I know it will never happen, but I'd love to see some way of standardizing how this information is presented based on various terms to help potential employees make informed decisions.
Right now there is MASSIVE information asymmetry and companies are absolutely leveraging that during their hiring processes. In many cases, they have to in order to stand a chance at being competitive when hiring (which is a statement in and of itself).
Given the complexity of these sorts of things for the average employee who has never looked at a term sheet before, has no clue about the tax implications of options, etc. what can be done to even the odds?
My personal rule of thumb right now is that the odds of getting equity that's worth a damn if I'm not a co-founder would typically not be worth it, so I make decisions based on the rest of the compensation package. It is simply the safest way to play it when I know I'm not the smartest one at the table in an equity-based discussion because of said information asymmetry.
Actually, my conclusion is that because of the information asymmetry, and the fact that for most opportunities the equity is not worth getting out of bed over, I choose to focus on the cash.
But please don't mistake that for me saying companies should just pay cash. While that would be great, I think there is definitely value in offering equity, particularly for early stage companies that may not have the revenue to actually offer a fully competitive salary.
The thing that needs to change is how prospective employees are educated about this so they can make fair and informed decisions as to their risk tolerance.
> My personal rule of thumb right now is that the odds of getting equity that's worth a damn if I'm not a co-founder would typically not be worth it, so I make decisions based on the rest of the compensation package.
This is, for most employees, the correct approach. The reality is that most of the information you might ask for and be provided is usually going to be of limited value and for a limited period of time unless you happen to join the company right before its final financing or an exit. Put more simply, equity structure is typically not static.
If you join a company in part because you like the equity structure at Series A, you have no guarantee that the equity structure will be as appealing to you after the Series B or C.
Yep, and further to that point, having the information doesn't necessarily mean there are any fewer ways for you to be screwed out of said equity. It just means that you might be more informed about the number of ways you can be screwed.
I turned down a recent offer from a startup aftet being offered x-thousand shares of common stock because they wouldn't give me any details about what other investors had priority shares over that among other basic questions.
I'm not sure I would ding a prospective employer for withholding that information. I would be OK with known the rough amount raised and that it's probably all about 1x preferred. In addition to what % and strike price I'm being offered. I don't think most employees need to know the details of all the fundraising.
If there was a better way to know the value of stock I'd take it. They are going to give me 20,000. 20,000 of what? What is 1 worth, is it worth something if the company sells now, tomorrow, over valuation, under valuation.
Those things are important if stock is part of your compensation.
If there are a good amount of shares with a greater than 1x preference and/or the employee pool (with no preference) is much smaller than usual, then the company should make additional disclosure of this information.
Exactly. That's what I ended up telling them: "Thanks for offering me 5000 shares of your company, but you won't give me any details about what they're worth... did you issue 50 million shares? 5 million?
If someone is stupid enough to take something that you won't tell them how much it is worth, you are going to end up with stupid/naive engineers and you will fail.
If this stuff is being given as if it's worth something, you need to know what that value is!
And it's no good asking the people offering it you. Of course they'll tell you it's worth a lot! Whether they believe it or not - something about which I am genuinely agnostic - for every cynical, reptile-eyed psychopath, there's somebody who's downed a yard of koolaid - it's in their interest to emphasise the potential value of non-hard-currency compensation, because it's cheaper to pay you that way than it is to find the (supposed) equivalent in actual money.
>> Though the startup is still debating how much information to give to the candidate, it will likely need to produce a policy around such requests soon.
If you're going to offer an employee something that sounds like ownership in the company, you should probably be willing/required to lay it all on the table. Failure to do so is a sure sign that what you're offering is not what you want them to think it is.
Furthermore, the employee is going to be at least as instrumental at realizing the company as your investors. If the investors have liquidation preferences, they have more valuable and higher-quality equity. Employees deserve the same value for their work even if their overall compensation is of lower magnitude than what the investors are putting in.
>This week, a Bay Area founder was taken aback when an engineer being recruited by his startup asked for both its cap table and information regarding the liquidation preferences of its venture backers.
Yep, if you are the engineer: time to nope the fuck out of there as quickly as possible. The founder has no real consideration for you other than as a resource in his fiefdom.
Now that's a bit extreme. A lot of engineers would consider the company as nothing but "It's just a job as I'll jump ship as soon as some better gig comes along", and that's totally fair .
You hire someone because there's work to be done. You would develop professional, working and possibly personal relationships as you work together for some time. That has nothing to do with the common hiring practices. For the records, I always asked for the cap table when negotiating an offer and I understand that founders are reluctant to share.
One of the two big startups quoted in the article made me an offer for an engineering job years ago, but wouldn't tell me the strike price of X options they offered -- never mind the percent of the company or priorities.
Is there a good guide out there that lists very plainly:
1) All of the information one should ask for re. equity.
2) What to do with that information.
I don't necessarily need to know all of the in and outs right away, but it would be nice to know a some of the key things that I really ought to know in order to get some kind of handle on it.
I would like this , but one additional question is "when" should you ask? As in, what part of the interviewing process does one ask about outstanding shares, etc..
Should it be after an offer is extended, immediately after the technical part of the interview, etc..?
I would feel awkward asking some of these specifics about financing early in the process.
Its only relevant after an offer is extended. View it as due dilligence...they are giving you equity in exchange for cash/less salary..the burden should be on them to prove its a good or fair deal.
> I would like this , but one additional question is "when" should you ask?
When discussing compensation, I assume. If someone offered you $X dollars per year and Y HappyTimeFunBucks, I'd definitely want to know more about the HappyTimeFunBucks before deciding.
So, there's clearly a lot changing in the winds of business, right, especially in tech circles where a) skilled employees are really in demand and b) we communicate a whole lot more than other sectors with each other.
I don't think anybody expects to really build a career long-term at a company anymore unless they're a cofounder--5 years, maybe, right? So, companies are starting to say, "hey, wait...let's lure them in with equity".
Problem is, we as employees are wising up (due to this sort of constant gossip we all have) that equity is basically not worth counting on at all, and is just a way of tricking engineers who've avoided business learnings into working for less than they produce.
I'm curious how long until we see an approach where the employees get a direct stake in the company's revenue, growth, and expenditures, instead of this silly equity proxy arrangement.
The problem that I see from a morale standpoint, especially for early engineers and hires, is that the founders have massive massive massive equity compared to you, but don't do nearly as much to actually build out the company. They don't organize the teams, they don't write all the fiddly bits of the code, they don't smile and dial all the customers.
And maybe that's just my own bitterness and experience, but it really seems like a lie to treat equity as some actual stake in the company, because you'll never get into the founder club.
I think what you're looking for is a "worker cooperative", which is basically a company wholly owned and controlled (directly or indirectly) by the employees.
1. How many outstanding shares (including as yet un-granted option pool shares) - divide your grant by this number and you have your ownership share of the company
2. If you're granted RSUs, ask about whether you need to file an 83b
3. If you're granted options, ask for the price of these options (or the last common share 409A valuation). This is your cost value of each share
4. Post-money valuation of the previous round (can't be calculated by 409A since that's different, but rule of thumb is that 409A valuation X outstanding shares x 5 ~= last round valuation).
5. Post-money valuation/total outstanding shares is technically the paper-worth of your options or shares (and you can subtract the 409A valuation to get the current expected profit per share). Assuming nothing else, your shares vested per year X (valuation-409A valuation) = your paper equity salary per year
Regarding the company prospects:
1. Money in the bank
2. Monthly burn rate, at which point you can derive the amount of time left for the company to keep going without raising more funding
3. Revenue growth rate, and expense growth rate - this allows you to adjust 2
4. Status of next funding round - when, and which investors. Ask if the same investors will participate again in the next round of funding. Very very rough rule of thumb - if yes, company is doing ok. if no, something's up (with the exception of large growth rounds where smaller investors can't participate anyway)
5. Ask about liquidation preferences (so if there's a sale or exit, do investors get their equity share or at least 1x their money back (the higher of the two), or do they get a multiple of their money back (if that's greater than their equity share)
I'd save the questions for the offer negotiation, but most of the equity questions are reasonable. I can understand someone not telling you the revenue/cost numbers, and that's where your due-diligence on the company/gut come in.
At Perfect Audience we told our potential hires this info at the time of giving them an offer sheet. It seemed only fair to let them know how the company was doing and how much money they stood to make from an acquisition.
At the time it seemed like the only fair approach. We founders honestly didn't know that most startups tell potential hires as little as possible about company finances.
Knowing what I know now, I'd still tell folks this info as it unwittingly gave us a hiring advantage over companies that don't.
> 1. How many outstanding shares (including as yet un-granted option pool shares) - divide your grant by this number and you have your ownership share of the company
Proper term for this is FDSO (fully diluted shares outstanding).
Given the huge information asymmetry problems between employees and employers introduced by options, (see the comment by 'babababa for a good list of things to ask, that not all companies will want to share) - would it just be easier to have an agreement like "if the company raises $X million, employee gets a bonus of $Y"? (you could have different X's and Y's for different tiers of round e.g. 20K bonus if we raise 10-50 million, 100K bonus if we raise 50 million+, etc, and maybe a different one for "company goes public").
You lose the tax benefit of cap gains vs income tax, and you miss out on some upside if you're an early employee at the next Dropbox (but you're probably not one of those); on the other hand the downsides are at least quantifiable, as compared to receiving an unknown percentage of the company at an unknown valuation with unknown liquidity preferences and having unknown tax issues (83b, AMT, etc).
This is literally something I just thought of now so I expect it to be full of holes. What do people think?
The biggest hole is simply that -- according to the typical story -- startups pay equity because it's cheaper than cash. They fundraise when they need more cash. If they could afford to throw a portion of the cash at employees, they theoretically would have been doing that already.
All this information should be able to be modelled into a distribution curve of likely returns. It should be possible for the company to model the likely returns and provide this as a nice probability curve of the value. This would allow new employees to know the value of what they have been offered without the company having to reveal all the details of everything.
It might be a nice little lifestyle business to offer a service/software where the founders enter in all their financial data and possible outcomes and it spits out a nice simple curve of the current valuation. It might be of value to the founders too :)
Here in the U.S., corporate charters are public documents and stockholders have certain legally-mandated information rights.
The liquidation preferences and other downside protections available for each class of stock must be set forth in the company's charter. These are public documents and copies can be obtained from the secretary of state's office in the state where the company is incorporated (typically Delaware).
Stockholders (but not necessarily option holders that haven't exercised options) may also access the company's books and records for the purpose of valuing their shares.
For example, Section 220 of the Delaware General Corporation Law gives stockholders an explicit right to access certain records and allows a stockholder to obtain a court order granting access to the records if the corporation refuses to provide them.
Thanks for bringing legal details to light here. These are exactly the sorts of details a startup would ignore; my former employer, a then-6-year-old-startup, omitted these sorts of details when I started digging into equity details.
Compliance would cost an unfortunate but necessary draw on a founder's attention. It would be nice to see companies like Clerky ( https://www.clerky.com/ ) pick this up... I remember seeing at least one other company doing similar legal services (e.g. 83(b) elections) if anybody can link them.
A significant risk is that the service might not handle the compliance exactly as the founder would like (for worse or for /better/). Perhaps a blogpost comparing services would help the community.
It's great to get the answers to these questions, and I'm all in favor of transparency. If you're joining a startup, however, you should realize the majority of the shareholders of a company can make a decision at any time to make a deal with a 3rd party which introduces enough dilution to make your shares/options worth very little. Even if it means amending the charter of the company or rewriting the shareholder agreement. They can also grant additional shares or options to one or more people which shift the percentage of your ownership in the company.
The most important thing (apart from thinking the company's mission is good and achievable and the culture a good fit etc) is that you can trust the majority shareholder(s). Or, as others have indicated, just focus on cash compensation. Then again, if you can't prove to yourself that the founder/majority-shareholder is trustworthy, you should run away anyhow, since the cap table will be the least of your worries if there's a lack of ethics.
By the way, my experience working for a startup (I've also worked for large companies, and for the government) is that they are difficult but if you like independence, challenges, and the potential for large rewards (with risk!), they're great.
This seems like it should be a no brainer. Otherwise it's nearly as crazy as accepting an offer where the company won't tell you the salary until after you take the job.
That someone would be "taken aback" by someone asking whether the air castles you're painting pictures of are literally worthless says a lot about this whole scene.
> The candidate presumably “worked somewhere where he discovered that these things matter,” says the founder, who asked not to be named in this story.
i.e., someone else screwed this guy before you got to him.
> “There are just so many complications involved” in sharing the nitty gritty of [how the employee is going to be paid last, if at all] in the event of a sale or a public offering. “We’re still thinking through all these things.”
48 comments
[ 2.6 ms ] story [ 108 ms ] threadRight now there is MASSIVE information asymmetry and companies are absolutely leveraging that during their hiring processes. In many cases, they have to in order to stand a chance at being competitive when hiring (which is a statement in and of itself).
Given the complexity of these sorts of things for the average employee who has never looked at a term sheet before, has no clue about the tax implications of options, etc. what can be done to even the odds?
My personal rule of thumb right now is that the odds of getting equity that's worth a damn if I'm not a co-founder would typically not be worth it, so I make decisions based on the rest of the compensation package. It is simply the safest way to play it when I know I'm not the smartest one at the table in an equity-based discussion because of said information asymmetry.
They could give them actual money. That seems to solve the problem neatly.
But please don't mistake that for me saying companies should just pay cash. While that would be great, I think there is definitely value in offering equity, particularly for early stage companies that may not have the revenue to actually offer a fully competitive salary.
The thing that needs to change is how prospective employees are educated about this so they can make fair and informed decisions as to their risk tolerance.
This is, for most employees, the correct approach. The reality is that most of the information you might ask for and be provided is usually going to be of limited value and for a limited period of time unless you happen to join the company right before its final financing or an exit. Put more simply, equity structure is typically not static.
If you join a company in part because you like the equity structure at Series A, you have no guarantee that the equity structure will be as appealing to you after the Series B or C.
Those things are important if stock is part of your compensation.
If someone is stupid enough to take something that you won't tell them how much it is worth, you are going to end up with stupid/naive engineers and you will fail.
If this stuff is being given as if it's worth something, you need to know what that value is!
And it's no good asking the people offering it you. Of course they'll tell you it's worth a lot! Whether they believe it or not - something about which I am genuinely agnostic - for every cynical, reptile-eyed psychopath, there's somebody who's downed a yard of koolaid - it's in their interest to emphasise the potential value of non-hard-currency compensation, because it's cheaper to pay you that way than it is to find the (supposed) equivalent in actual money.
If you're going to offer an employee something that sounds like ownership in the company, you should probably be willing/required to lay it all on the table. Failure to do so is a sure sign that what you're offering is not what you want them to think it is.
Yep, if you are the engineer: time to nope the fuck out of there as quickly as possible. The founder has no real consideration for you other than as a resource in his fiefdom.
You hire someone because there's work to be done. You would develop professional, working and possibly personal relationships as you work together for some time. That has nothing to do with the common hiring practices. For the records, I always asked for the cap table when negotiating an offer and I understand that founders are reluctant to share.
It does you no good to make $xxx,000/year and have y options if the company is at risk of not being able to make payroll in six months.
1) All of the information one should ask for re. equity. 2) What to do with that information.
I don't necessarily need to know all of the in and outs right away, but it would be nice to know a some of the key things that I really ought to know in order to get some kind of handle on it.
https://equityzen.com/blog/understanding-equity-compensation...
Should it be after an offer is extended, immediately after the technical part of the interview, etc..?
I would feel awkward asking some of these specifics about financing early in the process.
When discussing compensation, I assume. If someone offered you $X dollars per year and Y HappyTimeFunBucks, I'd definitely want to know more about the HappyTimeFunBucks before deciding.
I don't think anybody expects to really build a career long-term at a company anymore unless they're a cofounder--5 years, maybe, right? So, companies are starting to say, "hey, wait...let's lure them in with equity".
Problem is, we as employees are wising up (due to this sort of constant gossip we all have) that equity is basically not worth counting on at all, and is just a way of tricking engineers who've avoided business learnings into working for less than they produce.
I'm curious how long until we see an approach where the employees get a direct stake in the company's revenue, growth, and expenditures, instead of this silly equity proxy arrangement.
The problem that I see from a morale standpoint, especially for early engineers and hires, is that the founders have massive massive massive equity compared to you, but don't do nearly as much to actually build out the company. They don't organize the teams, they don't write all the fiddly bits of the code, they don't smile and dial all the customers.
And maybe that's just my own bitterness and experience, but it really seems like a lie to treat equity as some actual stake in the company, because you'll never get into the founder club.
https://en.wikipedia.org/wiki/Worker_cooperative
Regarding your grant:
1. How many outstanding shares (including as yet un-granted option pool shares) - divide your grant by this number and you have your ownership share of the company
2. If you're granted RSUs, ask about whether you need to file an 83b
3. If you're granted options, ask for the price of these options (or the last common share 409A valuation). This is your cost value of each share
4. Post-money valuation of the previous round (can't be calculated by 409A since that's different, but rule of thumb is that 409A valuation X outstanding shares x 5 ~= last round valuation).
5. Post-money valuation/total outstanding shares is technically the paper-worth of your options or shares (and you can subtract the 409A valuation to get the current expected profit per share). Assuming nothing else, your shares vested per year X (valuation-409A valuation) = your paper equity salary per year
Regarding the company prospects:
1. Money in the bank
2. Monthly burn rate, at which point you can derive the amount of time left for the company to keep going without raising more funding
3. Revenue growth rate, and expense growth rate - this allows you to adjust 2
4. Status of next funding round - when, and which investors. Ask if the same investors will participate again in the next round of funding. Very very rough rule of thumb - if yes, company is doing ok. if no, something's up (with the exception of large growth rounds where smaller investors can't participate anyway)
5. Ask about liquidation preferences (so if there's a sale or exit, do investors get their equity share or at least 1x their money back (the higher of the two), or do they get a multiple of their money back (if that's greater than their equity share)
*Edited formatting
At the time it seemed like the only fair approach. We founders honestly didn't know that most startups tell potential hires as little as possible about company finances.
Knowing what I know now, I'd still tell folks this info as it unwittingly gave us a hiring advantage over companies that don't.
Does the company not have an accountant?
Proper term for this is FDSO (fully diluted shares outstanding).
You lose the tax benefit of cap gains vs income tax, and you miss out on some upside if you're an early employee at the next Dropbox (but you're probably not one of those); on the other hand the downsides are at least quantifiable, as compared to receiving an unknown percentage of the company at an unknown valuation with unknown liquidity preferences and having unknown tax issues (83b, AMT, etc).
This is literally something I just thought of now so I expect it to be full of holes. What do people think?
It might be a nice little lifestyle business to offer a service/software where the founders enter in all their financial data and possible outcomes and it spits out a nice simple curve of the current valuation. It might be of value to the founders too :)
The liquidation preferences and other downside protections available for each class of stock must be set forth in the company's charter. These are public documents and copies can be obtained from the secretary of state's office in the state where the company is incorporated (typically Delaware).
Stockholders (but not necessarily option holders that haven't exercised options) may also access the company's books and records for the purpose of valuing their shares.
For example, Section 220 of the Delaware General Corporation Law gives stockholders an explicit right to access certain records and allows a stockholder to obtain a court order granting access to the records if the corporation refuses to provide them.
http://delcode.delaware.gov/title8/c001/sc07/#220
Ideally, a company would make this information available long before it is compelled to do!
Compliance would cost an unfortunate but necessary draw on a founder's attention. It would be nice to see companies like Clerky ( https://www.clerky.com/ ) pick this up... I remember seeing at least one other company doing similar legal services (e.g. 83(b) elections) if anybody can link them.
A significant risk is that the service might not handle the compliance exactly as the founder would like (for worse or for /better/). Perhaps a blogpost comparing services would help the community.
The most important thing (apart from thinking the company's mission is good and achievable and the culture a good fit etc) is that you can trust the majority shareholder(s). Or, as others have indicated, just focus on cash compensation. Then again, if you can't prove to yourself that the founder/majority-shareholder is trustworthy, you should run away anyhow, since the cap table will be the least of your worries if there's a lack of ethics.
By the way, my experience working for a startup (I've also worked for large companies, and for the government) is that they are difficult but if you like independence, challenges, and the potential for large rewards (with risk!), they're great.
> The candidate presumably “worked somewhere where he discovered that these things matter,” says the founder, who asked not to be named in this story.
i.e., someone else screwed this guy before you got to him.
> “There are just so many complications involved” in sharing the nitty gritty of [how the employee is going to be paid last, if at all] in the event of a sale or a public offering. “We’re still thinking through all these things.”
Yeah, I bet you are.