Tenure-Based Ownership - A distributed equity model for worker ownership

Ian Mobbs • 30 May 2019

I’ve been thinking a lot about equity lately. As America gets closer to full employment, workers are suddenly finding themself with the most power they’ve had in decades. With that, how can we distribute ownership of a company to the many, instead of the few? How can we cement worker power and ownership for decades to come? I propose an equity model I’ve been calling tenure-based ownership. The idea is basically this - your ownership in a company is proportional to the amount of time you’ve spent there, compared to everybody else. The formula to calculate this is pretty simple: just take yourHoursWorkedAtCompany / totalHoursWorkedAtCompany (you can replace hours with whatever unit you want). Here are some examples:

While there are clearly more complicated examples (typically the bigger the company, the more complicated the formula becomes), this actually follows some of the basic principles of traditional Silicon Valley equity pretty closely:

  1. The earlier you join a startup, the more equity you receive. In this case, you just happen to get a LOT more equity. For reference, when filtering compensation for startup jobs on AngelList, the equity slider only goes up to 2%.
  2. Equity is diluted as more and more employees join the company - this is important. While equity is diluted much faster with this equity plan, it’s the exact same concept as dilution at any other company. It would be up to the company implementing the equity model to determine when dilution occurs, but quarterly dilution seems to make the most sense.
  3. Your equity can vest over time. In this case, what would vest is your entitlement to whatever your percentage ownership of the company is. Let’s say you have a four-year vest schedule, with equity vesting at 25% per year. In the second example above, while the new employee may own 10% of the company after their first year, they’ve only vested to 25% of that, or a total 2.5% of the company. The remaining 7.5% of the company is held specifically for that employee

There’s also a lot that’s different about this plan. One of the biggest things is that it forces founders to really evaluate if you need to hire a new employee, as each new hire directly affects everyone’s equity. This is somewhat in line with some recent trends, where many new tech companies are attempting to grow like stable, small businesses rather than typical startups (that being said, this is required reading: Startup = Growth). It also dilutes the vested equity of those who leave the company faster than the traditional method, since your equity is directly tied to the total amount of time you’ve spent at the company. Some other notable differences include:

  1. If you plan on raising money, you’d have to issue a class of non-dilutable stock just for investors. While investors, employees, and owners often have different types of equity, in a plan where dilution is so frequent investors would demand non-dilutable stock. It’s unclear how this would affect things like employee morale.
  2. What happens when you decide to exit, whether it be via IPO or acquisition? That’s a very difficult question to answer. Some options include a one-time 10% dilution round to create equity for future employees and immediately transitioning to a standard equity model. Other options include immediately vesting all stock and just paying everybody out. It’s possible that you could maintain this equity model post-IPO, but I haven’t given much thought to how that would work.
  3. This plan is much less founder-friendly than typical equity models, in terms of compensation and voting rights. While this could be seen as a huge sign of trust from any new hires, it greatly reduces the potential reward from founding a company. There’s no way to solve that compensation problem (except hire very few people, very late in the game), but the solution for founder control is to have separate classes of stock for founders and non-founders with different voting rights.

There are a ton of open questions with this equity model. Why scale ownership in a linear fashion? If non-founders don’t get voting rights, does this really help guarantee workers rights? If you end up converting to a standard equity model post-exit, what’s the point of this at all? I’m sure there are a ton of other open questions and issues with this plan, and I’d love to hear them! Here’s a very simple Google Sheet you can copy to calculate equity based on tenure. Feel free to reach out to me via email or on LinkedIn - let’s talk about it!

capitalism • equity • startups