Valuing Equity
The price of anything is the amount of life you exchange for it - Henry David Thoreau,
Total compensation at a startup has plenty of factors. Base salary. Bonus. Medical benefits. Paid time off. Education allowance.
One tips the scales more than any other. Equity.
It can go to zero. It can be the beginning of generational wealth.
Equity is the main reason I stay in tech. It’s why I went in this direction post USG. This is also why I want to be on the revenue-producing side of a business. The more impact I can have on revenue, the more impact I can have on pushing valuations higher.
Valuing the equity grant as part of your total compensation involves a nuanced understanding of both the startup's potential and the terms of the equity offer.
Start by understanding the type of equity offered.
Stock Options: The right to buy shares at a set price. Pay attention to the exercise price, vesting schedule, and any expiration.
Restricted Stock Units (RSU)s: Shares given that are subject to vesting. Easier to value as they don't require purchasing.
What’s the vesting schedule?
Equity often comes over four years with a one-year cliff. The cliff means you don’t get any until you’ve been there for 365 days. Then it will start accruing at a monthly or quarterly rate. There’s also a chance for refreshers.
What are potential exit scenarios?
A liquidity event is a process by which an investor liquidates an investment position in a private company in exchange for cash. Acquisition, IPO or merger are all different scenarios. Liquidity events are not to be confused with the liquidation of a company, in which the business is discontinued.
In some instances, specific investors may be able to sell all or a portion of their ownership stake to a new or existing investor without the startup itself going under a change of control. Secondary market transactions are a liquidity event for the seller without being a true exit for all investors. This could be a means to realize a portion of vested equity.
Understand the tax implications.
Consider how your equity will be taxed (e.g., capital gains vs. income tax) as this affects your net benefit. A majority of options go unexercised due to the astounding costs involved, including taxes. There will be a bill. It could be less if you exercise and hold for more than year. Of course, this also means the money required could go to zero.]
Keep researching equity on your own. Make this a major part of any compensation negotiation. The startups route is a worthy one for the aspiring former fed. Make it worth your while.
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