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Ask HN: How to negotiate stock options?
119 points by playcache on Sept 3, 2021 | hide | past | favorite | 85 comments
A start up is very keen to hire me and are planning on making an offer. I am not being grandiose in saying I would be a good catch for them (they know it and I know it).

My position at present is that I very much enjoy my current job, they are very good at rewarding me and give a good level of autonomy to run my engineering team that I acquired and grew myself. I don't have anything to lose here, only (potentially) gain.

However the start up is pretty exciting and I know I could achieve a lot there. I would really enjoy the challenge.

However, the real aspect that would make the difference for me is company stock, to the point that if they sell the company I won't have to worry about paying off the mortgage on my house and get a decent slice for retirement and my kids education.

Now to my question, I am don't know jack about working out what would be a good amount of stock to shoot for. How would I go about establishing this? I figure I need to work out what the company could be worth and then consider what a percentage of options would provide.

Anyone have any experience they could share?



Having been on both sides here are my 2c. Pardon any brevity since i’m on mobile and in transit. Id advise reading up on these at this excellent guide (1).

Comp at startups are generally a sliding scale of cash to equity. A typical offer will ask you to slide it one way or another.

To judge stock, ask for,

- 409a valuation to know the current strike price of the shares

- total outstanding fully diluted shares to know the total shares available

- size of the employee option pool (eg, 10-15pct)

- possibility of an 83(b) election

- ISO vs NSO - what kind uf options are they?

- re ups, and anti dilution clauses?

- triggering events (eg what happens when the company gets bought?)

The more you know the better you judge the value. If folks are cagey in giving details, definitely push back and ask why.

Next, consider that the company’s progress is all that determines your shares net worth.

- how much do you believe in this team, space and product?

- and ask yourself - are you able to completely push this into a “lost cause financially” bucket in 5y? or do you need the cash? i’d advise being comfortable with the former :)

lastly, look at how much value you bring to the table to determine how much you get. if you’re engineer 1 with two non tech cofounders - you’d be worth much more than engineer 10. In that case, look at some of the blog posts online (esp by folks like Leo Polovets) on some ways to think about these numbers.

good luck!

(1) https://github.com/jlevy/og-equity-compensation


- 409a valuation to know the current strike price of the shares

- total outstanding fully diluted shares to know the total shares available

You can ask this, but has anyone actually had success getting an answer to these questions? Every time I've asked questions like these (which are generally considered sensitive financial information) I've gotten laughed at.


Getting laughter is a tell about the high bit of company culture. People’s mental model of other people largely assumes that other people are about as trustworthy as themselves.

Trustworthy people assume other people are trustworthy.

Backstabbers assume other people backstab.

Don’t misunderstand me, there’s a difficult conversation about stock. A few shares doesn’t give a person a say in how the company is run. It doesn’t make a person a principal. Doesn’t make them a “partner”.

Worker bees are still worker bees with shares. Trustworthy people offer shares because it might make you rich.

If someone laughs, they don’t think you deserve to be rich.


I agree and would never work at a company like this. They are basically asking you to buy in without knowing the price.


> Every time I've asked questions like these (which are generally considered sensitive financial information) I've gotten laughed at.

That's a red flag that the company you are talking to isn't serious.


The replies seem to be diametrically opposed on whether this is to be expected, which is interesting. I wonder if it depends on the country as well, e.g. whether this is a common thing in the US, while there might be some legal concerns for companies operating outside of the US to disclose such information before the candidate signs. Or for example it's too much hassle and uncertainty to fashion out tailor-made NDAs that are valid in the different countries they hire in.


That's an effort to make their abhorrent behavior seem normal. Don't fall for it.

Speaking firsthand, Glowforge will always share fully diluted options and the last 409a valuation. What we do is not uncommon, and IMHO is the only ethical course of action.

Note, however, that options are granted by the board, and until they approve the grant, the 409a and hence the strike price may change. For example, if the company got a buyout offer between your conversation and the board action, the board would likely have to order a new 409a before granting.

Good luck!


My company has always provided these. Applicants are obviously going to find out the current strike price as soon as their options are granted, so hiding that seems particularly strange.


Interesting to see that people do in fact receive this information. My guess is only the first key hires will be told this and not the rank and file joining after series A, for example.

In my experience laughter may be overstating it a bit, but the question is brushed off with an "it's confidential" and you are made to feel slightly stupid for asking. And these weren't fly-by-night operations either, but well-respected startups that went on to do very well.


When I've been at this stage, I've already signed an NDA for the interview and can be told the relevant info.


Interesting. This isn't sensitive information. If you don't get it, you have no way to evaluate the offer. Therefore these are hard pass questions. You must be only finding bottom tier startups, I suppose.

Great filter question because it's very easy to just walk away from them without any further consideration.


I have experienced both outcomes and offering to sign an NDA hasn't seemed to make much of a difference. YMMV


As the second employee at the company, I did get these answers. I also got cap table access.


I've gotten answers to both of those (sometimes had them volunteered unprompted).

Haven't been offered (or asked for) some of the other ones mentioned, like size of employee-specific pool.


Assuming you're through to the offer negotiation stage, the company should be willing to share the most recent valuation, fully diluted share count, and 409(a) val.


Yes. 100% of the time. If they do not answer run away.


I had a friend ask for their cap sheet after they were cagey with responses from similar questions. He figured they would had some massive expenses and An IPO was impossible or ridiculously far off. They eventually went under after three terrible years.


Why does dilution matter? Why would one care if your ownership percentage changes? Unless you’re a cofounder or engineer #1, I don’t think there’s a lot of value in trying to understand number of shares and dilution.


It gives you an idea of how much upside there is. If the stock is at $1/share, that tells you nothing. But is the valuation is $100 million and you think it could go over $1 billion, that means your funny money could maybe 10x. If you think it’s a billion dollar company and the valuation of $2 billion, maybe your shares are inherently worthless.


While technically this is reasonable advice, it should be noted that what you think the correct valuation ought to be, is highly likely to be wildly incorrect and a poor basis upon which to make decisions.


You’re not wrong. It’s more like you have an opportunity to get inside information on a company when you are interviewing. If the company sounds like it’s just plodding along and they’re on a series Q down round, maybe that’s less valuable than a startup that is about to blow up in the good way with a still modest valuation. You probably can’t tell if something is a diamond or a polished turd, but sometimes you can smell an actual turd. All stock options are a lottery ticket, but maybe you can pick the lottery ticket with the best odds compared when comparing them to the other options.


Is there a similar guide for Australian stock options? Or advice on how to research the equivalent forms and rules?


Most stock options will turn out worthless, or at least, worth less than the opportunity cost of joining the startup, even following a successful acquisition. If you're a very early employee and the company goes on to be very successful, you can get rich, but the prospect of that is very slim. That is not to say that options aren't worth negotiating, definitely maximise your grant, but do not associate a good grant with a good outcome.

After dilution, preferences, taxes, you're going to need there to be an exit worth many hundreds of millions to provide you with retirement money as an early employee. Options mostly serve to benefit the company -- they're golden handcuffs.

If you think the company has a very real path to an exit of 500m or more, you're joining early and you're willing to stay with them until their exit -- which, for an early stage startup, that could be 5 - 10 years -- you could probably retire...

As you can tell, I've been through multiple acquisitions (incl. a 9 figure acquisition) and made pennies.


Acquisitions are probably much more unpredictable than actual successful IPOs. I guess the investors will always need to have their preferred shares repaid first, and the exit price might even be lower than the last valuation. I have a friend who joined Snowflake at a pretty late stage and can still get enough money to retire, if he fully vests his options. Though of course, this is very much luck-based and he had no idea what he was getting himself when he joined just a couple of years before the IPO.


Can you give a real example with numbers (fake numbers okay)? I can't begin to understand how owning a % of a company gets reduced to pennies in the end.


It's possible if a company has raised a large amount of funding and/or the investors have aggressive terms. Liquidation preferences[1] mean preferred shareholders get paid out before common stock holders receive any sale proceeds.

[1] https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidat...


The article shared by Johnny555 is a good breakdown of the mechanics. Speaking to my own experience, my ballpark estimate is that I received an order of magnitude less money than I would have had I received my initial grant as a percentage of the final sale price. Pennies is hyperbole, but the amount I received from the 9 figure acquisition was thousands of dollars (instead of hundreds of thousands of dollars based on my original grant).


https://www.vestd.com/blog/how-equity-dilution-affects-your-...


You don't really own a percentage of the company, you own a number of shares.


I’ve been through two companies with exits. One left me with nothing (it was an acquihire), and the other basically increased my salary by about 1.5x (pre-tax, but because long term capital gains tax is lower than income it was probably more optimistic post-tax.)


A lot of startups these days support early exercise or extend the post termination exercise period from 90 days to much longer period like 10 years. So there is no need to stay with the company for 5-10 years after your options vested. The 4 year vesting schedule is standard.


I have built a remote team and 99% of the time the people I hire have not ever had a chance to own options in a company before so I always end up teaching them how they work.

The best way to negotiate options, in my opinion and experience, is to choose a number that you want your options to be worth in 4 years. For example "Hey CEO/Boss, if I work here and blow it out of the water for the next 4 year, I want the options you give me today to be worth at least X number" - This is a fair way to structure the conversation for a few reasons.

1. It sets up a timeline that is inline with your realistic amount of time at the business. If I tell you your options will be worth 100k for example after we IPO for 3B, that is not realistic or fair to you - it only justifies me shafting you today because I'm talking 10 years out and best case scenario.

2. You can walk through the future states (ie 1 to 2 funding rounds) and project the current value out based on expected increases of valuation at these subsequent fundraising rounds.

3. You set the number that you think your effort is with.

4. it is not talking about % points which people have weird biases around due to internet

Note: Assume 20% dolution at each fundraising round.

---

My rec's: If its your first startup, tell your boss after 4 years you want your equity to be around 200-300k. This gives you a way to walk backwards to today and come up with a real number of options to hit it.

If its your second and you want a home run be in the 750k-1m range

If you're an exec/leader - aim higher and talk it over.

VP at early stage are coming in around .8-1%


I understand that this is a compelling pitch for employees people who's first rodeo is with you; and consider this sort of discussion much more honest, than what people generally do.

On the other hand, this disregards liquidity: specifically, that vast majority of startups tend to die, vast majority of rest stagnate in funded but non-liquid form, liquidity events are boolean, and are happening generally years beyond fully vesting into stock options.

So, I feel, this too would lead to significant misunderstandings as people vest fully into their options, but can't get a penny for them.


I've never been able to get sufficient numbers/projections to make an informed decision about stock options at an early stage startup (and often the company doesn't know either). And it doesn't matter what they offer, it can always be diluted away from you, if not made outright worthless by a change in ownership structure. No matter how much you trust the current management, management can change, and not always for the better, especially as the company grows and there's more money involved. And this is all assuming that the company was successful enough to have value for options -- many won't get that far.

Unless you are already in a good financial position, I'd ask for more cash


The Zynga saga with options is the prime example of how a company can take these private promises and screw you.

A bird in the hand is worth 2 in the bush.


Some resources I've collected on the topic:

https://danluu.com/startup-options/

https://github.com/jlevy/og-equity-compensation

https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e8...

https://news.ycombinator.com/item?id=2623777

Others in this thread have posted great advice. You want to know the most recent 409A valuation, and you want to see the cap table (you might be asked to sign an NDA, which is a reasonable ask). Also, its unlikely your role is going to give you enough pull for an acceleration clause or similar (in either the event your role materially changes or an acquisition occurs), so if you do want equity and they're willing to provide it, get as much as you can so you capture as much value as possible during your tenure and vesting period. The difference between 10 basis points can be material in the event of rapid growth and eventual liquidity. The answer is always no if you don’t ask.

The equity is more likely to end up worthless or a trivial amount more often than not, but you can take steps to derisk the devaluation of this component of your compensation.


The last sentence here should be the top sentiment in this thread.

The vast majority of startup stock options end up worthless. Don't make any future plans based on it. It is a nice bonus if it amounts to something, but you should be sure you're well compensated in salary and benefits if it doesn't.


Fair Warning: It's not uncommon for a company to get bought for the price it costs to pay back preferred stock (investors) and essentially 0 out the common stock and/or offer new equity options (and new vesting period) at the new company as "payment" for your common stock holdings. It's happened to me twice. Common stock is last money out. So even if you're successful in that you grow the company until it's gets purchased - even that doesn't mean you're paying off any mortgages.

That said, it depends on seniority and what number employee you are. A very early employee (first 5) can get 1.5-3% that starts to drop pretty quickly where even if you're a senior level employee but employee number 50 after a series A or something you're likely at less than 1% no matter how valuable you are.

A good move is to go on angel.co job boards and see what other similar sized companies are offering for equity for similar positions and make a move from there. And to talk in percentage terms of common stock (because 100/10,000 is better than 1,000/1,000,000).


Given that the implicit bargain being made when you join an early startup is ‘I’m going to take a paycut to invest my time into the successful growth of this venture’, is there any kind of framework that exists that lets you put that investment into a more secure basis than common stock options?

Like, if you’re offering them a market-valued $300k worth of engineering skill over the next year for $150k, that’s a $150k investment in the company.

What kind of terms would an angel investor offering $150k get?


Yes: Similar to the startup's financial investors, take a portfolio approach to spreading risk. As you are investing time instead of money, that means spreading risk over time: decide at 3mo, 1yr, and 2yr if this is the outlier to double down on. Likewise, if senior and in a non-engineering role, negotiate a single/double trigger in the case of an early exit / acquihire: https://www.cooleygo.com/what-are-single-and-double-trigger-... .

RE:Preferred shares, Investors get preferred shares -- first money out -- to protect against something like someone raising a round and instantly selling. If the investors were common, the founders would be self-enriching at the direct cost of the investors (and the pension funds etc. funding them.) Your protection against that sort of thing is initially worse -- vesting cliff means no stock for 1yr. This generally gets compensated by a signing bonus to the new firm, but not a big win/loss either way, beyond being grounds to get a new lottery ticket elsewhere (losing you say 6mo on that ground: it was a dud).

After that, more about whether the company has raised more (including participation multiples) than it sells for. With today's megarounds at all stages, this is quite the danger. So it's about knowing how much they need to exit for before common shares convert, and who has the voting rights on that/when, which is a very fair question (vs. seeing the cap table, which is unlikely). Likewise, another protection here is on dilution, like how much of the employee pool is remaining vs will increase dilution on next round... but that that's much less of an existential risk than the trend of revenueless startups raising $3-10M seeds on bad terms (so a quick $10-15M buyout won't work) and unprofitable ones raising $20M+ A's (so a VC-packed board with a drinking-their-own-kool-aid will veto a < $100M deal), and then racing to a unicorn status that prices out most previously viable acquirers who'd only do $100M-300M.


i had the really good fortune of starting series B (coincidentally weeks before there was a C round) at a unicorn startup.

at the time i was overly-optimistic about its outlook and when countering pushed for more shares instead of higher base.

i bought all my shares before leaving a few years later and made out really well on the acquisition -- i think the sale_share_price was 50 x my_strike_price.

here's the thing though, retrospectively i still don't think i'd ever advise someone to do what i did. there are so many factors that had to line up exactly right for this to be a positive outcome for me:

* joined with particularly low valuation with company in a strong position

* happy enough to stay n years and vest all my shares

* was able to borrow $ from family to outlay the huge cost to buy what were at the time essentially worthless options

* survive getting absolutely KILLED on taxes, i think my AMT obligation when i exercised ended up being almost 2x as much as the cost of buying the shares (it uses a company filed valuation to set current fair-market-value which was completely theoretical since the company was private when i exercised)

i joined a fortune 50 company when i left and pushed for high base and a large performance bonus. i did the math on what my earnings would have looked like over time if i had spent my years working with big-co-pay vs. lower startup pay + good options outcome and even with a crazy lucky outcome i don't think the extra $ i earned was worth the high risk.

my partner and i both agree it wasn't worth it, especially when we reflect on how many early mornings, long nights, and weekends i had to work to make it happen.


This is really going to depend on the company. Generally earlier stage startups can be more flexible with the equity they can offer. More established companies are going to have limits on what they can offer so there will be less room to negotiate.

I think first you need to try to work out what the approximate value of the company is and what it could be worth if all goes well -- if the company has recently raised money this would be the best way to gauge the current valuation.

If equity isn't already being offered, ask for it, perhaps in exchange for a slight a reduction in salary. If they offer you 1% and you know the current valuation of the company you know exactly what they're offering which will allow you to better assess whether that's a reasonable offer and also if it's worth making a counter offer.

The only experience I can share is that I personally don't believe it's worth asking for stock options in exchange for salary in the majority of cases. Remember, most startups fail and if they fail you're effectively receiving nothing in exchange for a reduced salary. Even if this is a larger more established company then you could always just take the extra salary and invest it in the public market in similar companies -- perhaps ones you like more.

If you really believe in the success of this particular company then go for it, but after a decade of personally being screwed over and watching friends similarly get screwed over, I promise you the dream of making bank in a few years on stock options generally doesn't play out. In fact, I'd personally recommend asking for the opposite whenever stock options are offered -- a higher salary without the stock options. If you're making $5,000 - $10,000 more per year and investing that over 5-10 years 99% of the time your personal investments will be worth more than any stock options offered.


> but after a decade of personally being screwed over and watching friends similarly get screwed over, I promise you the dream of making bank in a few years on stock options generally doesn't play out.

The funny thing is that I guess I'm relatively new in the industry, and the story that left me the biggest impression is how a friend should be able to retire in a couple of years since he joined Snowflake a couple of years ago... Seems that he really really lucked out in this case indeed, since most experienced commentators in this thread unequivocally point out how luck-based this thing is.


First of all congratulations on finding an exciting next move in your career!

I concur with the sentiment expressed by other commenters: be wary of making financial plans (e.g., paying off a mortgage) that depend on company equity—unless the company is public, which does not seem to be the case per your post.

My advice to people usually is, go to a startup to learn new skills and aim for jobs and responsibilities that you would have trouble getting in larger, more risk-averse organizations.

Do not expect much out of the equity you will be granted for it is too hard to estimate its value: it depends on the cap table and sundry fine print (for instance liquidation preferences can drastically affect how much employees get even if the company exits) and other factors which are hard to control like execution risk. And all in all the financial reward could be far away in the future if the company stays private longer, so your mental model should also take that into account.

There are a lot of great resources online about startup equity, my favorite is the Holloway Guide to Equity, which I highly recommend:

https://www.holloway.com/g/equity-compensation

Good luck!


Yes, a good way to think about the value of the offer is to take the percentage, multiply by 1/2 to 1/4 for dilution, and then figure out what you get in a good exit ($1B or more). That's probably a best-case scenario.

Note that without early exercise it's likely not worth it.

Also, for anything other than a good exit, the preferred stock holders will likely keep all the money from an exit.


+1 on the point about "early exercise". The ability to exercise and file the $0 value increase with an 84(b) (assuming the company is < $50M capital) is the way the game is played in the Valley.

Ex: You get 10,000 options @ strike of $1 vested over 4 years. You exercise all of them early and file 84(b) with the IRS to say "I bought this stock at $1 for cost of $1 = $0 gain". 4 years later the stock is worth $10 / share. Now you have a gain which, most likely, you will owe LTCG if ANYTHING on that.

It's like printing money if you get the right company at the early time with enough shares to make it worthwhile.


I believe you mean the 83(b) election.


I'm confused here because my understanding is that 83b is specifically for shares and not options.


The 83(b) is not for the option per se, but the shares you own after you exercise the option.

> ... if the stock purchased pursuant to the exercise of an option is subject to a substantial risk of forfeiture, the service provider may make an IRC §83(b) election with respect to the stock received pursuant to the exercise of the option.

https://www.irs.gov/businesses/corporations/equity-stock-bas...

Also see "Restricted Property" in Pub 525.

https://www.irs.gov/publications/p525#en_US_2020_publink1000...


Wow. Thanks a ton for those links. Definitely something I want to share with others in the future.


Some advice:

- Do not take a pay cut to work at a startup. Most startups that are worth working at are well-capitalised and should be able to pay market salaries.

- If you are going to be granted ISOs (Incentive Stock Options) (you must ask to find out if this is the case), then it may be worthwhile only if combined with a) a low strike price, b) early exercise and c) a section 83(b) election. NSOs are generally not granted to full-time employees.

- Look out for funky triggers in the options contract. Ask management up front if they have any nonstandard clauses in their contract, and pay a lawyer to verify this. If there is dishonesty or lack of clarity on this, run.

- Look out for funky vesting schedules. Typical vesting schedules are 25% upon completion of 1 year (you get nothing if you leave within a year of joining) and 1/48th of the total grant every month thereafter. Sometimes the vesting happens quarterly, but not often (it's more common with RSUs + larger numbers of shareholders). Backloaded vesting schedule? Run.

- Time to exercise after termination of employment: this is usually a month or 90 days, but a few companies are beginning to offer generous 10-year expirations. Take note of what this period is and decide if you can scrape up the money to exercise the options if you decide to exit at a chosen time in the future (or if you are fired).

Having satisfactory answers on the above is a pre-requisite to negotiating numbers. I'd walk away if they are not met.


I have a MSc in Finance (so I understand options a bit), and I am currently working for my second startup. I was offered equity each time, and it was never part of the reason why I moved to work there.

I consider early startup equity like lottery, and an option on that lottery is worth even less in my eye. The taxes and legal specifications make these options super hard to evaluate... At the end, its mostly a way to defer an uncertain employee salary to an uncertain future... Normal equity is a mechanism to share decisional power, not only money. In my mind, most startup equity is to equity what Avril Lavigne is to heavy metal... not the real thing, something else in disguise.

And to be even bolder, I am actually against using options for any form of compensation, for employees AND for management. By nature, the value of an long call option does not only increase with the value of the underlying, but also with the volatility of the underlying. And if your option is way out of the money (Underlying <<<<<<< Strike price), your sensitivity to volatility is higher than the sensitivitiy to the underlying. In which situation would you want anybody in a business to have these incentives?


You can try to negotiate but the options bands are usually predetermined and approved by the board of directors. Trying to get an exception passed through can be difficult and usually only for leadership positions.


At a startup though, although there are bands, there is almost always the ability to go up from what is first offered.

I would always try to negotiate up by 50% from whatever it is. With startups, it's harder to go up by 50% on cash, but options are more fluid, and the worst they can do is say, "I can't move from X" but in a lot of cases you will probably get, "I can go up to <+25%>".

Negotiation around options is also the best thing to do if you think about it. It shows you think the company has value and that value will be higher in the future, even higher than straight base comp. Would you rather have $1000 more on your salary or $1000 more in options which could have a multiplier in the future. Cash won't. The value of cash is going down over time -- especially recently.


> but options are more fluid

Not always at medium-big startups. It is fixed depending on the position.

I have worked at like 6 different companies now from 20-1400 people. Smaller companies definitely have some flexibility but its usually a cash vs equity conversation.


You should always negotiate - agree there. But you should negotiate cash specifically because the value of it goes down over time. More now is good because you need to pay rent and buy food. Additionally cash comp becomes the basis of: 401k match, bonus, some other benefits (life insurance some times) and more importanty future raises.


You do not mention salary. Is the startup also paying more than your current position? I would put a lot of weight on the real money you are receiving now. Especially if you like your current team. I've had stock options pay out OK for a relatively small exit but it amounted to a really good bonus, not retirement and pay off the mortgage money.


My advice. Make sure you have the exact same class of stock that the CEO holds. That way you know the decisions they are making are designed to maximize the value of stock and there is not a conflict of interest.

My assumption is that if I have a class of stock that is different than that of the executive team, it's worthless. I've learned this hard way.


You're not generally going to be able to negotiate share classes in serious companies.


100% true. However, in evaluating the offer, understanding whether you’re getting the same class of shares or not is germane. (In a startup small enough where an employee can meaningfully negotiate their grant, it usually is.)


Agreed. I assumed this is an early stage startup. I should have been more specific. This advice only applies in that scenario.


Even if you have the same class of stock, vesting, good/bad leaver provisions and strike price make that a false comfort. Remember that you don't typically get stock itself but rather options to buy stock.

However if you _don't_ have the same class of stock that _is_ a pretty good sign that you're going to be last in line.


This is pretty standard anyway (the founders and employees all have common stock while investors get preferred shares – and that's only after a priced round).


CEOs can change the class of their own shares, this happened even with Google. I wouldn't think of this as any guarantee.


Not in all cases.


Assuming you’re in the US and it’s a fairly early stage company (one or two funding rounds), I’d look at:

* Early exercise: Allowing you to exercise your options immediately while the strike price == grant price (tax benefits and lower cash outlay) then vest the shares over time.

* Exercise window: Many companies only give you 90-days to use or lose your options if you leave down the road. Employee-friendly startups were giving 10-year windows for a while but these might have fallen out of vogue now.

* Restrictions on secondary sales and transfers: Ideally, they’ll have a short right of first refusal period but will allow secondary market sales before a liquidity event.

* QSBS: Maybe worth looking at whether the company will qualify at its current size but I wouldn’t worry about it too much. A nice perk if it works out.

-

Whatever % you end up at, assume some additional dilution in future funding rounds. The 50% to 75% mentioned below seems aggressive but it all depends on the strength of the company.

Also make sure they don’t have some abnormal vesting schedule. Four year vest with a one-year cliff is still the most common.

Others have linked good resources and I’ll add the Holloway guide.

https://www.holloway.com/g/equity-compensation


Let's take an example estimate like: number_of_options = (salary * 0.10) / last option valuation price

What's good about it, what's bad about it?

Realistically, as an employee, your total comp has a bunch of factors that include bonuses, insurance, benefits, travel rewards and flight/hotel choices, expense discretion, charity support, the list goes on to contain a lot of things.

These frame the question in terms of what portion of that total package value to you do you want a in the form of lottery tickets? (and not their price or claim of value on it)

Maybe you say, "nice salary, I'd like an additional notional 20% in options over 4 years," etc.

Maybe you are doing fine and you see a near term exit and you say, "This company has a 2-3 year horizon, I don't need the salary as much and I'll trade 25% of your offer for options provided you provide me and my lawyer with the full cap table. If not cap table, I need to price that in to the risk on the salary and I'm going to need 20% more."

If you don't have negotiating leverage or skill, you just say, "thank you!" and throw them in your change jar with old lottery tickets.


I only have experience from being in a recent similar position to you.

One thing I would say is, a lot of options related decisions require getting board approval so it might not be as easy as getting your contact to agree to some figure you had in mind. You might also not even be allowed to know how much you're getting until you're already hired due to policies around how the options are valued / issued.

Personally if I were you, if you're looking for a new long term position with stock options I'd try to find a publicly traded company. Mentally I imagine it'll be a lot easier knowing what you'll get based on them providing you +?? stock options per year that you can sell as soon as they're vested for real money. Or if you like it a lot where you're at, maybe they'll give you a better salary to compensate for not having options if you bring up that you're looking to leave.


Do publicly traded companies typically give stock options(ISOs)? I think they typically give RSUs, these are great because they are liquid, but they are also taxed as income tax which is about twice as high as the long term capital gains.


One person I know of gets real stock (AFAIK). It took a few years of working there initially before they were vested but now he can choose to sell them immediately after they become available to him every year and pay income tax on it or hang onto them for >= 1 year and then they get treated as long term capital gains like regular stock. He bought his entire house with the stock he accumulated over the 10ish years he worked there.


If the company is secretive about valuation a good line is to say, “my current stock options are valued at X and from what I can find I’d need a value of Y to match my current compensation.” Whenever I’ve used this line, I’ve gotten more stock options.


There are many good suggestions here, though I haven't seen anyone consider a tradition binary model.

Here's what I would do, knowing very little about the particulars of the options that start-ups offer vs. standard options.

1. Determine my fair market total-comp at a well established company. Maybe a FAANG, or some other firm in your industry.

2. Determine how much below that number the offer is for, not including the options. This is the discount you are accepting vs. a less risk comp structure. We need to make up for this discount in the options portion of the comp.

3. Now the fun part -- model the options payout and discount it back to present to determine the effective total compensation of the offer...

3a. A few variables to define. We'll keep this simple and pretend this a single period model - eg. "what's the value in 1 year", and not "what's the value at each exercize point?"

- probabilty_of_default: the likelyhood that you get nothing because the company failed, or some other reason. This is the 'risk' variable here

- strike_price: the strike of the options you're being offered

- price_at_expiration: the company's share price in 1 year

- number_of_shares: the number of shares you'll be able to buy

- interest_rate: this is the growth of cash over the 1 year

- tax_rate: what you'll need to pay in taxes if you excerize

3b. The value of the options in future dollars is then:

FV = (1 - probability_of_default) * (price_at_expiration - strike_price) * number_of_shares * (1 - tax_rate)

3c. To discount to present-day, you can apply the interest_rate:

PV = FV / (1 + interest_rate)

4. We want PV to be equal to the discount we calculated in #2 for it to be a fair offer. You'll note that there are a lot of unknowns in 3a, and that's where the tricky part is. But this at least gives you a framework to think about it.

(Now, I just did this on a whim, and I probably missed some details, so do let me know if there's any issue. But, this should be the gist of a very basic valuation)


Options are a pretty big gamble. I do and do not regret skipping them on my last gig. The primary issue I had was the company could simply deny exercising the options. I had always assumed the stock would grow, but at the time I didn’t know if I would stay the long term. Even then would they let me exercise them. Hard to say if they would have let me get away with millions in the end.


> I figure I need to work out what the company could be worth and then consider what a percentage of options would provide.

Correct.

The first part, you are on your own. That's basic research using crunchbase, owler, forester, gartner and so on. Obviously, look at recent exits in the space.

The second part, try startupequity.org. You'll need to know the company stage and valuation, which you should already know. I don't know how good their data is. BI published A16Z statistics on executive offers a couple of years back, it's easily found. The numbers are still good within error bounds.

An equity offer is more complex than a salary offer, because there's a wider range that varies more on the various input factors. That is, it has high sensitivity whereas salary component has lower sensitivity (to input factors).

Once you have an idea of the median equity offer for the position and for what you bring to the table, then you can judge if that would even be enough for you. You can do all this before even hearing an offer from them. I can't stress this enough, you absolutely have to do this first, so that their offer doesn't ground you on their number. That's called anchoring and it works, like advertising -- even when you know what is going on it still works. So you absolutely must know your number ahead of time.

For the same candidate in the same position, equity offers vary based on the company's valuation most of all. When they say "series A" median offer for "position x" is y%, what they really mean is for a company at the median valuation for a series A company.

Then, knowing what a median equity offer looks like, you need to model the exit valuation. I would work from the T2D3 unicorn model as a conservative baseline. (If the startup isn't a unicorn what's the point, given your objective?) That's just a baseline. You'll have to look at other exits in their space to see if a larger exit is typical.

So, for example, a VP at a series A startup worth about $50m might get 1.25% (just say) or $625k at current valuation. For a unicorn exit, that's $12.5m before taxes. Then factor in dilution and QSBS. I have a spreadsheet that models those factors. If you put contact info in your profile and reply to this thread I can send it to you. You should be able to do a first pass at it though and potentially rule them out immediately.


If they are very early stage, evaluate whether to make an 83(b) election, including making sure that the company facts and circumstances support it if you decide to make it.

There are significant pros and significant cons, so Google it and evaluate is the advice. Super early (and especially pre-funding), it’s much more beneficial than just after Series B or later.


How many employees are already in the company? What stage of funding is the company at (seed funding, round A, B...)?

As a rule of thumb, there's about 15-20% of the entire company stock that is allocated to employees. If you are negotiating for employee #1-3, there's room. If you are employee #50, you are looking at a decimal point.

Always ask for the current valuation.


“I need to make $X on the exit”. Negotiate and set the expectation with your CEO in dollars not shares.


If this is not late stage pre-IPO or publicly trading company, and you don't have full control to term sheets, vesting schedules, preferred shares schedules - consider stock worthless and negotiate higher cash pay.

Ignore verbal hype.


It's so interesting to see the amount of pessimism/skepticism/realism in the comments, considering how much employee stock options are touted as this magic alignment of incentives in tech.


The top comments basically mirrored my thoughts. I understand that companies starting out with minimal funding can't really pay you as much so they pay you in future earnings. However, from the employee perspective its a huge risk and likely you don't get paid that difference.


Options in a startup are 100% gambling.

Startups offer them in lieu of pay -- they're asking you to bet on the eventual success of the stock. As such, my perspective had been to negotiate to minimize the amount of options in exchange for maximizing the pay rate.

I basically consider stock option to be effectively worthless, and the pay rate is the only thing I really consider. That said, it's happened many times that I've worked for a company even though they couldn't afford to pay me a reasonable salary, because I was drawing value from the work itself. In those cases, options are nice because they are an acknowledgement from the company that you're taking a risk in working for them.


99% of startups fail. I'd rather get RSUs from an established company myself having done a startup once before that crashed and burned.


like others have mentioned, definitely go the 83b route if possible. if they don't offer it, and you have faith in the company, try to exercise your shares as early as possible. AMT is a bitch, and can price you out of ever getting the lower cap gains rate. Of course if the feds decide to raise the cap gains rate like they want to, then it won't really matter


Anyone experience with companies in the Netherlands? I have something that's called STAK but it's shrinking round after round.


You have to think long and hard if the company will actually be able to be sold, or go public.

Venture capitalists are professional company evaluators. They probably only fund 1 out of every 10,000 applications, and of those, of every 100 or more, do they get their money back.

So you have to look at your business evaluation skills and know if it yours are better than venture capitalists, who have seen it all, and have many expert evaluators, and the fact that they have a very small fraction of their companies making money.

Those companies that try to get venture capital and can't, probably are not a good bet. Now, there are probably some companies that couldn't get venture capital, but succeeded anyways, but that's not the way to bet. So if they hav venture capitalists, I'd ask them if they have any venture capital companies invested into their company, and what are the names of the venture capital companies. Then you go to that website and learn about those venture capitalists, and if they have a track record in the type of company you are considering. If not, then look askance at it. If it is one of the huge venture capital companies, that is better than a small one that doesn't normally invest in the type of company that you are considering. Also ask if the company you are considering working at has tried to get venture capital in the past, but were not able to. That is bad news.

The reason for all this is that if a company is not viable for either an acquisition from a larger company, or to go public, which is most of the time, then the stocks are 100% worthless. It will all be a waste of your time, especially if you take a lower salary for the stock options. You will lose a lot of your potential income during that time you are at the start up, if you are giving up up-front salary for stock. This is no fun at all if the company doesn't get acquired or go public. You probably will chalk it up to a "learning experience" but I don't agree with that. Because you just learned from what I just wrote above, and below.

Additionally, worse than the company's product or service itself...don't count out the worst thing of all - the incompetence of the founders and management. People can talk a good game, but the sh-t I've seen. Just think about companies that you have worked for and the incompetence of some people, managers and others. People think that companies are in it to increase the value of stock for the shareholders, and in some cases it just might be, and while everyone says that it is the reason, there are almost always hidden agendas. Many managers and owners are in it for the ego strokes, or power hungry, or have a horrible idea of the valuations of the company and don't sell at the best price, and actually prefer to have the whole thing go down in flames if their ego is not stroked. You will die a thousand deaths in this case, because you see all your hard work, and the stock you had planned for, go kaput, when it should have and cold have been acquired or gone public. There are thousands of these stories. One of those stories is about DR-DOS - the guy who owned it, Gary Kildall, went out to fly his airplane when IBM came calling to buy his OS. He wasn't there, so they went to Bill Gates, who actually bought MSDOS from another company for $30,000, licensed it to IMB,and the rest is history.

Finally, and I did read this somewhere a few years ago, someone correct me if I'm wrong, is that if you get 50,000 shares of stock options with a exercise price of $25 per share, which is $1.25 million, and when you are ready to sell, if the price goes up to $75 per share, an increase of $50/share, that would be worth $2.5 million again, IF you can sell them for $75 per share. But, IF the price happens to go DOWN to $5 per share for whatever reason, that $20/share loss, and a value of $250,000 on your shares at $5/share. So, when you decide to leave the company when this is the situation, I believe you generally have 90 days to exercise for those options. When you sell the options, I'm almost positive ( and someone correct me if I am wrong) that you then realize the gain as far as the IRS is concerned, but they use the original price as the basis and you will have to pay taxes on the $1.25 million of the 50,000 shares with original price of $25/share. So, most employees leave their stock behind and don't exercise their options, because they would have to pay taxes on $1.25 million, with only a $250,000 that you can get from selling them, so you immediately have to pay taxes on $1 million, which is $350,000 or whatever. Maybe I'm wrong on this, but somehow, since it is in the interest of the company to screw employees, you can get really, really screwed when you sell your stock.




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