How much equity should you have?
Negotiating your equity grant at a startup can be SUPER intimidating. It’s maybe the single most important negotiation you'll have in your career.
Yet most startup employees forget that the most concentrated asset in their personal financial portfolio, other than maybe their home, is their Incentive Stock Option grant. And it’s probably sitting in a desk drawer, collecting dust.
So I wrote this guide to help friends in my network with their own negotiations. Why should you care? By my estimate, in the last 18 months this advice has generated between $4M and $6M in total upside for them.
Here are some tips to help you get paid:
TL;DR:
Identify your levers: Decide which lever(s) you’ll try to max out - Base pay, Variable pay, Title, Benefits, Equity.
Understand the ESOP: Figure out how crowded the cap table is.
Differentiate yourself: Pick specific skillsets you can address relative to the company’s lifecycle.
Get the numbers: Ask for the number of options, strike price, fully diluted percentage of equity, cash value of equity grant, post termination exercise period, and vesting schedule.
Understand the vesting structure: Know how many years you are signing up for, and where the cliff is.
Research the tax consequences: Anticipate when you’ll get hit with a tax bill, based on the security type.
Understanding dilution: Benchmark how much dilution is normal.
How dilution impacts me as an employee: Forecast how your outcome and ownership may change over time.
Do your homework: Decide on your own if the company is relatively over or undervalued.
Be realistic: Play hard, but play fair with your ask.
Identify your levers
There are generally five levers you can pull in any job negotiation:
Base (cash): Salary portion
Variable (cash): Commission or Bonus based on performance
Title (status): Your hierarchy within the org
Benefits (contra expense): People always say this is a “lever” but I think it’s the least substantive on the list, unless of course you or a family member has a pre existing health condition
Equity (ownership): The option to purchase a percentage of the company in the future, at a specific price, which is linked to the company’s underlying value
It’s nearly impossible to max out all five. Ideally you’ll be able to max out one and get a good shake at one of the other levers. For example, I know a lot of people who join a startup and make it a point to maximize their equity and title, and take a hit on their base salary and benefits. I’ve personally chosen this route twice. But it really depends on what your personal situation is and what level of risk taking you’re able to subject your family (or dog / cat) to.
Below we’ll dig more into the fifth lever, Equity, under the assumption that you are trying to max out this lever in lieu of the others. Let’s go.