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Ask HN: How do I evaluate my equity offer?
55 points by xivzgrev on Nov 8, 2015 | hide | past | favorite | 57 comments
I just got an offer from a late-stage startup, that is offering me a small number of shares at a strong price (the latest valuation is already 2x the strike price I would get).

But, if I give up some portion of my salary, I can get more equity.

How do you think about this trade-off? What inputs do I need to ask the company for?


It's an easy equation.

Take your salary. If you can reasonably anticipate any bonuses, lump those in, too.

Now, add zero. That's what you should expect from equity.

My tally from a little over 20 years in Silly Valley:

- Startups: $7K ($11K invested in dud options, $18K in options that were positive a year after the company went public)

- Larger companies (Apple, Microsoft): Sign-on and incentive options that paid off well into six figures [yup, I'm being coy -- I'm making a point, not a financial disclosure].

On average you will do better at a large, established company as you gain seniority and people love your work. There are obvious down-sides to this, like having to deal with bosses you hate or sucky office politics, and maybe the company goes on the skids. But start-ups are a gamble. Maybe the risk is worth it, but for late stage, I doubt it.

Another way to ring the bell: If you are spectacularly good and play your political cards right you can do something like making Partner at Microsoft, which is worth many millions. Two of my friends went that route.

[An informal poll of my cloud of ex-cow-orkers who took pretty much the same mix-up of startups and bigCorps that I did is that they did pretty much as me, or better. A very few did much better and I see photos of their Hawaiian homes on Facebook a lot.]

Startups are fun, but they're still gambling, and you have to watch out for a crooked house (like all of your options being 'extinguished' by some fancy financial footwork. Had that happen, too, and the company's worth over a billion dollars now).

Generally, evaluate it at 0. Except ...

When the company is operationally cash flow positive, and growing.

The reasoning for that is fairly simply. Any company which is not operationally cash flow positive and growing will either die (value 0) or another funding round (what every you originally valued it at now less than that). Basically until a company is a company the equity has no value, instead you have value because in an acqui-hire situation there is more value if it brings in more engineers.

Best way to evaluate a startup offer are "Does it move me along my path of growth?"

So do you want to try being a "growth hacker" instead of an engineer? Or want more "full stack" exposure, or experience in a company running everything in house, or everything in the cloud? Basically does this experience help your move along your path.

That's the simplest explanation of dilution I've ever seen.

Just remember that companies like Box and (in the future) Square have IPO values below their final private round valuations. There is a reason your the the value of the common stock (your strike price) is half the price of the preferred stock's value, because there is a very high chance the common stock will never be worth the same value as the preferred stock (which likely has protections about IPOs or acquisitions below the valuation).

So with that out of the way, you are just an investor. Do you feel the valuation of the company is low/medium/high? If you think the value is low, then you'd want more stock. If you think it is high, take more money. The company probably wont give you enough information to actually figure this out, so you have to use your intuition.

The safe thing to do is just take more salary.

Forget about statistics. This is how I evaluate a job:

A Find out how much I need to take home per month to pay my bills and live to the standard I want as well as save for retirement.

B Determine if I would like this job. See if it's the kind of work I want to do and if it will take me where I want.

C if the offer in salary is A, great, equity is nice to have above it but it doesn't matter. If you have kids and mortgage like me you go for the maximum now money because you can't spend future money. If you're young and single take a chance, there's a tiny chance you'll get some money out of it (but not much of a chance)

A is most important. Don't go into debt or deprivation for someone else's dream.

I disagree with the common advice here that all stock options are worthless.

You say the company is late-stage. Assuming it's currently valued in the $100M range or more, I would estimate your upside to about 4X, maximum. Worst case of course is 0. So take the price of your options today, multiply by 4: that's the best case scenario of the one-time bonus you'll be receiving about 3 to 6 years from now.

Does the amount sound interesting to you? How does it compare to a slightly higher salary (that you get every year for many years to come)?

If the valuation of the company is much lower (<$50M), then the potential upside is larger (say 10X), but much less likely (higher risk of being worth nothing). That's when it gets really tricky to decide.

In the end, it's all a function of where you are in life: can you afford the risk, what is your current cash flow, savings, etc.

Options are the PROMISE.

And they should be treated accordingly. It's obvious that sales pitch will be about "... us becoming google|facebook|apple" tomorrow.

Just not today. Soon. But not today.

That's why it's 95% more wise to take cash today with a smile. Pat them on the back. Don't let them pat you on the back for taking less cash today.

Isn't the option a call that starts at the money? Then 4x the valuation implies much more return than 4x the current option value, namely 3x the strike price. Or am I wrong with this assumption / calculation.

> at a strong price (the latest valuation is already 2x the strike price I would get)

By "latest valuation" do you mean their valuation based on the most recent round? Remember that valuation is for preferred shares, and you will receive common shares. Preferred shares are usually valued significantly higher than the common share (IE 409A) valuation. (Investors are paying for the potential growth, employees pay the 409A price which is what is company worth right now)

Edit: also get a warm referral to a good attorney, they may review your paperwork and give you advice for free. In my case this free consultation led directly to an easy $10K cash swing in my favor, on top of a professionally reasoned plan for managing my equity. The attorney is an invaluable aid in negotiotation because they can play the bad cop hardass and also call the company's bluff (assuming the company isn't hoping to pull one over on you, in which case bringing in an attorney might conceivably make the company behave defensively and thereby risk your offer).

Despite all the jokes here about your equity being worth very little, most of them are probably right.

Of course it depends on the specific company, but if we are talking about a late stage startup in SV then they are most likely overcapitalized, and might end up IPOing at a price lower than their current valuation. This would make your common stock worth proportionally much less.

The valuation = 2x strike price thing is standard. Common stock valuation is always worth much less than preferred stock, because of the liquidation preferences (usually it's closer to 1/3 of the value). Often recruiters will use this to make it sound like you are getting an awesome deal.

To answer your question (should you give up more salary in return for more options/stock), the main question you have to ask yourself is "Do I think this company will IPO or be bought for _higher_ than the current headline valuation". If the company raises more money before their exit, then do you think they will go on to exit for an even higher valuation than their next round? If the company ends up exiting for a valuation that is lower than their current valuation, then you would have been much better off taking cash in the first place. Even if they exit at a higher valuation than they are today, but in the meantime they had raised some more money (and the final exit is lower than their last valuation), then it will affect the value of your common stock for the worse. If you are being offered ISOs rather than RSUs, you also have to understand the fact that you may end up in a position where you can't leave the company without purchasing your overvalued common stock (see: golden handcuffs).

If you don't understand the differences between common stock, preferred stock, liquidation preferences etc, I would highly recommend the book Venture Deals by Brad Feld[1]. It's written for startup founders, but equally useful for understanding employee stock options.

[1] http://www.amazon.com/gp/product/B00AO2PWOI/

"But, if I give up some portion of my salary, I can get more equity."

As many others have pointed out, the equity you get from a private company is difficult to accurately value and not under your control (e.g., vesting periods, etc.). You can take your full salary as cash, and if you want to invest in stock, take the amount you would have paid your company for the extra equity and invest it monthly in a mutual fund. Public companies have much more transparency in financial reporting, and you can diversify across many companies instead of putting all your eggs in one basket. Also, if your company fails (as most startups do), you'll still be left with something of value.

The "already" reaction to a preferred stock price that's 2x the common stock price is misplaced. Preferred stock is always higher priced than common and that is not an unusual ratio for a late stage company.

This. Generally strike price for common stock at startups is around 1/3 of the price of preferred stock (the "latest valuation"). Telling you this is anything other than standard practice is just lying to you to get you excited about the "great deal".

Why not take the differential in salary and invest it in growth company ETFs? You get a more diversified bet in that case. You are already incredibly long your companies prospect on account of you working there, if you want to take a high risk high reward bet I would advise taking it in something besides your employer.

I'm really surprised at how dismissive people are about the value of equity on Hacker News. Would you never start your own company, because then your compensation would certainly be tied to the value of the equity? If you really think that the shares are, on expectation, worthless, then don't work there, because your efforts will be for naught when the company folds.

Equity, as a VC or a founder, is very important. You also have a good amount of control over where the company goes, your stake only gets diluted on your terms, and the company's behavior can be tweaked to make sure you get a good exit.

As an employee, getting a small amount of common stock, none of those things apply: In practice, if things aren't going wonderfully, it's pretty easy for you to end up with worthless options, even when the founders and VCs end up alright. Even when the company is doing fine, founders rethinking how much equity they really want employees to have is not unheard of. Any calculation you make doesn't matter, as you are at the mercy of other people.

You'd see valuing employee equity very differently we all had not heard of, or been a part of, those horror stories.

Again, if you really think that there is a significant chance that you will get screwed over by the founders, then don't join the startup. Joining a startup is, in no small part, a bet on the founders, and it requires that you take some risk yourself.

Yes, a lot of early employees have ended up with worthless stock. That's the risk they took. There are also a lot who have become very rich.

Most employees end up with common shares, unlike the preferred shares that founders and VC's end up with. This can lead to situations where the VC's and founders make tons of money and employees get nothing.


I've never seen a founder end up with preferred shares. Lots of shares, sure, but not preferred.

It could be that founders (many in the community here) have a similar mindset to VCs: I need 10%+ to make it worth giving it a go. Standard equity grants for employees are tiny in comparison.

Founder equity isn't comparable to equity held by employees for the simple fact that employees have no control over the rules governing the equity.

Cash in the bank, on the other hand, is quite straightforward.

First, there's a huge difference between the value of 10-100% of a company's equity and the value of 0.1% of a company's equity. You can make up the expected value of 0.1% of a company via a very meager increase in salary.

Second, if I'm starting my own company and taking venture funding, I'm going to be paying myself and my cofounders a healthy salary out of that funding, enough that we're not constantly wondering why we're not taking a well-paying industry job. If I'm not taking venture funding, I'm doing this because I enjoy it more than I enjoy salary, because I have enough personal funds to cover the venture being unprofitable. Any profit is a bonus, but not the primary motivator. If I'm working for someone else, profit is my primary motivator.

You don't have to take funding if you're starting a company...

When they are going IPO?

A1: "Not sure". Action: Take salary.

A2: "Soon. Depends on Market condition". Action: Take salary.

A3: "On 15 of February, 2016". Action: Take equity.

A4: "On 15 of November, 2016". Action: Take salary.

In other words if company itself is uncertain or vague about the future, take salary.

If company is certain about near future big steps - take a little risk.

Answer: retain experienced counsel to assist you.

> I just got an offer from a late-stage startup, that is offering me a small number of shares at a strong price (the latest valuation is already 2x the strike price I would get).

If you are being offered options with an exercise price less than their fair market value (as established by the company's latest 409A valuation), you could face adverse tax consequences. It is unusual for a company to offer discounted stock options, so this suggests that you either don't understand what you have been offered (most likely scenario) or that the company is intentionally or unintentionally exposing you to a huge tax headache (least likely scenario). In either case, you'd be wise to seek professional advice.

latest valuation is surely a preferred valuation, not the 409a.

Which is the point: the OP is clearly confused about how this works, which is why he should retain experienced counsel.

How long do you expect the lockup to be? Depending on the company, there's a pretty good chance that you won't be able to cash in the options until after at least 1 quarter worth of earnings, and those have not been friendly, in the last few years. And of course you probably have the 1 year cliff to deal with, so maybe that's longer than the IPO plus earnings, and by then, are you confident that the company will continue with growth targets?

Remember, IPO has a lot of growth built in, so the IPO price expects that the company continues to grow super quickly, and with no more capital. If the company doesn't do that, the stock options are worth nothing. And remember that you have to buy the options before you can sell them, so unless you do that as part of the sale, you risk being out the money plus the taxes. It's risky.

My opinion, take the cash. Cash is king, and you're "guaranteed" that money regardless of stock performance. Invest it hoe you want, the other stock being lottery tickets. If the company IPOs you'll get stock as bonuses most likely anyways.

This is all my opinion of course. I am negative on most companies' ability to stand up under Wall Street scrutiny.

Be careful. Some equities have tight rules of what you can do with them, essentially rendering them worthless. What's the difference between one stock option you can't sell, can't withdraw profit or that doesn't exist in a clear piece of paper from the one that doesn't exist?

You don't need to pay taxes on the thing that doesn't exist.

First start using some comparison data using tools like https://angel.co/salaries which gives roughly the salary and equity breakdown to see wherein the histogram of possibilities this offer lies and how much more headroom you have

Regarding the tradeoff of salary vs equity its driven by pure personal risk appetite wherein if you think the company is something to bet on I would do it but if you need the cash, dont.People can give you pointers but just do what your gut tells you to do (imagine the stock is half of what today is, can you digest that?)

Most important inputs are the number of outstanding shares, liquidation preferences of investors, check for any accelerated vesting schedules and mostly the quality if people

I was poking around that tool yesterday and realized it was ~meaningless. (This comes from the hiring side, where I wanted to ensure the offers we're giving are in the top quartile.)

Basically: X$ at Y% equity doesn't factor in company status and trajectory. Being able to slice on valuation, revenue, funding round, and other basic indicators would be a big deal. Y% of a pre-seed vs seed vs big seed vs a vs b company matters, and even subtler details like at what point the strike price was set.

It'd be a great service to the community -- both founders and employees -- if AngelList added a way to slice on some of this stuff!

I was taught that if you're not early enough to get Class F stock then generally you're not going to realize any significant cash at an exit event. In the long run you'll see more money by foregoing the equity in favor of salary.

Thanks all for your help.

I ended up taking the highest salary that give a little equity. I ran my expenses and it gets tight, but I know if this stock takes off, I'd kick myself if I didn't have at least a little something in it. I think of it as diversification.

Then once I'm in the company, I can see how things go and I could invest more heavily with future raises, or pull back and take full amount in cash.

The nice thing with the company is that they actually bring you back up salary-wise over 3 years. You still lose that money, but it's not as bad as without that provision.

And thank you for pointing out my error with preferred vs common stock - I learned that now thanks to your feedback!

Just one metric you're not outlining here. Is the current offer at market rates or is the entire offer assuming some portion of equity in-lieu of cash?

If you're already being offered a job at market rates then the rest is really just how much of a gamble you want to take and If you're at market, and you've got equity then I'd take that.

Generally a startup is not going to open up their books enough for you to make a smart enough decision on whether any additional gamble is worth it.

I have a related question for the audience:

When evaluating a private company what financial data should you ask to see?

I plan to exercise my right as a shareholder (I have previously vested some shares into common stock) to inspect the books and I am interested in knowing the right questions to ask.

Edit: The immediate reason that I'm evaluating the company is to decide whether or not to put in the tax withholding for soon to vest RSUs or to surrender a portion of the shares in lieu.

Background: I'm a seed-stage VC and was an early startup employee twice.

I feel like there are some misconceptions in some of the other comments on this page.

- The expected value of stock is not zero. The median value might be zero, but certainly not the expected value. Check out this study of angel investment returns: [1]. Estimating from the chart on slide 5: 35% of investments went to $0, 17% were worth less than the last investment valuation, 33% were were 1x-5x, 7% were worth 5x-10x, 8% were worth 10x+.

- The study mentioned above covers angel investments, which are generally higher variance than late stage investments. For later stage companies with real revenues, your chances of going to zero are lower, but your chances of going to 6x or 30x are also lower.

- It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value, your options will be worth approximately $2m. It doesn't matter if $200k represents 0.2% or 20% because 10 times $200k is still $2m.

- If the company does so-so and exits below its current value, there's a chance that your options will be worth less than you expected. This is because investors usually have a right to get paid off first during an exit. Let's say the company is currently worth $200m and investors put in $70m so far and own 50% of the company. If the company exits for $100m, you would think non-investors would split 50% of the $100m, but actually they only split the remainder after the $70m investment is paid off (which is 30% instead of 50%).

- Don't bank on follow-on option grants in the future. You might get these, but you might not.

- If you're getting options, there's a good chance you have to pay the strike price to keep the options if you leave the company. Or you have to stay at the company until it IPOs or gets acquired.

As a rough guide, the main thing you need to know is the % of the company you would own and the last valuation. The expected value might be something like 2x or 3x over time, but with a huge variance.

The salary + equity offer is basically a measure of how risk averse you are. Would you rather have $600k in salary over 4 years, or $450k in salary and a lottery ticket that is worth $0 50% of the time, worth $100k 25% of the time, worth $400k 15% of the time, and worth $2m 10% of the time? The latter offer has a higher expected value, but also comes with a higher chance of walking away with $450k instead of $600k.

[1] - http://www.angelcapitalassociation.org/data/Documents/Resour...

> The expected value of stock is not zero. The median value might be zero, but certainly not the expected value.

Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game.

> It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value

How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x?

> Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game.

Not sure I agree with that. Simple thought experiment: would you prefer "$100" or "51% chance at $0, 49% chance at $1000"? I strongly suspect you'd prefer the latter, even though the median for that scenario is $0. My argument isn't that every startup might be the next Uber and that as a result you should take whatever stock you can get; it's that on average, startups increase in value (otherwise both startups and venture capital would quickly die), so stock has a positive EV. Not in the "99.9% chance it's $0, .1% chance it's Uber" sense, but in the 50% chance 0, 40% chance 2x, 10% chance 10x sense (which is pretty reasonable, especially if you work for 5 or 10 startups during your career).

> How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x?

VCs are generally looking for 3x-4x returns on average, and they'll never invest in a startup if the expected value isn't at least 3x-4x based on some estimated probability distribution. So the expected exit multiple is usually at least 3x or so.

The later stage you go, the more predictable and narrow the exit distribution becomes. For example, pre-product, a VC might be investing on the 2% chance that something will go up 200x. Post-launch but pre-revenue, a VC might be looking for a 5% chance of a 60x. Series A or B, it might be more like 40% chance that the VC at least gets their money back and 30% chance they'll make 10x. Growth stage, it might be more like 60% chance the VC doesn't lose any money, 30% chance it's a 5x. In all of these cases, expected value might be 2x-4x, but variance drops off drastically as a company matures. (Seed VCs are usually aiming for more like 4x-5x for their funds, while a late stage VC is aiming for 3x, so the lower variance is compensated by lower expected returns.)

> Simple thought experiment: would you prefer "$100" or "51% chance at $0, 49% chance at $1000"? I strongly suspect you'd prefer the latter, even though the median for that scenario is $0.

$100 or $490 or $1000 isn't really enough to make a meaningful difference in my life decisions, so I'll take the higher-expected-value option, simply because the money is strictly bonus. If I want to plan with the money, though, I want the lower-risk option.

In particular, compare a $90K + equity salary with a $120K + no equity one, where there's a small chance that the equity is worth well over $100K in three years. With the higher salary, if I want to spend it now, I can get an apartment closer to work, I can visit my family more or take more vacation, etc. Alternatively, if I save it, I can take a year off of work and fund my own work, I can put a down payment on a house, etc.

It's certainly true that if I win the equity game, I can take well over a year off of work, I can put a larger down payment on a better house, etc. But if I don't, I have to keep working and living in an apartment. And since I have no guarantee of it, I certainly can't spend that expected value now. From the purpose of planning, if I actively want to do one of these things in three years, I'd rather have a guarantee of being able to do it somehow, than a chance of being able to do it very well and a chance of nothing.

Once I have a guarantee of being able to buy a house in three years, I can do things like plan to start a family then. If I have such a goal in mind, it's clearly better to choose the lower-risk thing, if it provides enough money to enable this sort of long-term planning.

$100 vs. $490 will hardly make any difference to how many people I can invite to the wedding.

I hadn't looked at this from that perspective. That's a great point! =)

The only thing I'd add is that 5-10 years ago, a startup salary was a big cut from a BigCo salary. Like maybe 30-50% lower. These days, the difference between a startup salary and a Google salary might be something like $125k vs $150k -- and $125k is already enough money for taking vacations or having a down payment after 5-10 years of saving. Perhaps if there's a downturn, startup salaries will become low again, but that's not the case right now.

That's not quite the whole story though. Sure, base salary might be $125k vs $150k, but in reality it'd be:

- Startup: $125k base salary, small potential for an OK payout but a large potential that you'll take away that salary and nothing more after 4 years.

- BigCo: $150k salary, $200k RSU over 4 years, 15% bonus every year

Not counting the inevitable refreshers, bonus multipliers, raises, etc, you're really looking at $500k / 4 yr at a startup vs $890k from bigco. That's not an insignificant difference, and I feel like I'm being pretty conservative with the BigCo numbers.

You are discounting equity, bonus and future raises at bigco that you won't get at a startup. At bigco you can get rsus that are worth $25k all of the time, and 200k some times.

That's a good point. I agree, but IMO you can't bank on those. For example, I worked at Google for 3.5 years, got 1 small raise and 2 small refresher grants. At another startup, I never got a raise but got 1 huge refresher grant. Also, OP is talking about a late stage startup, which probably spends more like a BigCo than a seed stage startup.

First, divide the total number of shares outstanding by the small number of shares you expect to receive through restricted stock and options over the next couple of years. Then, multiply this number by zero to calculate the value of your stake in the company. Finally, figure out the total amount of salary you're giving up for this equity stake over the same time period.

> Then, multiply this number by zero to calculate the value of your stake in the company.

Best. Metric. Ever.

Can't the value end up negative if you factor in taxes? Or is that only if you goof up?

Also negative if it prompts them to fire you before the stock becomes worth something for real, e.g. https://en.wikipedia.org/wiki/Brian_Reid_(computer_scientist...

Yes, it can under certain circumstances.

You only pay taxes as a percentage of their value, afaik.

Mostly wrong. You pay taxes as a percentage of something, as of some time, after modifying that something in some way. Sometimes this means you pay more in taxes than you ever got from the thing you had, or sold, or bought, or whatever. Your searchable terms here are "ISO", "NSO", and "AMT". See also the rules for capital losses in general.

Other times, especially if you're the CEO or a major shareholder in a large corporation with a large lobbying budget, it means you can buy something, make money on it, and as a thank-you from Uncle Sam, actually pay less tax on all your profits than you would have otherwise. Your searchable term here is "NOL".

Isn't it great that we live in a country where the tax law is so fucking broken that all these things are common enough to have their own acronyms? I know I feel privileged, anyway.

One way people occasionally goof up is exercising, paying tax then, but waiting to sell, whereupon the stock has lost value in the interim.

This is totally correct! Except, sometimes it's wrong.

The trade off is fair depending on your level of risk. Without knowing anything about the company or your situation, I would put more weight into your own salary vs. the companies equity.

When you say "late-stage," is the company generating revenue? Is revenue growing? If so, this changes the standard-issue "it's all worth $0" logic a little bit.

It's worth nothing.

Problem solved.

You ask for a higher salary, because equities are not worth it in 99.99% of the cases.

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