Psychedelic VC: Equitable Compensation in Inequitable Industries
When a startup breaks up equity you see the first 80% split between the cofounders, 10% for early hires, and another 10% as an employee options pool. That’s the standard.
That means while a co-founder can see 20–30% of the equity, the acting CTO at an early stage organization might only see 1% depending on whether they’re part of the founding team or not.
I’ve seen countless friends take a “first-hire” job and be left with decimal-place equity while doing more of the work than either founder.
Sometimes you’ll stumble into co-founders who have an unequal equity split, one of them claiming that they brought in the initial capital, had the idea, or that they were the “first”. Experts like Michael Siebel, the current head of YCombinator suggest that equity is always split equally between founders. Less drama down the road.
In VC the same problem arises. General Partners typically take home all the carry, with many employees not taking even a bit of the cut. And for anyone who’s familiar with venture, you know that carry is where all of the real money is made.
For those who are newer to VC, there are two ways that the operators of a venture firm get paid: management fees and carry.
Especially for small funds, $25M for instance, the standard management fees of 2% per year are just too small ($500k) to support a whole team, operations, audits, marketing, press, fund administration, etc. Salaries are low, ours are $30k for the first fund, and make living on a VC salary impossible until the firm gets up to funds that are larger than $50M. Perhaps $30k is enough for living expenses in a small city, but most VC’s need to have their members located in or near big cities to have access to the biggest investors and the best deals. $30k in New York or SF won’t get you far, especially if you’re a younger investor paying off student loans or a new parent trying to support your family.
But “Carry” is where things get interesting. Let’s say you make a 2.5x return which is inline with top-quartile funds. That means you’ll make just shy of around $40M in returns over the initial $25M that has been invested. Carry is split 80–20 between investors and the firm, so 20% of 40M becomes $8M, your split of the winnings. There are details that I’m purposely excluding here which make this number smaller, but even if we assume the firms carry at the end of the day amounts to $5M, that’s still $1M in the bank accounts of each team member in a 5 person team.
This doesn’t happen over 1 year, but over 10, though even when it’s prorated over that time period there is still a $100k increase per year in salary for those involved.
Unfortunately, the split of carry happens in a much less egalitarian way. Typically GPs will take the majority of those winnings, 80%, and leave the rest for venture partners, principles, and other key contributors to the organization.
We decided to make two significant changes.
Firstly, we decided to vest our carry, something we haven’t seen done by other firms we’ve been in conversation with. If a key individual leaves we will be able to bring in someone else and still compensate them fairly and competitively. Secondly, we split our equity via a salary based model. Basically we looked at carry as an extension of salary instead of a bonus won whenever a company would exit.
This allowed us to create a much more even split for our firm that made the prorated wages of each member of our team equal, livable, de-risked, and fair.
We were met with critiques from investors who commented that “socialist compensation structures” don’t work to incentivize employees.
We had internal discussions about who holds the liability within the fund and how should that be compensated relative to everything else?
Some of our team had more experience, more connections, more access to capital, but at the end of the day we are all still learning and equally as dedicated to seeing our work flourish.
And what we found in the research was that we needed an alternative compensation structure to what was out there. Compensation is much less about absolute pay and much more about relative pay. And when you have contributors who helped build a firm over years of time, then the most important rule is that no one feels that they were disrespected.
The priority in building early stage projects of any sort is creating a foundation of trust. That is difficult to do when people tier themselves financially from the outset.
As we continue to work with dozens of startups in the psychedelics ecosystem we will continue to push the limits on egalitarian compensation structures that keep everyone well fed while making sure that everyone feels equally appreciated for their contributions.
