Early stage employees (usually among 1st 40 hires, or joined before the company is unit positive) tend to take on significant time and salary risk when joining startups.
Some of this risk is compensated for by the opportunity to grow and generate impact at rates that these employees wouldn’t have been able to achieve in more mature businesses. Some of it is through the building of strong relationships forged through fire drills, all-nighters, and solving impossible problems. And lastly, some of it is compensated by vested equity.
Much of the value from the first couple of aforementioned trade-offs are dependent on the employees’ own effort and focus. For the third, the equity, a lot is out of their control, especially when it comes to fundraising.
When companies choose to take on funding, they do so for a variety of reasons (staying afloat, working capital, new opportunities, fundraising climate, etc.), but they rarely consult or involve employees other than executives.
Yet the impacts of raising more money can have significant impact on one of the major reasons that employees give up time, salary, and oftentimes mental well-being to work at the company.
General dilution, preference, protection, increased cash burn, etc., are all ways that an employee’s equity stake can be significantly impacted. Aside from dilution, employees tend to be very inexperienced with most of the other ways that raising money can impact their common equity value.
Is there a way to allow early employees to protect themselves by purchasing some form of insurance on the value of their vested shares?
Could the insurance provider price the offering well enough to both minimize counterparty risk and benefit employees?
Is it possible that breakage (from unclaimed insurance or canceled policies) could effectively stand in for a counterparty?
Note - article was ported from a deprecated version of this blog