09 Oct 2021 equity psychology

In the world of startups, there's a commonly held view that equity is an important mechanism for aligning the interests of individuals with those of the company they work for. If you work hard, the company will become more valuable, and so too will your shares in that company. Therefore, giving shares (or at least stock options) to employees should motivate them to work harder for that company.

But as we all know by now, people are not ideal rational actors who work only to maximise their self-interest. There are other factors that drive us, sometimes to our own detriment. One such factor is how we feel about other people: if you like someone, you're more inclined to help them; if you don't like them, you're more inclined to hurt them. And if you really don't like someone, you may be prepared to hurt them even if doing so also hurts yourself.

Consider now this scenario: an employee owns 0.1% of a company, a founder owns 10%. If the value of the company goes up from £1 million to £10 million, the value of the employee's shares will rise from £1,000 to £10,000, and the value of the founder's shares will rise from £100,000 to £1,000,000. A rational employee may be motivated to work hard by the prospect of increasing the value of their own shares. But if the employee dislikes the founder, they may also feel motivated to suppress the value of the founder's shares. These two motivations are in conflict, but it's not implausible that the latter would win out. Sure, the employee would be missing out on £9,000, but the founder would be missing out on £900,000, and that's gotta hurt!

Even if the employee actually quite likes the founder, they might feel that it's unfair that their work will contribute to the founder becoming £900,000 richer whilst they only become £9,000 better off. This feeling of unfairness may well be sufficient to motivate the employee to slack off and forego their own potential gain (just as people reject "unfair" offers in the ultimatum game).

Does this kind of phenomenon have any impact on the performance of real-world startups? I don't know, but I'd be interested to find out. Employee motivation is a hot topic and it's not obvious to me that typical employee stock options provide effective incentives.

Related links #

• Herbert Gintis on Game Theory. He goes so far as to as to describe vengeance or retribution as "one of the basic human behaviours", arguing that is was essential in the development of cooperative societies.
• Handcuffed to Uber. Perhaps evidence that employee stock options are effective? Though I'm taking this with a large pinch of salt. This article was written in 2016, Travis Kalanick left 2017. You do the math.

Despite employees’ immobility, morale inside Uber remains high, according to our sources, a sentiment that the jobs site Glassdoor seems to confirm. Roughly 1,600 people have reviewed Uber on the platform; the 490 who’ve rated CEO Travis Kalanick collectively award him a 91 percent approval rating.