Startup Equity: Comparing Your “Currency” to a Competitor’s (Part 4 of an n part series)

untitledComparing base bay is relatively easy, equity not so much. A dollar is a dollar. And, if a dollar isn’t a dollar (let’s say it’s a Franc), there are published exchange rates to help convert values. But, with equity compensation, the base currency is your stock, and its value is not easily translated (or even agreed upon). This fundamental disconnect is one of the most challenging issues faced by anyone dealing with equity compensation at a start-up.

Let’s start with the oversimplified example above. There are exchange rates from dollars to francs, but they are not as consistent as the prices available for publicly traded stock. Then there is the basic fact that a franc may not be a franc. Switzerland uses the franc, as do Senegal, Rwanda, and Togo. In fact, there are eight or nine different types of “franc” used by about 22 countries. You had better fully understand which franc you are converting before you give a value. This is much like the confusion around instruments like stock options and restricted stock units (RSUs), or other real or synthetic equity tools.

If you don’t know what you are comparing, then you are probably going to be wrong. But, with nearly every currency, you can go to the internet or grab a good newspaper and find a fairly recent and accurate conversion rate. With start-up equity, very little is recent and very few are accurate. In fact, very little is published and what is, is very often incorrect. Even most of the least known currencies have published conversion rates. You can quickly do some research if someone offers to exchange Manat for Dollars. Turkmenistani Manat current convert at 1 Manat to 0.29 dollars. Azerbaijani Manat converts at 1 Manat to 0.57 Dollars. Not knowing the difference can make all the difference.

Exchange rates require comparable foundations. Getting 2,500 Stock options or RSUs means almost nothing. Being told that the current stock price is $0.10/share also means almost nothing. For equity compensation to have perceived value, you must understand the value of the company and the preferences of any other investors. Without this foundation, you have no idea if you have been granted a big piece of something or a tiny piece of almost nothing.

But, we’re not done. If you want to understand your company’s currency exchange rate to the real world, you must also understand the potential future value of the company and when that potential might be realistically achieved. It’s like if someone gave you Deutsche Marks a week before the move to Euros, but told you they couldn’t be exchanged for five or ten years. You would have known the current value, but even the best economist would have had a hard time predicting the success of the Euro and how inflation, deflation, the global economy and other factors would impact value in the long run. And let’s be honest, the stock at your startup is not as stable or predictable as the currency of one of the largest economies in the world.

What’s all of this mean in the world of startups and compensation?

If you are a company offering equity you must be willing to share information or be prepared for your expensive and possibly hard-fought equity program to have little or no value to your employees.

If you are an executive or founder, don’t expect anyone to appreciate what you have given up, if you are unwilling to communicate its current and potential value.

If you are a compensation professional, stop looking at values in surveys and expecting them to correlate to your situation.

Most importantly, ask a ton of questions before you get started and keep asking them over and over again after you get moving. The most amazing and exciting thing about currency isn’t any of the above. It’s the simple fact that very few investments move faster, change more often and have greater potential upside and downside than trading money. If that doesn’t sound like startup equity, I don’t know what does.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several industry resources including the recent Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.