Joining a Startup? Here's the Secret Keys to Startup Stock Options, Restricted Stock and RSUs.
Joining a Startup? Here's the Secret Keys to Startup Stock Options, Restricted Stock and RSUs.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Q: I'm joining a new company (for “startup” restricted stock, stock options or RSUs) created by an investment firm. Is that a startup?
A: No. A startup traditionally is founded by individual founders who earn sweat equity. Startup founders do not make investments in exchange for their founders shares. A company that's founded by investors is more like private equity, not a VC-type startup.
Q: A founder asked me to join is startup full time for 1% equity before they have investments or can pay me cash. Does this make sense?
A: No. If you're joining without a salary, you're really joining as a later stage founder. The right equity is based on internal equity with other founders (based on risk, contribution, etc.) not on market data for employee hires. All market data for startup compensation for employees assumes a meaningful salary from day 1. You're being asked to create something from - close to - nothing, so you want to think of your contribution relative to the other founders.
Q: I want preferred stock and anti-dilution protection in my startup equity offer.
A: Too bad. Founders, employees and executives at startups do not have anti-dilution protection. Dilution is part of startups and essential to how they work. It's not negotiable. The way to get around this is to negotiate for more shares so you'll have enough when you - certainly - get diluted. A startup that promises anti-dilution protection is not on its way to VC funding. That's a flag that they are full of it or that they're not a classic startup so all bets are off. Preferred stock (other than founder preferred stock, which is economically almost equivalent to common stock) is for investors of startups. Founders, employees and executives get some form of common stock. That might look like restricted stock, stock options (one of many variations thereof) or RSUs. You're not going to get preferred stock and you probably don't want it anyway.
Q: I want to join a startup and want to ask them for ways to limit my risk. Can you help?
A: Startup stock with the potential for high rewards is by definition, risky. If it's not high risk, it's not high reward. You can limit your contract risks (change of control protections, rights to vested shares, tax structuring, etc.) but the stock itself can't be de-risked.
Q: I think I'm happy with the number of shares in my startup offer. But I want them to give me a new grant every year.
A: If you need more shares later, you're not happy with your startup offer. Get more shares now, not later. Since startups are hoping to have huge jumps in value over time, they're not going to be making new grants over time. You should expect that 90% of the equity you earn in a startup is in your original grant. That's where the negotiation action is.
Q: There's services that can help me exercise my startup stock options, right? I don't have to worry about covering the strike price and tax cost, or negotiating for an alternative (like early exercise or an extended post-termination option exercise period) because they will help me. Right?
A: No. The secondary market for startup equity early liquidity is too uncertain to rely on as an option exercise strategy. Get another plan. Also nobody who is buying in the secondary market for startup stock is trying to “help” you.
Q: I need to figure out what the shares will be worth in order to negotiate my startup equity offer. How do I do that?
A: Nobody knows what startup stock will be worth in the future. People negotiate their offers based on % ownership relative to market for similar startups from market data, dollar value based on recent investor valuation/share compared to their opportunity cost or market data and internal equity based on their sense of fairness.
Q: Why isn't my startup being transparent? The offer letter only has the number of shares. Isn't that shady?
A: No. Startups are secretive by design and should be. If they were transparent about everything they wouldn't be very smart. If you need more info about the equity offer, ask. And keep asking until you get the info you need.
Q: The startup recruiter keeps telling me wild tales about how successful the startup will be. Should I believe them?
A: No.
Q: Is this startup stock option agreement or restricted stock unit agreement boilerplate?
A: Probably not. There's no such thing. Startup equity docs for startup restricted stock, stock options and RSUs often contain key variations. The highest-dollar terms are:
2. Rights to unvested shares in change of control and
Good luck!
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Joining a Startup? Here's the Secret Keys of Startup Stock Options, Restricted Stock and RSUs.
