How does Priceline's 'name your own price' work?

Democratic employees, will this idea work?

• A startup has established a 20% employee stock option pool. The startup hires 1 employee, this first employee is an A player, his name is Jack.  Jack gets 1% of the 20% starting in 90 days (slowly vested over 4 years).  Jack is told he will be evaluated in 90 days by his future fellow employees, and they will decide if he gets to stay or go,  The founders also have a vote in this as well.  The startup is in need of 2 more people, the Jack is involved in picking 2 more employees.  The startup explains to Jack that it is in his best interest to pick the most qualified people because they will add future value to the shares Jack owns.  Jack and the founders do the best job possible to hire the new employees with that in mind. Finally, John and Mark get added to the team.  John and Mark will also each receive 1% of the 20% of the stock option pool starting in 90 days (slowly vesting over 4 years). John and Mark were told when they got hired to really focus on their fellow employees and make sure they are qualified for their position and to make sure they will add value to their stock options. The 3 guys work together until doom day arrives.  Jack's 90 day evaluation is here. John and Mark now need to decide if Jack has been adding value to the startup or not because it will effect their own stock price in the future.  They decide to keep Jack around.  The startup tells the employees we really need a sales person because we got our product launched, but no one to sell it.  The founders and the 3 employees are too busy to sell themselves, and lack the experience.  Again its crucial for the team to pick the right candidate for the job because it effects their share price. So the team votes on starting to search to hire someone for the sales position. The founders find the top 3 candidates for the job. The founders and Jack, John, and Mark decide on Sarah.  Sarah now goes into a shared pool of the remaining 17%.  The first 3 employees get a fixed percentage because they are like the founders.  The remaining 17% will get diluted when more employees get on board.  So lets say another employee joins in we will call him Carl.  All the employees will watch Carl to make sure he is not going to lower the share price for everybody else.  Especially Sarah because she did not get a fixed %, she is going to get diluted the most. The employees are shown a projected image on the main wall of the building they are in, and one of the items that is projected is the share price.  The share price is a constant reminder of how important it is for this new employee to add value to that share price. The employees are not fully vested until they have completed 4 years of employment.  During that time they will slowly gain more vested shares over 4 years. No employee can cash out their vested shares until 1 year of employment has been completed.  If someone quits and cashes out their vested shares, that will cause cash to be spent which hurts the bottom line and less days before the startup is profitable. If employees have a big problem with one employee, they have to option to vote them out.  They just have to realize if this person is an A player when it comes creating value for the company they will be hurting their own share price. My idea I would think will spawn alliances (for good reasons), chatter, self policing, the new hire will feel the pressure from her co-workers and will not want to disappoint.  In this self regulating democratic environment I think you breed the best team possible.  I am sure there are pitfalls and counter measures to those pitfalls.  I would like you to explore and evaluate this idea with you, let me know if you think it will work or not. I would appreciate your input on this.

• Answer:

  This simply won't work for a host of reasons, chief of which is that it is based on some fundamental misunderstandings of the way businesses are structured and operate. Among the fallacies: 1) There is no such thing as "undilutable stock". The employee stock 'pool' simply represents a number of shares reserved for issuance to employees. As such, all employees in your theoretical company are granted options on specific numbers of shares, not just then first three. 2) For a private company such as you describe, there is no such thing as a publicly visible, changing stock price. There is a "fair market value" price at which options are granted, but that is typically set more or less annually. As such, there is no way to relate that to individual performance. 3) In a private company, there is no such thing as an employee "cashing out" his or her equity before the company goes public. The company has no obligation to purchase an ex-employee's shares, nor would it have any reason to do so, nor is anyone else able to do so. 4) Companies, other than pure equal partnerships, are not democracies. They are legally, technically and pragmatically owned by someone(s). In your example, whoever owns the 80% interest not allocated to employees is responsible for—and benefits from—everything the company does. To abdicate that responsibility in hiring or employee development is the path to certain failure. 5) Notwithstanding #4, best practices today already call for significant team involvement in both hiring and assessment. In my own company, all prospective engineering hires are interviewed by the entire tech team, and spend a full day actually pair-programming with one of our senior engineers before any offer is made. Similarly, everyone has what are called 360 reviews, in which their performance is assessed by every person in the company with whom they come in contact. Bottom line: strong team self-governance and independence is a Good Thing when used appropriately, but it is completely separate from compensation and corporate equity grants.