Figuring out the right amount of equity compensation at startups is a challenge. How much should I grant? How big should the grant be? How should I size the grant relative to base pay? Investors, boards, executives, HR and compensation departments at start-ups have conflicts over these questions all the time. In the past I have written about the11 Reasons Your Equity Compensation Survey Data is Wrong. This article focuses on three common ways to determine equity at startups regardless of your survey source.
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This is where most companies start. The first 10 or 20 key players at a start-up are Continue reading →
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.
Hi Alex. Thanks for the A2a. And thanks to Shriram Bhashyamfor also recommending me.
The first thing to clarify is the difference between “best practices” and most common practices. In the realm of equity compensation the most common practices are seldom the best. I will try and cover a bit of both.
“Early Stage” has also become a term of art in many cases. In this case I will write from the perspective of a company who may have up to a medium sized B Round. Your company may certainly fall into a different category.
Lastly, before I get into details, please realize that essential ANY equity compensation data is wrong at some fundamental level. Since you are unlikely to know how another company has designed their plan, what their investors expectations are, what the releasing timeline and potential value at the time of liquidity and whether the liquidity event is focused on IPO or acquisition (*and a series of other potential factors), you may be comparing apples to hotdogs, or plastic cups. (A list of the 11 reasons your equity compensation data is wrong)
The most common practices in the Silicon Valley (another assumption I am making, since these rules may not apply to you if you are located elsewhere) have been generally boxed in by VCs over the past couple of decades. The VC sway on startups is so strong that many companies (and many VCs) don’t realize that there may be other ways. In summary:
This is a fairly common question. The short answer is no. But, it depends.
The first thing you should turn to is your grant agreement. This will explain things like vesting schedules (generally when you can beging exercising stock options, or when you gain access to the stock or cash underlying things like. RSUs. The vesting schedules may also require that a change in control or IPO take place before any vesting is finalized.
Your agreement is also the most common place to see the details on post-termination grace periods. This is what may allow you to exercise any vested amounts after you leave. The rules for these are usually different depending on the type of termination. Example: Death or Permanent Disability may give you 6 months or a year, termination without cause may give you 30 days or three months, but being fired or “terminated for cause” often results in an immediate forfeiture of anything vested. Anything unvested usually is cancelled the date of termination, regardless of the reason.
If your vesting schedule allows exercises and your termination grace period allows exercises, they may still be additional restrictions that would keep you from exercising. Some of these may be defined in your agreement. Others may be found in the plan document.
You need to ask the company to put in writing their reasons for not allowing you to exercise. And you need to do this quickly. If there is a grace period you don;t want to mess around with the grant after that expires. If the company is on the edge of a transaction like an acquisition, you don;t want to have to learn a new set of people and rules.
Assuming that the start-up starts as a project, should discussion of equity occur before the product is done / before any funding is received? Or is it more customary to wait for a round of funding before discussing equity?
Answer (by Dan Walter)
Start discussing it immediately. Getting the equity split and details right can take some time. This doesn’t mean that you HAVE to finalize things immediately, but you should all be on the same page regarding the path to finalizing the details.
I have seen this issue become the dividing force at many small companies. When done correctly it should be the uniting force.
When all things are equal things should be split equally. When it is obvious that there is one “more than equal” player, care must be taken to ensure that everyone truly understands their roles and accountability.
And, remember that equity, among sane and reasoned people (not always the case) can be adjusted down the road. This is most easily done by offering more equity to the person(s) doing the most, rather than trying to take equity away from those doing the least.
As a grad student, I worked 5M part-time (25% of total time) with a co-founder, who came up with, funded and executed the idea. We were supposed to split 50/50 if I become full-time. However, we missed a milestone & I’m leaving to look for a full-time job. We never had a formal discussion with a contract, details on vesting schedule, etc. I want to be compensated in equity for the work I put in. How much equity should I ask? What % equity is fair?
Answer (by Dan Walter)
I align pay with company strategy and culture. Learn more at www.performensation.com. My expertise includes equity compensation programs.
1. You should ask for as much as you feel is fair.2. Like many others have said, you should expect to hear that 0% is what is believed to be fair.3. Being a part-time employee / contractor at a company that was not your idea, not funded by your money and whose product was generally not executed by you entitles you to a thank you, but little else.The key to startup equity is that is makes up for the 1) sacrifice in time, money, 2) lost opportunity elsewhere, 3) stress, 4) long hours and 5) passionate contribution you made to the company. Without at least 4 of those 5 it is hard to see how equity is justified, unless it was well documented (and therefore a legal obligation) prior to your leaving.