By |Published On: May 2, 2022|Categories: Entrepreneurship, Financial Planning|

What’s The Value Of Startup Equity?

You have a job offer from a startup company!  Congratulations!  What’s in the proposal?  Your offer contains straightforward items like salary, benefits, and vacation days.  The obscure piece is the equity, of course.  The equity ownership in the business is a complex piece.  Here’s what you can do to figure out its value.

What To Do With Your Job Offer?

First off, determine what type of equity you will receive.  What type of shares will you receive, common shares?  Preferred shares?  A special class of shares?  Will you get options, RSUs, or performance stock units? What’s the vesting period? If you do get options, are they ISOs or NSOs?  Can you and should you pre-exercise the options?

Second, what is the present value of the equity you will receive?  Can it be calculated in an easy way?  Or is it complicated?  With scenario analysis, are the outcomes vastly different – millions of dollars or a lot less?

Occasionally the firm will let you decide the amount of equity that you receive in your job offer.  Sometimes you can choose 100% salary and 0% equity.  On the other hand, some companies allow you to choose 100% equity and 0% salary.  In between, there are many other options.  It all depends on the company’s policy. 

Review The Contract

Typically, the correct language is standard.   But every once in a while, it may not be that upfront.  If this is the case, review the language with human resources or the recruiter.  Ask them the questions above to determine what you are really getting.

Job Offers During The Great Resignation

When leaving one company to join another, the new employer will sometimes compensate you for your equity, but you will have to barter for it.  For example, you work at Company A and you have $100K worth of Company A equity.  During the interview process you tell Company B about your Company A equity.  After a thorough review of your documentation and negotiations with Company B, sometimes they will give you $100K worth of Company B equity in your new job offer.  You will most likely lose your Company A equity when you leave.  

In case you’re wondering, when this occurs, there are usually no tax implications.  Your Company A equity will be forfeited and you will receive new equity in Company B.  

Questions Once You Start Work

Once you start your position at your new company, you will most likely have more questions about your equity.  Who will you ask?  Your coworkers?  This may be uncomfortable, awkward, and perhaps taboo. 

What about asking other friends at different startups? This may be helpful, but your personal financial situation is not theirs, and vice versa.  So how could their advice really be all that helpful?  Furthermore, how many people have your friends counseled on equity compensation with an objective point of view?  If they give a friend the wrong advice, what cost is it to them?  How could they be accountable without a penalty for incorrect advice?

Financial Perspective for Your Job Offer

There is a lot of risk with company equity.  You get 100% of your livelihood from your company (salary and benefits), so how do you think about lowering that risk?  This is a hard question, and I don’t expect you to answer it after reading this article, or after a conversation with a friend who is in a similar situation.  Arriving at an answer could take hours of work and reflection.  If you’re confused, worried, or just want to talk, feel free to set up a time with me.