Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / How Startups Are Issuing Rolling Dividends to Retain Talent
Transcript
- Lucas: So Databricks just hit a hundred and eighty-eight billion valuation yesterday, which is obviously massive. But I've been tracking something smaller and more structural that a handful of pre-revenue startups are doing with compensation. It's not options. It's not SAFEs with valuation caps. It's rolling dividends. Luna: Rolling dividends? For a pre-revenue company? How do you pay a dividend if you're not generating cash? Lucas: That's exactly the question I had. The structure is this: instead of granting stock options with a four-year vest and a strike price that might be underwater before the first liquidity event, the startup issues a dividend-bearing instrument — usually structured as a type of preferred phantom equity — that pays out a small cash dividend each quarter. Luna: But where does the cash come from if there's no revenue? Lucas: The dividend is funded by the founder's own capital or by a reserve set aside from the seed round. In one case I looked at — a B2B AI compliance startup that's still building its first product — the founder put two hundred thousand dollars of his own money into a segregated account. That account pays a quarterly dividend of one percent of the notional value of the phantom shares to each employee. The notional value is determined by a simple board-approved formula based on milestones completed, not revenue. Luna: So it's like a cash retention bonus but structured as an equity-like instrument. What's the advantage over just giving someone a signing bonus with a clawback? Lucas: Great question. A signing bonus is static. You get it once, and the clawback usually only covers the first year. The rolling dividend creates ongoing alignment. Every quarter the employee gets a small cash payment that only continues if they stay. And the dividend amount can increase as the company hits milestones — so the employee's incentive is tied to progress, not just tenure. Lucas: The 'rolling' part means the dividend right vests continuously. There's no cliff. If you join on January first, you've earned a pro-rata dividend for January by February first. It's designed for a world where engineers have multiple offers and want to see tangible value immediately. Luna: What about the tax treatment? If it's structured as a dividend, the employee pays ordinary income tax on it, right? That's worse than capital gains on options. Lucas: You're right — it's taxed as ordinary income. But for a pre-revenue startup whose options have a strike price that's essentially par value and no secondary market, the option has zero liquidity. The rolling dividend gives you cash now. Some employees actually prefer a known tax hit on cash they can use versus a theoretical future gain that might never materialise. Luna: I can see how that would appeal to a senior engineer who's been burned by options before. But doesn't this create a perverse incentive? If the dividend is tied to milestones, the employee might push for easy milestones rather than ambitious ones. Lucas: That's a real risk. The AI compliance startup I mentioned ties the dividend to three weighted metrics: product development milestones, customer discovery interviews completed, and team satisfaction scores. The board can adjust the weights quarterly. The founder told me they deliberately chose metrics that hard to game — customer discovery interviews have to be recorded and summarised, for instance. Luna: So it's more like a balanced scorecard tied to cash. How widespread is this? Is it just a fringe experiment or are we seeing a trend? Lucas: It's still fringe. I found maybe a dozen startups doing something similar, mostly on the West Coast and in New York. But the concept has been discussed in a few VC newsletters and on a couple of founder forums. It reminds me of how rolling SAFEs started — they were weird for a year, then suddenly standard. Luna: On that note, I want to say something about what we're doing here. We keep the show deliberately ad-free. No sponsors, no commercials. If you find these conversations useful for what you're building or running, the best way to support that choice is simple. The link is buy me a coffee dot com slash fexingo. Lucas: Yeah, it matters to us that the show stays independent. Every contribution goes right back into research and production. So if you've gotten value from episodes like this one on rolling dividends, that's where to go. Lucas: Back to the structure — another interesting variation I've seen: a startup that's doing rolling dividends but with a twist. Instead of cash, they pay the dividend in 'company credits' that can be used to purchase equity in the next round at a discount. So it's like a dividend that converts into a warrant. Luna: That's a clever way to preserve cash while still giving employees an ownership feel. But it adds complexity. How do you value the credit? And what happens if the next round never comes? Lucas: In that case, the credit becomes worthless. But the startup I'm referencing — a small AI tools company — has a provision that if no qualified round closes within three years, the credits convert into common stock at a formulaic price. It's not perfect, but it gives employees a floor. Luna: One thing I wonder about: how do investors view these structures? If I'm a VC looking at a Series A, and the company has a bunch of phantom equity with rolling dividend obligations, does that scare me off? Lucas: I talked to a partner at a growth-stage firm about this. He said as long as the total dividend obligation is capped — say, at two percent of the seed round per year — and the payout is tied to milestones that the board already tracks, he sees it as a net positive because it reduces turnover risk. His concern would only be if the dividend creates a fixed cash drain that could hurt the company in a downturn. Luna: So the key is making sure the dividend is discretionary or formulaic but not guaranteed. Most of these plans probably have language that the board can suspend dividends if cash runs low. Lucas: Exactly. The AI compliance startup's plan explicitly says dividends are payable only if the segregated account has sufficient funds. If the account drops below ten thousand dollars, dividends stop until it's replenished. That's a safety valve. Luna: I keep coming back to the question of who this is for. Early employee number three at a pre-revenue startup who values cash flow? Or a later-stage hire who already has a nest egg and wants upside? Lucas: From what I've seen, it tends to appeal to two types: first, the risk-averse but highly skilled operator who wants a steady income supplement. Second, the founder who wants to differentiate their offer in a competitive hiring market without giving away too much equity upfront. One founder told me he used a rolling dividend to hire a CTO who had turned down a two-hundred-thousand-dollar signing bonus at a big tech company because he wanted 'something that keeps paying'. Luna: That's a powerful story. But I wonder about the psychological effect. If you get a dividend every quarter, do you start thinking of yourself as a shareholder rather than an employee? Does it change how you behave? Lucas: That's actually the intent. The founder of the AI compliance startup said his goal was to make every employee feel like a mini-capitalist. He wants them thinking about capital efficiency and milestone achievement, not just about their salary. In his words: 'I want them to ask, 'Did we earn the dividend this quarter?' not 'When is payday?'' Luna: That's a mindset shift. It could backfire if the dividend is too small to matter. What's the typical size? A few hundred dollars a quarter? Lucas: In the cases I've seen, it ranges from five hundred to two thousand dollars per quarter per employee, depending on role and seniority. At the low end, it's a token — but tokens can still signal ownership. At the high end, it's meaningful enough that losing it hurts. Luna: And the rolling vesting means you can walk away anytime, but you forfeit future dividends. So it's a gentle golden handcuff, not a shock collar. Lucas: Right. No cliff, no repurchase obligations, no complex cap table gymnastics. It's a simpler tool for a specific problem: how do you make a pre-revenue startup feel like a place where talent can build wealth in real time? Luna: I'm curious — do any of these startups also offer traditional options on top of the dividend? Or is it one or the other? Lucas: Most offer both. The dividend is the cash component, and options are the lottery ticket. The rolling dividend doesn't replace equity — it complements it. In the AI compliance case, employees still get standard ISO grants with a four-year vest. The dividend is an additional layer. Luna: So the total comp package becomes: base salary, traditional options, and a cash dividend that vests month by month. That's a lot of moving parts for a small startup to administer. Lucas: It is. The founders I spoke with use a simple spreadsheet and a separate bank account. One uses a service called Pave to track the phantom equity. It's not as hard as it sounds, but it does require the founder to be disciplined about board approvals and communication. Luna: Let's talk about the broader context. We're in mid-2026. The talent market has been tight for AI engineers especially. Do you see rolling dividends becoming more common as a retention tool? Lucas: I think so. We've seen the rolling SAFE go from weird to almost standard in two years. Rolling dividends are earlier in that curve. But given the pressure on startups to compete with big tech salaries without the cash, I expect more experimentation. And if a few high-profile startups adopt it, it could tip. Luna: One concern I have: if dividends become expected, startups that can't afford them might feel pressured to offer them anyway, creating a cash crunch. That could be dangerous. Lucas: That's a valid worry. But the structure itself forces discipline — you have to pre-fund the dividend account. You can't promise dividends you don't have cash for. In that sense, it's self-limiting. Only founders who are willing to put their own capital on the line will use it. Luna: So it's a signal of founder commitment too. If you're willing to put two hundred grand of your own money into a dividend pool, you're telling employees you're all in. Lucas: Exactly. And that signal might be worth more than the dividend itself. In a world where startup failure rates are high, trust is scarce. A rolling dividend backed by founder capital is a tangible demonstration of skin in the game. Luna: Alright, I'm starting to see the appeal. One last thing: what's the biggest obstacle to wider adoption? Lucas: Education. Most founders don't know this structure exists. Most lawyers have never drafted one. And most employees don't ask for it because they don't know to ask. The first startup to blog about their rolling dividend plan in detail could set the template for others. Luna: Maybe that's a future episode — the legal mechanics. For now, I think we've given listeners a solid new tool to consider. Rolling dividends: not for everyone, but for the right hire at the right startup, a clever alternative to the status quo. Lucas: Exactly. If you're a founder struggling to close a key hire without giving away the farm, it's worth a conversation with your lawyer. And if you're an employee evaluating an early-stage offer, ask about the dividend policy. You might be surprised. Luna: Thanks for digging into this. I feel like I actually understand the mechanics now. Lucas: Glad it landed. That's all for this episode of The Series A Show. We'll be back with another fresh angle soon.