Startup equity is not cash.
Seems obvious, but we see early-stage founders and HR folks get ahead of themselves on this all the time.
You're a Series A founder (company valued at $40M today) and you're trying to close an amazing engineer. In her offer, you list the base salary, any potential bonuses, and the equity options package (almost always in Incentive Stock Options or ISOs).
𝗜𝘁 𝗰𝗮𝗻 𝘃𝗲𝗿𝘆 𝘁𝗲𝗺𝗽𝘁𝗶𝗻𝗴 𝘁𝗼 𝘄𝗿𝗶𝘁𝗲 𝘁𝗵𝗮𝘁 𝗮𝘀:
Annual base salary: $166,000
Potential bonus: Up to $8,000
Equity: Annual value of $26,000
𝗔 𝗯𝗲𝘁𝘁𝗲𝗿 𝗮𝗽𝗽𝗿𝗼𝗮𝗰𝗵 𝘄𝗼𝘂𝗹𝗱 𝗯𝗲:
Annual base salary: $166,000
Potential bonus: Up to $8,000
4-Year Equity Grant: X shares which represent 0.078% of outstanding shares
𝘓𝘪𝘯𝘬 𝘩𝘦𝘳𝘦 𝘵𝘰 𝘢 𝘦𝘲𝘶𝘪𝘵𝘺 𝘴𝘤𝘦𝘯𝘢𝘳𝘪𝘰 𝘤𝘢𝘭𝘤𝘶𝘭𝘢𝘵𝘰𝘳
Is that as easily understandable as the dollar amount? Definitely not. But it's far more honest.
Expressing equity in dollar terms should be reserved for startups that are valued at hundreds of millions of dollars - because the modal outcome for Series A equity is $0. It's why the discussion of "what percent of my compensation is equity vs cash" can be quite misleading at young companies.
This is an additional reason why poaching great talent from Big Tech can be challenging for early-stage founders. You have to compete with compensation packages where equity really is effectively cash (or cash equivalent). It's why comp can only ever be a part of the total motivation for joining (and hopefully the learning / mission / agency is a larger slice of the pie).
When it works, equity ownership is an unparalleled wealth-generating mechanism. But it should be explained clearly, with all the attendant caveats. Great founders invest in equity education for their employees so they can make better financial choices for themselves and their families.
Last note for the startup candidates reading this: if the company you're considering just gives you a simple number of options in your offer letter, don't sign. You need at minimum the outstanding share count as well so you can calculate a percentage ownership!
The more you know.
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#startups #salary #equity #founders #compensation
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