Ah that glorious moment when one of your high-value, hard-to-fill open roles at your company is about to finally end in a hire after months of dedicated searching. The interviews with your leading candidate have gone well, they’ve blown your socks off on product knowledge and skills in technical interviews, everyone seems to find this person engaging, bright, and can envision working with them.
There’s just one thing nagging you: some team members have noted that this person maybe seems a little bit “out for themselves,” and maybe would just find the paycheck more endearing than the product. This would be a deal-breaker for you if this were the case, but you really think you got a stronger sense of them than that. So how will you tell if they’re attracted to your company in particular, and not just any company that has growth potential?
You blow the dust off your cap table, check the headcount budget, and pile together two different offers:
- Offer 1: more salary, and less equity.
- Offer 2: more equity, and less salary.
You fire off both to the candidate, then sit back and drum your fingers nervously on your desk. Maybe, you say to yourself, they’ll pick the latter and then you’ll be able to show your team this person was the right call. After all, preference for stock options means they want to share in this company’s risks and rewards, and isn’t that what we’re looking for?
What do stock options and marshmallows have in common?
Thus has emerged the conventional wisdom that has dominated startup compensation structures for years. Founders often want to use equity, or stock options in the company, to reward employees who take an early risk and then “stick around,” and use that as a means to judge who is invested in the company mission and vision versus who is (and I say this in a good way, as we so often need them) a mercenary who will come in and do a particular job for a particular amount of money before moving on.
And certainly finding a way to sort for the people who are truly jazzed about what you’re building is critical. Passion for the vision is an indispensable team asset often even beyond raw skill, and it’s one we can scarcely buy with money to begin with. So I’ve seen hiring managers and founders try to offer two versions of an offer package: one with more money and less stock, and one with more stock and less money. They put it out to a potential hire as a kind of “Marshmallow Test” to tell if they’re motivated enough by working for this particular company to postpone their gratification.
The Stanford Marshmallow Experiments are a series of child behavioral studies that comprised of the following basic structure:
- an adult presents a child with a marshmallow.
- the adult gets up to leave the room.
- the adult tells the child they can have two marshmallows instead if they can successfully refrain from eating the one before the adult returns.
- whether or not the child eats the single marshmallow during the adult’s absence is recorded.
The children who participated in the experiment were sorted in to these two groups: the impatient marshmallow-consumers and the more patient marshmallow-investors. These two groups were then monitored for years to measure life outcomes, and it was found that kids who could resist the single marshmallows’ pillowy sugary temptation and delay their gratitude had better life outcomes across the board.
For years this experiment was held up as an example that early indicators of self-control and ability to delay gratification showed some kind of more desirable quality in people, that patience and the ability to wait for future outcomes meant maybe they were more talented, more intelligent, more inherently predisposed to success in some way.
It’s also an indicator that we tend to repeat in building our adult incentive-structures, especially in our workplaces. So we ask people to “pay their dues” and delay gratification in a job because we think that will show who really has the chops to succeed, and it helps us fill in the information asymmetry on which candidates are likely to meet our needs.
However it’s a shortcut that not only doesn’t work, but can actually diminish the power of founders’ vision and mission to attract invested talent.
It’s an easy mistake to make of course, especially as our idea of what owning stock options in a company is supposed to mean is a little outdated. Sharing in “a piece of the company” sounds romantic, and we’ll often hear those who were successful as founders wax sentimental about how they want people to be “a partner in the business” and invested, literally, in its outcomes.
However, it’s hard to be “a partner in a business” that could evaporate before we vest, or may have to lay us off for necessary business reasons, or let an abusive manager push us out, or get acquired and leave us without the protection of a change-of-control clause to vest early enough to access those options. Not to mention that companies just aren’t seeing the exits that they used to, and they’re taking a lot longer to ever even happen.
Lots of things can happen over the years that are not up to the employee and even not up to the founders that will render equity incentives completely inert. Our highest-value competitive hires will know this, and a candidate’s passion should not be required to come at the exclusion of their basic self-preservation instinct. The idea that someone who cares truly and deeply about our mission can be best identified through desire for equity is an increasingly false premise.
The Unreliable Marshmallow, and Valuing Skeptics
Let’s go back to our Marshmallow Experiment for just a second. Some years later a second round of these experiments was done introducing a new format:
- an adult presents a child with a marshmallow (or crayons or another incentive).
- the adult gets up to leave the room.
- the adult tells the child they can have two marshmallows instead if they can successfully refrain from eating the one before the adult returns.
- some of the time the adult returns and says sorry, there actually were no more marshmallows.
- the repeat behavior of children in the “reliable” versus “unreliable” environments is recorded.
Why is the introduction of the unreliable adult so important to this experiment? Well for one thing, it’s a little closer to how real life works, right? Sometimes there just are no more marshmallows, or people lie about how many they have, or sometimes we misunderstand the availability of marshmallows in the current marketplace.
And likewise the children who were in the unreliable environment in repeat sessions lasted a fraction of the time before just giving up and eating their marshmallows without waiting, sometimes as little as 1/4 of the wait time of their peers who were consistently rewarded with two marshmallows.
So to sum up the difference in the two experiments: suddenly all the kids put in the unreliable environment are way more likely to act like the kids who couldn’t resist the marshmallow for very long even in the “reliable-only” first version of the experiment. Whatever we believe about the “inherent” quality of a child capable of delayed gratification suddenly was more likely to evaporate for any kid under circumstances where patience did not predictably equal reward.
What if then preferring the higher-value outcome immediately is not a negative quality in a person, but an adaptive one?
As one researcher noted about how distinctly and quickly the removal of a set relationship between patience and reward modified the kids’ behavior, “If you are used to getting things taken away from you, not waiting is the rational choice.”
And this is true of our adult choices too. What happens if you are a person whose hard work on the job does not consistently correlate with recognition or reward? What if people of your gender, race, perceived ability, age often do not have reliable interactions with an industry and management system rife with unconscious bias? What if you’re a seasoned startup-veteran who knows that these bets don’t always pay off? The rational choice then may be to pick the compensation option that is cash-preferred, regardless of how strongly you feel the pull of a founder’s vision.
That we all have these varied views on the reliability of our outcomes is actually in so many ways to our advantage. Our products can be developed more effectively when they are designed, built, revised, debugged, refactored by humans that come at problems with different experiences of risk, problem-solving, and envisioning what outcomes are possible.
The skeptical people who would rather have the cash up front may also be the people we need to help us identify risk on our company horizon, to plan ahead and make smart choices not swayed by fantasies of an unlikely exit scenario. Maybe we don’t always want people to join our team who think that taking this kind of risk is easy, maybe we also need the people who understand the gravity of what it is we ask from them when we ask them to come to work for a startup.
So it’s high time for the delayed-gratification preference to take a hike, both in child developmental psychology, and in our equity packages. But fear not, dropping equity compensation as a candidate quality secondary-signaling indicator does not mean it isn’t possible to find people who are truly excited about what we’re building, it just means we’re going to have to try a little harder. And we can do this in some of the following ways:
- Put our values and mission more up-front in the hiring process (you wrote out your company values, right?)
- Target-market our company to the communities with special stake and interest in our space.
- Spend more time and money recruiting in underrepresented candidate pools.
- Promote and train your passionate people from within.
These aren’t perfect solutions to the candidate/startup incentive-alignment problem, but they can get us started in thinking about the importance of diversity and inclusion in the people we ask to come to work for us, including the diversity of their experience, backgrounds, motivations and priorities. Shelving equity-preference as that indicator can remind us of the true value of the people in front of us, and can help them connect more sincerely with the true value of mission and vision of what we are building, marshmallows optional.
Further Reading: