Understanding the Value of Early Stage Equity

Friend: "I got an amazing offer! 50,000 shares!" Me: "What's the total outstanding shares?" Friend: "Um... I don't know" Me: "What type of shares are they?" Friend: "Not sure..." Me: "When can you sell them?" Friend: "I should probably ask..." I've had this conversation at least seven times in the last year, and here's the playbook I usually share with those friends. 1/ Understand the type of equity Not all equity is created equal: ↳ RSUs are actual shares that vest over time ↳ Stock options let you buy shares at a set price ↳ Preferred vs common stock have different rights 2/ Know your vesting schedule The classic is "4-year vest with a 1-year cliff" Translation: You get nothing if you leave before year 1 Then you get 25% after year 1 And ~2% each month after But don't assume this is standard. Always ask: ↳ What's my vesting schedule? ↳ Are there acceleration clauses? ↳ What happens in an acquisition? 3/ Get the full picture before discussing numbers Ask for: ↳ Total shares outstanding ↳ Latest 409A valuation ↳ Investor preferences ↳ Prior funding rounds ↳ Expected exit timeline 4/ Model different scenarios Don't just focus on the "we IPO at $10B" dream. Model out: ↳ Down round ↳ Flat round ↳ Modest growth ↳ Hyper growth ↳ Acquisition 5/ Understand the downsides If you're getting options, know that you might have to: ↳ Pay to exercise them (could be $$$$) ↳ Hold them for years before selling ↳ Pay taxes before seeing any gains ↳ Lose them all if you leave too soon 6/ Negotiate the details, not just the number Key terms to discuss: ↳ Early exercise options ↳ Extended exercise windows ↳ Acceleration triggers ↳ Refresher grants ↳ Tax implications 7/ Plan for the "what ifs" ↳ What if the company gets acquired? ↳ What if I need to leave early? ↳ What if the next round is a down round? Pro tip: Email these questions to the recruiter. Create a paper trail. Get the answers in writing. Remember: Equity can be life-changing. But it can also be worth zero. Your job isn't to be optimistic or pessimistic. It's to be realistic. What other equity negotiation tips would you add?

I just spoke to a 25-year-old founding AE who got shafted with their equity package. There was a liquidity event and he missed out on ~$100,000 by not understanding how startup equity works. Here’s my TL;DR on what you need to know—and 5 important questions to ask before you take an early-stage role: 1. “What percentage of the company do these shares represent, fully diluted?” If your friend has 10k shares at her similar stage startup, that means nothing without knowing more information. Get the ownership percentage or total shares outstanding, not just the number of options. It's not apples to apples. 2. “What’s the 409A valuation and my strike price?” Your strike price determines how much you’ll pay to exercise your shares. It’s based on the 409A (not the last round valuation). A high strike = less upside. Ask when the 409A was last done and when the next one is coming. 3. “What’s the vesting schedule and is there any acceleration?” Standard is 4 years with a 1-year cliff. Meaning you get 1/4th of your equity on your 1 year anniversary and then the remaining 75% in monthly increments over the next 3 years you at at the company. If you leave or get let go before 12 months, you walk away with nothing. Ask about single trigger or double trigger acceleration in case of acquisition. Simply put, if you get acquired (single) or acquired and then fired (double), will your stock get accelerated? If you are junior, you may not have much negotiating power but always ask! 4. “What’s the exercise window after I leave?” *MOST IMPORTANT* Most companies give you 90 days to exercise after leaving. If you don’t have the cash (and the required tax bill you need to pay if the company grows really fast), you lose your shares. This happens more often than you think…. More progressive companies offer extended windows (1–10 years). 5. “Is this offer competitive?” Talk to recruiters. Ask friends. Check tools like Pave or Levels(.)fyi. Founding AE at a Seed or Series A company? Your equity should reflect the risk you’re taking. More importantly, it shows how the leadership team VALUES SALES as a function. BOTTOM LINE My advice after working for 3 venture backed companies, spending a year in venture, and then launching a company who raised funding: Good founders are good sales people. Their job is to get you excited about the opportunity. Don’t let them convince you the equity is worth it. You have to do your own research. And ask the right questions. Realistically, your equity is unlikely to be worth a lot. So don’t weight is as a primary reason to join a startup The biggest benefit of joining an early stage company is career acceleration, more ownership over major parts of a business, and the creativity to move fast. Have any questions about startup equity for salespeople? AMA in the comments below 👇

The single biggest factor that will determine the value of your startup equity is the quality of the company you join But once you've found a good business to bet on, it can be tricky knowing how to understand the value of your equity & negotiate from a position of strength Here are 4 things to always ask for: 1 - The share price during the last financing round or "last preferred price" This is super important as you can use this to calculate the present value of your equity Use this formula, equity value = number of shares you are granted * (last preferred price - strike price for your shares) You can divide this by the number of years you are "vesting" for to figure out the annual value of your equity 2 - The number of shares outstanding in the company This will help you calculate the percentage of the company you own using the following formula: Your ownership percentage = Your shares / Number of shares outstanding in the company While this number will keep changing every time the business raises money due to "dilution", it's still a very useful tool to benchmark your compensation 3 - The total liquidation preference on the company While this is frequently the total amount of money raised, sometimes it's a bigger number so you should always ask Liquidation preference is the dollar amount the company has to sell for before your equity is worth anything If your company raised $100M, it typically needs to sell for at least $100M before you see a penny no matter how much of the company you own! 4 - How much it will cost to own the shares directly & the "exercise window" This is relevant if you are given stock options (vs shares directly) but you should see how expensive it is to own the shares directly Owning shares directly could save you a lot of money on taxes -- holding shares for 1 year unlocks preferential long-term capital gains taxes, and 5+ years could end up with 0 taxes with QSBS If it costs a lot of money to own your shares, you should ask about what the "post-termination exercise window" is -- this is how long you have to buy your shares after you no longer work at the company -- I know this is a complicated topic, but I recommend saving this post for when you are next looking for a new job. And if you are curious about learning more, I'm teaching a free workshop next week on this topic - how to understand the value of your equity, link in comments.