Understanding Startup Equity

This article provides a comprehensive guide for individuals considering a job offer at a startup, particularly focusing on the crucial aspect of equity. While the article emphasizes the importance of understanding the details of your equity compensation, it acknowledges that legal advice may be necessary in certain situations.

• The article highlights the significance of receiving a written offer that outlines the key terms and conditions.
• It encourages you to understand how your equity compensation aligns with the company's broader equity structure and compare it to your peers within the organization.
• It emphasizes the importance of understanding how your options vest over time, the strike price (what you pay for your options), and the acquisition share price (what an acquirer would pay for your shares).
• It clarifies that focusing on the value of your options rather than your percentage ownership is essential. This is because your percentage will decrease over time, but the value of your options will hopefully increase.

The Importance of Comparing your Compensation with Peers

Understanding how your compensation compares to others within the company is crucial. While salary is an essential element, it's crucial to consider total compensation, which includes:

• Salary
• Options
• Vesting schedule
• Cliff
• Acceleration
• Bonuses
• Severance

Understanding the Value of Your Options

Estimating the value of your options involves several factors, including the number of options, the vesting schedule, and the potential acquisition share price. The article provides a helpful formula for calculating the acquisition value of your options:

• Acquisition Value = Number of Options x Acquisition Share Price

The article recommends using the preferred share price from the company's last investment round as a starting point for the acquisition share price. However, adjusting this price based on the company's performance and potential future valuations is important.

Understanding Equity Vesting and Cliffs

The article explains the common concept of equity vesting, where employees gradually gain ownership of their options over time. It typically involves a vesting schedule, usually spread over four years.

• The vesting schedule details the percentage of options that vest each year.
• The cliff is the initial period, usually a year, where no options vest.
• Employees typically have a four-year vesting schedule with a one-year cliff.

Valuation and Investor Preferences

The article emphasizes the importance of understanding the company's valuation, particularly the post-money valuation from the last funding round. This information helps assess the value of your equity.

• It is important to understand the investors' preferences and their expectations regarding the company's future performance.
• The article encourages you to research the company's board members and their backgrounds.

Additional Considerations

The article addresses additional considerations for employees considering joining a startup.

• It discusses early exercise of options, emphasizing the importance of seeking professional financial advice.
• It recommends using a lawyer to review your offer letter and ensure you understand all the terms and conditions.
• It emphasizes the significance of researching the company's track record, its competitive landscape, and its potential for future growth.
• It encourages you to ask critical questions regarding the company's funding runway, its key metrics, and its overall growth strategy.

Assessing the Company's Health and Future

The article encourages you to assess the company's financial health and its potential for future success.

• Key questions to ask include:
• How much cash does the company have on hand?
• How long will the company's funding last?
• What was the company's post-money valuation in the last round?
• What are the investors' preferences?
• Who is on the board, and whom do they represent?