286: Tokenized Equity & Derisking Entrepreneurship

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​Happy Monday!

Thanks everyone for the nice wishes last week 😄 I'll get through them all soon!

Amanda is also working on compiling all the parenting advice for anyone else who needs it.

Nothing new this week, so on to the Medley!

Tokenized Equity and Derisking Startup Compensation

Billion Dollar Loser, the story of WeWork's charismatic leader Adam Neumann's rise and fall, is as entertaining as it is painful.

It's full of delightful cringe as you read through it, right up till the end where the "bad guy" wins. Neumann walks off with 445m (originally it was going to be 1.7b), while his investors and employees are left to clean up the mess.

Part of what makes me sad with the WeWork story, as with many massive startup explosions before it, is the poor luck of the early employees. There were dozens (hundreds?) of people who could have received multi-million dollar payouts for their stock options had WeWork successfully gone public. But when the IPO fell through, they were left with nothing.

This is the gambit you often take when you work at an early stage company. Your salary is lower, but you receive a generous stock options package where if the company is ever acquired or goes public, you get a huge payout.

It's never quite as good of a deal as it seems though. If the company never sells or never goes public, your options are worthless. And it usually has to sell for a pretty high price to offset the foregone income.

Worse, if you leave before the company sells, you usually have to pay to exercise your options. This could be a huge sum of money, and then again if the company never does sell, or sells for less than you hope, you just wasted a ton of money buying something that was supposed to offset the amount of money you weren't making!

So while startup equity packages do have the chance of making you incredibly wealthy, they also have a chance (maybe a better chance) at making you worse off. That's not really how it should work, right?

One reason I don't like it is that it prevents you having a reliable trajectory towards wealth. You can get much richer joining or starting startups than being a doctor. But your odds of having, say, 10m invested at 50, is probably higher if you go the doctor route. The startup route has a higher variance. And a big part of that is due to the illiquidity of company equity.

If early WeWork employees could easily cash out some of their options along the way, they might have still made a few million off of the whole debacle. Secondary markets exist, sure, but they're not easily accessed and many retail investors can't buy into them.

This is one of the things that excites me about tokenized equity in crypto. When you work with a project, either as an employee or contractor, you always have the option to get some or all of your payment in tokens. And while it's not exactly the same as equity, it's close enough for these purposes.

Since crypto tokens are highly liquid, you can always trade them out for another token assuming there are at least a few people who want the tokens you have. So as you receive tokens for compensation, you can decide how much of your net worth you want to maintain in the company you're working for or on.

If early WeWork employees were receiving WE tokens instead of stock options, they could have market sold some of them along the way, and they would have had a much better outcome. And though WeWork isn't a great example, anyone who wanted to ride along in the growth of the company could have bought those tokens and held them as well.

I've particularly enjoyed that for my work. Crypto Raiders is the first time I've worked on something where anyone who wants to ride along a bit can just go buy the tokens. It's kinda cool. And while I'm not bullish on individual creator coins (e.g. "NAT" coin or something), I'm definitely bullish on anyone being able to invest in things their favorite creators are working on.

It also helps to derisk entrepreneurship and joining early-stage companies. Instead of sacrificing income for the potential at a huge payout later, you can sell some of your equity along the way so you're guaranteed some degree of a good outcome no matter what.

If you wanted to go full risk-on, you could hold everything and try to make as much money as possible. But if you also wanted to play it safer and sell some along the way, you'd still have that option. Entrepreneurship and joining early stage companies could be much less risky.

The next question though is: what is the optimal strategy for a founder? I personally prefer to think about making financial decisions where I end up wealthy in almost all likely possible futures. I think that does a good job of encouraging you to be sufficiently risk-on to accumulate significant wealth. But also encouraging you to be smart enough to protect your downside as you have bits of success.

What it might encourage is selling some of your equity to build up a large enough low-risk position, say a yield-earning stable coin portfolio that can cover your expenses, first, then go heavier with the risk to see how far you can take it.

That might lower the ceiling on just how financially successful your endeavors can be. But it will also raise the floor considerably. And if the floor is raised for anyone pursuing independent work, that opens the doors for many more kinds of work to be pursued.

Anyway, hope you're having a good Monday!

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