11 ms·

Questions candidates can ask about equity compensation

185 points by Ozzie_osman 4y ago

daenz 4y ago
I've asked some of these questions before, but always got the answers in person or over video chat. What happens when what I was told doesn't square with what actually happens (for example: acceleration if the company is acquired)? Is there a recommendation for getting the answers to these questions in writing? Is there even any recourse?
- jefftk 4y ago
  The standard way to convert verbal answers to writing is to send out notes after. You write an email like: "It was great getting a chance to talk to you this afternoon! I wanted to send a quick summary of what I took away from the conversation, just to make sure we're on the same page..."
  - akhmatova 4y ago
    Yup - this is a very useful tool. It doesn't have the same status as a binding, legal contract. But it does make it a lot harder for them to wiggle away from what they were initially promising you.
waynesonfire 4y ago
Is the motivation that asking these questions is going to be used in some way to get better compensation? 1. Ask questions 2. ??? 3. Profit! The true is that equity in a startup us extremely risky. So you're either going to get a large chunk and be a decision maker or you're ganna be a passive participant and hope for the best. No questions is going to change that. Even if the answers to these questions may be desirable NOW, tomorrow you can be diluted. It's meaningless to stress over this. Join because you love the company or are going to be a decision maker.
- bspear 4y ago
  Diligence on the startup so you know what you're getting into. Also prevents early employee churn because people feel duped once they look under the hood. The greatest frustration is usually around: 1. feeling like your equity cut is not enough once you know what other people are paid; 2. not knowing how much you pay in exercise cost / taxes / exercise window until it's too late On 1, there's a growing DB of startup comp here: https://topstartups.io/startup-salary-equity-database/ https://topstartups.io/startup-salary-equity-database/
- akhmatova 4y ago
  Is the motivation that asking these questions is going to be used in some way to get better compensation? Could be. But these questions can also be useful as (1) bullshit filters and (2) signalling (that you know your stuff and are not to be toyed with). In particular as to (1): you should be able to readily get answers to these questions; any hint at evasiveness, or a refusal to answer, should be taken as a red flag.
- awillen 4y ago
  It's not meaningless at all. First off, if you're comparing multiple offers with similar salaries, equity considerations may be a good way to make a decision. Beyond that, understanding how companies handle equity compensation can tell you a lot about their culture and treatment of employees. There are companies out there that are eager to answer these questions because they give generous stock compensation and want you to know it. There are also companies that will obfuscate and hide behind misleading numbers. I once had an offer and asked for more equity, only to be told by the recruiter that the stock was about to split, so I'd actually get twice as much (this is absolute nonsense, to be clear, and a huge red flag). Lastly, with regard to your initial question about compensation, asking these questions absolutely can be useful to that end. When you're negotiating with early to mid-stage startups, one of the things that you can negotiate is your equity/salary split. I once took a pay cut from the initial offer in exchange a much greater amount of equity than I was initially offered. That was because I found a lot of positives about the company and preferred higher risk and more reward (thankfully it looks like that is going to work out very well in my favor, but obviously that was in no way assured). If a company's giving you bad answers as it relates to equity, you may well want to try to negotiate for a higher salary in exchange for less equity, so your financial circumstances aren't tied as much to the company's performance. Understanding equity gives you one more dimension on which to negotiate, and the more things you can negotiate, the better off you are. There is this prevailing idea in Silicon Valley that you should just ignore equity and treat it like a lottery ticket, and while I think that is very good for financial planning, it is otherwise awful advice. Just because you don't have full control over the way things go with equity doesn't mean that you shouldn't educate yourself on what can be a meaningful portion of your compensation.
akomtu 4y ago
Why would a startup answer these questions honestly? The biggest part of what they offer is an illusion of future payout: they'll appeal to emotions, talk about the their mission and how they help the humanity and how you will play a critical role there.
- whiplash451 4y ago
  Not all startups are like that. Some of them will be quite upfront about the reality of things. In fact, the way they answer the questions could be a signal in and on itself.
ttymck 4y ago
Alternatively, don't join startups for the equity. Even if you genuinely believe the person answering your questions genuinely believes the answers they are giving, there's perilously little evidence to suggest their answers will be binding or accurate. 4 years from now, anticipate something to the effect of: "I have altered the deal, pray I don't alter it further", this could come from the CEO, an investor or the acquirer. Anything more favorable should be considered a statistical miracle. Joining a near-IPO company is something I can't speak to, but have a more optimistic view of. Furthermore, joining a public company with liquid equity is something I can personally say is well worth it. Do not join startups for the equity.
- daenz 4y ago
  >Do not join startups for the equity. If you're not a founding member, what reasons does that leave?
  - runnerup 4y ago
    Great coworkers, fun work environment with high velocity of innovation, decent enough pay, flexible work arrangements, preferred geography, belief in the mission.
    - SOLAR_FIELDS 4y ago
      I recently did a round of interviews specifically targeting series A and series B companies and this is a pretty accurate summary. Some interesting things that were offered to me: - Unlimited nomading or work anywhere in the world for the same pay - Extremely generous PTO (by USA standards) - Quite generous WFH equipment stipends
    - daenz 4y ago
      You can get all of those things at a non-startup. Having worked at a handful of startups and non-startups, I am skeptical that a startup offers those things at above-average rate the justifies the downsides, which are, from my experience: * High pressure to work at all hours, because a startup is fragile * Extreme financial uncertainty * Many QoL concessions If you're not accepting a generous equity package in exchange for ensuring that the startup thrives and succeeds, you're missing a huge opportunity for exchanging hard labor for potentially high return. It's like buying a lottery ticket without filling in the numbers.
eweise 4y ago
Companies should be required to open the books to employees if they are offering equity. Without good data, employees are forced to believe the founders BS.
- babyshake 4y ago
  Not only open the books, but be forthcoming about answering those questions in a way that is very easy for employees to reference without needing to look through detailed cap table info.
  - neilv 4y ago
    Maybe a mandated standard-format one-pager periodic/occasional statement with all the pertinent information in a form understandable to the layperson, so that employees don't have to ask, nor try to interpret on their own.
- phphphphp 4y ago
  Most people don’t know how to interpret financial information, nor do they know how to value equity (with or without the financial context). You can look at equity crowdfunding to see how completely underprepared most people are for assessing company financials: pretty much every normal person defers to business leaders narratives to assess a business, and if you trust a business enough to join it, then you probably trust the leaders enough to buy their narrative — with or without financials.
  - deleted 4y ago
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  - deleted 4y ago
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- quickthrower2 4y ago
  Yes to value the options you need to do the same DD as if you are buying the company. In addition DD on the clauses about those options and the many ways you can lose out.
deathanatos 4y ago
Even if you get these answers as an interview candidate, once you've joined the answers will become outdated … and for most of it, you won't be getting updated information. While things like successful rounds of funding do get shared, enough information about the health of the company (e.g., revenue vs. expense? over time? runway? how expected projects you're working on either will or do translate to revenue, and how much?) to make a meaningful decision about whether the company is worth investing in or not just isn't ever shared, IME. With no real information, there is only one value that can be assigned to the equity: $0.
- quickthrower2 4y ago
  It is a lemon market
buro9 4y ago
Whether you get answers depends a lot on the size of the company. Fewer than 10 employees... those interviewing likely know the answers and will share. Between 10-50 employees... those interviewing may still know the answers and may still be open to sharing them. Above 50 employees... it is increasingly likely that this information isn't known by more than a few people (those involved in the fundraising, accounts, senior leadership), and that your interviewers do not know it - if they know it at one point in time it's out of date quickly (next raise). It quick becomes something that only a very few people know and the information isn't useful/constructive to those focusing on execution (those who will be interviewing you). The questions are good... but if you don't get answers and would choose not to take the roles on that basis, then you might want to chat to a lot of people who have been early stage and done well - because very few got answers to those questions.
- TimPC 4y ago
  Start-ups who don’t solve these issues will see more knowledgeable potential employees walk away. The fact is start-ups pay a fair bit below the market wage and people have every right to know what sort of equity you’re getting in exchange for that. If a start-up is unwilling or unable to answer fairly basic questions about how their equity works it’s totally reasonable to not work for them.
  - ttymck 4y ago
    Knowledgeable about their job != knowledge about corporate equity. There's a large share of capable engineers who are still wide-eyed over startup equity. Folks I know personally and greatly respect. Startups have had no trouble duping engineers into lower compensation while delivering serviceable results, and will continue to have no problem.
    - ryandrake 4y ago
      This might be a harsh, unpopular opinion, but if someone is going to accept a job where equity is a significant portion of their compensation, they really need to understand the essentials of equity, how options work, their tax implications, how to read basic financial statements, and so on. This is your livelihood we're talking about. Would you accept a job that paid in Bitcoin without understanding the basics of cryptocurrency? How about one that paid in Beanie Babies? I'm not saying go back to school and get a Finance degree, but people need to get informed about their compensation!
fortran77 4y ago
It's been my experience with startups that there are different classes of shares, too, and it's generally stacked so that the founder's shares can retain their percentage of the company while everyone else's can get diluted down to nothing.
ushakov 4y ago
i asked these when a company offered me to interview with them they didn’t want to let me know until i pass the interview i politely declined to proceed with the interview
dan-robertson 4y ago
I quite like Ben Kuhn’s discussions of the topic, e.g. https://www.benkuhn.net/terms/ https://www.benkuhn.net/terms/ and https://www.benkuhn.net/offer/ https://www.benkuhn.net/offer/ I’d not really thought about it before reading the first post I linked but it’s clearly incorrect to take valuation = price payed for preferred shares * shares outstanding because you’re pricing the preferredness at 0 when it is not worth 0.
jeffrallen 4y ago
I recently got an equity offer that is a personal promise from the founder to do X in the future if Y happens. Sounds good to me. Because frankly, equity compensation is a total lottery anyway, so why not have it also depend on the trustworthiness of the founder too. Shrug.
- yieldcrv 4y ago
  Why compound the odds against you? Is that a serious thought process? Just get your contingent offer in writing, because that freezes a time period of trustworthiness that remains applicable even if they change their mind or their opinion about you.
  - b112 4y ago
    The founder could be forced out; would a new board take an outsted founder's word on a verbal for comp? What if the founder gets hit by a bus? Sad indeed, but who will verify the cash owed? What if the company is insolvent? A buy out may result in partial repay... but new owners are not going to pay on mere word. Things are on paper for reasons. More than listed above.
    - jeffrallen 4y ago
      You're right, but a payout from equity compensation is contingent, already, on those things and a thousand others not happening. It's a lottery and not worth my time trying to guess the odds. Better to use that time enjoying a fair salary to work with interesting people, and then we'll see. Maybe the promise is kept, maybe not. I think analysing equity compensation carefully is a good idea. But one outcome of that analysis can be, "Yolo, let's just give this a shot, take things a day at a time and enjoy the ride." Not everything in life can or should be put into contracts. (Despite my recent ode to them.)
      - yieldcrv 4y ago
      - 4y ago
me_me_mu_mu 4y ago
As someone who took equity that got rekt over the past year, I’m never making that mistake again. Give me as much cash as possible. I’m a software engineer, and not one of the first five/ten employees.
stevebmark 4y ago
Holloway also has the best guide to equity I've read: https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation. It's clear how much work they put into it to make it as approachable as possible.
fny 4y ago
Most important thing everyone needs to understand about equity comp right now: most 2021 rounds overvalued all startup by significant multiples. While equities have corrected dramatically, the revaluation for startups will only occur when the next round of funding comes around. So, in all likelihood, that unicorn $3B valuation being paraded is sub $1B right now, and if rates continue to March higher, your equity value will be cut even more dramatically. If your heart is set on a startup that you believe will survive the next decade, take money over equity now then when the company is hurting and needs to save cash, bulk up on equity at cheap levels.
crossroadsguy 4y ago
A very important question is missing imho — is there a buy back plan available - at least just enough to pay exercising amount and the tax? I have finished a year at my startup. I’ll be leaving soon. If I exercise my vested stock it’ll be more than half of my current CTC (yeah, that’s pre-tax). So that’s what I’ve decided that I do not want to be an investor in this company paying paying back the salary (which is less than what I’d command otherwise) it pays me! PS. I knew the risks and now I’ve lived it. Never again!
lanbanger 4y ago
The only question you should be asking is: Are these shares listed on a public market? If yes, you can value them at market price. If no, their current value is zero.

185 points by Ozzie_osman 4y ago

I've asked some of these questions before, but always got the answers in person or over video chat. What happens when what I was told doesn't square with what actually happens (for example: acceleration if the company is acquired)? Is there a recommendation for getting the answers to these questions in writing? Is there even any recourse?

jefftk 4y ago
The standard way to convert verbal answers to writing is to send out notes after. You write an email like: "It was great getting a chance to talk to you this afternoon! I wanted to send a quick summary of what I took away from the conversation, just to make sure we're on the same page..."
- akhmatova 4y ago
  Yup - this is a very useful tool. It doesn't have the same status as a binding, legal contract. But it does make it a lot harder for them to wiggle away from what they were initially promising you.

waynesonfire 4y ago

Is the motivation that asking these questions is going to be used in some way to get better compensation? 1. Ask questions 2. ??? 3. Profit! The true is that equity in a startup us extremely risky. So you're either going to get a large chunk and be a decision maker or you're ganna be a passive participant and hope for the best. No questions is going to change that. Even if the answers to these questions may be desirable NOW, tomorrow you can be diluted. It's meaningless to stress over this. Join because you love the company or are going to be a decision maker.

bspear 4y ago
Diligence on the startup so you know what you're getting into. Also prevents early employee churn because people feel duped once they look under the hood. The greatest frustration is usually around: 1. feeling like your equity cut is not enough once you know what other people are paid; 2. not knowing how much you pay in exercise cost / taxes / exercise window until it's too late On 1, there's a growing DB of startup comp here: https://topstartups.io/startup-salary-equity-database/ https://topstartups.io/startup-salary-equity-database/
akhmatova 4y ago
Is the motivation that asking these questions is going to be used in some way to get better compensation? Could be. But these questions can also be useful as (1) bullshit filters and (2) signalling (that you know your stuff and are not to be toyed with). In particular as to (1): you should be able to readily get answers to these questions; any hint at evasiveness, or a refusal to answer, should be taken as a red flag.
awillen 4y ago
It's not meaningless at all. First off, if you're comparing multiple offers with similar salaries, equity considerations may be a good way to make a decision. Beyond that, understanding how companies handle equity compensation can tell you a lot about their culture and treatment of employees. There are companies out there that are eager to answer these questions because they give generous stock compensation and want you to know it. There are also companies that will obfuscate and hide behind misleading numbers. I once had an offer and asked for more equity, only to be told by the recruiter that the stock was about to split, so I'd actually get twice as much (this is absolute nonsense, to be clear, and a huge red flag). Lastly, with regard to your initial question about compensation, asking these questions absolutely can be useful to that end. When you're negotiating with early to mid-stage startups, one of the things that you can negotiate is your equity/salary split. I once took a pay cut from the initial offer in exchange a much greater amount of equity than I was initially offered. That was because I found a lot of positives about the company and preferred higher risk and more reward (thankfully it looks like that is going to work out very well in my favor, but obviously that was in no way assured). If a company's giving you bad answers as it relates to equity, you may well want to try to negotiate for a higher salary in exchange for less equity, so your financial circumstances aren't tied as much to the company's performance. Understanding equity gives you one more dimension on which to negotiate, and the more things you can negotiate, the better off you are. There is this prevailing idea in Silicon Valley that you should just ignore equity and treat it like a lottery ticket, and while I think that is very good for financial planning, it is otherwise awful advice. Just because you don't have full control over the way things go with equity doesn't mean that you shouldn't educate yourself on what can be a meaningful portion of your compensation.

akomtu 4y ago

Why would a startup answer these questions honestly? The biggest part of what they offer is an illusion of future payout: they'll appeal to emotions, talk about the their mission and how they help the humanity and how you will play a critical role there.

whiplash451 4y ago
Not all startups are like that. Some of them will be quite upfront about the reality of things. In fact, the way they answer the questions could be a signal in and on itself.

ttymck 4y ago

Alternatively, don't join startups for the equity. Even if you genuinely believe the person answering your questions genuinely believes the answers they are giving, there's perilously little evidence to suggest their answers will be binding or accurate. 4 years from now, anticipate something to the effect of: "I have altered the deal, pray I don't alter it further", this could come from the CEO, an investor or the acquirer. Anything more favorable should be considered a statistical miracle. Joining a near-IPO company is something I can't speak to, but have a more optimistic view of. Furthermore, joining a public company with liquid equity is something I can personally say is well worth it. Do not join startups for the equity.

daenz 4y ago
>Do not join startups for the equity. If you're not a founding member, what reasons does that leave?
- runnerup 4y ago
  Great coworkers, fun work environment with high velocity of innovation, decent enough pay, flexible work arrangements, preferred geography, belief in the mission.
  - SOLAR_FIELDS 4y ago
    I recently did a round of interviews specifically targeting series A and series B companies and this is a pretty accurate summary. Some interesting things that were offered to me: - Unlimited nomading or work anywhere in the world for the same pay - Extremely generous PTO (by USA standards) - Quite generous WFH equipment stipends
  - daenz 4y ago
    You can get all of those things at a non-startup. Having worked at a handful of startups and non-startups, I am skeptical that a startup offers those things at above-average rate the justifies the downsides, which are, from my experience: * High pressure to work at all hours, because a startup is fragile * Extreme financial uncertainty * Many QoL concessions If you're not accepting a generous equity package in exchange for ensuring that the startup thrives and succeeds, you're missing a huge opportunity for exchanging hard labor for potentially high return. It's like buying a lottery ticket without filling in the numbers.

eweise 4y ago

Companies should be required to open the books to employees if they are offering equity. Without good data, employees are forced to believe the founders BS.

babyshake 4y ago
Not only open the books, but be forthcoming about answering those questions in a way that is very easy for employees to reference without needing to look through detailed cap table info.
- neilv 4y ago
  Maybe a mandated standard-format one-pager periodic/occasional statement with all the pertinent information in a form understandable to the layperson, so that employees don't have to ask, nor try to interpret on their own.
phphphphp 4y ago
Most people don’t know how to interpret financial information, nor do they know how to value equity (with or without the financial context). You can look at equity crowdfunding to see how completely underprepared most people are for assessing company financials: pretty much every normal person defers to business leaders narratives to assess a business, and if you trust a business enough to join it, then you probably trust the leaders enough to buy their narrative — with or without financials.
- deleted 4y ago
  [deleted]
- deleted 4y ago
  [deleted]
quickthrower2 4y ago
Yes to value the options you need to do the same DD as if you are buying the company. In addition DD on the clauses about those options and the many ways you can lose out.

deathanatos 4y ago

Even if you get these answers as an interview candidate, once you've joined the answers will become outdated … and for most of it, you won't be getting updated information. While things like successful rounds of funding do get shared, enough information about the health of the company (e.g., revenue vs. expense? over time? runway? how expected projects you're working on either will or do translate to revenue, and how much?) to make a meaningful decision about whether the company is worth investing in or not just isn't ever shared, IME. With no real information, there is only one value that can be assigned to the equity: $0.

quickthrower2 4y ago
It is a lemon market

buro9 4y ago

Whether you get answers depends a lot on the size of the company. Fewer than 10 employees... those interviewing likely know the answers and will share. Between 10-50 employees... those interviewing may still know the answers and may still be open to sharing them. Above 50 employees... it is increasingly likely that this information isn't known by more than a few people (those involved in the fundraising, accounts, senior leadership), and that your interviewers do not know it - if they know it at one point in time it's out of date quickly (next raise). It quick becomes something that only a very few people know and the information isn't useful/constructive to those focusing on execution (those who will be interviewing you). The questions are good... but if you don't get answers and would choose not to take the roles on that basis, then you might want to chat to a lot of people who have been early stage and done well - because very few got answers to those questions.

TimPC 4y ago
Start-ups who don’t solve these issues will see more knowledgeable potential employees walk away. The fact is start-ups pay a fair bit below the market wage and people have every right to know what sort of equity you’re getting in exchange for that. If a start-up is unwilling or unable to answer fairly basic questions about how their equity works it’s totally reasonable to not work for them.
- ttymck 4y ago
  Knowledgeable about their job != knowledge about corporate equity. There's a large share of capable engineers who are still wide-eyed over startup equity. Folks I know personally and greatly respect. Startups have had no trouble duping engineers into lower compensation while delivering serviceable results, and will continue to have no problem.
  - ryandrake 4y ago
    This might be a harsh, unpopular opinion, but if someone is going to accept a job where equity is a significant portion of their compensation, they really need to understand the essentials of equity, how options work, their tax implications, how to read basic financial statements, and so on. This is your livelihood we're talking about. Would you accept a job that paid in Bitcoin without understanding the basics of cryptocurrency? How about one that paid in Beanie Babies? I'm not saying go back to school and get a Finance degree, but people need to get informed about their compensation!

fortran77 4y ago

It's been my experience with startups that there are different classes of shares, too, and it's generally stacked so that the founder's shares can retain their percentage of the company while everyone else's can get diluted down to nothing.

ushakov 4y ago

i asked these when a company offered me to interview with them they didn’t want to let me know until i pass the interview i politely declined to proceed with the interview

dan-robertson 4y ago

I quite like Ben Kuhn’s discussions of the topic, e.g. https://www.benkuhn.net/terms/ https://www.benkuhn.net/terms/ and https://www.benkuhn.net/offer/ https://www.benkuhn.net/offer/ I’d not really thought about it before reading the first post I linked but it’s clearly incorrect to take valuation = price payed for preferred shares * shares outstanding because you’re pricing the preferredness at 0 when it is not worth 0.

jeffrallen 4y ago

I recently got an equity offer that is a personal promise from the founder to do X in the future if Y happens. Sounds good to me. Because frankly, equity compensation is a total lottery anyway, so why not have it also depend on the trustworthiness of the founder too. Shrug.

yieldcrv 4y ago
Why compound the odds against you? Is that a serious thought process? Just get your contingent offer in writing, because that freezes a time period of trustworthiness that remains applicable even if they change their mind or their opinion about you.
- b112 4y ago
  The founder could be forced out; would a new board take an outsted founder's word on a verbal for comp? What if the founder gets hit by a bus? Sad indeed, but who will verify the cash owed? What if the company is insolvent? A buy out may result in partial repay... but new owners are not going to pay on mere word. Things are on paper for reasons. More than listed above.
  - jeffrallen 4y ago
    You're right, but a payout from equity compensation is contingent, already, on those things and a thousand others not happening. It's a lottery and not worth my time trying to guess the odds. Better to use that time enjoying a fair salary to work with interesting people, and then we'll see. Maybe the promise is kept, maybe not. I think analysing equity compensation carefully is a good idea. But one outcome of that analysis can be, "Yolo, let's just give this a shot, take things a day at a time and enjoy the ride." Not everything in life can or should be put into contracts. (Despite my recent ode to them.)
    - yieldcrv 4y ago
    - 4y ago

me_me_mu_mu 4y ago

As someone who took equity that got rekt over the past year, I’m never making that mistake again. Give me as much cash as possible. I’m a software engineer, and not one of the first five/ten employees.

stevebmark 4y ago

Holloway also has the best guide to equity I've read: https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation. It's clear how much work they put into it to make it as approachable as possible.

fny 4y ago

Most important thing everyone needs to understand about equity comp right now: most 2021 rounds overvalued all startup by significant multiples. While equities have corrected dramatically, the revaluation for startups will only occur when the next round of funding comes around. So, in all likelihood, that unicorn $3B valuation being paraded is sub $1B right now, and if rates continue to March higher, your equity value will be cut even more dramatically. If your heart is set on a startup that you believe will survive the next decade, take money over equity now then when the company is hurting and needs to save cash, bulk up on equity at cheap levels.

crossroadsguy 4y ago

A very important question is missing imho — is there a buy back plan available - at least just enough to pay exercising amount and the tax? I have finished a year at my startup. I’ll be leaving soon. If I exercise my vested stock it’ll be more than half of my current CTC (yeah, that’s pre-tax). So that’s what I’ve decided that I do not want to be an investor in this company paying paying back the salary (which is less than what I’d command otherwise) it pays me! PS. I knew the risks and now I’ve lived it. Never again!

lanbanger 4y ago

The only question you should be asking is: Are these shares listed on a public market? If yes, you can value them at market price. If no, their current value is zero.