EquityZen Knowledge Center

EquityZen has curated this list of quality resources for secondary investors, shareholders and company representatives.
Have additional questions? We'd love to hear from you.

Considerations for Your Startup Equity Compensation (Part 2)

Startup CompensationShareholderEmployee

Nat Disston   March 12, 2015

So we're stepping back to talk about how startups award equity and what you should consider when evaluating startup job opportunities. In Part 1, we looked at the major factors that affect your ownership stake, upside potential, and the riskiness of your equity compensation. Now we’ll look at some numbers to demonstrate both how your equity package is determined and what it might be worth.



So you’ve received an offer from a startup (or are hoping for one) with a salary and some number of “options” for your equity grant. So from what hat did they pull that equity number?

As we previously discussed, equity compensation is part art and part science. The younger the company, the more this skews to being an art. For example, the first few hires will be granted equity as a numerical percentage of the company such as 0.5%, 1%, 5%. Age, experience, and how badly they need you will determine the final number. This is so because there is less and less of a tangible value to assign to the equity the younger the company. After the company’s first few critical hires and once they’ve begun raising institutional financing, this practice should quickly mold into a more formulaic approach. 

Tangible Equity:

Unless you’re joining a company that’s only a few people in a closet with an Internet connection, this is the bucket most startup employee prospects will find themselves in. You’re joining a company that has 10 to 100’s of employees and has raised institutional financing (i.e. VC funding). These are two key factors because it means that 1) the company is beginning to form a corporate structure and 2) has the backing of an institution that has put a valuation and price point on the business.

As EquityZen's CEO, Atish Davda, explained for Inc Magazine there are certain questions you should ask when evaluating a startup offer. They include the number of shares outstanding and the company's most recent valuation. It is this information that can help assign a current, real dollar value for your equity.

Fred Wilson of Union Square Ventures has shared his methodology to ensure fair allocation of equity for employees that is easy to communicate in dollars. It may not be the industry standard, but it can help provide a framework for your equity award and where the number came from. The idea is that equity should be given as a factor of your salary and communicated in dollars:

The Multiple:

Firstly, your level within the organization will determine the portion of your salary that will be given as equity. The most senior and critical roles receive the most equity while the least critical, most junior roles receive the least. A break down might look like this:

CXO  - 0.5x
VP – 0.4x
Manager – 0.25x
Employee – 0.1x
Non critical hire – 0.05x

The Dollar Value:

So if you’re a Manager with a salary offer of $100,000.  Your equity grant offer might equal $25,000 that will vest over 4 years.

That dollar value will be based on the Fair Market Value (FMV) of your company. There are a few methods to determine the FMV, and each company may choose a different route. One common method is the most recent institutional financing round. If your company raised $25M dollars at a $75M valuation, it is worth $100M ($75M + $25M). If there are 50M shares of the company outstanding, then the price per share would be $2 ($100M / 50M shares = $2 per share).

In this example, you would be offered 12.5K options in the company:

[Compensation x some multiple (i.e. 0.25)] / Price per Share of last round = #shares

[($100,000 salary x 0.25 multiple)/$2 per share] = 12,500 option grant

*          *          *          *          *


The goal of equity grants is to align the interests of employees and the company. It should not be confused with cash or other compensation. However, assigning a dollar value to your equity can take it from being a mysterious lottery ticket to something tangible. What's more, you have the ability to increase the value of your equity through output and contribution at the company. The company should continue to grow over the 4 years that your equity vests. Additionally, you will receive retention grants that will increase the number of options you own to compensate for dilution and award superior performance. Equity is treated differently at each organization, but it is important for you to ask the right questions and understand what you are really being offered. Knowing the concepts behind how equity is issued and what it's worth will be critical in your decision making.
Read more...

Considerations for Your Startup Equity Compensation (Part 1)

Startup CompensationShareholderEmployee

Nat Disston   March 05, 2015

Here at EquityZen, we talk a lot about startup compensation and the nuances of it all (ISOs Vs. NSOs Vs. RSUs? The AMT Tax?). However, I wanted to step back and provide a more general look at how startups award equity and what you should consider when looking at startup job opportunities. This will be broken into two parts, with the first talking generally about how equity compensation is divided among employees and the factors that weigh in. The second will give some numerical examples and guidelines for examining or anticipating your startup compensation based on those factors.

The Employee Stock Option Pool (ESOP)

The first thing to understand is the Employee Stock Option Pool (ESOP). When a company is founded they issue shares. These shares are divided among founders, early investors, and a portion set aside for the first employees. Each time a company raises capital they issue new shares to the investors. Additionally, they authorize more shares to the ESOP to allow them to continue hiring competitively as they grow.

Without talking in #’s, $’s, or %’s, there are 4 major factors that weigh in on the effective amount of equity you may be given and its (potential) value: Size, Funding, Stage & Age, and, of course, you. These factors combine to determine the amount of equity the company has available, the value and potential future value of that equity, and the probability that your equity will actually be worth something one day.

Size

A fairly obvious one, the more people sharing the pie, the less of the pie each new person can have. If you’re among the first hires at a company, your ownership would be relatively significant. If you’re joining a 1,000-person startup (whether the word “startup” is still applicable is another story itself), you will own a relatively smaller portion. When evaluating a startup job opportunity, it’s important to consider how many employees there are currently and how many they intend to have in the future. When possible, consider the turnover and how many employees have joined and left the company.

Funding

As discussed above, each time a company raises capital they issue new shares to the investors. Again, this is a gross generality, but a company that has raised more money has generally taken on more dilution than a similar company who has taken less financing. Additionally, the more money they have raised means the more money their investors will take if they are acquired. You should consider how much money the company has raised and over how many consecutive rounds they raised that capital. A company raising $20 million when they’re already worth $1 billion will have way less dilutive effects on your ownership than a company that raises $20 million when they’re worth $80 million.

Stage and Age

The stage and age of the company, while similar to the funding history, can also be used to evaluate your startup’s prospects. Companies traditionally raise capital in the following progression; Angel, Seed, Series A, Series B, Series C and so on through the alphabet until they either fail, get acquired, or go public. The later on they are in this stage is an indicator of the success of their product/market fit and business model. The more established the company, the less risky your offer and the less equity you are given. Consider the stage and age of the company from a risk versus reward perspective. Equity in a seed stage company has a lot of upside, but it is very risky. Equity in an established startup (again, the word startup here may be debated) likely has more tangible valuable today, but with less upside. Simply put: the success rate of a mature, established, well-funded company is much higher than that of an early-stage startup, and you should adjust the expected value of your equity accordingly.

Role

The above factors are the general things to consider. More specifically to you would be your role within the company. Are you a highly specialized person, one of the few that can do your job? Are you joining the sales team where incentives may better be tied to short-term performance (cash commissions for sales instead of equity grants)? Consider the team you’re joining, the impact and trajectory of your role, and your unique skill set.


*          *          *          *          *

The way equity is granted is part art and part science. While equity can have huge upside potential, as we’ve discussed before, all that glitters is not gold. When evaluating startup opportunities, you need to assess your risk/reward appetite, as well as your appreciation of equity and its upside potential versus cash compensation. Of course, while equity compensation can be a main factor into your decision-making, be sure to consider the other tangible benefits of the job: career growth, work environment, and, of course, cash compensation.

For further reading, below are a few of my favorite articles pertaining to this topic:
-       - Is it Time for You to Earn or to Learn? (Mark Suster, Upfront Ventures)
-       - Grant Equity to Your Employees (First Round Capital)
-       - Employee Equity: How Much? (Fred Wilson, USV)
-       - 5 Questions You Should Ask Before Accepting a Startup Job Offer (Atish Davda, CEO EquityZen)

Next week I’ll publish Part 2, which will drill down on some numbers to think about when considering a job at a startup and the equity.
Read more...

What You Need to Know About Stock Options, Pay Packages, and What You're Really Getting Offered

Startup CompensationShareholder

Atish Davda   October 24, 2014


Inc.om
At EquityZen, we make a big fuss about understanding equity compensation. After all, would you accept a job offer of 50,000 a year if you didn't know the currency in which you would be paid? What if it were USD? GBP? BTC?

So you have more tools at your disposal, we have compiled a list of questions you should ask before choosing among a few offers or accepting the final one. Below is an excerpt from our piece on Inc.com. In case you need a refresher, here are some earlier pieces we've written to help you with the basics:


Without further ado, here is what you need to know about stock options, pay packages, and what you're really getting offered:
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:


Evaluating Offers
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?

Read more at Inc.com... 



Read more...
Have questions?