[tptacek]

Personally, I think negotiating for equity in terms of percentages is a mistake. The better way to do it is in terms of financial outcome.

You make X dollars in salary every year. You model the equity as a lump-sum bonus paid after 4 years (divide the liquid value of the options by 4, mentally applying as a deferred bonus for each vesting year).

To make that happen, you ask management for some outcome scenarios --- a "low", "medium", and "high" outcome, for instance --- that values the grant you're getting.

ie: "If we're acquired for $50MM, your options would be worth $Y". You make $X/yr, so, if the company is acquired, you'd effectively have made $X+($Y/4)/yr. Are you happy with that number? Then agree.

To dig into the low/med/high scenario, two helpful anchor numbers: first, the company's valuation at its last round (if the medium option 20x's valuation, that's, you know, worth knowing), and second (and I think more important) the multiple of trailing revenue that represents. In other words: in the "medium" outcome, how much revenue do your employers propose the company to have done in the preceding year, and what multiple does that imply for the valuation?

These are easy numbers to get your head around, implicitly capture the percentage of the company you're getting without making that the terrain you're negotiating over, and (most importantly) forces your employer to be clear about where the numbers are coming from and how the business will actually work.

The other way to do this is just to value equity at $0.

[7Figures2Commas]

The intention of the process you outlined is good, but the process itself is flawed and highlights the pitfalls of trying to value equity at early-stage startups.

First, very few startups can accurately tell you "If we're acquired for $50MM, your options would be worth $Y." Heck, for fun, ask a founder of a typical angel or venture-backed startup how many shares it has outstanding fully-diluted.

If tons of startups struggle to describe what their capital structure looks like today, why should prospective employees rely on them to make estimates based on what their capital structure will look like months or years from now? Dilution, liquidation preferences, the option pool, acceleration terms. There's so much that can't be predicted or controlled, so asking a company to come up with exit scenarios for specific employees is like asking a blind man to read tea leaves.

> The other way to do this is just to value equity at $0.

At most early-stage startups, this is the correct approach to dealing with equity. There are very good reasons most vested employee options are never exercised.

This doesn't mean that the OP shouldn't ask for some equity, but focusing negotiations around basis points of equity and trying to assign a future dollar amount to equity is generally a bad idea for the average employee because it opens the door for treating equity as a 1:1 (or close to 1:1) substitute for salary, which at early-stage startups it is not.

If an early-stage startup wants to offset your cash salary with equity, try this: ask for $50 to $100 worth of equity for every $1 of salary offset. How the company responds will likely tell you a lot more about its future than if you ask what it guesses 1 option will be worth 4 years from now.

[tptacek]

try this: ask for $50 to $100 worth of equity for every $1 of salary offset

You take that number from their last valuation?

[7Figures2Commas]

Of course. In the US you can't get around 409A.

As a prospective employee, if you fundamentally believe that the company's latest 409A valuation is already too rich and equity is important to you, don't join the company.

[jballanc]

> The other way to do this is just to value equity at $0.

I've worked for startups that gave me stock options, and I've worked for consultancies that have done profit sharing. In every case, I came away with $0. Options can be diluted away and profit sharing is subject to accounting tricks.

The only time I received stock and made money from it was when I worked for a large, established, and very profitable company.

Another thing to consider is that any reward with a vesting schedule will cloud your judgement on when is the right time to jump ship. The advice I was given was that in your 20s you ramp up your income fastest by taking new positions at new companies, and in your 30s the best way to increase your income is to advance within a single company.

I think a good target would be to take a new job every year or two in your 20s, targeting a 15-25% increase in salary each time. However, given that most options have 4-year vesting schedules, that essentially means forgoing stock based compensation until later.

[tptacek]

I walked away from what turned out to be a pretty significant pile of money by not purchasing my employee options at the last startup I was an employee of. I don't regret it and would still advise against people putting actual dollars down on private company options, but options ending up worth something are not a myth.

[Catalyst4NaN]

I think I understand what you mean. Certainly i'll look into evaluating my value + wants based off your model.

For me in some small way I want to be working for a company that is even in an almost insignificant way mine... Not dissimilar to the attitude that I guess crowdfunders have.

[tptacek]

No matter how you choose to negotiate, do the step of asking your employers for a couple scenarios --- not just one --- that will put actual numbers to the value of your options. Not based on the VC valuation, but on what the company might get acquired for, and what sales figures would look like at those acquisitions.

You will find hiring managers that literally have no idea how or why your options could be worth anything, and it's worth knowing when you're dealing with them.

[Catalyst4NaN]

First thing on my todo list for Monday! :)

[7Figures2Commas]

> You will find hiring managers that literally have no idea how or why your options could be worth anything, and it's worth knowing when you're dealing with them.

Here's a different perspective for you to consider: most founders or hiring managers at early-stage startups don't have the ability to convince a reasonably skeptical person why the company's equity will ever be worth anything. It's basically a matter of faith. Most startups aren't going to have an outcome that delivers wealth to employee shareholders. You either believe that the company has the opportunity to defy the odds or not.

You say you are learning a lot, will have a good deal of responsibility and like your co-workers. In other words, it sounds like you're pretty happy and pleased with the prospect of continuing your employment with the company. A lot of people, even those who have maximized their compensation, are unhappy in their jobs, so you have something money can't buy.

This doesn't mean you shouldn't protect your financial interests and ensure that you're fairly compensated. But ask yourself what you stand to gain or lose from taking negotiations down a path that will ask your employer to convince you that whatever equity it offers you could be worth something.

The most important part of any negotiation is to determine what it is you want and need. Far too many people fail at negotiations because they don't do this. As a result, negotiations become focused on things that don't matter. You might win such a negotiation, but still come out a loser.

You like the idea of minor equity stake, ostensibly because you want to feel invested in a business that you're excited to be working for. If that's the case, you could do a lot worse than to pick a number, and tell your bosses you're really excited about the company's prospects and want to feel invested in its success. Chances are you'll have a far better outcome than putting your bosses on the spot and demanding that they predict the future.

[mvc]

> But ask yourself what you stand to gain or lose from taking negotiations down a path that will ask your employer to convince you that whatever equity it offers you could be worth something.

If you're going to be the head engineer in a startup, shouldn't you be having this conversation anyway as part of your job?

[7Figures2Commas]

As someone who has held hiring responsibility: there's a difference between asking a prospective employer for the information needed to make an informed career decision and challenging your prospective employer to convince you of its prospects to make you wealthy.

There are a number of perfectly reasonable questions prospective startup employees can and should ask that will give them the information needed to run their own exit scenarios. For instance, "What percentage of the fully-diluted outstanding shares does my option grant represent?" is always a good question to ask.

A prospective employee who demands that the company guesstimate how much he or she might make under random acquisition scenarios occurring at some unknown date in the future will stand out as being inexperienced at best and unreasonable at worst. Furthermore, no hiring manager can ethically meet such a demand.

In this case, the OP is already employed by the company he's negotiating with and it sounds like he's the one asking for equity. To request equity that hasn't been offered and then demand that the company prove it has value is a particularly awkward negotiating stance. Ostensibly he's asking for equity in the first place because he thinks it might have some value.

[imaginenore]

But where did the $50MM figure come from?

[tptacek]

It's an arbitrary number, but so will the real estimate; what I think the important exercise is: take the arbitrary "real" estimate and have them back it out to what multiple of their projected sales that's meant to be.

As the other commenter points out: it's very difficult to gauge how valuable a share in a private startup is going to be worth. I think it's a lot less hard to reason about how much revenue the company is going to make.

That doesn't directly solve the valuation question --- the multiple on revenue is going to vary wildly from 3x to 100x --- but at least you get an idea of what they think their business plan is; and, if they're hoping for a 50x valuation, or they think they're going to be doing $1bn top-line in 2 years, then at least you know they're being crazy optimistic.