> What if an outside board member wants to get paid $500K a year in cash
That's the thing, they (assuming you're talking about an investor or cofounder) wouldn't want to. They're holding onto a chunk of equity that would be worth maybe $10M, $100M, maybe even $1G, if the company gets to IPO, so they would NOT want to sabotage the company by taking a $500K salary from it now and have their shares be worth nothing.
Employees who have peanuts in equity have different incentives. They couldn't give three hoots about the company's long term success if they can get $500K this year for a downpayment on a house to send their kids to a good school district.
If it's a VC-backed company, the board member merely represents the VC fund and wouldn't personally enjoy the entire upside of the equity the fund owns. I think it's possible that they would still take $500K risk free today over the value of future potential compensation that might trickle to them.
However, they also don't sabotage the company since word would get around that they or the VC they represent are terrible board members that sabotage companies.
Besides reputation damage, they can also be sued by the shareholders for failing to uphold their fiduciary duty.
It's similar to why the CEO doesn't just pay themselves their entire series C, close the company, and retire (assuming the bylaws allow the CEO to pay themselves).
> merely represents the VC fund and wouldn't personally enjoy the entire upside of the equity the fund owns.
Not always true. I've had VCs who want to split their investment between fund and personal at the last minute when you pretty much don't have a choice and don't have time to shop around.
That equity is still a short term interest, no? Sell it now and you don't have to care what it's worth in 10 years. It's a meme nowadays that companies have been entirely short term oriented for the past while, influenced by stock buyback programs for executives.
An employee has incentives like needing the company to survive so that they can maintain their healthcare, pay rent/mortgage each month, maintain a work visa, and recieve a pension. Getting a big downpayment on a house makes the employee even more tied to their employment, since now they have a bigger monthly cost to fill than before.
> Sell it now and you don't have to care what it's worth in 10 years.
Unless you're already clearly a unicorn it's not particularly easy to find a buyer for your founder equity in a startup at the prices it might IPO at if things go well.
Founders selling their own equity too early will also destroy morale and investor relations to the point where the company isn't likely to succeed anymore. Buyers realize this, and aren't going to hand you IPO prices for it.
That's the thing, they (assuming you're talking about an investor or cofounder) wouldn't want to. They're holding onto a chunk of equity that would be worth maybe $10M, $100M, maybe even $1G, if the company gets to IPO, so they would NOT want to sabotage the company by taking a $500K salary from it now and have their shares be worth nothing.
Employees who have peanuts in equity have different incentives. They couldn't give three hoots about the company's long term success if they can get $500K this year for a downpayment on a house to send their kids to a good school district.