Compensation

How to calculate startup equity

August 8, 2022
The Carta Team

When you get a job offer from a startup, it’s likely a combination of both salary and equity compensation. Understanding how your base salary compares to another offer is simple, but calculating startup equity (how much your shares are worth) is more complicated. 

Below are questions you can ask to make sure you are getting a fair equity grant. We’ll also cover some basic calculations to understand your equity’s potential value (don’t worry, we have a startup equity calculator to help).

How to make sense of your equity offer

Before taking the job, ask these three important equity questions:

1. What percentage of the company’s equity am I getting? 

The percentage of equity you’re receiving in a company varies based on how many total shares the company has. Ask your potential employer to include all outstanding shares (including preferred stock and restricted stock) not just what’s left in the employee option pool. Employee option pools can range from 13% to 20% of a startup’s equity, according to Carta data, so you won’t be able to accurately determine your ownership percentage with the employee pool alone. 

When you understand the percentage of ownership you’re being granted, you can more accurately determine the weight of your share and make sense of your raw number of options.

Alternatively, ask how many fully diluted outstanding shares there are and do the math below to determine your percent ownership.

To calculate percentage ownership of a company, divide shares offered in an option grant by the total shares outstanding.

Or, you can determine the projected notional value of your option grant using the formula below.

To calculate the notional value, multiply preferred price by the number of options.

2. How do you decide how many options each employee gets?

Does the company have an established method for equity compensation? (Bonus points if they continually reevaluate their process to make sure it’s still fair.) The later the stage of the company, the more robust their compensation philosophy should be. Ideally, your potential company maps each role to a level with a corresponding equity and salary band.

No system? Then your offer might be more random than fair. You’ll want to do more due diligence with the first question.

3. Do you offer employee liquidity and/or refresh grants?

In other words, will you be able to sell shares before an exit (like an IPO or M&A)? If the company intends to remain private for a while, ask if they will hold tender offers (opportunities for shareholders to sell shares of equity). 

If the company is unwilling to budge on your equity offer and you feel it is too low, ask whether they offer equity refresh grants after a certain amount of time or in certain situations, like if you get a promotion. A refresh grant gives you a separate set of options that vest over a new period of time.

Startup equity calculator

Once you have all the facts, it’s much easier to compare multiple offers (or compare your new job offer to your current equity package). Our free startup equity calculator can help you understand the potential financial outcome of your offer.

To use this calculator, you’ll need the following information:

  • Last preferred price (the last price per share for preferred stock)

  • Post-money valuation (the company’s valuation after the last round of funding)

  • Hypothetical exit value (the value at which the company could exit)

  • Number of options in your grant (the total number of options offered to you)

  • Strike price (the price per share to exercise your options)

You should be able to find most of this information in your offer letter, but if you don’t, ask. 

 

Two people discuss a startup equity compensation job offer.

Download the calculator

 

How to use the startup equity calculator

  1. Input the last preferred price, post-money valuation, and/or total number of outstanding shares from the companies you want to compare. 

  2. Determine and input a hypothetical exit value: Look at similar companies that have gone public or gotten acquired recently.

  3. Fill in the number of options and strike price in your offer for Company A and Company B.

  4. View your estimated ownership percentage and option payout. 

How to negotiate your equity offer

Even if you’re satisfied with the company’s equity offer, it doesn’t hurt to ask for more. Negotiating can be intimidating, but it’s easier if you go into the conversation prepared. Here are some dos and don’ts to keep in mind: 

  • Never say a number first: You’re not obligated to tell the company how much you’re currently making or the number of shares you’re looking for. In fact, in some states, it’s illegal for them to ask how much you make. Instead, ask them what their range for the position is, and you can decide whether that seems fair.

  • Do your research: Negotiating is easier if you can justify why you deserve more. Beginning the conversation with “I have another offer with a notional value of $X” or “people at my level usually receive Y% of the company” is much more convincing than “I want more.” Before you ask, research what other people are making at similar companies and gather any other relevant data points. Tools like Carta Total Comp make it easy to look up salary data. And in places like New York City, salary and equity data are going transparent to remove the compensation black box job seekers have had to deal with. 

  • Know what parts of the equity grant are negotiable: Unless you’re an executive, you’ll likely only be able to negotiate your number of shares. It doesn’t hurt to ask about vesting schedules, acceleration triggers, and different types of stock—just know those parts of your offer may not change.

  • See if you can negotiate other aspects of your offer: If the company is unwilling to budge on the equity aspect (e.g. if they want don’t want to dilute their option pool or view the level of the role differently), see if they can raise your compensation via other means, like a sign-on bonus or higher salary.

  • Know what you care about most: Some people choose to ask for a higher salary, while others ask for more equity—or both. Understand your risk tolerance, need for money in the short-term, and potential of the company when considering where you want to negotiate.

Other questions to ask about your equity offer

While the three questions we covered above can help you understand the basics of your offer, the answers to the following questions below will help you dig more into the details.

What was your company’s valuation after your last round of funding? 

The company’s post-money valuation shows how investors valued their shares of the company. If you multiply the company’s valuation by the percent you stand to own, you can get a general idea of how valuable your grant is right now. If the company isn’t willing to share this, see if their latest valuation was announced in a recent press article.

When do my shares vest? 

You usually have to earn your shares (or the right to purchase shares) over time. This process is called vesting. Make sure you know how long you have to stay at the company in order to earn your options or shares. And if the company is offering RSUs, make sure you understand whether there’s a condition tied to them (e.g. you won’t receive them until the company goes public). 

Tip: Ask if your vesting schedule is the same as what others get in the company. Today, it’s pretty standard to see a four year vesting window with a one year cliff and monthly vesting after that. If the schedule is different, ask why.

How long after leaving the company do I get to exercise my shares? 

What is your post-termination exercise policy? When you leave a company, you may only have a certain amount of time to purchase your options before the company puts them back into the option pool. If you don’t buy them in that time period, you’ll lose them. For some companies and equity types, you may only have 90 days. It’s important to know this so you can ensure you have enough money to exercise your options (if you choose to) and pay taxes

If/when the company goes public or gets acquired, what’s the minimum valuation it needs for people with common stock to make a profit? 

Usually, investors get a guaranteed return while employees only stand to make a profit if the company is worth more than a certain amount. Find out what that amount is.

Equity is an essential component of compensation at many companies. By asking these questions and calculating your startup equity, you’ll be armed with the knowledge you need to make the best decision when you’re considering a job offer or asking for an equity increase in your current role.  

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DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. 

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