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Investors diluted themselves for staff
Scott Galloway went down the list of payouts and found inequity everywhere. One part-time worker based in Chicago ended up with about half a million or a million dollars. Others who had been around for years in low-level jobs had little equity and didn't make much money.
A senior person can try to top people up. In several cases, Galloway felt someone needed a bigger share, so he went back to his investors at General Catalyst and asked whether they could top these people up. It isn't free money: everybody else's cut shrinks, the investors' included.
General Catalyst said yes. They took the dilution to top up people they had never met, something Galloway had never seen a venture capitalist do.
How does a company sale divide the money?
Proceeds from a sale are paid out in a set order. Investors who hold preferred stock usually collect first, according to terms they negotiated when they invested, and the remainder is split among common shareholders in proportion to the shares they own. Employees' stock options only pay out after they are exercised, which means a person's payout depends on how many options they were granted and when. Anything added for one group has to come out of the share of another.
Why do early employees often get little equity?
Startups reserve an option pool for employees, and the pool is sized in the early rounds and then diluted as new investors come in. Options usually vest over four years, with a one-year waiting period called a cliff, so people who leave early forfeit them. Low-level and part-time roles are often granted small or no option packages when they are hired. Over a long company life, a person's percentage can shrink even while the company's value grows.
What is a management carve-out plan?
A carve-out plan sets aside a portion of the sale price for employees before the proceeds are divided among shareholders. It exists because investors with preferred stock can be paid first, which can leave employees with little when a sale price is modest. The portion is typically negotiated with the board and investors before the deal closes. Carve-outs became common in venture-backed sales for that reason.
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