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Question

I'm trying to evaluate a job offer at a startup. I'm going to use some theoretical figures here. I asked for $12k pay and was offered $10k pay and $2k equity. There is a 1 year cliff period, and 3 year vesting period.

I would be sacrificing $2k in pay for 4 years, total $8k, in exchange for $2k in equity. I feel I should be asking for more, does it sound right that I should be asking for $8k in shares from the start? I wouldn't get 100% ownership of these shares until 4 years in, so in my eyes, I'm swapping like for like. $8k of sacrificed pay, over 4 years, for $8k in shares with 100% ownership after 4 years.

Even if there is the option to buy more shares later, I've sacrificed $2k annual pay, so that additional pay wouldn't be there to purchase any available shares.

I may be looking at this in totally the wrong way, so any advice appreciated.

I think the percentage of equity I've been offered is 0.1% but I need to double check this when I next speak with the company.

Is there any provision for actually selling the shares? If it is not a publicly traded company, how is the market value set, and how would a buyer be found? — May 24 '14 at 18:42
If you're going to sacrifice $8k over 4 years, then you should be asking for at least $8k of equity over 4 years (more if you will have a valuable/critical role with the startup, or if you'll be expected to work crazy hours). — May 25 '14 at 1:39
See also: workplace.stackexchange.com/questions/22841/â€¦ — May 25 '14 at 1:44
$2,000 equity once? or $2,000 equity per year in lieu of salary? — May 25 '14 at 23:41
"I may be looking at this in totally the wrong way, so any advice appreciated." On the contrary, I think this is the perfect way to look at it. — May 26 '14 at 14:48

score 3 · Answer 1 · 2014-05-25 19:34:09Z

Sounds like an awful deal

You are over 4 years investing post tax $8000 to by shares worth $2000 now.

So you are gambling that in 4 years time your shares will have gone up 400% to break even this is assuming that any further rounds donÃ¢Â€Â™t dilute you Ã¢Â€Â“ actually you need more as I am not considering the time value of money here and any taxes on the options.

You need to have at least a 4 or 5 x multiplier of the salary sacrifice make this worth considering

The reason why: look at a mature company like BT (BT.A) the current 5 year share scheme is going to return over Ã‚Â£50k tax free (5 years a Ã‚Â£200 a month) - and this has ZERO risk to your capital.

If you thought it was a good idea, you'd borrow $2,000 from someone to buy the shares, take the $12,000 salary, and pay back the loan after a year. — May 24 '14 at 22:34
@gnasher729 but compared to a standard share save scheme which is for all employees it seems very poor value for an early stage start up. — May 25 '14 at 10:44
That's what I meant. Instead of sacrificing 4 times $2,000 to get the shares, he could just take out a loan to buy them, pay back the loan in the first year, have 3 times $2,000 in his pocket, plus the same shares. — May 25 '14 at 21:06
@gnasher729 at what is the % is the loan - and you have to take the tax saving involved in a salary sacrifice into account. Its a shockingly poor deal even if you they had the cash to pay for the options — May 26 '14 at 11:37

score 2 · Answer 2 · 2014-05-25 11:34:12Z

This is a conventional early-stage company stock ownership offer. The primary purpose of giving you an equity share is to give you, the employee, an incentive to make the company successful. Its secondary purpose is to save the company a bit of cash on salary costs.

By offering stock, they're hoping to attract employees who want to do what it takes to make the company enormously successful. So you need to look at the company's prospects. Do you have a sense of confidence in the founders? Do they have a good idea? Have they evaluated whether anybody will buy what they're inventing and making? Do they have the flexibility of mind to adapt if they need to? Is this group of founders and this company worth five years of your life?

If you don't think the company's shares will be worth a lot some day, don't work at this company.

They're pitching this to you as a tradeoff between stock and salary. In truth it is not. That's a mildly deceptive pitch designed to persuade you to accept a lower salary. This equity stake is not an investment, it is an incentive. Don't bother accounting for it as an investment.

The 17% reduction in cash salary ($12K to $10K) is aggressive but not unreasonable if this company is using investor money to pay you and the other employees. The longer their cash lasts, the better chance they have at success. You might be able to negotiate a bit more cash pay if you need it.

The four year vesting schedule with a one-year cliff is very common.

0.1% of the shares of the company is a reasonable offer for a skilled but inexperienced individual contributor if the company is already financed, still in its first year of operation, and not almost out of cash. If they aren't already financed, it's far too low.

These shares are most likely not liquid. That is, nobody can buy or sell them on the stock market. If this is in the USA, there's no way you can sell them to an individual unless that person is a so-called "qualified investor." (Hint: your uncle probably isn't. If he is he knows it.) In any case you'll need the company's permission to sell them, and they will not grant that permission unless the circumstances are truly extraordinary.

But if the company goes public you will be able to sell your shares on the stock market after a waiting period, usually six months. If the company is sold to another company you'll get paid by that other company. This can be a very, very, good deal. It's the whole point of startup equity ownership.

If the company raises another round of financing from investors after your shares are granted, your ownership will become diluted. Your fraction of ownership will go down. That's also expected. If the company is doing well the share price will go up even as your percentage ownership goes down. The executives / founders of the company will explain this to you in detail as it happens.

If this is a stock option, you'll receive the right to purchase a certain number of shares of the company's stock at a certain price, called the strike price. For example, suppose the company has ten million shares of stock outstanding, and they most recently sold six million of those shares to investors for a dollar each. In that case, your 0.1% grant would be ten thousand shares, and your strike price will be perhaps $1.20 per share.

You don't have to pay that money -- the strike price -- until you exercise your options, that is, buy your shares. Let's say you decide to leave the company after two years (half the four-year vesting period). That means you'll be have the right to buy 5,000 shares (half your shares) when you leave, and you'll have to come up with the $6,000.

Now, if the company goes public a year later and you can sell your 5,000 shares for $35 each, well, you figure it out. Ka-ching!

If the company fails you'll have an interesting souvenir -- a worthless stock certificate -- to tack on your home office wall.

Good luck! I've personally had some success with this, and I hope you do too.

Based upon my own experiences, 0.1% is an extremely subpar offer (though a fair bit depends upon what the OP's actual role is). The cliff/vesting terms are standard, but that allocation is anemic. — May 25 '14 at 1:43

JakeGould 6,5821739 · Answer 3 · 2014-05-24 13:37:54Z

Using your theoretical numbers:

I asked for $12k pay and was offered $10k pay and $2k equity. There is
a 1 year cliff period, and 3 year vesting period.

The assumption is basically beginning after 1 year & then available to you after 4 years you will have a return on investment would be much higher than $8,000 ($2,000 * 4). Which basically means they want you to gamble a salary in return for a commitment from you. And the commitment is basically the cliff period.

I think this is actually a low risk investment in a career as well as a company if you are up for it. Because unless there are other clauses, you can simply leave on good terms 1 year + 1 day later and the investment is still yours to cash out or hold onto.

I think the percentage of equity I've been offered is 0.1% but I need
to double check this when I next speak with the company.

That basically means that you have no real voice in the company. It is purely a financial incentive. Meaning unless you are some superstar, the chances of that percentage going to to a larger amount that means something in the great scheme of the company are zilch.

If the deal is clean and your cliff is 1 year and you can walk away while still having access to that investment, then I see little risk.

"and the investment is still yours to cash out" - Careful; if this company is like most startups then there's likely nowhere to go to 'cash out' the shares, and there won't be unless/until the company goes public or is bought out/acquired. — May 25 '14 at 1:52
@aroth True enough. But honestly I think anyone who is at startup already knows this. ItÃ¢Â€Â™s a gamble. So tired of pointing that out all the time. — May 25 '14 at 1:54

WillMcLeod 1 · Answer 4 · 2014-05-26 13:51:30Z

Don't think of it as a valuated investment. The value of a startup is in flux and the offer of shares to early employees is just a good faith motivational tool.

Much more important than the economics are the control provisions. When do your options expire? Is it 1 year after vesting or 10? Will you have the resources to pay taxes on the shares when exercised? Make sure your shares can be used. This is an important point that never gets considered.

NotMe 20.9k55695 · Answer 5 · 2014-05-26 20:21:19Z

It is very difficult to place an actual "value" on $2k in equity that relates at all to your salary. You now have two potential sources of income from it. The first is if any dividends are paid, as a stock holder (or member if an LLC) you would receive a portion of those dividends. You might ask if they have ever paid dividends and how much was meted out.

The second is during a liquidity event in which the company is either sold or IPOs. Let's say the company has an estimated value of $100k (this value should be known to you prior to accepting any offer). If the company sells for $500k, then your payout on the sale should be $10k. Obviously, this is more than the $8k you "gave up" in salary.

However, if the company sells for $50k - entirely possible - then your portion is $1k.

Today no one can tell you what the company might be worth in the future. It might be less than, the same as or more than what it is perceived to be worth right now. Which means that $2k of equity could ultimately be valued at anything from nothing to a lot.

Next, you should consider that your $2k of equity might very well be devalued as a percentage of the whole based on if the company seeks outside investment. When an investor puts money into a company then the pie gets bigger, but your percentage goes down. You mention that the offer represents 0.1%. That's not enough to make any type of difference when voting.

Bear in mind that if you accept this now and they accept investor funds before you've vested, depending on how things are written up you could end up with a whole lot less % wise than if the same amount vested prior to accepting those funds. There's not enough space here to explain this.

Now, as an equity owner you should have the ability to sell your portion to someone else at any time. Usually companies retain the right of first refusal. So it's entirely possible that you take the $2k in equity today and 5 years from now sell it back to the company or to another employee. It's possible to make money on this deal later, but it's also possible you don't.

Further, there are tax implications for having equity in a company. You should seek competent tax advice about this. They are going to have a LOT of questions for you and this employer. For example, the tax basis are completely different between equity and salary. One is under regular employment taxes, the other is generally under capital gains (USA).

My point in all of the above is that you simply can't compare any amount of equity to monies received as salary. Because equity could end up worth far more, the same or far less than the equivalent salary by the time it all shakes out.

The only real way to look at this then is that Equity is "bonus" money. In other words if you get something from it then great; if not, well you weren't living off of it...

Which then takes us to how you should be looking at this deal: Are you willing to work for the salary they gave you, with a potential but not guaranteed bonus at a later date?

score 3 · Answer 6 · 2014-05-25 19:34:09Z

Sounds like an awful deal

You are over 4 years investing post tax $8000 to by shares worth $2000 now.

So you are gambling that in 4 years time your shares will have gone up 400% to break even this is assuming that any further rounds donÃ¢Â€Â™t dilute you Ã¢Â€Â“ actually you need more as I am not considering the time value of money here and any taxes on the options.

You need to have at least a 4 or 5 x multiplier of the salary sacrifice make this worth considering

The reason why: look at a mature company like BT (BT.A) the current 5 year share scheme is going to return over Ã‚Â£50k tax free (5 years a Ã‚Â£200 a month) - and this has ZERO risk to your capital.

If you thought it was a good idea, you'd borrow $2,000 from someone to buy the shares, take the $12,000 salary, and pay back the loan after a year. — May 24 '14 at 22:34
@gnasher729 but compared to a standard share save scheme which is for all employees it seems very poor value for an early stage start up. — May 25 '14 at 10:44
That's what I meant. Instead of sacrificing 4 times $2,000 to get the shares, he could just take out a loan to buy them, pay back the loan in the first year, have 3 times $2,000 in his pocket, plus the same shares. — May 25 '14 at 21:06
@gnasher729 at what is the % is the loan - and you have to take the tax saving involved in a salary sacrifice into account. Its a shockingly poor deal even if you they had the cash to pay for the options — May 26 '14 at 11:37

score 2 · Answer 7 · 2014-05-25 11:34:12Z