HomeBlogEquity Pooling is a Social Good and Basic Right

Equity Pooling is a Social Good and Basic Right

November 23, 2023Aaron Rosenson

Equity pooling is not just a wealth management benefit for employees – it’s an important social good.

Founders and employees should understand how and why equity pooling protects them and encourage others to avail themselves of this important resource.

This is because they have the right to avoid unnecessary risk. They should be able to reduce the likelihood of a major financial loss in their life, to the extent that it harms no one else around them.

And therein lies the benefit of equity pooling – the elimination of a risk that can be reduced, without harm to anyone else. Along with the higher likelihood of having a meaningful outcome from a startup.

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How Does Equity Pooling Work?

Equity pooling is when an individual exchanges part of the economics of their startup stock or options for the economics of other startups.

  • In doing so, they transform their personal holdings from a single, concentrated holding, into a portfolio of other businesses.
  • Equity pooling requires no cash, no disclosures, no approvals, and often involves no change to tax treatment.
  • It can be done with a few simple signatures and is available to anyone who works in the startup industry.

When a stock or option holder enters an equity pool, they become a member of a “fund” of other promising companies. When any of those companies has an exit, everyone in the pool gets paid, according to their proportionate share of the pool.

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For example,

  • Let’s say you have a $1M paper position in a startup.
  • You decide to participate in an equity pool with 9 other members, with an equal $100,000 commitment (just 10% of your holding).
  • One of the pool members has a 5x outcome, from the time that they committed their equity.
  • $500,000 would be split amongst the pool members and you would receive about $50,000, despite having never worked at that company.
  • Meanwhile, you would continue to retain both the other 90% of your stock/option position, as well as the other 9 active companies in your equity pool, all of which could be a meaningful exit event for you.

Your Right to Equity Pool is Long-Overdue

With equity pooling, founders and employees can freely manage and diversify their extremely concentrated positions. Why is this "long overdue"?

1) The right to responsibly protect oneself

The vast majority of our society enjoys the right to diversification. Anyone can take their hard-earned money and assets and spread them about index funds, different stock, bonds, and more. There’s no shortage of ways that people can find balance and security, as they try to build their wealth and protect themselves and their families.

This is all the more important when we consider how important diversification is, objectively! 92% of public stock managers cannot beat an index of the largest public companies!

Indexes are historically the right way to protect and grow your money in the much more stable world of public companies (even with trained professionals working full time to beat the index). How much more so should private shareholders have access to diversification, instead of singular, concentrated bets!

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Stock and option holders deserve access to these strategies, without having to hop from company to company to acquire different sets of stock and options.

2) Stock and options are too important to be thought of as “bets”

We live in an era where it is well understood that startups have an outsized impact on our economy, job market, and culture. Many of the most well-known businesses in the world sprang from the startup industry.

The founders and employees building start-ups are part of a system that has made massive contributions to the job market, economy, and national wellbeing. They deserve the right to protection and financial responsibility.

Furthermore, making money on stock and options has never been more of a long-term endeavor.

  • The initial 4-year vesting plan was created to be aligned with a company journey to IPO that often took 6 or 7 years.
  • Nowadays, successful companies often take 12 or 15 years to have an exit.
  • With ambiguity throughout that journey as to whether they will even be successful at all.

These startup equity positions can be worth 5, 6, 7, or 8 figures of money. The expectation that holders of such assets should just chalk them up to speculative bets and sit tight for a decade until they materialize is no longer realistic. It is not respectful of the massive impact that these assets have on anyone's real-world personal portfolio.

Furthermore, these assets are not just “speculative paper” – case in point, because many people would not sell their start-up positions for a very substantial discount. So they really do play into the wealth management picture of one's personal financial life – yet, equity holders are tremendously limited from doing anything about it.

Employees can spend their entire careers accumulating a few concentrated stock positions, only to have them worth nothing. And by the time they are realized as worthless or not particularly valuable, the employee or founder may be too late in their career or life responsibilities to be able to appropriately react.

A balanced scale with stack of coins and a paper documents

Meanwhile, we live in a type of growing affordability crisis and a general lack of global stability. Home ownership has never felt this more out of reach in decades, for millions of people. More than ever, those that make their livelihoods in company building deserve safer and more reliable ways to grow and protect a nest egg. Allowing them to diversify their stock and options without compromising their alignment with their employer is only proper.

3) Equity Pooling Helps the Participant, Without Harming Anyone Else

Not only does equity pooling achieve tremendous benefits for its participants - it causes no harm to anyone else.

Equity pool participants often retain massive exposure to the business that issued them their stock or options. Their motivation to contribute is unchanged.

They are not taking home a large amount of cash that would demotivate them either, when they choose to equity pool. Nor are they sharing any information, or indicating anything about a business’ prospects (executives and founders of some of the strongest businesses in the world are participants in Apeiros equity pools).

If anything, equity pooling just leads to benefits for the company that has had its equity pooled.

That participant now has less personal stress. This allows them to perform better in their work and in their home. And is just the right way to enable them to live.

An illustration of a man working on a laptop with headphones

And the employee now has more willingness to stay than a company long-term. Because their equity can effectively be used to power a wealth management strategy, versus their place of employment being their sole way to power such strategy.

  • Historically, great executives would jump from company to company, to build a portfolio of different holdings.
  • But now, they can stay at a single company for a long period of time, and by dint of its stock and options being able to act as a currency, they can acquire their interests in other startups from a single place of employment.

This is better for both the employee and the business.

Let’s Make Startups a Safer, Better Place to Build Wealth

With equity pooling, founders and employees become more likely to realize outcomes from their hard work. The benefit of diversification is finally within their reach, as it is for nearly everyone else in the working world.

An illustration of a girl working with her laptop in a large busy office

In a challenging economic environment + a startup ecosystem that has grown dramatically in importance – people deserve nothing less. We need to build a society where everyone is free of impediments to providing for themselves and their family, amidst an era of inflation and unaffordability.

It’s our civic duty to allow equity holders to take steps to protect themselves with equity pooling, since their actions are supported by objective data and they are of no harm to others. By helping people to understand the promise and opportunity of equity pooling, we can create a safer, more equitable society. For the people and families making great contributions to the future of our economy and our national prosperity. And for all the rest of us.

If you wish to explore how equity pooling can make you safer and better off, book a meeting with us here. And share this article, to help others around you with exposure to startups become aware of an important new resource.

Aaron Rosenson

Aaron is a Chief Investment Officer & Co-Founder at Apeiros and a former General Partner at Aleph, an early stage venture capital fund.