From a 40,000 foot view, it's odd that employees who are investing their professional effort are relegated to a lower equity tier. I think the person asking the question in the article makes a valid point: why is it fair for human capital to be devalued in this way?
If you start a company and you turn $200 million of investment into an exit of $100 million dollars you haven't done anything valuable. Why would you expect your stock to be worth anything?
Why should investors expect their full investment back when they did a bad job choosing who to invest in?
I don't think it's reasonable to pretend that the current system exists because it's the fairest. Investors exert more negotiating power than employees, and that's the reason they get better terms.
I once stumbled on a rant by a post doc CS student. In addition to an essay why being able to do type erasure is good and why actually doing type erasure is terrible. He had an essay with the observation that while capital has the ability to pull their money and reinvest it elsewhere if they dislike returns and risk, skilled workers are kinda stuck with whatever skill they've invested in. And capital can diversify while a worker usually is stuck with exactly one investment. Given that it seems shitty to give capital better tax preferences than earned income.
If my example (turning $200 million into $100 million) the investors don't get their full investment back. They lose half of it.
But I get your point. And yes, it has something to do with leverage.
But I also assert that the current system is better for common shareholders as well. The idea that we could have a slightly different world in which investors acted exactly as they did today, but bought common shares instead of preferred shares is clearly wrong.
If they're buying common instead of preferred then valuations would drop significantly. Probably by over 50%. This means that either companies would be giving away much larger %s of themselves when fundraising or they would be raising much less capital (which is of course used to pay the salaries of all those common shareholders). Both are probably bad for common stockholders in most cases. Which is why we see very few companies ever do this.
Because the VCs are funding your salary. If the company goes under the investors lose their money. You get to keep the money (salary). So the risk is on them and there should be some protections.
But that salary is discounted based an offer of real ownership of a piece of the company. It's not clear to me why the last 20% of a salary, taken as equity, should have a lower preference in the capital structure than cash invested.
