As a startup veteran, I have fairly strong feelings about equity as relates to compensation packages

In my opinion, equity is worth less than the digital paper it is not printed on.

In other words, while large equity grants are used to lure people to work for startups, they very rarely are worth anything at all. 75 percent of venture-backed startups fail prior to a liquidity event, which means that all the hard work for low pay and theoretical equity was worth nothing. This statistic isn't new -- yet for some reason, wide-eyed entrepreneurs keep joining up hoping to be part of the next Google.

I've personally worked for seven companies that offered me stock options or equity as part of my overall compensation package, and all initial grants were tied directly to my salary. Out of those, only two have had liquidity events, which is roughly average.

In general, it works like this: a prospective employee is given a grant based on the salary they are hired (at a multiple of your annual salary in equity) at the current valuation of the stock. If you know how much stock has been issued, and how strong the company is, you can make some fairly good assumptions as to how much that equity may eventually be worth.

There's an interesting phenomenon, though -- as the equity is based on salary, there is a marked gap in equity grants among women. Unfortunately, as employee option pools are only a subset of a company's stock capitalization table, women tend to have a much smaller percentage of company stock overall than men -- creating a chasm wider than the pay gap.

How wide?

35 percent of all employees with equity are women, however they hold only 20 percent of the equity overall. Additionally, female founders retain only 39 cents to each dollar of equity owned by male founders.

These stats may come as a surprise to some, but it shouldn't.

Time and again, the number one reported cause of the wage gap is the lack of negotiation by women during hiring. The majority of women simply accept the offer they are given and don't see it as an opportunity to gain an advantage. Another contributing factor is that with items like equity, there is no baseline to go by.

What can you do to avoid falling into the same trap?

1. Bet on winners.

No matter how passionate someone is about their idea, there is no greater indicator of success than past success. Try to work for founders who've succeeded before, and only join companies after they have closed series-A - but before they close series B.

The success rate among seeded companies is too low to offset the lower exit values.

2. Get the full picture.

Know how much of the company you are actually being granted, how much money is in the bank, and what the cash flow situation is.

All of this should be available in your paperwork and when you ask - and if it's not, that's a warning sign.

3. Negotiate for salary, not equity.

Most of all, understand that a stock option is a lottery ticket. You will most likely never see a return on it, so negotiate for what you actually want, rather than the promise of a future return.

I personally negotiate for preferred shares (instead of common) for a greater return potential, as well as benefits that are important to me.

While this may not ultimately change the equity or wage gap, it may serve a different purpose: the more educated people are about their options, there will be fewer "victims" of it.

And perhaps that's all we need.

Published on: Oct 19, 2018
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