How Startup Equity Can Impact the Average Tech Employee

When the first startup I worked for was acquired in 2010, my equity—which I did not have full appreciation of up until that point—cashed out on the lower end of the four-figure range. That is not the level of value that we tend to get excited about when we talk about startup equity, but it was significant in my life at that time, as I had just finished graduate school a few years prior.

Those few extra thousand dollars added a few months of rent money to my bank account. They afforded me the ability to move to a nicer apartment that was closer to downtown, which meant I could spend less time commuting and more time with my friends.?

The money helped me pay off my car and student loan faster, which meant that each month wasn’t as financially stressful to me as it had been. My equity—albeit relatively small (I was employee number 53)—gave me padding in my bank account when I needed it most.

More significant, though, is what that equity taught me. It helped me understand what equity meant. It crystallized for me what it means to work together with my coworkers to build a valuable company—and, more importantly, it gave me the desire to try doing it again.

In the?first piece?of a three-part series on equity-sharing among Chicago startups, I explored the opportunities Chicago has to better leverage startup equity as a tool to compete nationally for talent. Giving all venture-backed startup employees equity is an important foundational step toward creating the necessary density of talent to meet Chicago startups’ needs and prevent talent and startups alike from moving to the coasts.

The value of equity to an ecosystem extends beyond keeping up with talent demands; giving equity to all startup employees creates the opportunity for exponential startup growth.

One of the most common justifications I’ve heard for why startups in Chicago don’t give all their employees equity is that most employees wouldn’t become rich anyway, so there’s no point. But let’s be real, folks: This is something that only a rich person says.?

If you have the financial privilege to throw down four or five figures at a given time without giving the expense much thought, then sure, receiving four or five figures out of an equity deal wouldn’t seem significant. But this is not the position that the vast majority of people are in.

While my equity payout in that first startup was relatively small, some of my colleagues certainly walked away from the acquisition as newly-minted millionaires. Most of them, though, landed somewhere in between, which was very meaningful to not only their lives but to our ecosystem (Ann Arbor).?

Those who weren’t executives but joined the startup in the years before me did not walk away “rich,” but they were able to entirely pay off homes, cars, and student loans.

My colleagues’ ability to pay outright for major life expenses is remarkable from a social equity perspective, given that home ownership and debt-free education are two of the most significant builders of multi-generational wealth (particularly in light of our current student debt crisis).?

But this is also significant to an ecosystem’s growth. The difference between being concerned about monthly housing costs or not is enough to determine whether a person can take on the risk of founding a new company.

“GIVING EQUITY TO ALL STARTUP EMPLOYEES CREATES THE OPPORTUNITY FOR EXPONENTIAL STARTUP GROWTH.”

Similarly, the difference between having student debt or not is enough to impact whether a person—especially an experienced operator—can take on the risk of joining a startup in its earliest stages, when its longevity is unclear and when under-market salaries are often offset by equity.?

Since that first startup I worked for was acquired in 2010, my fellow individual contributors and I have gone on to found or join new startups in Ann Arbor like?Duo Security,?Mobiata, and?Deepfield Networks, which have all since been acquired by Cisco, Expedia, and Nokia respectively. And many of the individual contributors in those successful companies have since moved on to help build the city’s next wave of startups like?Censys, which—supported by a strong and proven talent pool—captured the attention and confidence of top-tier coastal investors in its earliest funding rounds.

In other words, the Ann Arbor ecosystem didn’t have to wait for the same entrepreneurs to launch and exit their next companies in a linear fashion; rather, the ecosystem grew exponentially thanks to the equity that empowered experienced employees to take on startup risks earlier than they could have if they’d been less financially stable.?

So while a $50,000 payout might not seem like much to an investor or repeat founder who’s looking to cash out from the next unicorn, that $50,000 can make a huge difference in a person’s ability to join and help grow a startup into the next unicorn.

When this happens at scale, even just a few times, an ecosystem’s density of talent and resources grows meaningfully. What it means to get an equity payout becomes tangible and more people want to be a part of it. The quality of talent increases because experienced and successful people begin leading the next wave of experienced and successful people.

And that talent’s visibility increases externally; people begin to flow in from other locations and further accelerate ecosystem growth. Most importantly, more people can fund their startup long enough to get the traction necessary for long-term sustainability or, better yet, hypergrowth.

Originally published in American Inno.