Technology start-ups today offer exciting career opportunities. Below is a guide to help you navigate the all-important equity package in your start-up job offer.
Start-ups vs. Corporations
Let us consider a firm a venture-backed start-up that sits somewhere between securing seed financing and achieving $1 billion in enterprise value. Evaluating a job offer at a start-up versus a traditional corporation can look like this:
|Salary||Below- or at-market||At- or above-market|
|Training||Limited, unstructured||Comprehensive, structured|
|Career Progression||Open-ended||Clearly communicated|
If you are evaluating between offers for similar roles from different start-ups, your decision will come down to the headline figures: salary and equity. While crude, here are calculators to help with salary ranges from WealthFront and AngelList. But, what do the equity figures mean?
While valuing equity is difficult, do not accept the offer blindly. After all, would you accept a job offer of 70,000 a year if you didn't know the currency in which you would be paid?
Here are five important questions you should ask:
1. What type of equity grant will I receive?
Equity is granted in various forms with Incentive Stock Options (ISO) and Restricted Stock Units (RSU) being most popular. Employees receive common stock, while investors receive preferred stock. There are nuances in tax treatments for each type, so if you're not well versed in this matter, check out: Understanding Equity Compensation and What it Means for Startup Employees.
2. What are the total numbers of shares outstanding today?
Bonus: What are the company's plans for raising capital in the future?
Most employment offers contain not your percentage ownership of the company, but a number of options granted to you (the numerator). In order to calculate your percentage ownership, you need to know shares outstanding (the denominator). Also, keep in mind dilution. For instance, if the start-up raises additional capital in the future, the denominator could grow reducing your ownership, hopefully, in a more valuable company.
3. Is everyone on the same vesting schedule?
If RSU: Is there a performance condition tied to these RSUs?
To align your and the company's incentives, equity is not given the day your start, it is earned over time. This concept is called vesting, and the set of terms at which you earn that equity is called the vesting schedule.
A standard vesting schedule spans four years, with a one-year cliff and the rest vesting monthly. The cliff means if you leave before one year of service, you will have earned no equity. If you were granted 1% equity when you joined, and you left after 2 years, you would own half, or 0.50%.
Restricted Stock Unit (RSU) grants sometimes have a performance condition tied to them, which means they may not vest until the company conducts an IPO or get acquired by another company.
4. What was the company's most recent valuation?
Bonus: What was the company's most recent 409A valuation?
The 409A valuation is a measure of book value, often calculated by external auditors. This price sets the floor for valuing common stock. For ISOs, the most recent 409A valuation will also be the per-share exercise price of your options. Read more about 409A Valuations at Arcstone Partners' Blog.
A start-up's valuation, usually defined by the most recent funding round, is considered its market value. Since recent financing rounds typically value the company while issuing preferred stock, it is not an accurate representation of the value of common stock, which is what you have. It is commonly regarded as a good proxy for the share price, and therefore gives you a rough idea of what your equity is worth: market price less book price. Here is an anecdotal piece by Robby Grossman about valuing one's equity.
5. Are there non-standard transfer restrictions (such as requiring board approval)?
Once the equity vests, it remains yours, but there are some limitations on what you can do with it. Having transfer restrictions on your shares is common, so watch out for non-standard ones. Uncommon transfer restrictions on your equity, which diminish liquidity on already illiquid stock, hurt their value versus equity of another start-up.
Standard restrictions mean you cannot pledge, encumber, sell, dispose of, assign, or otherwise transfer the shares to others without the company getting first dibs. This provision is often a result of a ubiquitous clause called Right of First Refusal (ROFR). An example of an atypical transfer restriction is requiring board approval of a proposed transfer.
Remember, you may not always have negotiating leverage, but if you ask these questions, you'll know what you're getting.