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The Equity Talk

Jan 3, 14 • equity, startups

When you’re joining an early or mid-stage startup, equity will likely be part of your compensation. Quite a bit has been written on equity, how it’s granted and how it works- I’ll reference quite a few articles at the end of this post from people with far more experience than I. The purpose of this post is solely for an employee who has already completed general interviewing and has received an offer from said company including equity as compensation.

When you are offered equity you should be sure to ask certain questions because, as it’s a part of your compensation package, you need to be able to place a rough, approximate value on what it’s worth. The company legally can’t tell you a future value, but they can give certain important information.

1. If the company offers you a number of shares- how many shares are outstanding?
2. If the company offers you a percentage- how many shares is that? Then confirm the number of shares outstanding.
3. Confirm that the vesting schedule is the traditional 4 year window with a one year cliff (see below for an article on vesting).
4. Then ask what the most recent valuation was- you might ask if the company has had a 409a valuation.
5. If the company just raised money, you can ask what was the pre-money valuation? What was the post-money valuation? What is the current outlook (up, down, or neutral)?
6. If the conversation has gone well thus far, ask what the burn rate is like.
7. Based on that answer, ask if the company is thinking of raising money soon, and if yes, how  employee dilution is treated as rounds occur. Going along with that, ask if there is potential for employees to receive equity grants later on (for outstanding performance, etc.).

At the end of the day, all of these questions drive towards understanding how they’re compensating you. The company should definitely give you answers to the first 4-5 questions; if not, I would have a hard time accepting (unless the company is really really early stage- then the first three suffice). The last two are bonus questions.

Don’t be surprised if equity is pretty much non-negotiable, beside the opportunity for a sliding scale. A sliding scale is when they offer you a blend, for example, “You can choose among the following: 100k and .1% of shares, 80k and .2% shares, or 60k and .6% shares.”

You’re not asking whether about plans to exit, or IPO, or whatever, because in many ways you’re just trying to understand your small slice amidst the overall growth prospects.

Again, the timing on these questions is important. It should be separate from you believing in the vision and the growth prospects of the company (which you already should if you get to this stage).

Now for some resources:

An Engineers Guide To Stock Options

The Right Way To Grant Equity To Your Employees

Three Ways To Avoid Tax Problems When You Exercise Options

Fred Wilson has written extensively and excellently on this topic (I already linked him twice above). If you really want to understand, you’ve got some reading ahead of you!

And just a quick reminder that for great risk there can be great reward:
Welcome to the Unicorn Club

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