The company recently got $3M investment. I’m being offered $152k salary and 2% equity, vested over 4 years. Is this good?
My thinking is that 2% of $3M is about $60k, so I could treat that as an extra $15k per year. But if I look at the valuation based on that investment, it is probably worth 5x that, like an extra $75k per year. All in all it is over $200k compensation, which I’m grateful for, but it’s on par with a tech job at a big tech company. Are these reasonable assumptions, or am I missing something?
Great explanation of how startup equity works (and why early employee equity is typically “worth more” even as they get heavily diluted).
But would love better numbers around the failure case for the employee, because at seed-stage it’s probably 95% or higher.
Many successful IPOs aren’t so successful for early employees - most public companies trade below IPO price when employee lockup periods expire. If you join a year before a successful IPO, it’s not uncommon for your options strike price to be above the fair market price once you can sell (meaning your options are literally worthless). A high valuation pre-IPO can wreck employees equity.
As a seed / Series A employee, there’s a good chance you’re fired or quit and choose not to (or can’t afford to) exercise your options. Would you pay $50k to buy a lottery ticket that is probably worth $0, and you might not know for 5 years?
Pro-rata rights + dilution can obviously destroy early equity. If your company has a bad year and then recovers stronger than ever, that bad year might destroy your equity. There are a million ways for later-stage investors to fuck over current equity holders, and while your exec team doesn’t want that to happen sometimes they don’t really have a choice.
So my tips:
This is all good advice to strongly bear in mind.
I think the absolute failure rate of startups is probably 95%, but the failure rate of venture-backed startups is about 75%, pretty much in the middle of your high and my low, according to a 2022 Harvard Business School study (“The Venture Capital Secret: 3 Out of 4 Start-Ups Fail.”)
Would only add that there are a fair number of service providers these days that will help employees exercise their options if the company is up and to the right. Might have to hand over a thirdish of your shares but you won’t have to come out of pocket for them.