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:
buy shares outright or early-exercise with an 83(b) if you’re early enough that it’s possible / affordable.
don’t value equity in comp packages as worth anything if it’s not liquid. You can still negotiate it / use it as leverage, but your own valuation of it should probably only include the question “will I get rich if this works out?”
if you get early liquidity options, take them.
at all times expect that your equity is at risk and likely worth little. Don’t stay at a bad startup because you’re valuing your equity too highly.
if you’re at the pre-IPO stage, expect a very fun ride but don’t expect that last point to change. Sell as much as you can stomach, whenever you can.
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: