Negotiating Equity at an Early-Stage Startup
"Based on my prior experience & discussions within my network, I am looking for a salary of X with an X% equity.
Does that work on your end?"
Disclaimer: The content provided below should not be taken as financial advice. I am not a licensed financial or tax professional, and consulting with one when making investment decisions is advisable.
Most recently, we dived into the questions to ask when assessing the equity portion of a job offer at an early-stage startup.
This post will delve into my approach to understanding the market, effective negotiation strategies, handling objections, and other critical considerations in the equity negotiation process. Let’s get to it!
Understanding the Market & Knowing Your Worth
Before jumping into negotiations, it's imperative to understand the market rates for both salary and equity, especially in relation to the specific stage of a startup one is applying to. This knowledge empowers someone to be an informed “job shopper” and confident negotiator.
Here's a strategy that has consistently worked well for me: I believe in transparency from first conversation with a company. After inquiring about the top-level financial aspects, I dive into the budgeted salary and equity for the position. Regardless of whether the company willingly discloses these figures, I express my expectations upfront and seek confirmation of their feasibility.
I typically frame it like this: "Based on my prior experience and discussions within my network, I am looking for a salary of X with X% equity. Does that work on your end?"
This approach is effective for a few key reasons:
Knowing My Worth: I generally stay in the same industry and often market to a similar buyer (I’ve been a marketer). Because of this, I bring a ton of knowledge and experience from being through this type of growth and industry before, and I know the value that will bring to a new company and empower them to go faster.
Backed by Data: Conducting thorough market research and arriving at the negotiation table armed with data from peers, industry sources, and relevant websites makes it harder for the company to negotiate down or push back.
Setting Clear Expectations: Addressing these aspects early in the process gives the company ample time to evaluate and potentially adjust their offer to align with my expectations. It eases the stress of the negotiation process for both parties, fostering a more positive experience.
Common Objections and Pushback
While this approach has proved successful, it doesn't guarantee that negotiations will always go smoothly. One common challenge at early-stage startups is working with founders who may lack experience in candidate negotiations or understanding market rates, especially for specialized roles.
For instance, I currently reside in New York City, known for its high cost of living. I unapologetically factor this into my salary expectations, and I'm clear that if a company can't accommodate this, it might not be the right fit for me. On the equity side, considering my extensive relevant experience, I often aim for the higher end of the market range, putting the onus on the company to determine if they can offer more equity to someone of my caliber.
Intriguing Counter Offers and My Epic Flop
The saying that "everything is negotiable" holds true, and I've encountered some interesting proposals when it comes to equity negotiations.
One company offered a range for both salary and equity, allowing me to choose the combination I preferred (e.g., lower pay with higher equity or vice versa). I responded with, "I appreciate the offer, but based on my experience, I believe I'm worth the top end of both. I'm excited to join the team. Can we make that happen?" They agreed.
Another counteroffer involved a base salary with a substantial bonus component to meet the desired salary threshold, but the equity offer was less than half of what I had asked for. I countered by saying, "While I appreciate the offer, it differs significantly from our initial discussion and the agreed-upon figures. The tax implications of the bonus alone would represent a considerable pay cut." As a result, the offer was revised to include a higher base salary, with a lower bonus, and a staggered equity arrangement, with an option for an 83(b) election (more on that below).
And in the spirit of keeping things real with you, one time I accepted an offer as is with zero negotiation (this is before I got in the practice of discussing compensation during the first conversation). I was freelancing at the time and it was the most money I had ever been offered. The hiring managers response, “Oh dear. We’re going to have to work on those negotiating skills.” I took that one to heart and made it a priority to level up my understanding and confidence in these talks.
I share these examples to show that there isn’t a standard back and forth-in these types of negotiations. For many of us, the negotiation process can feel stressful and frankly emotional, but with the proper response, we still can find a way to get what we deserve, even if it doesn’t happen right out of the gate.
Securing More Equity
It's not unusual to be offered more equity during a promotion or raise. This presents another opportunity to negotiate, allowing you to explore whether you can receive merit increases in the form of equity rather than salary or vice versa.
Negotiating Better Terms
An often overlooked aspect of equity negotiations for non-executive employees is the ability to negotiate the terms of equity options. While securing a shorter vesting schedule can be challenging, negotiating the timing of your option purchases can be highly advantageous. In the United States, you typically have two routes: the 83(b) election, which allows you to "pre-purchase" your equity upfront, potentially leading to substantial tax savings. The other option is extending the window to purchase shares after employment ends.
In the past, employers have been hesitant about 83(b) elections, considering them a hassle due to the paperwork involved. However, I've found that it's a relatively minor inconvenience and well worth negotiating for if it can save thousands in taxes and provide the freedom to exit on your terms.
For the sake of brevity, there are also things like single and double triggers, accelerated vesting, etc. These are commonly reserved for senior employees.
Reflecting on My Journey
While I have become more confident in my ability to negotiate equity and salary over time, I've also made my fair share of mistakes. The biggest nugget I’ve learned through all of these negotiations has been how important it is to understand “what’s normal” and to keep in mind at the end of the day, if someone is trying to get you to join their company, especially in early days, they’re excited to bring you onboard!