assessing the equity Portion of a job offer

“If an employee doesn’t understand the equity portion of their offer, that’s on them.”

— overheard early in my career 😳

I’ve been fortunate enough to work for two successful startups (Klaviyo & Postscript) that were passionate about educating employees around the complexities of startup equity.

I’m hopeful it’s a trend we’ll continue to see in the industry.

Unfortunately many early-stage employees don’t understand the complexities of equity, even if they’ve been working in tech startups for a while. Too often I’ve heard folks who dismiss equity as not a meaningful part of their compensation package or don’t understand the full picture regarding what their equity represents, is valued at, etc. It’s a blindspot that could cost them more than a pretty penny if that company takes off.

In this post, I’ll cover the questions I ask when presented with an offer that includes equity to understand the terms of the offer.

*** This content should not be taken as financial advice. I am not a licensed financial or tax professional.

You should consult someone who is when making investing decisions.***

How Equity Gets Distributed to Employees

Before we dive in, a quick overview—Similar to salary ranges, startups usually follow industry best practices for employee cap pool management, and that covers how much equity a new hire is offered based on several factors, typically including seniority, role, and at what stage they join.

This information is publicly available, even to non-founders like you!

The general rule of thumb for equity is the earlier you join a company, the higher the equity offer is but generally with a lower salary than the market rate. Equity is a lot like a lottery ticket, you’re taking a bet that the company will grow and that your equity will make up (or hopefully surpass) the pay cut you’re taking in the meantime.

Drilling into the Details

While every company does things a bit differently, these are the questions I default to when looking to better understand an offer that includes equity.

1️⃣ What is the strike price for these options?

The strike price is the cost per option. This is helpful to understand how much the options will cost to buy (before taxes).

2️⃣ What’s the current FMV?

FMV stands for fair market value, it represents the latest valuation of what shares would sell for if they were on the public market today. FMV is typically determined by a 409A which is usually done annually. It’s important to note that the strike price and FMV are two different variables but are directly related when it comes to assessing taxes. Most companies aim to have a low FMV for tax purposes.

3️⃣ What % of the company does this number of options represent?

5,000 out of 100,000 and 5,000 out of 100,000,000 are very different percentages.

Understanding what percent of the company the equity offer represents empowers someone to understand if they’re getting a fair offer when compared with the market averages. This is especially true when comparing multiple offers side by side, just because one company is offering more shares does not mean that is a bigger portion of the business.

4️⃣ What type of options are they?

From ISOs to NSOs to RSUs, there are a variety of types of options that can be offered all with different terms that impact the recipient.

5️⃣ What are the terms of vesting?

From 4 year vesting with a 1 year cliff, to what happens if the company decides to part ways with me, the details in the terms of vesting are important to understand risk.

6️⃣ How does the company value this equity offer?

Because many companies tend to have a preference to get as a low an FMV as possible, it’s not unheard of for a company to have their own internal version of how they view what the options are worth.

Pulling it altogether to understand

While not exhaustive, with these pieces of information I have a better understanding of the total offer and can evaluate and of course, negotiate.

If you’re adulting with a financial planner/advisor or tax consultant, this is a great time to loop them in if you’re not a numbers savant to better understand your tax liabilities, etc.

Resources like Carta and even a quick Google search of “your title/level + series “x” equity” can often yield some good data around what is a fair offer in terms of percentages etc.