A distinction needs to be made between illiquid equity at early-stage startups and liquid equity at publicly-traded companies or companies that are well on their way to liquidity. What makes sense at Equinix, Juniper Networks and Opsware, all publicly-traded or acquired companies, may make little sense at an early-stage startup.
When equity is liquid, ongoing grants are akin to bonuses. At early-stage startups, however, the attractiveness of ongoing grants to employees ultimately depends on the perceived value of those grants. If a path to liquidity is not clear and employees are not certain that the company's traction is producing meaningful appreciation of their existing equity, ongoing grants are unlikely to be very compelling.
In short, I think it's a mistake for earlier-stage startups to treat equity as a retention tool. It can be an effective recruiting tool in some circumstances, but unless your company is a rocket ship that is going to reach the moon soon, which most early-stage startups are not, focusing too much on equity as part of the compensation package can easily hurt retention because most of the experienced and savvy employees know how to keep score.
I don't think Andy's point is that equity is a strong retention tool. It's that when people stop vesting, then it's almost active encouragement to go look elsewhere.
When equity is liquid, ongoing grants are akin to bonuses. At early-stage startups, however, the attractiveness of ongoing grants to employees ultimately depends on the perceived value of those grants. If a path to liquidity is not clear and employees are not certain that the company's traction is producing meaningful appreciation of their existing equity, ongoing grants are unlikely to be very compelling.
In short, I think it's a mistake for earlier-stage startups to treat equity as a retention tool. It can be an effective recruiting tool in some circumstances, but unless your company is a rocket ship that is going to reach the moon soon, which most early-stage startups are not, focusing too much on equity as part of the compensation package can easily hurt retention because most of the experienced and savvy employees know how to keep score.