From Erin, Paysa’s Equity and Compensation Expert
Without certain information from a company, it’s impossible to know whether an equity offer is good. This is because your ownership is a function of how many shares you hold compared to the “Fully Diluted Capitalization” of the company. The fully diluted capitalization (or “cap”) is the sum of all issued and outstanding common stock and preferred stock, outstanding option shares, shares reserved for issuance under a stock plan and (usually) all promised but unissued shares (such as warrants and convertible notes).
The equation for determining your ownership in a company is:
Ownership Interest = Your total Shares
Fully Diluted Capitalization
So in your example, if you receive 1500 option shares and the fully diluted cap is 500,000 shares, your grant is worth 0.3% of the company today. On the other hand, if the fully diluted cap is 100,000 shares, your grant is worth 1.5%. As you can see, without knowing the total number of outstanding shares, you are missing an integral piece of the equation.
So how much equity can you expect? If you are one of the first 5-10 employees of a company and your position demands a high degree of skill, connections or prior experience, you have a lot more power to negotiate a higher percentage of the company. After the co-founders have taken their pieces of the pie, the first few employees often receive grants between 0.2-1.5% of the company. This the trend, though, not a rule.
After the first 10 employees, many companies adopt a standard equity schedule. As an example, they may decide that all new senior engineers will receive 0.2-1.5% and product designers will receive 0.1-0.4%. If this is the case, you may have a hard time negotiating a higher grant unless you can make a case for why your skills are more valuable than your colleagues’. Consider negotiating more favorable vesting terms or a future equity bonus instead.
Also, the fact that your option grant is not priced is not surprising because the Company’s board of directors must determine the price per share on the day the company approves the grant. Be wary if a company promises you an exercise price in your offer letter; it’s entirely possible that the price you were promised will change between the date of offer and the date of grant.
With all this in mind, my suggestion is to go back to your potential employer and ask:
- What percentage of the company does 1500 shares represent? or How many shares are outstanding (including promised but unissued stock)?
- Are employee option grants standardized? For example, do all senior engineers get the same starting equity package?
- What are the other terms of the grant? (i.e. type of grant, vesting, exercisability, etc.)
Then, check out this guide to negotiating your equity compensation on Paysa to see where you might be able to negotiate a better deal. Best of luck and happy negotiating!