Startup equity is not cash.
Obvious! But we see early-stage founders and HR get ahead of themselves on this all the time.
The AI bubble has only made it worse. With valuations getting wild, employees can be dazzled by equity offers expressed as massive dollar figures...but ask a few startup folks who joined rocket ships in 2021 how often those numbers actually hit the bank account.
Okay: you're a Series A founder (company valued at $60M) and you're trying to close an amazing engineer. In her offer, you list the base salary, any potential bonuses, and the equity options package (Incentive Stock Options or ISOs).
๐๐'๐ ๐ฒ๐ฎ๐๐ ๐๐ผ ๐๐ฟ๐ถ๐๐ฒ ๐๐ต๐ฎ๐ ๐ผ๐ณ๐ณ๐ฒ๐ฟ ๐ฎ๐:
โข Annual base salary: $153,000
โข Potential bonus: Up to $8,000
โข Equity: Annual value of $26,000 โ
๐๐๐ ๐ถ๐ ๐๐ต๐ผ๐๐น๐ฑ ๐ฎ๐ฐ๐๐๐ฎ๐น๐น๐ ๐ฟ๐ฒ๐ฎ๐ฑ:
โข Annual base salary: $153,000
โข Potential bonus: Up to $8,000
โข 4-Year Equity Grant: 15,000 options which represent 0.054% of fully-diluted shares + a link to a scenario model the employee can utilize to project the future
Is that as easily understandable as the dollar amount? No! But it's far more honest.
Expressing equity in dollar terms should be reserved for startups that are valued at hundreds of millions of dollars - because the modal outcome for Series A equity is $0. It's why the discussion of "what % of my compensation is equity vs cash" can be quite misleading at young companies.
Besides share count and % ownership, candidates should also ask:
โข ๐๐๐ป๐ฑ๐ถ๐ป๐ด: What is the post-money valuation of the company? When did that round take place? Has the company had to raise any convertible bridge financing since then? Are there plans to raise more capital?
โข ๐๐พ๐๐ถ๐๐ ๐ฑ๐ฒ๐๐ฎ๐ถ๐น๐: What is the current strike price? What is the vesting period? What is the post-termination equity period for these options (typically they'll say 90 days after you leave, which is..not a lot! Could be a negotiation point for you to push on).
โข ๐ข๐ป๐ฒ ๐ณ๐ถ๐ป๐ฎ๐น ๐พ๐๐ฒ๐๐๐ถ๐ผ๐ป: When this company goes public or gets acquired, what's the minimum valuation it needs to achieve for common stock to make a profit?
Venture-backed dollars can come with strings attached. Those strings (liquidity preferences, participating preferred, etc) can make it harder for employees to get any real value out of their equity EVEN WHEN the company exits. This question may not be something a recruiter can answer.
Remember: equity is not cash. It's upside only.
The more you know.
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Peter Walker
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