You have your first job offer from a startup
and now you're trying to figure out startup equity for employees.
Is the equity they're offering fair?
And what are the things that you need to consider? In this video,
I'm going to tell you exactly what you need to know about the equity.
Hello and welcome back to my channel
where I help you with slay or career,
and cultivate the successful life that you want. Today I wanted to talk to you
about the startup equity. Because I remember the first time
that I took a job at a startup and I had no idea
how to appraise my equity, how to negotiate for it, what it even meant,
and it was really hard to find a single resource
that told me everything that I needed
to know in order for me to take the next step in negotiating the offer.
And especially in negotiating the equity. That's why I wanted to make this video
for you today, because I know some of you are going to be in this boat,
or some of you who are in this boat will discover this video. If you're new,
welcome to my channel.
I'm going to give you the basics of what startup equity is, how it works,
how you can appraise it, and how to find out if you're getting your fair share.
And one thing I want to make sure that you actually
stay all the way to the end of this video,
because there is one thing when you think about equity,
and when you're appraising equity,
there's one thing that almost no one talks about
and I think it's really important. And I want to make sure you know,
but there's a few things that you need to know before it's going to make sense.
Now if you're ready,
click that like button and let's get right into it.
The first thing that you need to understand about
the equity in your job offer is if it's restricted stock or if it's a stock
option. There is a very key difference between the two.
The option is essentially giving you the right to
purchase shares at a set strike price.
That strike price is going to be based on a
reasonable valuation which if you're in the
States it's probably going to be based off of their most recent 409A.
Which is essentially the valuation of their company.
Now if you join and the stock price goes up, and up and up.
This can be a great deal because essentially you're
going to get the benefit of the difference
between your strike price and the valuation when there is an exit.
So if you're a strike price is $1 and there was an exit at $5 a share,
you're up $4 per share.
If you have a hundred shares that is $400 good for you with an option.
You do technically have to purchase the share though,
and that's the contrast between the option and.
the restricted stock restricted stock.
They are just going to grant the stock to you. You don't have to pay anything.
This has a monetary value.
You are going to accrue it according to the vesting schedule
which we'll get into in a few minutes.
There is an important differentiator between the option
as well as the restricted stock. Restricted stock actually has a valuation.
It is yours. It is essentially payment to it as it actually accrues,
whereas an option does not have the tax implications
until you actually exercise it. There is actually a really great resource
that if you're trying to understand this from a
tax perspective that I'm going to link to down below because to be honest
I totally am not going to be the best person
to talk to you about taxes in the US if you have a job offer with equity,
the next thing that you need to know is how much are you actually getting.
If it's options or if it's restricted stock,
you want to understand how many options
or how many shares are being allocated to you
and really when you're thinking about this from a compensation perspective,
what you want to do is you want to understand
what the percentages and what the value is.
This is where it gets a little bit tricky because some startups,
because they are private companies,
are not going to want to tell you what their most
recent 409A is they are going to guard it. I feel like this is especially common
with a really early stage company because their valuation
isn't something that they're super proud about yet.
There will also be some companies that don't
want to have a high level of transparency
about how much percentage they are giving you
and you actually get that based on the number
that they are giving to you versus the number that are outstanding.
You run the math and that's going to give you the numbers.
However, some companies will actually just tell you what percentage
they're giving you and it's going to be super easy for you to understand.
And in my personal experience,
there was even one time that I was given the percentage,
and they didn't even know what that meant in terms
of the number of stock units that I was going to be granted.
So there is going to be a different experience
and it is very much going to depend on the company
and who you're actually working with,
but this is something that you have to keep in mind that sad.
You still want to ask the questions because
essentially what you're trying to do here is to do is if it's restricted stock,
what the actual value is because that is now compensation or if it's an option.
You want to triangulate the option against what
you think an exit price might be to see how this actually
might translate for you longterm.
At this point you've heard me talk about investing on several occasions,
so what is vesting? Aside from early nineties fashion,
which maybe one day will make a comeback.
When we're speaking about fasting in terms of your restricted units or your
options, what we're talking about is how they actually accrue.
There's going to be something in your equity plan called a cliff.
That is you have to work there for a certain amount of time
before you actually get stock and what that means is that you're going
to have to be there for a certain amount of time
before any shares or options are actually granted to you.
This might be three months, it might be six months. Most common,
I tend to see a year.
Now there's a few things that you need to know in terms of vesting.
First of all, you need to understand the vesting period. Is it four years?
Is it five years? Is it 10 years?
When they grant you the options or the restricted stock,
how long is it going to take in order for you to have rights to purchase,
or to have all of those that they have granted to you. That said,
it's not necessarily going to all be
trickled down on like per on a per day basis.
Typically what you're going to be dealing with is first of all at cliff,
and this is the amount of time that you need to be employed
before any of your options or your restricted stock is going to vest.
So this can be three months, it could be six months,
it can be a year after that cliff, there is going to be a vesting schedule.
This could be monthly, it can be quarterly, it could be annually,
and generally what you're going to find is that across a period of time the
shares are, the options are going to be allocated in an equitable way.
So if you're on a four year vesting schedule and you have a one year cliff,
25% of your options are going to be available to you on your first anniversary.
If that doesn't make sense or you want some clarity
in terms of an offer that you actually have,
you can drop it in the comments down below
and I'm going to do my best to help you understand this.
The next thing that you need to know about your equity
is how you can actually extract it.
So you have your restricted stock or you have your options.
What are they good for? How? How does this work?
If you haven't worked in a private company
and you haven't had stock for a private company in the past?
There is something really important that you need to know.
It's not like trading on the New York stock exchange
or the London stock exchange where you just don't feel like having them anymore.
You would like to cash out. I'll just sell those,... [cash register]. No,
this is a private company,
so there are two ways that you're generally going to be able to cash out
and actually reap the benefits of your equity
and that is an IPO or an acquisition.
Those are essentially the two exit strategies
that are going to free up investors,
employees and founders to actually cash in on the equity.
Now investors are actually paying for this stock.
If you're getting restricted stock units, you're actually working to earn them.
If you have options, you're working and you have a deal
essentially cause you're going to get them on sale
when they're worth a whole bunch more when you have an exit event.
Outside of an exit event, there is a couple of other options.
However, these are a little bit more tedious and might not be available to you.
And the reason it's going to be more tedious is under most agreements,
most companies are going to have to consent.
There have been instances where companies
will buy back stock or you can sell your shares during a fundraising round.
Or rising in popularity over the last few years, has been secondary markets.
Secondary markets allow investors to purchase
shares from employees who no longer want them
or who just want to cash in and buy their boat. Whichever,I'm not here to judge.
But again the caveat until there is an exit strategy
is that option might not be available to you and
what this means is if you have restricted stock or if you have options,
you might be holding the bag and potentially even having to buy that bag
for a company that doesn't have an exit strategy.
And if you leave you're not going to have any direct influence anymore.
Finally, the most important thing that you need to think
about as you are actually considering this job offer for equity
or with equity in a startup is: Is it ever going to be worth anything? Listen,
we all watch Silicon Valley and we have these dreams.
When we join a startup of making bucket loads of money,
and we can buy buy our house, our plane, our Louis Vuitton bags.
With all that we made because we were an early stage
employee and the company just really took off and it was the next Facebook,
it was the next Google, it was the next Apple, whatever it is. However,
that's not the reality for most companies and in fact statistically speaking,
most companies don't get to an exit event
they fold before that happens and this is one of the things
that you really need to take into consideration.
because if you're joining an early stage company,
many will offer an under market salary in exchange for overloaded equity,
which is something that in theory can pay off and you can be a billionaire.
However, is it actually going to turn out like that?
Statistically speaking it's really not.
So as you are actually considering these things
and using the resources that I'm going to actually drop
in the link below to actually help you dig into this a little bit more.
If you want to, you need to be working on very reasonable expectations
and really face, is this company going to have an exit event?
What stage is it at? And if you're an early stage employee,
you probably aren't actually going to know if it is In fact the next Facebook.
And even when it gets to an exit event, if there is an IPO,
there is a chance that the IPO price tanks, which is something that we actually
recently have seen with several of the unicorn IPOs,
including one which was actually withdrawn.
During an IPO there is usually a lockdown period
where you're not actually allowed to sell any shares,
so you're not going to be able to benefit from the IPO
Excitement of the day.
You'll probably be able to actually sell your shares a few months down the road.
If you've taken an under market salary
and there never is any equity that actually pays off
or amounts to anything or has an exit event
or you can't actually get permission to sell
on a secondary market or you want to lead
and you don't want to actually invest in the company
to buy your options as you walk out the door,
this is something that you truly need to keep in mind.
Taking the imbalance between your salary and equity is a big bet.
You're essentially playing roulette, and if you're at the stage in your life,
your finances and your career where you can take that bet, do it.
I personally have in the past. However, if you're earlier in your career,
if you're still establishing yourself, getting your financial footing,
paying off your student debt, doing all of those things,
this might not actually be something that you really want to bank on.
Now, I did see one video that I'm actually going to link
here that I recommend that you check out.
Because it actually deep dives into the technicalities
of equity versus how you should think about equity
and what you need to know just in context of the offer.
I highly recommend that if you do want
to get more into what the different options are and stuff like that,
go and check it out. It's not mine, like it's just a really awesome video,
and I really think that it's a great resource. In addition,
there are some really good resources
in terms of understanding what the average allocations
are and stuff and I'm going to drop those all into the description. So, Hey,
you have a one stop shop and now you can choose your own adventure.
And that actually gives me with a question for you.
Since we're talking about taking an imbalance between your salary and your
equity,
what stage are you at?
Would you actually take an offer if it had a lot of equity,
not as much compensation or does compensation matter a lot more to you?
Let me know in the comments down below. Now,
if you have that offer in hand and you want to
make adjustments to the compensation, to the equity,
to really anything about it, you definitely are going to
want to subscribe because you will not want to miss my next video,
which is going to actually tell you everything that you
need to know before you head into a salary negotiation. If you haven't already,
I would love for you to click that like button.
If you did find this video helpful,
it lets me know that you like videos like this
and that I should probably make some more just like it.
Thank you so much for being unapologetically ambitious,
for taking this time to invest in yourself, your professional growth,
and to really investing to understand the offer
that you have and the equity that you're considering.
And also of course for taking the time to watch this video.
I hope to see you in the next one. Bye for now.