Joining an Early Stage Startup? Negotiate Your Startup Equity and Salary with Stock Option Counsel Tips
Startup equity negotiation tips for early stage founders, executives, employees, consultants and advisors.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Startup Equity @ Early Stage Startups
"Hey baby, what's your employee number?" A low employee number at a famous startup is a sign of great riches. But you can't start today and be Employee #1 at OpenAI, Discord, or one of the other most valuable startups on Earth. Instead you'll have to join an early-stage startup, negotiate a great equity package and hope for the company’s success. This post walks through the negotiation issues in joining a pre-Series A / seed-funded / very-early-stage startup.
Q: Isn't startup equity a sure thing? They have funding!
No. Raising small amounts from seed stage investors or friends and family is not the same sign of success and value as a multi-million dollar Series A funding by venture capitalists.
Carta’s data team published an update in December of 2023 showing the “graduation rates” from Series Seed to Series A within 2 years. They affirm that it’s not a sure thing to graduate from Series Seed to Series A and, therefore, even have the chance to make it all the way to a successful acquisition or IPO. In hot years of 2021-2022, the graduation rate hovered around 30% across all industries. In 2023, it ranged from:
23% for FinTech
20% for HealthTech
19% for Consumer
17% for SaaS
16% for Biotech
Here's an illustration from Dustin Moskovitz's presentation, Why to Start a Startup from Y Combinator's Startup School on the chances so "making it" for a startup that has already raised seed funding. These 2nd Round “graduation” numbers are higher than Carta’s numbers, as this data was from 2017 (a hot hot time for startup funding).
What are the chances of a seed-funded startup becoming a "unicorn" (here, defined as having 6 rounds of funding rather than the classic “unicorn” definition of a $1 billion valuation).
Q: How do you negotiate equity for a startup? How many shares of startup equity should I get?
Don't think in terms of number of shares or the valuation of shares when you join an early-stage startup. Think of yourself as a late-stage founder and negotiate for a specific percentage ownership in the company. You should base this percentage on your anticipated contribution to the company's growth in value.
Early-stage companies expect to dramatically increase in value between founding and Series A. For example, a common pre-money valuation at a VC financing is $8 million. And no company can become an $8 million company without a great team.
Imagine, for instance, that the company tries to sell you on the offer by insisting that they will someday be worth $1B and, therefore, your equity worth, say, $1M. The obvious question would be: Does it feel fair to you to make a significant contribution to the creation of $1B in value in exchange for $1M? For most people, the answer would be “no.”
Or, consider that the company is insisting that an offer of 1% is “worth” $1M because the company expects to raise a Series A - based in part on your efforts - at a $100M pre-money valuation. Leaving aside the wisdom (or lack thereof) of evaluating the offer based on its future value, you would want to ask yourself: Does it feel fair to you to make a significant contribution to the creation of $100M in value in exchange for $1M in equity (which would presumably be only partially vested as of the Series A)?
That would depend, of course, on how significant your contribution would be. And it would depend on the salary component of the offer. If the cash compensation is already close to market level, that might seem more than fair. If the cash offer is a fraction of your opportunity cost, you would be investing that opportunity cost to earn the equity. The potential upside would need to be great enough to balance the risk of that investment.
Q: Is 1% equity in a startup good?
The classic 1% for the first employee may make sense for a key employee joining after a Series A financing, but do not make the mistake of thinking that an early-stage employee is the same as a post-Series A employee.
First, your ownership percentage will be significantly diluted at the Series A financing. When the Series A VC buys approximately 20% of the company, you will own approximately 20% less of the company.
Second, there is a huge risk that the company will never raise a VC financing or survive past the seed stage. According to CB Insights, about 39.4% of companies with legitimate seed funding go on to raise follow-on financing. And the number is far lower for seed deals in which big name VCs are not participating.
Don't be fooled by promises that the company is "raising money" or "about to close a financing." Founders are notoriously delusional about these matters. If they haven't closed the deal and put millions of dollars in the bank, the risk is high that the company will run out of money and no longer be able to pay you a salary. Since your risk is higher than a post-Series A employee, your equity percentage should be higher as well.
Q: What is typical equity for startup? How should I think about market data for startup equity?
Data sets on employee and executive offer percentages for early stage startups can be misleading and encourage companies to make unrealistically low offers to early hires. There’s two reasons for this. First, these data sets are for employees who are earning something like market level salaries along with equity. Second, these data sets exclude anyone classified as a “founder” from the data set for employees. They keep different data sets for founders! So the gray area between the two classifications makes the use of data tricky. Who is a founder for purposes of the data set? Depends on the data set. Carta, for instance, excludes anyone with 5% or more from the employee/executive data set and classifies them as founders! Even if they are earning market-level cash from their start date.
Here’s the bottom line:
If you are joining before you are being paid startup-phase-market-level cash salary, you are a late stage founder. You should evaluate your equity percentage relative to the other founders within the company or within the market data set.
If you are joining for a combination of cash and equity at an early stage startup, the offer should make sense to you. Simply pointing to market data for the right % ownership is not enough. You’ll want to consider the market data for % ownership in conjunction with the dollar value of the equity based on how investors have most recently valued the company.
Q: How should early-stage startups calculate my percentage ownership?
You'll be negotiating your equity as a percentage of the company's "Fully Diluted Capital." Fully Diluted Capital = the number of shares issued to founders ("Founder Stock") + the number of shares reserved for employees ("Employee Pool") + the number of shares issued to other investors (“preferred shares”). There may also be warrants outstanding, which should also be included. Your Number of Shares / Fully Diluted Capital = Your Percentage Ownership.
Careful, though, because most startups do not issue preferred stock when they take their seed investment funds from their seed investors. Instead, they issue convertible notes or SAFEs. These convert into shares of preferred stock in the next round of funding. So if you negotiate for 1% of a seed stage startup funded with notes or SAFEs, the fully diluted capital number used as the denominator of that calculation does not include the shares to be issued for those seed funds.
How can you address this? First, make sure you know what’s included. You can ask:
How many shares are outstanding on a fully diluted basis? Does this include the full option pool? Are there any shares yet to be issued for investments in the company, such as on SAFEs or convertible notes? How many shares do you expect to issue upon their conversion?
If you are comparing your offer to other seed stage offers or to market data for seed stage offers, you would want to take that into consideration. The number the company provides is only an estimate, of course, but it’s a way to address this in your evaluation.
“Fully Diluted Capital” includes only issued shares and reserved shares. For an early stage startup, that would include founders shares, the option pool, and any preferred shares issued to investors in a priced round. It will not include shares to be issued upon conversion of SAFEs and convertible notes. Therefore, you will want to include some estimate for the conversion of those investments when you are understanding the percentage ownership in an early stage startup offer.
Q: Is there anything tricky I should look out for in my startup equity documents?
Yes. Look for repurchase rights for vested shares.
If so, you may forfeit your vested shares if you leave the company for any reason prior to an acquisition or IPO. In other words, you have infinite vesting as you don't really own the shares even after they vest. This can be called "vested share repurchase rights," "clawbacks” or "non-competition restrictions on equity.”
Most employees who will be subject to this don't know about it until they are leaving the company (either willingly or after being fired) or waiting to get paid out in a merger that is never going to pay them out. That means they have been working to earn equity that does not have the value they think it does while they could have been working somewhere else for real equity.
According to equity expert Bruce Brumberg, "You must read your whole grant agreement and understand all of its terms, even if you have little ability to negotiate changes. In addition, do not ignore new grant agreements on the assumption that these are always going to be the same." When you are exchanging some form of cash compensation or making some other investment such as time for the equity, it makes sense to have an attorney review the documents before committing to the investment.
Q: What is fair for vesting of startup equity?
The standard vesting is monthly vesting over four years with a one year cliff. This means that you earn 1/4 of the shares after one year and 1/48 of the shares every month thereafter. But vesting should make sense. If your role at the company is not expected to extend for four years, consider negotiating for a vesting schedule that matches that expectation.
Q: Should I agree to milestone or performance metrics for my vesting schedule for startup equity?
No. This is a double risk. Not only is there a high risk that the company will not be successful (and the equity worthless), there is a high risk that the milestones will not be met. This is very often outside the control of the employee or even the founders. More on this issue here. The standard is four-year vesting with a one-year cliff. Anything else is off-market and is a sign that the founders are trying to be too creative and reinvent the wheel.
Q: Should I have protection for my unvested shares of startup equity in the event of an acquisition?
Yes. When you negotiate for an equity package in anticipation of a valuable exit, you would hope that you would have the opportunity to earn the full number of shares in the offer so long as you are willing to stay through the vesting schedule.
If you do not have protection for your unvested shares in the stock documents, unvested shares may be cancelled at the time of an acquisition. I call this a “Cancellation Plan.”
Executives and key hires negotiate for “double trigger acceleration upon change of control.” This protects the right to earn the full block of shares, as the shares would immediately become vested if both of the following are met: (1st trigger) an acquisition occurs before the award is fully vested; and (2nd trigger) the employee is terminated after closing before they are fully vested.
There’s plenty of variation in the fine print of double trigger clauses, though. Learn more here.
Q: The company says they will decide the exercise price of my stock options. Can I negotiate that?
A well-advised company will set the exercise price at the fair market value ("FMV") on the date the board grants the options to you. This price is not negotiable, but to protect your interests you want to be sure that they grant you the options ASAP.
Let the company know that this is important to you and follow up on it after you start. If they delay granting you the options until after a financing or other important event, the FMV and the exercise price will go up. This would reduce the value of your stock options.
Early-stage startups very commonly delay making grants. They shrug this off as due to "bandwidth" or other nonsense. But it is really just carelessness about giving their employees what they have been promised.
The timing and, therefore, price of grants does not matter much if the company is a failure. But if the company has great success within its first years, it is a huge problem for individual employees. I have seen individuals stuck with exercise prices in the hundreds of thousands of dollars when they were promised exercise prices in the hundreds of dollars.
Q: What salary can I negotiate as an early-stage employee?
When you join an early-stage startup, you may have to accept a below market salary. But a startup is not a non-profit. You should be up to market salary as soon as the company raises real money. And you should be rewarded for any loss of salary (and the risk that you will be earning $0 salary in a few months if the company does not raise money) in a significant equity award when you join the company.
When you join the company, you may want to come to agreement on your market rate and agree that you will receive a raise to that amount at the time of the financing.
I sometimes see people ask at hire to receive a bonus at the time of the financing to make up for working at below-market rates in the early stages. This is a gamble, of course, because only a small percent of seed-stage startups would ever make it to Series A and be able to pay that bonus. Therefore, it makes far more sense to negotiate for a substantial equity offer instead.
Q: What form of startup equity should I receive? What are the tax consequences of the form?
[Please do not rely on these as tax advice to your particular situation, as they are based on many, many assumptions about an individual's tax situation and the company's compliance with the law. For example, if the company incorrectly designs the structure or the details of your grants, you can be faced with penalty taxes of up to 70%. Or if there are price fluctuations in the year of sale, your tax treatment may be different. Or if the company makes certain choices at acquisition, your tax treatment may be different. Or ... you get the idea that this is complicated.]
These are the most tax advantaged forms of equity compensation for an early-stage employee in order of best to worst:
1. [Tie] Restricted Stock. You buy the shares for their fair market value at the date of grant and file an 83(b) election with the IRS within 30 days. Since you own the shares, your capital gains holding period begins immediately. You avoid being taxed when you receive the stock and avoid ordinary income tax rates at sale of stock. But you take the risk that the stock will become worthless or will be worth less than the price you paid to buy it.
1. [Tie] Non-Qualified Stock Options (Immediately Early Exercised). You early exercise the stock options immediately and file an 83(b) election with the IRS within 30 days. There is no spread between the fair market value of the stock and the exercise price of the options, so you avoid any taxes (even AMT) at exercise. You immediately own the shares (subject to vesting), so you avoid ordinary income tax rates at sale of stock and your capital gains holding period begins immediately. But you take the investment risk that the stock will become worthless or will be worth less than the price you paid to exercise it.
3. Incentive Stock Options ("ISOs"): You will not be taxed when the options are granted, and you will not have ordinary income when you exercise your options. However, you may have to pay Alternative Minimum Tax ("AMT") when you exercise your options on the spread between the fair market value ("FMV") on the date of exercise and the exercise price. You will also get capital gains treatment when you sell the stock so long as you sell your stock at least (1) one year after exercise AND (2) two years after the ISOs are granted.
Q: Who will guide me if I have more questions on startup equity?
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Startup Negotiations: How Preferred Stock Makes Employee Stock Less Valuable
Originally published February 13, 2014. Updated August 30, 2023.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Common Stock v. Preferred Stock
Startup employees and executives get Common Stock (as options, RSUs or restricted stock). When venture capitalists invest in startups, they receive Preferred Stock.
Preferred Stock comes with the right to preferential treatment in merger payouts, voting rights, and dividends. If the company / founders have caved and given venture capitalists a lot of preferred rights - like a 3X Liquidation Preference or Participating Preferred Stock , those rights will dramatically reduce the payouts to Common Stock in an acquisition. An individual who holds 1% in common stock would be curious, therefore, about the preferred stock’s rights to know if their 1% would really be 1% in an acquisition.
Is Preferred Stock Negotiable for Employees and Executives?
No. Preferred Stock is not negotiable for employees and executives (other than perhaps founders preferred stock which relates not to acquisition payout amounts but to liquidity rights and voting rights). The key is to understand if the investors’ Preferred Stock has unusual, off-market liquidation preferences. If so, that would weigh in favor of negotiating for more shares, more cash compensation or - less often but occasionally - management retention plan terms to make up for uninspiring Common Stock rights.
Liquidation Preference & How It Affects Common Stock Payouts
One Preferred Stock right is a "Liquidation Preference." Without a Liquidation Preference, each stockholder – preferred or common – would receive a percentage of the acquisition price equal to the stockholder's percentage ownership in the company. If the company were acquired for $15 million, and an employee owned 1% of the company, the employee would be paid out $150,000.
With a Liquidation Preference, preferred stockholders are guaranteed to be paid a set dollar amount of the acquisition price, even if that guaranteed payout is greater than their percentage ownership in the company.
Here’s an example of the difference. An investor buys 5 million shares of Preferred Stock for $1 per share for a total of $5 million. After the financing, there are 20 million shares of common stock and 5 million shares of Preferred Stock outstanding. The company is then acquired for $15 million.
Without a Liquidation Preference, each stockholder (common or preferred) would receive $0.60 per share. That’s $15 million / 25 million shares. A hypothetical employee who held 1% of the company or 250000 shares) would receive $150,000 (that’s 1% of $15 million).
If the preferred stockholders had a 1X Liquidation Preference and Non-Participating Preferred Stock, they would receive 1X their investment ($5 million) before any Common Stock is paid in an acquisition. They would receive the first $5 million of the acquisition price, and the remaining $10 million would be divided among the 20 million shares of common stock outstanding ($10 million / 20 million shares of common stock). Each common stockholder would be paid $0.50 per share, and hypothetical employee who held 1% of the company would receive $125,000.
In an up-round acquisition, though, this 1X non-participating preference would not affect common stock payouts. In an acquisition at $100 million valuation, the investors would choose the higher of:
Their $5M liquidation preference and
Their percentage of the company valuation. If they had 20% of the company’s shares, they would of course here choose $20M in payouts. And all common stockholders would also receive their percentage payout.
Ugly, Non-Standard Rights That Diminish Employee Stock Value
The standard Liquidation Preference is 1X. This makes sense, as the investors expect to receive their investment dollars back before employees and founders are rewarded for creating value. But some company founders give preferred stockholders multiple Liquidation Preferences or Participation Rights that cut more dramatically into employee stock payouts in an acquisition.
If preferred stockholders had a 3X Liquidation Preference, they would be paid 3X their original investment before common stock was paid out. In this example, preferred would be paid 3X their $5 million investment for a total of $15 million, and the common stockholders would receive $0. ($15 million acquisition price – $15 million Liquidation Preference = $0 paid to common stockholders)
Preferred stock may also have "Participation Rights," which would change our first example above to give preferred stockholders an even larger portion of the acquisition price.
Without Participation Rights, Preferred Stockholders must choose to either receive their Liquidation Preference or participate in the division of the full acquisition price among the all stockholders. In the first example above, the preferred stockholders held 20% of the company and had a $5 million Liquidation Preference. When the company was acquired for $15 million, the preferred stockholders had the choice to receive their $5 million liquidation preference or to participate in an equal distribution of the proceeds to all stockholders. The equal distribution would have given them $3 million (20% of $15 million acquisition price), so they chose to take their $5 million liquidation preference, and the remaining $10 million was divided among 20 million shares of common stock.
If the Preferred Stock also had Participation Rights, (which is called Participating Preferred Stock), they would receive their Liquidation Preference and participate in the distribution of the remaining proceeds.
In our example with a 1X Liquidation Preference but adding a Participation Right, the Participating Preferred Stock would receive their $5 million Liquidation Preference AND a portion of the remaining $10 million of the acquisition price equal to their % ownership in the company.
$5 million Liquidation Preference + ((5 million shares / 25 million shares outstanding) * $10 million) = $7 million
Common stockholders would receive (20 million shares common stock / 25 million shares outstanding) * $10 million = $8 million.
Our hypothetical employee who held 1% of the company would receive $100,000 (.01 * $10 million) or 0.67% of the acquisition price.
Employee Focus – Quick and Dirty Analysis
These calculations are complicated, so most candidates who are evaluating a startup job offer keep it simple in considering the effects of preferred stock. The quick and dirty way to know if preferred stock is an issue in evaluating an equity offer is to find out:
Do preferred stock investors have any liquidation preferences beyond the standard 1X non-participating preference?
If not, it’s not an issue in any up-round acquisition (and so most startup hires would not be concerned about the preferences at hire).
Founder Focus – Negotiating Your Acquisition Payout
If you are a founder and are negotiating with an acquiror, consider renegotiating your investors’ Liquidation Preference payout. Everything is negotiable in an acquisition, including the division of the acquisition price among founders, investors and employees. Do not get pushed around by your investors here, as their rights in the documents do not have to determine their payout.
If your investors are pushing to receive the full Liquidation Preference and leaving you and/or your employees with a small cut of the payout, address this with your investment bankers. They may be able to help you play your acquiror against the investors so that you are not cut out of the wealth of the deal, as most acquirors want the founders and employees to receive enough of the acquisition price to inspire them to stay with the company after acquisition.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Thanks to investment banker Michael Barker for his comments on founder merger negotiations. Michael is a Managing Director at Shea & Company, LLC, a technology-focused investment bank and leading strategic advisor to the software industry.
VIDEO Startup Stock Options: Startup Valuation
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Uber IPO - Lessons for Negotiating Startup Equity Offers - Spring 2019 Newsletter - Stock Option Counsel, P.C. - Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
Uber's IPO is a great lesson for startup employees on negotiating their startup equity. Unicorn startup recruiters have been telling hires for the past few years to value the offered RSUs at many multiples, even 10X, of the most recent investor valuation in negotiating their compensation offers. Since Uber's value has not risen even 2X in that time, any hires who accepted offers based on this calculus have lost significant value compared to their opportunity cost.
Individuals need negotiate for enough shares in a startup to balance their risk. The calculation for the right number of RSUs at a late-stage startup with a public-company-size valuation is the current investor value per share, not the potentialfuture value.
Shira Ovide explored this issue in Bloomberg Opinion last week with input from Stock Option Counsel:
Uber's example shows that employees at startups – particularly those who come aboard when the company is more mature – often don't get rich, even when the companies are successful. Many workers are at the bottom rung of stock holders and tend to have less information about their company's value and prospects than just about anyone else who holds shares. ... Mary Russell of Stock Option Counsel, which advises employees on compensation at startups, said people evaluating job offers at more mature startups should analyze only what the proposed equity is worth at the time of negotiation, not what it could possibly be worth in a dreamy future. That’s not always easy, because Russell said startup recruiters sometimes suggest that a 10-fold increase in valuation in the past is an indication of what prospective employees can expect from their wealth.
For more on using current value to evaluate startup equity offers, see this video from the Stock Option Counsel blog.
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and for the Stock Option Counsel Blog! I will continue to send quarterly updates on important topics in the market for startup equity for individual founders, executives and employees. Please keep in touch.
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Fall 2018 Newsletter - Stock Option Counsel®
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
Here's the big news in the world of startup equity.
Leaked Compensation Data for Startup Executives from Andreessen Horowitz. Business Insider has published a database of startup executive compensation data leaked from Andreessen Horowitz. It was sourced from executive search firms and is searchable by fundraising stage. This data may be valuable to startup executives negotiating their compensation and interesting to anyone curious to know how much executives in the startup world earn in cash and equity.
How to Use the Data. The data reveals that the level defined for a role can dramatically affect the compensation offer. For example, the difference between the compensation for a CMO and a VP of Marketing at a Series A company would be significant in both cash and equity. In counseling individuals on their compensation negotiations, I see the most significant increases in cash and equity from successful re-leveling arguments. Read more on my blog about how to use leveling to negotiate the right startup offer or contact me for information on my services.
Pay Gap for Startup Equity. I was recently interviewed by Bloomberg for an article on the gender pay gap for startup equity. They featured a study by Carta which found that women "make up 35 percent of equity-holding employees, but hold only 20 percent of the employee equity," and, further, that women make up "13 percent of founders but hold 6 percent of founder equity." I noted that one reason for the gap may be a lack of willingness to push for information necessary to evaluate a startup equity offer: "Equity is information asymmetry squared. You have to have the confidence to put the responsibility on the company to give you enough information."
Closing the Information Gap. It's up to individuals to educate themselves on equity and negotiate for the right number of shares to balance the risk of joining a startup. The purpose of my practice is to be available to those who need guidance in this process. See my website for more information.
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and for the Stock Option Counsel Blog! I will continue to send quarterly updates on important topics in the market for startup equity for individual founders, executives and employees. Please keep in touch.
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
The C-Level View - Fine Print Issues in Startup Executive Equity Grants
Executives joining startups study the equity grant documents carefully for these issues to avoid surprises in the fine print that might limit the value of their equity. Photo by Daniel Putzer.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
For executives trading significant cash compensation for startup equity, the fine print of the equity documents can significantly change the risk/reward profile of the deal. Be on the lookout for value-limiting terms in the Equity Grant Agreements, the Stock Plan and the Certificate of Incorporation.
Equity Grant Agreements
The Equity Grant Agreements and Stock Plan are usually not provided to the executive with the Offer Letter, as the official equity grant is not made until after hire. However, these agreements contain important details about the grant, so it makes sense to review them before agreeing to the number of shares or signing the Offer Letter.
For example, the Equity Grant Agreements may give the company the right to forcibly repurchase shares from the executive after termination of employment, even if they are vested shares of restricted stock or vested shares issued upon exercise of options. This dramatically limits the value of the equity, as the most significant increase in value of startups has historically been at the time of an exit event.
They may also require the executive to agree to future retroactive changes to the terms of the equity. For example, they may include the executive’s agreement to be bound to repurchase rights that might appear in future changes to the bylaws or the executive’s agreement to sign onto exercise agreements or stockholder agreements in the future which may have onerous terms.
If the Equity Grant Agreements have repurchase or other forfeiture rights for vested shares, it makes sense to negotiate these out of the deal or provide for alternative compensation to make up for the potential loss in value. If the Equity Grant Agreements have commitments to be bound by unknown future terms, it makes sense to remove these commitments and have all relevant terms provided up front.
The Equity Grant Agreements will outline the tax structure of the grant and the expiration period for stock options. These can dramatically improve or limit the value of the grant. A well-designed stock option tax structure can provide for Qualified Small Business Stock tax treatment, which allows for 0% federal tax rates on the first $10M in gains. A poorly-designed stock option tax structure can lead to forfeiture of vested shares or a $1M+ tax bill before liquidity to cover those taxes. The key is to understand the proposed structure and negotiate for any changes to make it consistent with the intended option exercise strategy. It might even make sense to re-design the grant as an RSU rather than a stock option.
The Stock Plan
The Stock Plan (otherwise known as an Equity Incentive Plan) can have some of the same red flags addressed above under Equity Grant Agreements. They may also have other onerous terms especially relating to treatment of executive shares in a change of control. The company may reserve the right to terminate, for no consideration, all unvested options at change of control. This could be a significant cancellation of value and could seriously decrease the executive’s leverage in negotiation of post-acquisition employment terms. Also, if an executive has negotiated for favorable double trigger vesting acceleration upon change of control rights, this term could invalidate that benefit, as cancelled unvested options would not be available for acceleration in the event of a post-acquisition termination.
If the Stock Plan has this or other onerous terms, it makes sense to negotiate for modifications in the Equity Grant Agreements or for a grant made outside the Stock Plan with terms crafted for the individual executive. If the Stock Plan has a company right to cancel unvested options at change of control, it makes sense to address this directly in the language of the executive’s vesting acceleration upon change of control term so that the cancellation cannot occur without a corresponding acceleration of vesting.
Certificate of Incorporation
The Certificate of Incorporation will outline some key economic rights of investors, including their liquidation preferences. Executives joining established startups can be misled by their percentage ownership if the investors have significant liquidation preferences, either because of significant fundraising or onerous investor terms. For example, in a company with $50 million investment and outsized investor rights of 3X participating liquidation preference, the investors would take the first $150 million in acquisition proceeds and participate with common stockholders in the distribution of the remaining proceeds.
If investor liquidation preferences are high, it makes sense for an executive to negotiate for significantly more shares to balance the risk or negotiate for a management retention bonus to be earned upon acquisition to make up for the loss in equity value due to these preferences.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
In the News: Startup Employees in the Dark on Equity
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
“Mary Russell, an attorney who founded Stock Option Counsel to help employees evaluate their equity compensation, says the first step is for employees to make sure any equity is theirs to keep. Some companies have repurchase rights in their equity agreements that give them a right to buy back shares and options from any employee who leaves; and some give founders or investors broad latitude to change the terms.
“If the company can take back employee shares it dramatically limits the value of those shares,” says Ms. Russell. “It’s the sort of thing an employee needs to know about when they go into a job.” She says it’s as simple as asking whether the company can take back vested shares.”
See Katie Benner's full article, Startup Employees in the Dark on Equity. The Information is a subscription publication for professionals who need the inside scoop on technology news and trends.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Repurchase Rights are "Horrible" for Employees
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
“As an aside, some companies now write in a repurchase right on vested shares at the current common price when an employee leaves. It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this.”
What can you do about it? Ask before you join:
“Can the company take back my vested shares?”
For more from Sam Altman, see his post, Employee Equity. For more on repurchase rights on vested shares, see Clawbacks for Startup Stock - Can I Keep What I think I Own? For more on questions to ask to make sure you have true startup equity, see our post, Startup Equity Standards - A Guide for Employees.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
The Gold Standard of Startup Equity - A Guide for Employees
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Click to view the SlideShare to learn the three standards that define startup equity and three questions to ask to know if you have the real thing.
See this SlideShare to Learn the three standards that define Startup Equity and three questions to ask to know if you have the real thing.
1. Ownership - “Can the company take back my vested shares?”
2. Risk/Reward - “What information can you provide to help me evaluate the offer?”
3. Tax Benefits - “Is this equity designed for capital gains tax rates and tax deferral?”
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Bull’s Eye: Negotiating the Right Job Offer
Learn the four ways startup determine the right equity offers for new hires.
Boris Epstein is the founder of BINC Search, a next-generation recruiting startup that helps Silicon Valley companies hire technical talent at the scale they need.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
You’re negotiating your salary and equity. You know there is a right answer – a bull’s eye where the final offer should land. But where is it?
The company is deciding what to offer you. They know there is a right answer, and they’ll get there using these four factors:
1. Past Comp – your salary and equity in current and past jobs
2. Peer Comp – the salary and equity of others in your peer group within this company
3. Desired Comp – what you want to get paid, regardless of other indicators
4. Market Comp – your competitive offers in the market
The right offer for you is the bull’s eye at the center of these possible offers. You can maximize your final offer by thoughtfully using these factors in your negotiation.
Past Comp
The company may ask you to disclose your compensation in your previous positions – your Past Comp.
If you disclose these numbers, be sure to include detail or “color” on the numbers to show the true value of your Past Comp. Do you believe your salary was lower than it should have been because of difficult financial circumstance at the company? Are you overdue for a review and raise? Does your company have valuable equity or a bonus structure that should be included to accurately describe your Past Comp? Are you expecting to continue vesting or receive additional stock option grants that you would forfeit by leaving your company?
A thoughtful discussion of your Past Comp may be more effective than following the lore that you should never disclose this information. You can use your answer to the question to guide the company to the right offer.
Peer Comp
The company also considers your Peer Comp – the range this company is already paying employees in similar positions. You start shaping this number during your interview as you discuss roles, levels and opportunities and present information to help the company understand where you fit to add the most value to the team.
For a company with a thoughtful system of leveling, there will be names or labels for each position and a range of salaries and equity packages they offer within each level. Your negotiation work is to distinguish yourself and show that you are a peer of those being paid at the highest end of the range for your level based on your unique skill set or experience.
The more unique your position, the less experience a startup will have in defining your Peer Comp. If you are a first-hire designer, physician or other leadership or expert role, you may have to help the company understand who your peers will be. This is especially important in early-stage startups, where the hiring team might not understand that your new role should be considered a peer of, for example, vice presidents rather than junior engineers.
Desired Comp
The company also considers your Desired Comp – what you want to get paid. This is highly relevant to the right offer.
Desired Comp is especially important in equity packages, where your evaluation of the company’s equity may vary greatly from another candidate’s evaluation of that package. If you’ve been hoping for a home run exit during your career, you’ll be looking for an equity package that could get you there. If you’re strapped for cash and looking to maximize salary, you will have less desire for an equity-heavy final offer.
There may be some tradeoffs, of course, but the right offer will be centered on your Desired Comp. So do your self-reflection homework and know what you want.
Market Comp
Companies take into account Market Comp and need to know what they will have to offer to stay competitive. While companies have a general idea of what is “market” for each position, your personal Market Comp is unique and driven by your efforts to identify alternative offers. The only way to use the right Market Comp in your negotiation is to go out to the market, derive that information and communicate it to the company.
Once you have competitive offers, evaluate the equity packages and make thoughtful comparisons between them. For example, based on your appetite for risk and financial considerations, would you prefer options to purchase 1% of a Series A startup with a company valuation of $5 million or 5,000 RSUs of a public company with a current market price per share of $10? How many more stock options would the Series A startup have to offer you to equate to the public company offer? The company cannot make this estimation for you any more than they can decide which company is the best fit for your personality. When you own this process, you can confidently and effectively communicate to your company what is “market” for your equity offer.
Market Comp is also relevant after hire, as the startup job market can shift dramatically over time and new opportunities are always surfacing. As you continually find new information about opportunities, you can continually communicate with your company about what is “market” in defining the right salary and equity for your position.
Bull’s Eye: The Right Offer
With thoughtful attention to these four factors, you can use your negotiation to guide the company to the bull’s eye – the right offer for you. If you see the company using the wrong data, you can bring the conversation back to the truth as you see it and work toward the right outcome.
For more help on these preparations, you are welcome to read the full text of our interview here: The Right Offer – Long Form Q&A Between Stock Option Counsel and BINC Search
Boris Epstein is the founder of BINC Search, a next-generation recruiting startup that helps Silicon Valley companies hire technical talent at the scale they need.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Learn how startups determine the right equity stake offer for new hires.
Negotiating the Right Job Offer – Long Form Q&A Between Stock Option Counsel and BINC Search
Read the full Q&A between Mary Russell and Boris Epstein. It’s full of insights on how to negotiate the right compensation offer from a startup.
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel.
Boris Epstein is the founder of BINC Search, a next-generation recruiting startup that helps Silicon Valley companies hire technical talent at the scale they need.
Thanks for reading our shorter blog post: Bull's Eye - Negotiating the Right Job Offer. This is the full Q&A between Mary Russell and Boris Epstein. It’s long, but it’s full of lots of insights on how to negotiate the right compensation offer from a company.
Boris Epstein is the founder of BINC Search, a next-generation recruiting startup that helps Silicon Valley companies hire technical talent at the scale they need.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Mary Russell, Attorney @ Stock Option Counsel: Welcome, Boris. I’ve always enjoyed our discussions on compensation negotiations because you seem to believe that a candidate and a company can discover a “right offer.” Employees who come to me for Stock Option Counsel want to get to that “right offer” for salary and equity, and I’m happy you’ve joined us to share your perspective on how to get there.
Boris Epstein, Founder @ BINC Search: Thank you. I think there is a right offer in a compensation negotiation, and companies and candidates arrive there by identifying four data points:
1. The candidate’s Past Comp
2. The Peer Comp of the candidate’s level within the company
3. The candidate’s Desired Comp and
4. The Market Comp or competitive scenarios in the market
The epicenter of all the different data points would be what they would arrive at to get a right offer. So if all four numbers align, it’s really easy. If the four numbers are divergent in some way, then someone’s going to have to make tradeoffs and concessions. If the person’s making $100,000 but then they want $200,000, and market’s $150,000, someone’s going to have to make a tradeoff somewhere to arrive at the right package.
Stock Option Counsel: Let’s talk about each of those numbers.
BINC Search: For Past Comp, the company will look at the person’s situation to figure out what the offer would realistically have to be in order for it to be correct or acceptable. For Peer Comp, usually a company will look at internal equity, the peer class that the person would fall within at the company. Desired Comp would be what the person wants. Regardless of all the other indicators – it’s the “this is what I want” number. Market Comp would be the company’s understanding of what’s “market” for this type of individual and this person’s competitive scenarios or other offers.
Stock Option Counsel: Thanks. I think that gives candidates some information to broaden their sell and build their negotiation beyond a single data point. I’ve seen candidates who fear that their weakest points – their Past Comp as current salary or their Market Comp as lack of other offers – will define their final offer. But this conversation is a great reminder that there are many relevant numbers and many ways candidates can sell themselves. Let’s go on into the details of how the company finds the right offer.
Past Comp
Stock Option Counsel: On Past Comp, candidates often want to stick to the rule of, “Don’t reveal your current salary.” How can a candidate communicate Past Comp without starting out at a disadvantage?
BINC Search: I think a candidate should be stating their Past Comp up front when asked. This would be at the beginning of a process, if and when asked by the company. And then if and when asked by the company they should be divulging their either desired range or at least expectations for comp up front as well. And then it doesn’t need to be discussed until both parties know they want to work together. So I don’t agree with that rule of thumb about not divulging comp up front.
Stock Option Counsel: So how does Past Comp go into the company’s calculation? Are they just going to say, “Oh, you’re making that. So we’ll pay you a little bit more than that”?
BINC Search: Sometimes, yes. It’s a data point, that’s an important kind of measurement of you – you who are asking to be priced – was previously priced. That’s exactly what your Past Comp is. It’s a data point that tells a company how you were previously priced. That then becomes an indicator for how to determine your next package.
My recommendation to candidates is to be open and transparent with regards to comp. I’ve had debates with candidates about this and the common reason to not share comp is because that might hurt their ability to derive an offer. Whereas a company would typically look at someone who did not want to divulge comp as a candidate hiding something. So that that then surfaces as a different red flag that then becomes another topic of discussion – “What’s the person hiding? And why doesn’t the person want to share. Everyone else shares. What should I now be concerned about that I wasn’t previously concerned about?”
Stock Option Counsel: Is it really seen that negatively?
BINC Search: I’ve seen companies not extend offers to candidates who didn’t want to disclose comp.
Stock Option Counsel: So assuming the person is going to disclose it and fears it will lower their final offer from the company, what’s the way to make the case for why that data point is no longer the key relevant data point?
BINC Search: I think the means by which it is shared is the exact way to do it. Let’s say you worked at a company for ten years and you got an initial offer for $100,000 and then you didn’t get a raise for ten years. So then the company says your potential future employer says, “Hey, what’s your Past Comp?” And you say, “Well, it was $100,000. But I should let you know that I was offered this salary ten years ago and I haven’t gotten a raise in ten years. My understanding would be that market has shifted a little bit in the last ten years and that part of this process is to kind of figure out to what degree that has actually happened. So I’d just like you to know that wherever you’re taking these notes, that this was an offer that was given to me ten years ago. And now we can use it for whatever purpose you guys want to use it for.”
Stock Option Counsel: Can you think of any other ways to build the case that the Past Comp should not determine the right offer for the new position?
BINC Search: Whatever color you could add to the picture I think would be a helpful addition. That’s what the company’s looking for when they ask for Past Comp. They’re looking for some sort of data point to help them get to a decision. They’re not trying to screw you. They’re not trying to make a case to like drill you down or whatever. They’re trying to figure out the right offer so it’s helping them for a candidate to add color to it. Sometimes people add color like, “My current salary was $100,000, but I was given that a year and a half ago. I’m up for review in six months. I’m anticipating a raise to $110,000 – my manager promised me I swear – so I’m at $100,000 now but I’ll probably be at $110,000 in six months. Take that for whatever you want to take it for. That’s my comp history.”
Stock Option Counsel: That sounds really useful in using spin to avoid being tied to an otherwise disadvantageous Past Comp number. From a Stock Option Counsel perspective, I would see a candidate’s spin of Past Comp should include their valuation of their equity stake in their current company, the value of upcoming vesting they would be sacrificing to take the position and even the value of upcoming increases in equity grants or liquidity opportunities.
Peer Comp
Stock Option Counsel: Do you have any thoughts on Peer Comp, as in what is the best way to position oneself in that regard during the interview process?
BINC Search: For Peer Comp, companies internally are going to say, “Ok, this person who I just interviewed is going to fit in at this level, and the other people within our org that are paid at this level are making about this much. So therefore, this is about the range within which this person should be paid here.”
A candidate should be making sure that they’re being connected to the right peer class. They do this by just asking for some perspective around where they’re being considered, like where they’re fitting within the organization and what the expectations are for that level of a person. If I’m a fresh college grad and I ask that question and the company is comparing me to people with ten years of experience, that’s good because if I do well I’m going to get paid like people with ten years of experience. But if not then I may be put into an inaccurate peer class. That’s an extreme example, but making sure you’re being compared to the right peer class is a data point.
Stock Option Counsel: I know people are very concerned when they come into a company that they’re being considered for a position that’s appropriate for them and where they want to be. What do you advise people when they’re concerned that they’re not being considered in the right peer class? Once that emerges, is it too late, or can they make the case later and say, “Hey, let’s reconsider where I would fit in here.”
BINC Search: You can, to whatever degree it’s reasonable to do that. Information is going to drive that, so whatever information the company has to help the candidate understand why and where they’re fitting in is going to be one side, and the other side is going to be whatever information the candidate has that can help the company understand kind of where and why they should be there. So that’ll just be kind of the natural progression of the conversation.
Stock Option Counsel: Where and why would it be reasonable to go back and do a better job of selling oneself?
BINC Search: Well, the company may say, “Well, we’ve interviewed you, and we think you’d be a great fit on this team and on this level.” And the person will say, “Oh, that’s really nice. One thing that I wanted to bring up is that I heard about this team and this opportunity and I thought that might be a good place for me to fit potentially. That seems interesting.” So that would be the way a natural dialogue might go. Depending on what side and to what openness the company might say, “That’s good that you think that, but this is where we think you should be and why.” And the candidate will say either, “I’m open to both,” or they’ll say, “It’s nice that you think that, but this is where I want to be.” And there will be a discussion around it.
Stock Option Counsel: Do you have any advice for people on how to talk themselves up in an appropriate way and in a true way? This would be necessary to align themselves with the right peer group in the company and get themselves put in the right place for who they are and what they offer. I think that the worst thing would be to take an offer where you’re not valued and then just be stuck there for a while and then leave.
BINC Search: Yah, but then think about the other worst case of being leveled too high. And then having an inappropriate amount of expectation put on you that you’re not ready for. And you got that because you negotiated really well and sold yourself high, but now you’re in this job that you can’t do essentially. Right? So that’s the other side of the coin for like negotiating too high or for or asking for too big of a job.
I’d argue that the right resolution is to fight for clarity and understanding of roles and levels and opportunities and just be pretty true about where you can fit and add the most value. And try to be as eloquent and clear about that as you can be. So I’ve seen both sides, people who are under-leveled and then have to be popped up quicker and then people over-leveled and then it being a negative experience for both sides.
Stock Option Counsel: If someone’s selling themselves into a higher spot and the company settles on a lower spot, is it fair for the company to say, “We’ll reevaluate in six months or a year”?
BINC Search: That’s a reasonable concession that could be made. Like, “Hey, I understand that you want to be at this level. Our evaluation has not helped us believe that you’re there right now. But I appreciate your confidence. Why don’t we start you here, and in six months we can reevaluate you and if what you say is correct, then we should all have no problem helping you get to that level.”
Stock Option Counsel: Excellent. We’ll talk more later about how to approach those raise or promotion conversations.
Desired Comp
Stock Option Counsel: Can you give some examples of professional ways to communicate Desired Comp?
BINC Search: Usually it’s in the form of a conversation. Like the company will say, “Hey, what are you making right now?” And the person will say, “I’m making this.” And then the company will say, “What do you want to be making in your next job?” And the person will say, “This is what I want to be making.” And then if there’s alignment from an expectations perspective, then everyone thanks each other and moves on to the next topic.
That’s the way it should go. I don’t know how it always goes. Some companies never ask, and then sometimes it works out at the end and sometimes they get surprised and then that’s not a good thing. Sometimes candidates offer the information if the company doesn’t ask. And the company will thank them for it and then move on. Sometimes candidates will share this information or it will be discussed and then the company will decide to not move forward based on a misalignment. I guess those are a few scenarios that could take place.
Stock Option Counsel: You’ve mentioned that it’s difficult when a candidate doesn’t know what their Desired Comp is – when they’re at the end of the road and still don’t know what it is that they want. And Desired Comp is a big part of my Stock Option Counsel practice as a thoughtful, high-level understanding of the company’s equity helps candidates identify what equity offer they want to see. What do you suggest to help people identify that Desired Comp number?
BINC Search: There’s two points where Desired Comp is important. Up front in the beginning of a process you want to at least have an idea. It’s difficult for a candidate to know exactly what they want up front. Because their market experience is going to influence what they should want. So be up front before a candidate goes through an interview process if they’re making $100,000, it’s difficult to say I want $115,000. Some say, “This is what I want.” But then that’s immaterial because when they go through an interview process market is going to influence that potentially.
Whereas at the end after they’ve done a reasonable amount of due diligence on the opportunities they are considering, they should be able to start putting price tags on different opportunities should they work out. That’s the natural exercise that candidates should be going through. “Okay, this is starting to get close to home, what would they need to offer for me to accept? What would this package need to look like? What would it realistically take for me to leave my job?” It’s when things start to get realistic that they should start to be narrowing down to a Desired Comp.
Stock Option Counsel: So would you say that Desired Comp question would be “What does it take for you to leave your current job?”
BINC Search: Everyone has a “what’s this worth to me” scenario. They just need to understand kind of what it is. So Desired Comp is like, “What it would take for someone to not do something and in exchange for doing something?” So if someone’s making $100,000 a year now at a crappy job, and then they interview with a really good job, then the theory should say that for an equal amount of money they would rather be doing a better job than a worse job. That’s like a simple stupid way to come up with a Desired Comp.
Stock Option Counsel: Stupid is good. Go on.
BINC Search: If they’re at a job that they absolutely love and they’re making $100,000, and they interview with a job that is slightly less desirable, that slightly less desirable job would probably have to pay them. Let’s say the slightly undesirable job said, “We’ll pay you $200,000 a year.” Then the candidate says “Wow, okay, I’ll be doing something I like less, but I’ll be getting paid more. Therefore, that equation makes sense for me and my lifestyle. It’s now worth it for me to move forward.” So both are extreme situations, so in this instance in the case of coming up with a Desired Comp, it’s “What’s it worth to me to do this job?” And that’s as kind of pure and simple as a candidate should think about it given whatever circumstances exist in the world.
Stock Option Counsel: Do you have any examples of people who make that decision and are happy with it in that analysis? Or people you’ve seen overvaluing the salary or comp and not thinking enough about the position? Or people who were eventually unhappy because they were thinking too much about the position and not enough about the comp?
BINC Search: I generally recommend that people separate the money from the job when they’re going through their consideration process. Offers and comp packages confuse interest in job. So I always recommend that a candidate evaluate the job first, figure out the job they actually want, stack rank their options, and then start including comp into the equation. If they get the best job at the best comp, it becomes a no brainer. If they get the best job at a reduced comp, they have to make a tradeoff. But at least it’s clear. It’s like a separate kind of line item that they could evaluate.
You also asked about times when candidates have made mistakes. This is where market and transparency and chatter becomes a thing because the candidate feels they did a great job in-- let’s say-- negotiating an offer and then they hear that someone who seems to be a peer or close to their regard is getting something more than they are getting. There is that kind of look over the fence sort of a thing that goes down. They ask, “Hey, how did you get that? Why didn’t I get that?” I try to recommend that candidates don’t go down that route once it’s past decision point. If it’s past decision point, it’s difficult for a candidate to do much about it. It really just causes angst. But it’s a hyper-transparent market. So you do the best you can given the information you have and you should be at peace with your decisions until the next time.
Stock Option Counsel: I agree on separating the desire for the compensation from the desire for the job so that the compensation issue gets the full attention it requires. That’s especially important with equity compensation. There’s quite a lot of risk in accepting private company equity, and my Stock Option Counsel clients who take the time to thoughtfully evaluate their equity comp offer can find out: “Is this number of options or shares enough to inspire me to feel really, really good about taking those risks? If not, what would they have to offer to get me to that good feeling?” It’s a lot easier to negotiate from a position of confidence about what you desire and why.
Market Comp
Stock Option Counsel: How do you suggest candidates avoid being in the position where they’re looking over the fence and seeing that their neighbors are earning more than they are?
BINC Search: Well, you can’t avoid it. At the pace that this market is moving, there are always going to be better options, there are always going to be new options that surface that didn’t exist two days ago when you had to make a decision. It’s just generally going to happen. That’s why time of employment has started to go down. It used to be five years, then it was three years, now we see companies being open to hiring someone on a full time basis knowing that in a year or a year and a half they’ll reevaluate their options. That’s just what’s happening with the market. So companies make decisions based on the information they have, and so do candidates. There’s nothing you can do to not go through that experience.
Stock Option Counsel: Do you have a feeling on how quickly that shift in time of employment has happened?
BINC Search: Seven to ten years ago, five years used to be good tenure at a company. Then five to seven years ago, three to five years was a reasonable length of time. Now I think two to three years would be considered – not reasonably long term – but the reasonable expectation by which a candidate makes their employment decisions. While companies would love for their employees to retire with them and be with them in ten years, I think a lot of companies have a hard time knowing where they will be in five years or ten years or whatever time frame it is they want their employees to be with them. So I think everyone is in constant reevaluation. Everyone – companies and candidates – are in a perpetual evaluation of their situation mode, which generally makes for a great dynamic market in my opinion. It puts everybody in a place of accountability. Employers for their ability to employ and retain, and employees for their ability to perform and deliver, which is I think correct.
Stock Option Counsel: Interesting. Time of employment is also very relevant to equity compensation. If candidates are accepting four-year vesting terms in their stock options or are receiving stock options with high exercise prices, they need to be aware that they may not be vesting the full grant before departure and that if they leave the company they may have to come up with the cash to cover the exercise price and tax bill.
Going back to the question of Market Comp, do you have any thoughts on the best way to approach a current employer to reevaluate comp or talk about a raise?
BINC Search: Reevaluation of package? I think that the truth is that anytime there’s new data to be presented is a reasonable time and opportunity to have a conversation around comp. So the way this tends to infuse itself in the world most commonly is a candidate gets employed by company with the belief that he’s going to be there for three years. And then six months into it someone happens to call him and offer him a job for double the price. And then the person all of a sudden is victim to this huge offer and now wants to “do right” by this situation they’re in. So this person goes to their boss and says, “Hey, I didn’t mean to do this, but I have an offer for twice my salary now because this happened. So I just wanted to tell you.” So then the current employer says, “Oh, let us see if there’s something we can do to help.” And then there goes the counteroffer situation. That’s natural and what happens pretty regularly in today’s market. So anytime a new data point surfaces that would be worth reopening a comp conversation would be when it should happen.
Stock Option Counsel: The classic relationship wisdom is that you’re bound to be stuck in a bad relationship if you don’t have the courage to say along the way, “Hey, you know this or that isn’t working for me.” Do you think that those people who fail to keep bringing the data points forward to their employer end up angry and frustrated with their low comp?
BINC Search: Yah, there are people who don’t feel comfortable sharing this information and then kind of perpetuate the misery that they’re in or perpetuate the unhappiness that they are in. Yah, there are definitely people who are in that boat.
Stock Option Counsel: Do you want to talk more about that?
BINC Search: No, I honestly don’t really. People should do whatever they feel is right to do. For some people it’s worth it for them to keep their mediocre job with mediocre comp because that’s what’s fitting for their lifestyle. And then other people feel the need to go maximize their opportunity. I think it all evens out in the end. I don’t think people must go and chase top comp. I don’t think people must always be benchmarked to top of market.
Stock Option Counsel: How do employees make the case for what is Market Comp for their contribution? Generally, how do you describe Market Comp to your candidates?
BINC Search: This is a tough one. Market is when you usually derive competitive situations. That would be like a “market rate.”
If you go interview with five companies and all five companies extend you an offer for $150,000, it could be argued that your market value is priced somewhere around $150,000. If you’re making $100,000 now and all five companies offer you $250,000, regardless of what you’re Past Comp is, your market value is about $250,000. So whatever you’re able to kind of able to get from the market is about what market rate is for you.
Stock Option Counsel: Do you want to flush out what a market is?
BINC Search: Literally a market is like, picture an old world market where you walk from stall to stall and every stall is selling something. So if you have a product, and the product is a Snickers bar. And you walk around to 20 different stalls and say, “How much would you pay for this, how much would you pay for this?” And everybody says, “I’ll pay you a dollar.” Then that Snickers bar is worth a dollar. That’s “market” for that Snickers bar.
If you walk around to 20 different companies and ask every company, “How much would you pay me to work here?” And every company says $150,000, your market is $150,000. You may not like it, but that’s what market is for that person.
Stock Option Counsel: Of course that wouldn’t be realistic, as $150,000 is not going to come from every company. So how does it work in the real world now where there’s a lot of variation.
BINC Search: I don’t think there’s as much variation as people perceive there to be. I think the variation comes from the mis-bucketing of market points. So seed funded startups tend to pay pretty consistently. A-round funded startups tend to pay pretty consistently. And down the line to B-round funded startups, etc. So depending on the size and maturity of a company, there tends to be a reasonable amount of consistency with those types of companies. So if you interview with ten big companies you’re going to find there to be some reasonable level of consistency with that bucket of companies. There could be companies that are out of market for what a big company pays this type of individual. But there is a market for a type of person within a type of company.
Stock Option Counsel: I’ve heard employers argue that there is no such thing as market or that this is too subjective of a number to discuss. Can you talk about how the employees can identify what those points are? How do they know they have it right?
BINC Search: How do they know what market is? The only way to know is to actually go to the market and try to derive that information. They either have to collect that by going out and getting offers themselves or they have to collect data from their friends who got offers. But they should take that with a grain of salt because they are not their friends. That is a way to do it. Some people will go look at comp calculators online. I advise against using that as fact, but it is a data point. I don’t use any of them or endorse any of them. It’s not something that I would use to help determine any of this. But a candidate can to get some kind of idea of what some type of job is paying.
If a candidate interviews in the dark, then they don’t know what the market is. They wouldn’t know what it is. They may ask the recruiter what market is. They may ask another professional, like yourself, what market is. Getting some sort of sense of market is the only way they can get that data.
Stock Option Counsel: That’s great. What are you thoughts on equity comp and market? When you have a candidate who is interviewing and comparing equity comp, what kind of thoughts do you share with them on what’s appropriate for which stage of company? What do you say when someone asks you, “Is this right, is this fair, is this market for equity comp at this stage of company?”
BINC Search: In the position that we’re in, we have the luxury of being pretty connected to market. So we can give a candidate a pretty good idea of how on target – low on target or high something is in comparison to their position in the type of company. Same would go true for equity. We can recognize that and then advise accordingly.
How would a candidate figure that out? They would have go to through the same exercise. They have to use their Past Comp, if they have historically received certain sized grants or option packages from different companies, then that should be an indicator. They should be educated by the company around how the company benchmarks their level internally for that piece of the comp package for the Peer Comp. And then they should do their market homework.
Stock Option Counsel: I think Market Comp and comparing offers is where Stock Option Counsel and thoughtful attention to equity are essential. One percent of a Series A company and ten percent of a Series A company could be of equal value – “Market Comp.” I advise clients to take the time to evaluate and compare the equity offers and really own this process, because the companies are not able to make these evaluations for them any more than they can choose the right job for a candidate.
Do you have any final thoughts that you’d like to share?
BINC Search: I don’t know if I offered enough magic bullets. I don’t know if the goal of this is to have a magic bullet or to just perpetuate the conversation.
Stock Option Counsel: I think the goal is just to talk about things that are true. There’s much fear in compensation negotiations and people seem to feel they’re working against a secret formula or system that’s being used against them. It’s good to hear some truths about that system from someone who deals with this every day and say, “This is how to approach it and stand on the ground to be true and honest and effective.”
For the concise version of this conversation, see Bull’s Eye: Negotiating the Right Job Offer.
Boris Epstein is the founder of BINC Search, a next-generation recruiting startup that helps Silicon Valley companies hire technical talent at the scale they need.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Stock Option Counsel Tip #1
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Use @angellist to research "market" equity for your company size. https://angel.co/jobs #equity #negotiation #startup
From The Daily Muse
Attorney Mary Russell, Founder of Stock Option Counsel based in San Francisco, advises that anyone receiving equity compensation should evaluate the company and offer based on his or her own independent analysis. This means thoughtfully looking at the company’scapitalization and valuation.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Thanks Ji Eun (Jamie) Lee for the mention in The Daily Muse!
“Is This the Right Company?
Investors buy equity in a company with money, but you’ll be earning it through your investment of time and effort. So it’s important to think rationally, as an investor would, about the growth prospects of your start-up.
Attorney Mary Russell, Founder of Stock Option Counsel based in San Francisco, advises that anyone receiving equity compensation should evaluate the company and offer based on his or her own independent analysis. This means thoughtfully looking at the company’s capitalization and valuation. ”
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.