Most people will tell you to negotiate your salary when offered a job. Find out why that is TRUE and especially important when discussing equity at a startup.
I’ll be totally honest; I did not negotiate any part of my offer for my current job. I don’t regret that. However, that doesn’t mean you shouldn’t seriously consider negotiating your equity compensation at a startup(or for that matter, at any company public or private).
Especially at a private venture-backed company, your equity can end up being the most important piece of your employee compensation. This is not to say you shouldn’t worry about benefits or negotiate your salary or bonus structure, but please don’t ignore the equity.
Why is equity so important?
Equity is important… yet my bet is that most people don’t negotiate they equity grant. To get to the bottom of this, I asked the following question on Blind and found that many people actually do negotiate equity.
Our question is: Why shouldn’t you?
Let’s take the hypothetical SaaS startup BiffCo that just raised their Series C funding at a $100M valuation.
Let’s pretend the VCs paid $5 per share. BiffCo wants to add a couple young salespeople to help them scale, so they take resumes from all over the country. Out of hundreds of applicants they choose our imaginary friends Marty and Lorraine. Both Marty and Lorraine are great candidates and excited to take the job, but Lorraine has already read this blog post and knows she should negotiate her equity.
Marty gets a call from the CEO of BiffCo who says “Hi Marty,I’d like to personally offer you a job as a salesperson here at BiffCo. Your starting salary will be $60,000 and you will get 1,000 stock options that will vest over 4 years.”
Marty, excited as ever says “Thank you so much for the opportunity, to be honest I’d love to work here, but I have another offer for a bit higher salary. Do you think you could make my salary $70,000?”
The CEO replies immediately “We can do that.”
The CEO congratulates Marty again and then calls Lorraine, giving her the same spiel.
Lorraine, calmly says “Thank you so much for the opportunity, BiffCo is my first choice! I can make it on that salary, but I have a couple questions. I’m curious what the strike price is on those options, and how much did the Series C VCs pay for their preferred stock?”
The CEO hadn’t heard this before from a job candidate, but he obviously knew the numbers “The strike price is $1 and the VCs paid $5.”
Lorraine thinks for a moment then asks “I’d love to work for you, but because I really believe in the future of BiffCo, I would want an additional 3,000 options. That way I will vest 1,000 each year.”
The CEO thinks for a moment, then accepts.
To the untrained eye it may seem like Marty got the better deal: he is going to make $10,000 more per year than Lorraine. However, Lorraine realizes the potential of getting what Marty may see as “only $3,000 more inequity,” and the potential that has to grow.
Fast forward 4 years… Both Marty and Lorraine are still at the company, and one day they find out BiffCo is going to IPO. Everyone is excited and anxious to hear what the listing price will be. The CEO comes on the now large company’s video call and says “we have talked with the banks and we are going to list our company at $26 per share.” Everyone cheers. 6 months later after a nice bump on day one and never looking back, the price of BiffCo’s stock is trading at a whopping $41!
Both Marty and Lorraine worked for 4 years and fully vested their options, let’s see how each of our friend’s negotiations paid off:
So, after 4 years plus 6 months of IPO lock-up, Lorraine ends up with a total of $400,000 pretax income (assuming she sells all of her stock). In the same scenario, Marty ends up with $320,000: a difference of$80,000 despite getting paid $40,000 more in salary over 4 years. This is not to mention that Marty’s income was taxed at short term income rates, while Lorraine could potentially hold her stock and qualify for long-term capital gains treatment.
All the company needed to do was exit above $14.33/sh (or 2.86x the Series C VC's money) and Lorraine does better off in the long run. That would imply less than a $300M valuation, less than one third of a unicorn! If the company did exit for $1B, Lorraine would potentially make more than $100,000 more than Marty. All because she simply negotiated her equity. Once again this is not to say you can’t or shouldn’t negotiate your salary as well, imagine if either Marty or Lorraine had done both! It is, however, important to understand how to negotiate for equity, and what makes sense.
What to ask for when granted equity?
Negotiating your salary is straight forward. You likely have previous jobs or competing offers or just the interest as references for good ballpark numbers. Negotiating equity can be a bit more difficult of a concept, but it will almost assuredly impress your future employer (even if you are unsuccessful).
The first important step is to simply ask how many options you will get, and what their strike price is. Although they can't guarantee your strike price until the board meets to approve your grant, you can ask what the current exercise price is. While you are at it, get the next board date and the likelihood that you would get the current FMV as your strike price. If not likely, then ask whether you get a ratchet to grant more shares if the strike rises. You can insist on a vesting date that matches your start of service regardless of how long it takes for the board to approve your grant.
You can ask how many shares have been authorized on a fully-diluted basis which plays a critical role in assessing the value of your company and the potential for your shares. You should also ask for the price and date of the most recent VC round and see if you have a meaningful discount. If not, then it should be apparent that the company is closer to an exit or else you are being overcharged for your options. You can use the VC price as a decent starting point for any modeling of scenarios on the potential value of your options.
Although their answers might be subjective, it doesn’t hurt to ask what the time-frame and plan is for liquidity.
Here is a list of a few things you should be asking for when offered equity at a startup:
2. What is the options strike price?
3. How many shares will I get?
4. How many shares are there currently on a fully diluted basis?
5. When do the options begin vesting?
6. When will the grant date be? (Typically the nest board meeting)
7. How long will my exercise period be? (90 days if ISOs)
8. Does this plan allow for early exercise?
9. Does this plan allow for cashless exercise?
10. Is there an acceleration clause such as being fired without cause or being acquired before vesting?
11. What was the date and price of the last VC round?
12. What are the company’s repurchase or cancelation rights?
13. Can I ever sell this stock pre-IPO? Is there a Right of First Refusal (ROFR)?