Private equity vs. public equity

Private equity vs. public equity

Author: Jenna Lee
Read time:  6 minutes
Published date:  10 February 2020
Job offers often include base salary, bonuses, stipends, and shares. Here's how to value a compensation package including private equity or public equity.

It’s hard to evaluate job offers. Even if you were to disregard your feelings about the job responsibilities, title, company mission, and people (which you definitely should not do), there are so many things that go into your total compensation package—base salary, bonuses, stipends, and more—that it’s hard to figure out how much they’re actually offering. And with companies constantly one-upping each other to fight for the best talent, it’s only getting harder to accurately compare offers from a monetary standpoint.

And then there’s the equity part of your offer, which further complicates things. Over the years, countless smart, qualified, and diligent candidates have blown the negotiation process when applying for a job at a privately-held, fast growing startup. Here’s how they should be thinking about their offers: 

Private equity vs. public equity

What is private company equity?

Private company equity represents shares you get from a private company. Generally, it’s hard to pin down what private company equity is worth (since the stock isn’t trading publicly) or when you’ll be able to cash out (if you’re able to cash out at all). But that risk can come with great reward.

What is public company equity?

Public company equity, on the other hand, is actual stock in a publicly traded company (like Google or Apple). With publicly traded stock, it’s easy to know how much it’s currently worth—you can simply look at how much it’s trading for on the market. You can also usually sell it whenever you want. The downside: it might not grow in value as fast as equity in a private company.

Why it seems like the public company’s offer is better

When you get an offer from a large, public company, you usually calculate your total annual comp like this: 

Public companies usually offer restricted stock units (RSU) or something similar, which are generally pretty liquid—they turn into shares as soon as they vest and can be sold either immediately or after a blackout period for cash. 

When you get an offer from a private company, on the other hand, the offer is usually expressed like this: 

To make it easier to compare offers, you might simplify the math in your head to: 

…and then all your enthusiasm for the private company instantly evaporates because the figure you come up with is invariably substantially less than the public company’s offer.

Usually, it’s not the cash part of the offers that’s so dissimilar (although startups still generally pay a bit less in bonuses than their big-company counterparts… or pay no bonuses at all). The gap is almost always in the equity piece, and the gap is often large: at first glance, the public equity may be “worth” 3-5x(!) more.

At this point, you might think the startup is crazy—and maybe even feel personally attacked—for a few reasons:

  1. You typically can’t sell private company equity unless there’s a liquidity event like an initial public offer (IPO), a secondary transaction like a tender offer, or a merger or acquisition.

  2. You have to pay money to exercise your stock options (buy your shares) and may have to account for taxes.

  3. Startups are inherently risky. The company could fail, and your equity could be worth nothing.

  4. Despite all of this, the private company is still probably offering a smaller cash compensation package than the public company.

Sometimes you and the company salvage the relationship and work through the math together, but often, your System 1 reaction to the offer pervades. The barrier proves insurmountable, and you go with the public company’s offer… unless you look at private company compensation packages another way.

How to evaluate job offers from private companies

In many cases, the private company isn’t purposely undervaluing you or trying to play sketchy negotiation games. Startups can represent tremendous potential for upside and allow you to share in the wealth that may be created by the effort you put into the company. But you can’t participate in that upside without taking on some risk. And risk materializes in the equity portion of your offer. Imagine two hypothetical companies:

  • Company A is a large public company that is growing 15% every year. (This is pretty good given that the S&P 500 returns about 10% a year.)

  • Company B is a growth-stage startup that is excelling and doubling in value every 18 months.

Suppose you get $100K of equity in each company, vesting over four years. At the end of that time period, your $100K of stock in Company A will be worth ~$174,900. Your $100K of stock in Company B, on the other hand: worth a cool $667,000.

Once a company is large and established, it’s extremely unlikely that it will go from 15% growth one year to 200% growth the next. But the very best startups, depending on when you join them, do often perform much, much better than 10x over five years. Sometimes as much as 1000x.

Now imagine that Company A offered you that $100K, but Company B was trying to shoot for “parity.” If you do the math, you’ll see that Company B should have given you options worth about $20k to match the value of A’s grant.

If you compare those offers head to head—without taking into account risk and potential growth—it’s easy to feel undervalued. If you have two numbers to compare and you’re risk-averse, you’re always going to want the bigger one, and 20 < 100.  

How to compare job offers

Having more than one job offer is a great situation to be in, but it’s a big (and often difficult) decision—especially if you’re excited about both companies. Here are our top three pieces of advice for comparing offers:

Factor in growth

In startup land, the company you pick is more important than everything else: it’s more important than the role, it’s more important than your salary, and it’s more important than the projected value of your equity grant. Look at the guy who painted the walls on the original Facebook office. As Eric Schmidt told Sheryl Sandberg when she was considering joining Google, “if you are offered a seat on a rocket ship, get on—don’t ask what seat.”

So if you’re trying to decide between two startups, pick the one that you think has the greatest opportunity for growth. It doesn’t hurt to evaluate each equity offer (in fact, we built a free startup equity calculator to help make it easy), but don’t obsess about constant factor differences between equity packages.

Similarly, if you’re trying to decide between a public company and a startup, do the math to factor in the potential for growth and consider your appetite for risk. Don’t try to compare two incomparable numbers straight up.

Also, it’s generally not a good idea to try to negotiate with a startup by using a public company equity package as a direct comparable. Instead, ask the startup how they came up with the offer and what the company’s projected growth looks like. That way, you can get a better idea of how to compare the two offers.

Consider liquidity

It’s also important to decide whether liquidity is important to you. A million dollars in “gain” that you can’t actually realize isn’t much good when you have student loans to pay or need to make a down payment on a house.

There is nothing dishonorable about needing liquidity; this is a problem that we are working on at Carta for private companies, too.

Know (and fight for) what you deserve

When you’re making a decision and evaluating offers, make sure you check out our Shareholder Bill of Rights. While most startups are trying to do the right thing, employees are often the only people who can hold companies accountable. Demand these rights from the companies you interview with so that you can make an informed decision and improve your future workplace.

P.S. At Carta, we care about our employees, we’re growing fast, and we’re hiring—join us! 

Do you know the tax implications of your equity ownership?

Get expert 1:1 support on your equity and taxes with Equity Advisory—an additional offering exclusively for Carta customers.

Help your employees navigate tax decisions
Carta Equity Advisory helps employees make informed decisions about their equity and taxes. Learn how you can help educate your team.
Request demo

Author: Jenna Lee
Jenna is a former member of the content team at Carta. Despite working in Fintech her entire career, she has never had a La Croix.
DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. 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.