Incentives

... differ.

At "BND" (not related to the subject company's actual or operating name) we were in an early enough phase that we were inclined to spend a significant amount of time in company metaconversation about focus, incentives, etc. This can be uncomfortable but in a utilitarian sense is probably mostly good: if you find something you dislike, that's better for your subsequent decisions than not having found it.

I particularly enjoy conversations about incentives because I have a behavioral-economics view of management: if you find someone's behavior to be irrational, it's more likely that you misunderstand their actual or assumed incentives than that they're behaving truly incorrectly with respect to them.^[1] Thus it's interesting to talk with people about what they believe their and my incentives to be with respect to a particular activity because it reveals some of what they assume about everyone's future behavior as opposed to what they've already observed.

A rich context for this incentive talk is the role equity compensation plays in incentivizing employees, including the founders, and any mechanics by which it does so. In our conversations about the company's engineering priorities following its successful (over double the goal in a relatively favorable set of valuation tranches) seed raise in the perceptively adverse CY23Q1 VC environment, BND's CEO (its founder) consistently referred to survival as the company's priority^[2]. As the plurality shareholder, survival is his goal, he said, and as an early employee with a bit more than 1% of the company's fully-diluted equity, I should be incentivized towards the same.

We can go pretty deep in dissecting whether or not this is true, but a couple factors stick out:

• With respect to complicated agents deciding amongst competing goals, finding the correspondence between equity ownership (or any other objective measure) and decision alignment is at worst accounting shenanigans; at best a research problem. Does equity ownership turn everyone into an agent maximizing its expected value, or is the equity just an indirect way to recapitulate the directive function^[3] of the managerial relationship?

• If we ignore the agency problem, and assume that mutual equity ownership equals alignment of goals, do the parties share a means of calculating the expected value of this inherently statistical quantity? Not at all: as an early employee, somewhat like the VCs, my payoff function is market-derived — not unique to this company — and extremely asymmetric, favoring strategies with the highest variance (and thus highest probability of an outcome above the mean); someone who perceives there to be anything to lose, or has a non-market-based component to their compensation — a founder, for example — is more likely to maximize expected value.^[4]

• Not to get all Matt Levineishly cute on the last bullet but if we have to transactionally evaluate our comp at every decision, we've already lost!

When I'm working for an early startup it's because I want to work freakishly hard, with like-minded people, on a high-risk, high-reward problem. I'm not sure that corresponds to a strategy that optimizes for survival, and that's okay.