5 Questions to Ask About Startup Equity Before Accepting a Job Offer
There are many factors that go into your decision to ultimately accept a job offer. But, whether or not you accept an offer hopefully won’t (and definitely shouldn’t) come down to the startup equity you’re offered when you join the company. While startups offer myriad perks—increased autonomy, ability to make a true impact and opportunity to get in on the ground floor—many young startups are cash-strapped and therefore offer their early employees equity compensation to make up for what may be a lower-than-market-rate salary. And, if you’re company makes it big, your startup shares could end up comprising the majority of your earnings.
So, while your decision to accept an offer shouldn’t hinge on equity, it’s important to understand cap table principles, what you’re being offered, and the questions you need answered as you negotiate your offer:[bctt tweet="5 questions about #equity to ask before accepting a #startup job offer - @dianawmartz"]
1. What percentage of the company's equity do the options granted represent?
Often times, your offer letter will only include the total number of options you’ll be granted (for example 20,000) over the course of the set vesting schedule the company has in place (we’ll get to that in a minute). But, the total number of options you’re granted means nothing unless you know what portion of the company those options represent.
2. What is the vesting schedule for my options?
Equity is not given the day you start, it is earned over time, and the set of terms in which you earn that equity is called the vesting schedule. A typical vesting schedule spans four years, with a one year cliff and the rest vesting monthly. The cliff is a protection for the company and means that if you were to leave before working at the startup for one year, you will have earned zero equity. If you were granted 0.1% equity when you joined, and you left after 2 years, you would own half, or 0.05% of your granted options.
3. What was the most recent valuation of the company?
While many companies won’t be willing to share their most recent valuation, knowing this number will help you determine the value of your options. But, remember, a valuation is just a valuation. It’s not set in stone. So while you might be making money on paper, it’s important to remember that you won’t actually see any cash until your startup goes through a liquidity event (either an acquisition or an IPO).
4. How long does the company expect their current funding to last?
Asking this question—again, a pretty sensitive topic before you officially join the startup—can give you some insight into whether or not there are any dilutive events on the horizon. Since fundraising typically dilutes your holdings, this is an important factor to understand.
5. Does your vesting accelerate if the company is acquired?
Many startups will offer accelerated vesting if the company is acquired. In this situation, accelerated vesting is important for two key reasons: 1) layoffs are unfortunately not unheard of after a startup has been acquired and 2) you may decide you don’t want to stay at the acquiring company.
Striking it rich from startup equity alone is a long shot. A million and one things need to go right before you’ll see a dime. So, while equity is enticing and has certainly paid-off for many in the startup world, you can’t bank on its fruition, and shouldn’t make an offer decision based on the equity you’ll receive. Instead, seek to understand what your equity options mean, and do everything you can to make a positive impact at your company and make them worth something.[bctt tweet="Seek clarity on your #equity options + do all you can to make them worth something. @dianamartz"]
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