00:00welcome to the a 16z podcast I'm Michael
00:03Copeland if you are lucky enough to be a
00:05part of a company that goes from zero to
00:08a monster with an IPO or some big
00:11liquidity event along the way it's not
00:13usually the case that the distribution
00:15of the wealth created is equitable a few
00:18people make out like bandits deserving
00:20or not while others many of whom put in
00:23the work to make the company a success
00:24end up with very little that was the
00:28case with Andrew Mason and his first
00:30company Groupon and frankly it bugged
00:32him so while building his next company
00:35Mason also designed a system for equity
00:37distribution that he thinks is fair
00:40something Mason calls progressive equity
00:43Ben Horowitz who has seen plenty of bad
00:46ideas to make equity distribution more
00:48equitable he actually loves this one
00:50joins Andrew Mason on this segment of
00:53the a 16z podcast to dissect Mason's
00:56idea and the admittedly very
00:58high-quality problem that underlies it I
01:01am Ben Horowitz and I'm here talking to
01:03Andrew Mason and today we're going to
01:05talk about a concept that he invented
01:07called progressive equity and mega Docs
01:10and we are very excited to have him
01:12Andrew thank you for coming thanks for
01:14having me it's good to be here so yeah
01:18this is one of these things where I get
01:21kind of emails all the time about new
01:24kinds of employee incentive plans and so
01:27forth and like how the old ways of in
01:30sending people will never work and
01:31there's a great better way and usually
01:33they're just chock-full of halls and and
01:36ridiculous but this one I thought was
01:40ingenious so if you want mind kind of
01:42taking us through kind of the problem as
01:44you saw it and then the solution that
01:47sure well there are a number of
01:51different challenges I think in in
01:55coming up with an equitable system for
01:58distributing equity among the people
02:00that are involved in a company
02:02this particular progressive equity thing
02:04solves one of those challenges which is
02:07if you're lucky enough to be part of a
02:09company that that grows to be quite
02:13more than a billion dollars typically if
02:15you if you look over the last 10 years
02:17or so at there or farther back at the
02:20distribution of ownership take out
02:22investors for a minute and just look at
02:23the distribution of ownership among the
02:25people that actually work at the company
02:27the founders and the employees you have
02:29a couple of people who end up making
02:32enough money to to live a million
02:36lifetimes and then you have a handful of
02:39people that achieve some kind of
02:41financial independence and then there's
02:42this long tail of people that do well
02:45but though and they get a nice house
02:48maybe maybe they can buy a house but
02:50they've still got to work yeah and this
02:54happened to us at Groupon and it was
02:57kind of frustrating because because I
03:01felt like there were all these other
03:02people there I felt like I was frankly
03:04ending up with more money that I wanted
03:07or knew what to do with and there were
03:08all these other people who had put in
03:10enormous effort and I I looked for ways
03:14that I could at that point even give
03:16some of my equity to them to kind of fix
03:19the distribution and it ends up being a
03:22real challenge yes hey I'm familiar with
03:26that challenge so so what progressive
03:30equity is is a system that's basically
03:33like a like a progressive tax it's an
03:34income redistribution system within the
03:38company that as the company becomes more
03:41and more valuable it redistributes
03:43percent ownership away from the the
03:47highest percent owners and towards and
03:50and towards the lower percent owners so
03:52the more valuable the company come
03:53becomes the mechanism by which it works
03:57you could do it different ways but we
03:59tried to keep it very simple there's
04:02some number which we've determined to be
04:06a financial independence threshold right
04:09which is a number that we say once
04:12you've made this amount of money you
04:13have enough that you never need to think
04:15about money again right maybe this is a
04:18good time to pause and just and just
04:22point out the absurdity of
04:25the fact that we have to think about
04:27solving problems like this in this world
04:30what to do when you make resume what you
04:32bunny call it a problem yes so I don't
04:36know how to get around that there's the
04:3818 year old version of me sitting in the
04:41corner shaking his head completely
04:43ashamed of what he sees in this chair
04:46but I'm gonna just yeah anyway so you
04:53have this financial independence
04:54threshold and that's some number in in
04:58the blog post or I read about this I
04:59didn't feel comfortable actually
05:01everybody has to figure that out on your
05:02own you can talk to your financial
05:03adviser or whatever but our company came
05:07up with a number I'm gonna use a fake
05:09term that I was calling Megan donks and
05:12I said I think I said 50 mega donks was
05:15the financial independence threshold so
05:17once you have enough equity or once your
05:19company is valuable enough that your
05:21total ownership is greater than 50 mega
05:23donks all of your value beyond that has
05:26is basically taxed at 50 percent right
05:28so you get half of it and the other half
05:30goes into a pool that's redistributed to
05:33the rest of the employees pro rata with
05:35their ownership and that's basically how
05:37it works and when you did that did you
05:40you know you made it pro rata with the
05:42ownership did you think about making it
05:45not pro rata with the ownership ie like
05:49completely levelling it once it became
05:53progressive well I think the the idea
05:58would be that your ownership percentage
06:03the employee ownership percentage is
06:04reflective of the impact that they have
06:06on the company Ranch is a whole other
06:08problem right and sometimes it is
06:10sometimes it is sometimes it isn't
06:12sometimes it isn't I know I'd argue
06:13that's even a that's probably a more
06:16pervasive problem in companies and one
06:19that this doesn't do anything to solve
06:20at all but yeah yeah you're always I
06:22mean I partly because people get equity
06:25when they're hired right not based on
06:27their work and it's amazing that how
06:31weak that correlation is between what
06:34people get when they're hired and how
06:35well they do you know once they get
06:37there and how hard they
06:38work and how much effort they put it
06:39yeah I mean I'm sure you had a similar
06:41experience but I remember at one point
06:43looking at the cap table and seeing how
06:45much all the different employees owned
06:47and if you just put it in line by
06:49ownership and if you put it and then if
06:51you line it up by impact like tears yeah
06:57the saddest thing in the world so so I
07:04guess that's why I thought to do it pro
07:06rata is that separately you should solve
07:10the problem of figuring out how to
07:12properly just distribute among employees
07:15to reflect impact but yeah yeah yeah
07:18interesting so one of the things you
07:22kind of obfuscated in the in the blog
07:25post and and then again here but is a
07:27really kind of important thing is the
07:30threshold in that if you set it too high
07:35it actually becomes meaningless on
07:38several levels in that like Facebook
07:40didn't actually have this problem
07:41because everybody made so much money
07:43because like the company just ended up
07:46being so like incredibly valuable so you
07:49know if you had set it at like a
07:50whatever ten billion dollar level it
07:53doesn't matter like at all even though
07:55like it would have paid out it just
07:58would have made any difference to
07:59anybody and then on the other hand if
08:02you set it to low then it's going to
08:05hurt your executive recruiting because
08:07you know with Google offering people
08:09like a hundred million dollars to stay
08:11at Google you know if you're offering if
08:14you say ok the threshold is 10 million
08:17then are you going to be able to recruit
08:19it executive so how did you think about
08:21that balance and how did you get to the
08:23number and then I imagine every employee
08:26that you have knows the number or do
08:29only the people who would potentially
08:31get taxed or how do you all the
08:33employees know the number okay it and so
08:35so there's two different ways that I
08:37think people tend to think about
08:38financial independence when I sit there
08:40there's you never have to work again and
08:43that's a different threshold I think
08:45like if you're careful about how you
08:47spend your money you never have to work
08:51what I'm talking about is financial
08:52independence which is the point at which
08:54you impulsively buy or you you buy a
08:58motorcycle with the same degree of
09:00carelessness that you buy a cup of
09:02coffee and and so in terms of the
09:08downside of executive recruiting I mean
09:12I just think anybody that feels like you
09:15know you're capping me out or you're
09:16taxing me I don't know like person's an
09:19 I don't know that's a good test
09:22but how about you know there's kind of a
09:27philanthropic side so if you look at
09:29okay Mark Zuckerberg who probably made
09:31as much money as anybody and not that he
09:35hasn't bought stuff but he's also like
09:37given away like a colossal amount of
09:39money did you think about okay for that
09:43case you know for redistributing it to
09:46employees are we gonna ultimately kind
09:48of if over a certain amount what
09:50actually happens is it all goes to
09:51charity them how do you think about that
09:53I I thought about that a little bit and
09:55I actually it's it's a really good point
09:58like arguably it's better for one
10:01benevolent person to end up with all
10:05this money instead of just distributing
10:07it evenly among all the employees so
10:10that they can all buy you know slightly
10:12nicer cars and other work you know
10:15materialistic things right so I think
10:18that's a really good point it still felt
10:20like in principle something that was
10:22that was good to do but I think that's
10:25been put potentially a really good
10:26argument to not do something like this
10:28so then you you kind of have this
10:32one-time event where like the tax is
10:37paid and everything is distributed and
10:40then you kind of switch in to kind of
10:44old world right speak do you worry about
10:50like what that does to the culture
10:53because like you have you know rolling
10:56into whatever an IPO or a gigantic
10:59secondary or potentially a sale
11:02I imagine this kind of extra mega group
11:09you know we're all in this together
11:11incentive and then that's just gone
11:13mm-hmm and so how do you think about
11:17that and then with that like make you
11:20wanna like defer a big secondary or an
11:23IPO because you're gonna lose like what
11:26really is in a way a magical incentive
11:28for the company because like here you've
11:30got this thing where you know nobody
11:33else is gonna give me some of their
11:35stock like no nobody else who I'm gonna
11:37work for is gonna go okay here's like
11:39half of my stock and I'm giving it to
11:42you like that's a that that's really a
11:45kind of a special thing and then you've
11:46got that special thing all the way
11:48through the company and then it's over
11:49right yeah I never liked the fact that
11:52it and that the way that it's structured
11:54is that there's this event and then and
11:57then it's over one of the reasons that I
12:00published all the legal documents that
12:02we that we came up with was partly in
12:05hopes that someone would take them and
12:07find ways to improve upon them that was
12:09the best thing that we could figure out
12:11how to how to come up with that was in
12:15line with with with the law yeah and was
12:20was not a major tech didn't put
12:24employees that were under this program
12:25at a major tax disadvantage or anything
12:27like that so it does have this one-time
12:30event those are definitely potential
12:33issues that that that we may end up it
12:36would be being lucky and if we're
12:38fortunate actually taxes yeah
12:42then we may end up dealing with some of
12:44those things but it but I'd love to see
12:45if there's a way to have the same effect
12:48that that where you're redistributing
12:51value but it it's not all tied up in
12:56liquidation event yeah interesting and
12:58then do you worry about people in
13:03advance of the event who would be on the
13:07getting tax side attempting to game the
13:10system by like maybe there's a small
13:13secondary sale that we can
13:15execute where I can unload as much of my
13:19stock as possible because then I won't
13:21have to pay the tax sir hmm
13:24kind of like I found progressive tax
13:27ends up working yeah yeah shelters I
13:29want to say that it's that it's
13:31structured in a way that we can we can
13:33avoid some of that like we like in order
13:36to trigger the so so I think like one of
13:40the restrictions on the RS use that that
13:44and and and the the triggering of the
13:48redistribution of the of ownership is
13:52that the secondary cell needs to be at
13:54least 15 percent of the company or 35
13:57million dollars or something like that
13:59right so you're saying that you're
14:02saying that employees might like senior
14:04employees might lobby for a signal or
14:08smaller than that right exactly so you
14:11know oftentimes what I say you'll do a
14:13big round let's say the company does a
14:14big round of financing of a billion
14:17dollar valuation and oh you're unicorn
14:19and then there's all this demand in the
14:22secondary market and people are calling
14:24them and saying hey can I buy your
14:25shares and now they're thinking okay if
14:29I sell them now I get an added benefit
14:31of I don't have to pay the tax well I
14:33think I think the way that that it's
14:35structured is that all of that it's
14:37accumulated value over time so it
14:40doesn't matter if you sell right so it
14:41shouldn't matter okay and then another
14:43thing that you've done which is kind of
14:45interesting in today's environment as
14:47you said if you leave at any time before
14:50the taxes paid whether you're vested or
14:52not you lose all your progressive tax
14:55winnings right so this redistribution
14:58pool that you would benefit from just
15:01because it felt like it became very
15:03complicated to do it the other way and
15:06this does feel like a benefit for people
15:08who are going to it there's there's very
15:11for most people there's no downside and
15:13only upside like again a company needs
15:16to be extraordinarily valuable for the
15:18average employee that's owning
15:20you know a tenth of a percent of the
15:21company yeah to reach the financial
15:25independence threshold so so that hasn't
15:29been an issue when we've talked to our
15:32employees because most people see it as
15:34the whole thing is no downside and
15:37potential upside if I stick around long
15:39enough for whatever right it's better
15:41than anything else in the market but you
15:44know potentially if people other
15:46companies adopted it then it might
15:49become a thing and how is it I guess
15:51like have you felt like people get it in
15:54the recruiting process and join the
15:56company is is it a big draw for new
15:59employees um you know so far in our
16:03company because we're small and we're
16:06we're kind of weird yeah we're building
16:13this platform for audio tours which just
16:15sounded it's awesome yeah and it's gonna
16:17be huge but it sounds it sounds weird
16:19but it tends to people that have been
16:22attracted to it if tend to be attracted
16:24to it before a passion for the problems
16:26that we're solving and this is a nice
16:28bonus so we haven't gotten into the
16:30phase of the company yet where we're
16:32attracting people who are like which
16:35post product market fit pre IPO gravy
16:40train can I jump on - that's going -
16:43right that's going to get me to the
16:45point that I never need to work again in
16:47a shorter period of time as possible and
16:49that's probably where I start to see
16:51this being a major recruiting advance
16:54and so do you worry about it being a
16:56major recruiting advantage in that sense
16:59and that that's one of the you know one
17:02of the and you know like you or CEO of
17:05Groupon so you completely understand
17:07this dynamic but is that you know one
17:11thing you hate to have in the company is
17:13a bunch of people joining for all the
17:15wrong reasons because there's no way
17:17that they join for the wrong reason and
17:20then kind of become part of the right
17:23culture and although like every time I
17:25tell CEO is this they just ignore me and
17:27they go for we need like boss level
17:29engineers like I don't care if they have
17:31ambition right but does that you know
17:35because it does tend to take away from
17:37what you have which is like a kind of
17:40weird exceptional culture of people who
17:44really are on this problem and are there
17:48on a mission well I think I think
17:50there's two potential ways that this
17:53policy could appeal to a potential
17:56recruit one would be in the purely
17:58mercenary this is a place where I could
18:00potentially make more money and yeah
18:03that that I mean we have to be realistic
18:05about the fact that that's that's a
18:07motivation for four people but I agree
18:10it's we wouldn't want people joining for
18:13that that being the primary motivation
18:16the other way to look at it is oh this
18:19is a company that in principle thinks
18:22that the more that values the the input
18:26or the the impact of employees and is is
18:31putting thought and effort into making
18:34sure that employees are rewarded in that
18:37and that the spoils don't end up going
18:41being completely lopsided and but
18:45they're reflective of the of the impact
18:47and I work I want to work in the kind of
18:49company that thinks about their
18:52employees that way so and and I want to
18:57work in the kind of company where I have
18:59the opportunity to own more as where I
19:02am incented to make the company more
19:04valuable because I get to own more of it
19:08as it becomes more valuable now do you
19:10worry at all about the kind of company
19:14policy seeming like a political policy
19:18where you Eddie because you know once
19:20you get into politics you get this like
19:24weird kind of religion and it's like
19:25yeah those guys over there are
19:27communists or so forth it because you
19:30know you've called it a progressive
19:32equity yeah system and you know
19:34progressive taxes you have a better name
19:36for it well I think it's a great name
19:38because it's very descriptive yeah
19:41and I you know I tend to agree with it
19:45you know particularly in Silicon Valley
19:47today there's a whole kind of class of
19:50kind of people with a much sharper
19:52libertarian bent right who might think
19:55okay I already live in a progressive tax
19:57system do I wanna live in a progressive
19:59equity company and I think you've
20:03observed the thing that I observed which
20:07is the you know what you get paid has to
20:13do with a lot of things other than your
20:15effort and skill and like that just is
20:21the way life is and I think oh you know
20:23my mom was a nurse and like she was like
20:25a phenomenal nurse she could in her
20:27entire lifetime make what I can make in
20:29a year as a venture capitalist even if I
20:31was a crap venture capitalist and value
20:36to the world you know like there's one
20:38person like saving your life and there
20:40is another person doing like what I'm
20:42doing I'm like okay that doesn't seem
20:46but you know on the other hand
20:48capitalism works a lot better than
20:52you know communism in practice sense of
20:54being like a massive concentration of
20:56power and Joseph Stalin was not a nice
20:59guy and and whatnot so how do you how do
21:04you think about kind of you know because
21:06you don't really want to enter that
21:07debate as the CEO you actually want
21:10anybody you know be they like a
21:13libertarian or a right-wing Republican
21:15or left-wing Democrat like you'd like
21:17them all to feel welcome in the company
21:19you don't want them to feel like okay
21:20I'm going into a world where they're
21:23I agree like I that was a concern just
21:28from a from its there it seems like
21:33there's no upside in in in mentally
21:38anchoring this system to a particular
21:42political point of view which it isn't
21:44anchored to a particular political point
21:46of view and mmm I called it progressive
21:49equity because it was descriptive and I
21:52was lazy and didn't think
21:55but but argue if I was really being if I
21:58was really if I was like writing a book
22:00about this or like or like actually like
22:02going out and trying to market it or
22:04something like that I probably would
22:06have taken the time to come up with a
22:08more agnostic yeah title for it probably
22:11like three musketeers equity you know
22:13all for one one for all yeah no I agree
22:19but I think from an employee perspective
22:21I think once you talk to employees about
22:24it they they get it pretty quickly and
22:27there's nothing about it that's
22:29anti-capitalist so you know in a world
22:31where you've got incidents like when the
22:36secret guys bought Ferraris off the
22:38secondary and like all the employees
22:40were we're very depressed and upset
22:42about that and just you know kind of a
22:44general you know less loyal kind of
22:49company environment partly due to all
22:51the opportunities and so forth but it's
22:54very difficult to build a great company
22:57if the people in the company don't love
23:01the company and want to stay there a
23:03long time and I was just saying closing
23:06that congratulations on like a really
23:09creative step to figuring out how to put
23:13that together and I'm hoping it works it
23:17is a great experiment but really really
23:20thoughtful and congratulations and thank
23:22you for coming Andrew thanks my pleasure
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