Your equity is a huge component of your overall compensation package in a start-up so it’s important to arm yourself with as much knowledge on the topic as possible. In fact, lack of information is often the biggest pitfall for employees negotiating stock. So what information is important?
First, you’ll want to gather information about the company making the offer. What level of funding has the company received? How many employees do they have? Do the have standardized equity award schedules? Generally, the later the stage of the company, the smaller the equity offer is likely to be. Later stage companies also regularly adopt standardized equity awards, meaning all employees in a specific role receive the same amount of stock. For example, all senior engineers might receive .5% when they join. Ask the company whether their compensation awards are standardized, if they’re not, consider asking for a range of equity awards for positions in your department, this will help contextualize your offer.
Next, gather as much market data as you can. Check out Paysa’s top salary compensation tool to see what others in similar positions have received at similarly situated companies. This type of tool provides you with the latest in market trends and allows you the footing to negotiate the deal you deserve!
Once you have a handle on the amount of stock you can expect, then you should consider the type and terms of the option grant, including:
- Type of Grant – NSO or ISO
- Vesting Schedule – most likely standard 4yr with a 1yr cliff. But can you negotiate acceleration?
- Exercisability – If you have the money, consider asking for an early exercisable option grant.
- Potential for More Equity – in lieu of more stock now, maybe the company will promise you additional grants in the future.
Negotiating Equity Compensation, on Paysa, delves deeper into each of these topics but it’s important to know that negotiating these variables will provide you with a better equity deal in the long run.
Then you want to make sure you understand a few details about the company’s stock plan and option terms. These areas may impact the value of your options:
- What happens to option shares in the case of a merger, acquisition or liquidation of the company?
Usually a company will delay making this decision until the acquisition or liquidation event occurs. That allows maximum flexibility when structuring the deal. Sometimes, though, the company may specify at the outset what happens – for example, it may decide that all unvested options will be thrown out. It’s important to know what the company’s policy is before you accept the equity compensation offer because the treatment of your options in the event of an exit has a huge implication on their value.
- How much money has the company raised and what are the future fundraising plans?
Each time the company has a preferred stock financing, the “liquidation overhang” increases. This is because each series of preferred stock has the right to receive proceeds from any sale or liquidation of the company prior to payment of the common stock holders. While you can’t negotiate away the liquidation overhang, it’s not a bad idea to understand how much investor money currently stands in front of the common stock and any future plans to increase that amount.
Liquidation overhang is inevitable with a successful startup and normally not a reason to panic. However, if there are signs that the company is struggling this may impact the value of your options. For example, if the company has gone through a down round, or a financing at a valuation lower than the valuation in the previous financing, then anti-dilution provisions likely increased the liquidation overhang. This is generally a red flag, and a good reason to pause and investigate more before taking the equity offer or the job!
- Are your options priced at the current fair market value? Has the company received a 409A?
Companies almost always price their option grants at or above the fair market value of the common stock on the day of the grant. This ensures compliance with certain tax laws. If the company hasn’t done this, there is a chance that the grant could result in large tax bills for both the employee and the company. It’s unlikely that this will be an issue since most companies obtain independent 409A valuations of their common stock. But, it’s not a bad idea to double check that the company follows these best practices.
- Get the offer and the grant in writing and signed!
It may seem like a simple point, but many employees encounter problems with their equity because they didn’t get the offer or option grant in writing or because the documents had the wrong details. If you’ve been promised acceleration of vesting, make sure that term is in your offer letter and your option grant paperwork. If it’s not, after signing the paperwork you’ve essentially given up that right. It’s also important to make sure that the company has counter signed all documents related to your equity.