One thing that young people are very bad at– to their detriment, and VC-istan’s profit– is evaluating equity in a startup job offer. They don’t understand the numbers, what they mean, or the processes that lead to them holding certain values. Many focus unduly on percentages, which isn’t the right way to go. As is often noted and obvious, 1 percent from an established company would be amazing; 1 percent of a pre-funding startup is below consideration, except for very light contract work (a couple hours per week of advising). An alternative is to convert the equity grant into a dollar figure. The problem here is that the valuation process is essentially black magic. There is no “market” valuation for a VC-funded startup because VC collusion is so entrenched that there is no competitive market. Rather, it’s driven by processes into which a typical employee has no visibility. Even if you’re getting $50,000 per year of vesting in “equity”, you’re getting what finance calls penny stocks, and you should be aware of their attendant problems (even if you’re not in finance, the Series 7 process, although boring, teaches a lot) before you take those too seriously. Sure, penny stocks can make a person rich; they can also go to zero. Plan accordingly.
VC-istan runs, I think, on a fake generosity. A clueless 22-year-old has no idea what he’s worth on the market. Compared to a PhD student’s stipend of $1,700 per month, an “exciting” startup job that comes with a much higher salary (but still $40,000 below what he could command if he went east, for finance, and got a real job for adults) seems like a great deal. To boot, he’s getting $30,000 (vesting over four years, with a “cliff” provision applied to the first) worth of equity! How generous! That’s how companies bill their equity participation. “We’re giving you this, because we want you to feel like an owner.” (In this case, “feel like an owner” often means to work long hours, put up with drudge work, and favor what we baselessly claim to be firm-wide existential risks over your own career goals, health, and friendships.) In reality, employee equity always comes with vesting (as it should) and a typical schedule is four years, which means it’s $7,500 per year. So it’s not a gift; just regular compensation. In that particular case, it’s a $40,000 pay cut in exchange for $7,500 in penny stocks. Hardly a good deal.
Every equity offer comes with a vesting period (typically 4 years) and a “cliff” provision that no equity is earned if the employee leaves (or is terminated, and “cliffing” firings at 362-364 days are pretty common). It’s important to keep that in mind. The equity “grant” is contingent on an outcome that, in the VC-funded world, is pretty rare. At a typical startup, it probably won’t be worth it to keep coming into work every day for 4 years. Six months from now, you might be answering to an outsider you’ve never heard of.
In fact, full vesting seems only to occur for the mediocrities. The bottom 15% (as well as an additional 15% who are capable but politically unlucky) get fired, often without severance, long before the four-year mark. The top 15% usually bounce, because waiting around to “vest” on some piddling 0.02% equity offering, when you can roll the dice again and possibly be a founder– or at least get a real title and be a founder two gigs later– is a pathetic excuse for not growing up. (This is another rant, but most VC-funded startups are halfway houses for college kids who’d rather waste their 20s than (gasp!) have to show up somewhere in the a.m. hours.) With the top and bottom of the pack getting drawn out, it’s the middling players (“chief vesting officers”) who are actually around for long enough to tap their full, four-year, grants. Keep that in mind. Your expected percentage of that four-year target is probably (including cliff) 25-50 percent, and closer to the 25% if you’re unusually good (or bad) at what you do.
All that said, I’m going to assume the reader knows this. Of course, there still are good startups out there, and I will never deny that fact. They’re uncommon, but they exist. People need to know how to evaluate their equity allotments, and that’s what I’ll focus on here. Below is a simple formula:
Person-Power = (Number of employees) * (Equity percentage)
This isn’t a meaningless statistic or even a heuristic. Companies exist to aggregate human labor, and equity represents a share in what the group produces. If you’re offered 0.02% of an 80-person company, that’s representative of the work of 80 * 0.0002 = 0.016 people. In other words, each week, your equity represents a payment (in time) of 0.016 * 40 = 0.64 hours of work. You put in an eight-hour day, and the equity is a return of seven minutes and 41 seconds of human time: a long bathroom break.
The person-power metric accounts for the meaninglessness of equity percentages (as again, 1% of Google would be fantastic) and the uncertainty surrounding valuations. It gives actual meaning to the equity. You can envision a 0.02% slice of an 80-person company as a 5.76 seconds of each person’s workday being done on your behalf, or (as above) 7.68 minutes of total human time. That’s not all that much, in contrast to the concessions that these small companies expect because “we’re a startup”. Of course, outside of the startup world most companies give zero equity, so one might argue that, “hey, it’s better than nothing”. Sure, but those zero-equity non-startups actually pay people real salaries, give annual raises, try harder than startups not to fire people unjustly, have a lot of slack in the schedule allowing for (semi-furtive, but easy to execute) personal career growth, and let people leave at 5:00.
So what’s a fair range for person-power? Well, it depends on the risk level. The average, across the whole organization, can never be more than 1.0. In fact, it will typically be less than that because investors, advisors, and board members need their cut (and the investors actually bring something to the table!) I’d say that 0.15-0.3 is more than fair for a junior-level employee, and 0.5-0.8 (except for a risk-taking founder) is quite generous. That is what real equity looks like.
Below 0.1, on the other hand, I’d say that the employee should write the equity off entirely and focus only on the salary (with an understanding that startups rarely give salary raises or annual bonuses; if the investor-determined valuation goes up, that is the raise). I also don’t see why companies offer low equity amounts in the first place; those seem to complicate the finances of the company for minimal benefit, because if these junior chumps have any talent, they’ll figure out the VC-istan game and either want ten times more, or become 10-to-4 “chief vesting officers” while they plan for their next gig. (If I were running a company, I’d be extremely liberal with profit-sharing but give almost no one equity; that’s for investors, but I’d encourage employees to diversity their finances beyond their employer.) The signal is negative. For me, equity has an uncanny valley. If I’m not going to get a real stake, then I’d rather just zero the equity in exchange for a market-level salary, sane working hours, annual raises and bonuses, and not being surrounded by 21-year-old college kids who think their token ownership ought to drive them to work till 11:30 at night (with various stories of unprofessional behavior emerging out of that coupling of the night hours with the office.)
I don’t have an overarching, sweeping conclusion or any real wisdom here, but I think that every startup employee should take the time to compute that Person-Power number. If it doesn’t match or exceed the percentage of market salary (including four years of raises, bonuses, and career support) that he or she is giving up to work there, it’s probably time to bounce.
