace, these efforts are certainly not worth 60-70% of what will hopefully be a massive company. It’s the empoyees that are pouring their heart into this company. I can’t help but feel some resentment.

The startup studio model feels broken.

Plese help me understand why this is ok.

  • Did people draw salaries from the start? If so, didn’t the studio take a financial risk?

    I happen to agree with you that it’s absurd that the wealth created by a company typically doesn’t go to the people who work there. Instead it goes to a select few who often took very little personal risk. In a capitalist system there will always be people who have money and therefore own businesses (either directly or through the stock market) and they’ll get richer even if they don’t do any work themselves.

    In your case though there’s no way the equity is going to be redistributed to the employees. So if you can’t make peace with that, leave the company. There are worker cooperatives out there for people who believe that the profits of an organization ought to be be shared between the workers. Alternatively, start treating your job like a regular job. Don’t slave away the good years of your life to make other people rich.

  • Employees never get large percentages. A hire-on CTO gets less than 4% typically (i.e. a CTO who came in after the company started). If salaries are paid, even less.

    As for ownership of the startup – again that’s a function of fundraising and your existing founding team. If they took a raw deal, then they took a raw deal.

    From my experience, founders with no pedigree typically do get screwed like this. Vegas Tech was offering $300K for 40%+ of companies they invested in – this was actually worse because this huge ownership stake made those companies toxic to any other outside professional investors from then on. It was fly or die – and 99% of them are going to die.

    Of course, to be fair, the success percentages for any incubator are never that high – but getting into that heavy an initial load makes long odds longer.

    As an employee – the only way to make bank is for your startup to go unicorn. In this case, the pool is so deep that even the tiniest slice goes a long way. Otherwise, a 5% stake even in a seed round startup will get diluted into under 1% very easily if any significant amount of money gets raised.

    Find an equity dilution calculator on the internet and play with it to see what I mean.

  • You left out a crucial point like one of the commenters said. Did you take any financial risk? Did you get market salary?

    At the end of the day nobody put a gun on your head to make you work there. If you were not ok with the model you could’ve started on your own.

    I’m sorry I see nothing wrong with this arrangement.

  • Not sure what I can add to this, but you did kind of answer your own question by saying that you benefit by working under the companies umbrella brand. If that market presence wasn’t there through reputation etc, would you be pulling in the business?

    It sounds like things are operating exactly like any other business does, and at least you own equity in the business – thats the surly the payout and beneficial situation if the company becomes super successful. If you personally haven’t invested any finances in the company and you are at least getting paid work, it’s perhaps a bit churlish to start assessing the company as a whole in terms of who is being paid what. Anyone can say exactly the same about any company they work for: “we do all the hard graft, and the directors get the lion’s share…its not fair” etc etc etc

    I think in the spirit/motivation of all startups – apart from the self made fun factor, is that people get involved for the long game and it’s the dream of many to eventually float the company and turn that one percent share into a great deal of cash at some point. But like a previous person said, you all presumably had the discussion already about how equity was to be shared out, so I guess you can either be patient and play that long game, secure in the knowledge that you at least have a cool and paid job!….or, start something up on your own and do what they have done, work hard and take the majority share of your income.

    As a side note, I almost set up a ‘shared space’ studio recently, with the intention of renting out desks to other creatives and perhaps ideally form some kind of co operative business. But, the more I considered it, the more I began to asses what was important to me and came to the realisation that it is not the space itself or the environment that creates a brilliant business, its the people and only the people.

    What I would be asking yourself, rather than how much money you are making and what you think is fair, is how happy are you and do you love your work and the people you are working with. If the answer is yes you love your job and everyone there, then I’d say you are pretty darn successful already my friend.

    Good luck

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