Startup Equity: The Most Common Mistake (Part 7 of an n part series)

untitledHere is my 2017 gift to you. I truly believe that equity compensation helped build the technology industry, and therefore the world as we know it. But, an unfortunate number of startups make the same error when using this complex and powerful tool that drive corporate success.

If you browse the internet, ask entrepreneurs or receive guidance from someone at a VC firm, you will get similar answers when asking about equity awards for the first twenty, or so, employees. This information, while accurate at a generic level, is likely to be incorrect for your specific circumstances.

The answer looks a bit like this. Outside of the founders, the C-level hires should each get Continue reading

Startup Equity: Synthetic Equity or Sharing Without Sharing (Part 5 of an n part series)

untitled4When you hear “equity compensation” and startups, you immediately think of stock options. More recently RSUs (restricted stock units that settle in company stock) have also been popular. But, what if you aren’t the “sharing” type? Or what if your company doesn’t have stock? LLCs are a good example. How does your business compete when it doesn’t have access to the same tools? Synthetic equity is becoming an increasingly popular answer.

Synthetic equity refers to any type of incentive plan where the value delivered to participants fluctuates based on the value of the enterprise. For corporations, the most common tools are Continue reading

Startup Equity: 409A vs Investor Value (part 2 of an n part series)

untitledfWe have all seen the headlines, “XYZ receives $100M in funding at a $3B valuation.” We seldom see the “other” valuation showing the same company is worth $350M. For publicly-traded companies, value is determined by investors working as a group in a real-time market. They are generally purchasing the same kind of stock. Values are based on a combination of publicly disclosed information, supercool computer models and gut feel. But in the world of the pre-IPO start-ups, values take on a life of their own.

Investors in startups are buying stock with more risk and more upside potential. Companies only sell stock to investors on Continue reading

How do Googlers manage their RSUs?

Question (Orig. on Quora):

Since RSUs makeup for major chunk of their future savings, do Googlers feel insecure about stocks dropping significantly ? For example, LinkedIn stocks lost their worth significantly overnight. Do Googlers sell immediately or reinvest into other venues or just hold onto them ?

Answer (by Dan Walter):

I think if “Googlers” as a group did mainly the same thing, the would be deemed far less intelligent than expected.

Doing the “right thing” with RSUs depends on many factors. Some of these are personal, some are market driven, some are income and tax driven and still others are driven by psychology.

Here is what the smart people do.

1) Long before their RSUs vest they take advantage of the financial education and planning opportunities offered by the company or recommended agents.

2) As their RSUs vest that look at the current market conditions, the plan put together with their financial advisor and any indicators of how things may change.

3) They also look at their current cash position, their current concentration of Google stock, and related industry stock as part of their portfolio.

4) They look at what other vesting events may be occurring in the near term future.

5) They look at any potential cash payments they may be receiving soon.

6) After all of that they make a determination to keep or sell the share delivered after vesting. This decision will be different for different people and will be different for different vesting dates.

They key to equity compensation is being well educated about your awards and the choices surrounding them.

In my more than two decades of working on these programs I have found that perhaps a single digit percentage of ALL equity holders truly utilize these awards well. It should be noted that this single digit percentage is across all companies. This means that, at many companies, the percentage is below the fraction of 1% and at others it is quite high. This is mainly due to the amount of time, effort, passion and money the company spends on educating people. BUT, individuals can get much of this information on their own, even if their company is relatively silent.

A Small Problem for Compensation Professionals

6a0134836082f8970c01bb090d7e4a970d-200wiThis is not the article I intended to post today. I had something else ready to go, but realized this was more important. I am sitting in my hotel room in San Diego, California getting ready to head over for the second day of the annual WorldatWork Total Rewards Conference. Total Rewards is a BIG category.  In three days it is not possible to dive into every type and flavor of “reward”. But one important family of compensation, equity, is almost completely missing from this year’s event.

Don’t get me wrong. There are some Continue reading

What’s Equity Really Worth?

untitled2We all know that equity compensation is the driver behind the astronomic growth in executive compensation. We all know that it is also the reason that tech lords make millions before the tenth year of their careers. It is the reason that the average home in San Francisco and San Jose is more than $1 Million. We all know that these things are true because we have all read or heard the stories. What if these stories were only partially true?

What is equity compensation REALLY worth? How do you know how much to give? How do your employees know how much they are getting? What truly drives, impacts, reduces and magnifies this value? In this post, Continue reading

Could the stock options or RSUs you receive from a “unicorn” startup be diluted?

Question (Orig. on Quora):

Of course the rsu’s can be worth nothing if the company implodes, but other than the company simply failing, is it possible for my stock to become worthless?

Answer (by Dan Walter):

Sure. Imagine the company goes through a down round financing. Imagine the new investors put a structure in place that ensures they receive their full value if the company is sold below a given price. If the company is eventually sold below this price then all of the value of the company would be paid to the latest investors and nothing to the holders of employee equity.

This is just a super simple hypothetical but I can bet that some people on Quora have real horror stories about similar transactions.

How to Determine Equity Grant Sizes (it’s probably not what you think)

6a0134836082f8970c01bb08c1f798970d-200wiDetermining grant sizes or values is Part 4 and the next challenge in my ongoing series, “Stock Options on the Precipice”. At some point, you will arrive at a place where you will need to determine award sizes. There have been times where this was less difficult than it is right now. And, there will never be a time where this is as formulaic and consistent as base pay amounts.

The first question is whether grants should be based on a percentage of the company, a given number of shares or options or a dollar value converted into a grant amount. Much of this depends on Continue reading

11 Reasons Your Equity Compensation Survey Data is Wrong

6a0134836082f8970c01b7c8191c03970b-200wiPart 3 of my ongoing “Stock Options on the Precipice” series.

How much equity should I give (or get)?

It’s probably the most common question I get asked. The answer, as I am sure you know, is “It depends”. And, with equity compensation the final answer is even squishier than other types of compensation. Data seems to be all over the place. Trends appear to vary based on who is providing them. It often feels like survey data is pulling companies in specific directions, when it should be reflecting directions that have already been taken. What in the heck is going on?

You haven’t lost your mind. Equity compensation really is Continue reading

Employee Stock Options on the Precipice?

6a0134836082f8970c01bb08b4abc0970d-200wiI am declaring February “Stock Option Month” at the Café (at least in relation to my posts). For more than 20 years I have been directly involved in the ebb and flow of employee stock options. When they are great, they are the best. When they are not great, they can be truly destructive. I will call it right now. We are, once again, on the precipice of the downfall of stock options. Consider the headlines below. Continue reading