My position at present is that I very much enjoy my current job, they are very good at rewarding me and give a good level of autonomy to run my engineering team that I acquired and grew myself. I don't have anything to lose here, only (potentially) gain.
However the start up is pretty exciting and I know I could achieve a lot there. I would really enjoy the challenge.
However, the real aspect that would make the difference for me is company stock, to the point that if they sell the company I won't have to worry about paying off the mortgage on my house and get a decent slice for retirement and my kids education.
Now to my question, I am don't know jack about working out what would be a good amount of stock to shoot for. How would I go about establishing this? I figure I need to work out what the company could be worth and then consider what a percentage of options would provide.
Anyone have any experience they could share?
Comp at startups are generally a sliding scale of cash to equity. A typical offer will ask you to slide it one way or another.
To judge stock, ask for,
- 409a valuation to know the current strike price of the shares
- total outstanding fully diluted shares to know the total shares available
- size of the employee option pool (eg, 10-15pct)
- possibility of an 83(b) election
- ISO vs NSO - what kind uf options are they?
- re ups, and anti dilution clauses?
- triggering events (eg what happens when the company gets bought?)
The more you know the better you judge the value. If folks are cagey in giving details, definitely push back and ask why.
Next, consider that the company’s progress is all that determines your shares net worth.
- how much do you believe in this team, space and product?
- and ask yourself - are you able to completely push this into a “lost cause financially” bucket in 5y? or do you need the cash? i’d advise being comfortable with the former :)
lastly, look at how much value you bring to the table to determine how much you get. if you’re engineer 1 with two non tech cofounders - you’d be worth much more than engineer 10. In that case, look at some of the blog posts online (esp by folks like Leo Polovets) on some ways to think about these numbers.
good luck!
After dilution, preferences, taxes, you're going to need there to be an exit worth many hundreds of millions to provide you with retirement money as an early employee. Options mostly serve to benefit the company -- they're golden handcuffs.
If you think the company has a very real path to an exit of 500m or more, you're joining early and you're willing to stay with them until their exit -- which, for an early stage startup, that could be 5 - 10 years -- you could probably retire...
As you can tell, I've been through multiple acquisitions (incl. a 9 figure acquisition) and made pennies.
The best way to negotiate options, in my opinion and experience, is to choose a number that you want your options to be worth in 4 years. For example "Hey CEO/Boss, if I work here and blow it out of the water for the next 4 year, I want the options you give me today to be worth at least X number" - This is a fair way to structure the conversation for a few reasons.
1. It sets up a timeline that is inline with your realistic amount of time at the business. If I tell you your options will be worth 100k for example after we IPO for 3B, that is not realistic or fair to you - it only justifies me shafting you today because I'm talking 10 years out and best case scenario.
2. You can walk through the future states (ie 1 to 2 funding rounds) and project the current value out based on expected increases of valuation at these subsequent fundraising rounds.
3. You set the number that you think your effort is with.
4. it is not talking about % points which people have weird biases around due to internet
Note: Assume 20% dolution at each fundraising round.
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My rec's: If its your first startup, tell your boss after 4 years you want your equity to be around 200-300k. This gives you a way to walk backwards to today and come up with a real number of options to hit it.
If its your second and you want a home run be in the 750k-1m range
If you're an exec/leader - aim higher and talk it over.
VP at early stage are coming in around .8-1%
Unless you are already in a good financial position, I'd ask for more cash
https://danluu.com/startup-options/
https://github.com/jlevy/og-equity-compensation
https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e8...
https://news.ycombinator.com/item?id=2623777
Others in this thread have posted great advice. You want to know the most recent 409A valuation, and you want to see the cap table (you might be asked to sign an NDA, which is a reasonable ask). Also, its unlikely your role is going to give you enough pull for an acceleration clause or similar (in either the event your role materially changes or an acquisition occurs), so if you do want equity and they're willing to provide it, get as much as you can so you capture as much value as possible during your tenure and vesting period. The difference between 10 basis points can be material in the event of rapid growth and eventual liquidity. The answer is always no if you don’t ask.
The equity is more likely to end up worthless or a trivial amount more often than not, but you can take steps to derisk the devaluation of this component of your compensation.
That said, it depends on seniority and what number employee you are. A very early employee (first 5) can get 1.5-3% that starts to drop pretty quickly where even if you're a senior level employee but employee number 50 after a series A or something you're likely at less than 1% no matter how valuable you are.
A good move is to go on angel.co job boards and see what other similar sized companies are offering for equity for similar positions and make a move from there. And to talk in percentage terms of common stock (because 100/10,000 is better than 1,000/1,000,000).
at the time i was overly-optimistic about its outlook and when countering pushed for more shares instead of higher base.
i bought all my shares before leaving a few years later and made out really well on the acquisition -- i think the sale_share_price was 50 x my_strike_price.
here's the thing though, retrospectively i still don't think i'd ever advise someone to do what i did. there are so many factors that had to line up exactly right for this to be a positive outcome for me:
* joined with particularly low valuation with company in a strong position
* happy enough to stay n years and vest all my shares
* was able to borrow $ from family to outlay the huge cost to buy what were at the time essentially worthless options
* survive getting absolutely KILLED on taxes, i think my AMT obligation when i exercised ended up being almost 2x as much as the cost of buying the shares (it uses a company filed valuation to set current fair-market-value which was completely theoretical since the company was private when i exercised)
i joined a fortune 50 company when i left and pushed for high base and a large performance bonus. i did the math on what my earnings would have looked like over time if i had spent my years working with big-co-pay vs. lower startup pay + good options outcome and even with a crazy lucky outcome i don't think the extra $ i earned was worth the high risk.
my partner and i both agree it wasn't worth it, especially when we reflect on how many early mornings, long nights, and weekends i had to work to make it happen.
I think first you need to try to work out what the approximate value of the company is and what it could be worth if all goes well -- if the company has recently raised money this would be the best way to gauge the current valuation.
If equity isn't already being offered, ask for it, perhaps in exchange for a slight a reduction in salary. If they offer you 1% and you know the current valuation of the company you know exactly what they're offering which will allow you to better assess whether that's a reasonable offer and also if it's worth making a counter offer.
The only experience I can share is that I personally don't believe it's worth asking for stock options in exchange for salary in the majority of cases. Remember, most startups fail and if they fail you're effectively receiving nothing in exchange for a reduced salary. Even if this is a larger more established company then you could always just take the extra salary and invest it in the public market in similar companies -- perhaps ones you like more.
If you really believe in the success of this particular company then go for it, but after a decade of personally being screwed over and watching friends similarly get screwed over, I promise you the dream of making bank in a few years on stock options generally doesn't play out. In fact, I'd personally recommend asking for the opposite whenever stock options are offered -- a higher salary without the stock options. If you're making $5,000 - $10,000 more per year and investing that over 5-10 years 99% of the time your personal investments will be worth more than any stock options offered.
I concur with the sentiment expressed by other commenters: be wary of making financial plans (e.g., paying off a mortgage) that depend on company equity—unless the company is public, which does not seem to be the case per your post.
My advice to people usually is, go to a startup to learn new skills and aim for jobs and responsibilities that you would have trouble getting in larger, more risk-averse organizations.
Do not expect much out of the equity you will be granted for it is too hard to estimate its value: it depends on the cap table and sundry fine print (for instance liquidation preferences can drastically affect how much employees get even if the company exits) and other factors which are hard to control like execution risk. And all in all the financial reward could be far away in the future if the company stays private longer, so your mental model should also take that into account.
There are a lot of great resources online about startup equity, my favorite is the Holloway Guide to Equity, which I highly recommend:
https://www.holloway.com/g/equity-compensation
Good luck!
Note that without early exercise it's likely not worth it.
Also, for anything other than a good exit, the preferred stock holders will likely keep all the money from an exit.
- Do not take a pay cut to work at a startup. Most startups that are worth working at are well-capitalised and should be able to pay market salaries.
- If you are going to be granted ISOs (Incentive Stock Options) (you must ask to find out if this is the case), then it may be worthwhile only if combined with a) a low strike price, b) early exercise and c) a section 83(b) election. NSOs are generally not granted to full-time employees.
- Look out for funky triggers in the options contract. Ask management up front if they have any nonstandard clauses in their contract, and pay a lawyer to verify this. If there is dishonesty or lack of clarity on this, run.
- Look out for funky vesting schedules. Typical vesting schedules are 25% upon completion of 1 year (you get nothing if you leave within a year of joining) and 1/48th of the total grant every month thereafter. Sometimes the vesting happens quarterly, but not often (it's more common with RSUs + larger numbers of shareholders). Backloaded vesting schedule? Run.
- Time to exercise after termination of employment: this is usually a month or 90 days, but a few companies are beginning to offer generous 10-year expirations. Take note of what this period is and decide if you can scrape up the money to exercise the options if you decide to exit at a chosen time in the future (or if you are fired).
Having satisfactory answers on the above is a pre-requisite to negotiating numbers. I'd walk away if they are not met.
I consider early startup equity like lottery, and an option on that lottery is worth even less in my eye. The taxes and legal specifications make these options super hard to evaluate... At the end, its mostly a way to defer an uncertain employee salary to an uncertain future... Normal equity is a mechanism to share decisional power, not only money. In my mind, most startup equity is to equity what Avril Lavigne is to heavy metal... not the real thing, something else in disguise.
And to be even bolder, I am actually against using options for any form of compensation, for employees AND for management. By nature, the value of an long call option does not only increase with the value of the underlying, but also with the volatility of the underlying. And if your option is way out of the money (Underlying <<<<<<< Strike price), your sensitivity to volatility is higher than the sensitivitiy to the underlying. In which situation would you want anybody in a business to have these incentives?
My assumption is that if I have a class of stock that is different than that of the executive team, it's worthless. I've learned this hard way.
* Early exercise: Allowing you to exercise your options immediately while the strike price == grant price (tax benefits and lower cash outlay) then vest the shares over time.
* Exercise window: Many companies only give you 90-days to use or lose your options if you leave down the road. Employee-friendly startups were giving 10-year windows for a while but these might have fallen out of vogue now.
* Restrictions on secondary sales and transfers: Ideally, they’ll have a short right of first refusal period but will allow secondary market sales before a liquidity event.
* QSBS: Maybe worth looking at whether the company will qualify at its current size but I wouldn’t worry about it too much. A nice perk if it works out.
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Whatever % you end up at, assume some additional dilution in future funding rounds. The 50% to 75% mentioned below seems aggressive but it all depends on the strength of the company.
Also make sure they don’t have some abnormal vesting schedule. Four year vest with a one-year cliff is still the most common.
Others have linked good resources and I’ll add the Holloway guide.
What's good about it, what's bad about it?
Realistically, as an employee, your total comp has a bunch of factors that include bonuses, insurance, benefits, travel rewards and flight/hotel choices, expense discretion, charity support, the list goes on to contain a lot of things.
These frame the question in terms of what portion of that total package value to you do you want a in the form of lottery tickets? (and not their price or claim of value on it)
Maybe you say, "nice salary, I'd like an additional notional 20% in options over 4 years," etc.
Maybe you are doing fine and you see a near term exit and you say, "This company has a 2-3 year horizon, I don't need the salary as much and I'll trade 25% of your offer for options provided you provide me and my lawyer with the full cap table. If not cap table, I need to price that in to the risk on the salary and I'm going to need 20% more."
If you don't have negotiating leverage or skill, you just say, "thank you!" and throw them in your change jar with old lottery tickets.
One thing I would say is, a lot of options related decisions require getting board approval so it might not be as easy as getting your contact to agree to some figure you had in mind. You might also not even be allowed to know how much you're getting until you're already hired due to policies around how the options are valued / issued.
Personally if I were you, if you're looking for a new long term position with stock options I'd try to find a publicly traded company. Mentally I imagine it'll be a lot easier knowing what you'll get based on them providing you +?? stock options per year that you can sell as soon as they're vested for real money. Or if you like it a lot where you're at, maybe they'll give you a better salary to compensate for not having options if you bring up that you're looking to leave.
Here's what I would do, knowing very little about the particulars of the options that start-ups offer vs. standard options.
1. Determine my fair market total-comp at a well established company. Maybe a FAANG, or some other firm in your industry.
2. Determine how much below that number the offer is for, not including the options. This is the discount you are accepting vs. a less risk comp structure. We need to make up for this discount in the options portion of the comp.
3. Now the fun part -- model the options payout and discount it back to present to determine the effective total compensation of the offer...
3a. A few variables to define. We'll keep this simple and pretend this a single period model - eg. "what's the value in 1 year", and not "what's the value at each exercize point?"
- probabilty_of_default: the likelyhood that you get nothing because the company failed, or some other reason. This is the 'risk' variable here
- strike_price: the strike of the options you're being offered
- price_at_expiration: the company's share price in 1 year
- number_of_shares: the number of shares you'll be able to buy
- interest_rate: this is the growth of cash over the 1 year
- tax_rate: what you'll need to pay in taxes if you excerize
3b. The value of the options in future dollars is then:
FV = (1 - probability_of_default) * (price_at_expiration - strike_price) * number_of_shares * (1 - tax_rate)
3c. To discount to present-day, you can apply the interest_rate:
PV = FV / (1 + interest_rate)
4. We want PV to be equal to the discount we calculated in #2 for it to be a fair offer. You'll note that there are a lot of unknowns in 3a, and that's where the tricky part is. But this at least gives you a framework to think about it.
(Now, I just did this on a whim, and I probably missed some details, so do let me know if there's any issue. But, this should be the gist of a very basic valuation)
Correct.
The first part, you are on your own. That's basic research using crunchbase, owler, forester, gartner and so on. Obviously, look at recent exits in the space.
The second part, try startupequity.org. You'll need to know the company stage and valuation, which you should already know. I don't know how good their data is. BI published A16Z statistics on executive offers a couple of years back, it's easily found. The numbers are still good within error bounds.
An equity offer is more complex than a salary offer, because there's a wider range that varies more on the various input factors. That is, it has high sensitivity whereas salary component has lower sensitivity (to input factors).
Once you have an idea of the median equity offer for the position and for what you bring to the table, then you can judge if that would even be enough for you. You can do all this before even hearing an offer from them. I can't stress this enough, you absolutely have to do this first, so that their offer doesn't ground you on their number. That's called anchoring and it works, like advertising -- even when you know what is going on it still works. So you absolutely must know your number ahead of time.
For the same candidate in the same position, equity offers vary based on the company's valuation most of all. When they say "series A" median offer for "position x" is y%, what they really mean is for a company at the median valuation for a series A company.
Then, knowing what a median equity offer looks like, you need to model the exit valuation. I would work from the T2D3 unicorn model as a conservative baseline. (If the startup isn't a unicorn what's the point, given your objective?) That's just a baseline. You'll have to look at other exits in their space to see if a larger exit is typical.
So, for example, a VP at a series A startup worth about $50m might get 1.25% (just say) or $625k at current valuation. For a unicorn exit, that's $12.5m before taxes. Then factor in dilution and QSBS. I have a spreadsheet that models those factors. If you put contact info in your profile and reply to this thread I can send it to you. You should be able to do a first pass at it though and potentially rule them out immediately.
There are significant pros and significant cons, so Google it and evaluate is the advice. Super early (and especially pre-funding), it’s much more beneficial than just after Series B or later.
As a rule of thumb, there's about 15-20% of the entire company stock that is allocated to employees. If you are negotiating for employee #1-3, there's room. If you are employee #50, you are looking at a decimal point.
Always ask for the current valuation.
Ignore verbal hype.
Startups offer them in lieu of pay -- they're asking you to bet on the eventual success of the stock. As such, my perspective had been to negotiate to minimize the amount of options in exchange for maximizing the pay rate.
I basically consider stock option to be effectively worthless, and the pay rate is the only thing I really consider. That said, it's happened many times that I've worked for a company even though they couldn't afford to pay me a reasonable salary, because I was drawing value from the work itself. In those cases, options are nice because they are an acknowledgement from the company that you're taking a risk in working for them.
Venture capitalists are professional company evaluators. They probably only fund 1 out of every 10,000 applications, and of those, of every 100 or more, do they get their money back.
So you have to look at your business evaluation skills and know if it yours are better than venture capitalists, who have seen it all, and have many expert evaluators, and the fact that they have a very small fraction of their companies making money.
Those companies that try to get venture capital and can't, probably are not a good bet. Now, there are probably some companies that couldn't get venture capital, but succeeded anyways, but that's not the way to bet. So if they hav venture capitalists, I'd ask them if they have any venture capital companies invested into their company, and what are the names of the venture capital companies. Then you go to that website and learn about those venture capitalists, and if they have a track record in the type of company you are considering. If not, then look askance at it. If it is one of the huge venture capital companies, that is better than a small one that doesn't normally invest in the type of company that you are considering. Also ask if the company you are considering working at has tried to get venture capital in the past, but were not able to. That is bad news.
The reason for all this is that if a company is not viable for either an acquisition from a larger company, or to go public, which is most of the time, then the stocks are 100% worthless. It will all be a waste of your time, especially if you take a lower salary for the stock options. You will lose a lot of your potential income during that time you are at the start up, if you are giving up up-front salary for stock. This is no fun at all if the company doesn't get acquired or go public. You probably will chalk it up to a "learning experience" but I don't agree with that. Because you just learned from what I just wrote above, and below.
Additionally, worse than the company's product or service itself...don't count out the worst thing of all - the incompetence of the founders and management. People can talk a good game, but the sh-t I've seen. Just think about companies that you have worked for and the incompetence of some people, managers and others. People think that companies are in it to increase the value of stock for the shareholders, and in some cases it just might be, and while everyone says that it is the reason, there are almost always hidden agendas. Many managers and owners are in it for the ego strokes, or power hungry, or have a horrible idea of the valuations of the company and don't sell at the best price, and actually prefer to have the whole thing go down in flames if their ego is not stroked. You will die a thousand deaths in this case, because you see all your hard work, and the stock you had planned for, go kaput, when it should have and cold have been acquired or gone public. There are thousands of these stories. One of those stories is about DR-DOS - the guy who owned it, Gary Kildall, went out to fly his airplane when IBM came calling to buy his OS. He wasn't there, so they went to Bill Gates, who actually bought MSDOS from another company for $30,000, licensed it to IMB,and the rest is history.
Finally, and I did read this somewhere a few years ago, someone correct me if I'm wrong, is that if you get 50,000 shares of stock options with a exercise price of $25 per share, which is $1.25 million, and when you are ready to sell, if the price goes up to $75 per share, an increase of $50/share, that would be worth $2.5 million again, IF you can sell them for $75 per share. But, IF the price happens to go DOWN to $5 per share for whatever reason, that $20/share loss, and a value of $250,000 on your shares at $5/share. So, when you decide to leave the company when this is the situation, I believe you generally have 90 days to exercise for those options. When you sell the options, I'm almost positive ( and someone correct me if I am wrong) that you then realize the gain as far as the IRS is concerned, but they use the original price as the basis and you will have to pay taxes on the $1.25 million of the 50,000 shares with original price of $25/share. So, most employees leave their stock behind and don't exercise their options, because they would have to pay taxes on $1.25 million, with only a $250,000 that you can get from selling them, so you immediately have to pay taxes on $1 million, which is $350,000 or whatever. Maybe I'm wrong on this, but somehow, since it is in the interest of the company to screw employees, you can get really, really screwed when you sell your stock.