Important here is to have a good view on what is a competitive compensation package for the position and profile that you are looking to fill. How to negotiate equity in 9 steps Here are some steps you can follow to negotiate equity effectively: 1. Equity is more than just securing financial gains. In four years, the company will be worth $5B, or $0.*. For example, you . When negotiating equity in a startup, employee ownership is an option to consider. Answer: Thanks for asking me to answer. Negotiate Cash Over Equity. The value of each depends on the stage of a company's growth, the role, and an employee's previous experience. The key to negotiating equity in a startup is understanding that you are not just bargaining for yourself. How can a founder best negotiate equity and a VC term sheet? I expected the VC partner who was on the start-up's board to be deeply involved in the . A few years ago a venture capital firm hired me to help one of its start-ups negotiate a critical deal. You don't vest all 4,000 ISOs until you work at the company for four years. Phantom stock, which is a bonus provided to the employee that is based on the value of . First, there is the startup equity that should be used to attract new hires. I've been working in the startup ecosystem for the last decade, both as an investor and operator . and just totally accept their equity compensation. Negotiating Compensation at a Startup. Previously on GeekWire : The only wrong answer is 50/50: Calculating . More importantly, they need to grow. The equity represents ownership — having a stake in the company you're helping to grow and succeed. 3. http://cenkuslaw.comIf you need money for your startup should you give up a huge part of your startup equity to get it? However, equity compensation is applicable in both the startup and corporate worlds. Compensation package structure and options The startup life promises much: personal development, autonomy, the chance to build a company that changes the world for the better. Here's my response to the student. If you leave before you hit your one year mark, you won't get any equity. To calculate equity, you can subtract the liabilities from the assets. How Much Equity Should I Ask For A Private Company? Learn from a top startup Lawyer, as well as a Founder who has raised over $80 million and had a successful exit, on how to strategically negotiate a venture term sheet and equity with investors to generate the best outcome for you and your team. As a rule of thumb a non-founder CEO joining an early stage startup (that has been running less than a year) would receive 7-10% equity. Generally, equity is granted in the following ways: Written agreement. Cash-strapped startups and business owners typically use sweat equity to fund their companies. Also, startup values don't remain constant. You will most likely never see a return on it, so negotiate for what you actually want, rather . Last night I listened to attorney Karen McKercher presenting tips for negotiating an investment deal to a group of angel investors (the Willamette Angel Conference members). The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. Consequently, the strike price of the options will be higher than when you joined the trade. I'm a start-up and I'm beginnng the process of selling a confectionery product. Equity: "the value of the shares issued by a company." "one's degree of ownership in any asset after all debts associated with that asset are paid off.". Crunchbase News reports that raising between $7 million to $9 million maximizes a startup's chances of achieving a successful exit. I'm going to use farmers' markets as a test for this to prove the concept as much as I can. If you look at those two terms and consider it all to be muddled together . It's human nature overvalue the thin. Do you have a co-founder? You've read Paul Graham's article, and understand that the amount of equity you should ask for is based on some basic math. After dividing initial stakes among themselves , founders use it to lure talent and compensate employees for the salary cut that they almost inevitably will take when joining a startup. Knowing the amount of investors, the number of rounds, and the growth potential can help you determine if your equity offer is fair, as equity can become diluted as more investments are made and more employees join. Whether you're joining a startup with seed funding or being recruited by a company that's already raised serious chunks of venture capital ($50 million, for example), you must acquire industry knowledge and conduct your own due diligence to avoid becoming a casualty of . If this startup is fast-growing, successful, and not-yet-public, it's safer to assume your equity will at some point be worth something. You don't want to negotiate with your co-founder in front of a potential million dollar deal, right? For example, the founder of a tech startup company may value the efforts placed towards developing the company at $200,000. Equity should be shared with all the founders, advisors, and employees of your company so they can share in its success. 4. An Engineer's Guide to Silicon Valley Startups - great advice even designers can use. Next, identify funding sources, pick a business structure, and register. Figure out what salary would make it worthwhile for you to work with them. Most people won't come out ahead, but those who know how to play the game can sometimes win big. This will give you more time to work out an agreement that you like, and you can learn how the tech transfer office works. But the scenarios are not all equal, and not all recipients find themselves on a path to riches, contrary to popular perception. What it often cannot promise is the highest salary. Eager to avoid . Introduction. Quick overview: How to negotiate your starting salary. I would start by deciding what you think the right compensation would be for you. Most startups fail, but if you're lucky, you'll join one of the few that is not worth $0 in the long run. Start-up and early stage company CEOs - often if these companies are undercapitalized, they cannot support the proper CEO or C-level executive compensation, so a custom package may well be appropriate to complete the recruitment for the benefit of both parties. Turnaround CEO situation - if a company has performed poorly, has been in a . Got an offer to join a startup working with a few of my current execs (I know in another thread I mentioned a potential opportunity to do CVC, but I turned it down..). Say your company grants you 4,000 ISOs that vest over a four year period and come with a one-year cliff. There are many nuances to startup funding 2, but the basics described above on how equity is priced and how those prices evolve throughout a company's life are a big part of the puzzle. Glassdoor, Payscale, and GetRaised are good places to start on the salary front, and you can sometimes see the equity percentages companies offer on AngelList. Does your startup have multiple shareholders? When employees start out, they may negotiate equity to a higher percentage. The more people who invest time and money into the venture, the more you might have to divide the equity up and give it to the people who support you. So, we have prepared six questions that will make you look really smart and help you understand your equity compensation. If you name the lowest number you'll accept, you can be pretty sure the company's not going to exceed it, at least not by much. Negotiating equity proves that you believe in the potential of a business—remember this when you start negotiating numbers. Startup jobs -- where you're given stock in a new company in exchange for working for a low or even no salary -- are like a gambling trip to Las Vegas. Six pitfalls to avoid when negotiating employee stock options. I have a friend who would like to be involved but on an equity basis (26% for him 74% for me). First, you should make sure to get at least some cash. Some examples of how this can happen include: Having equity in a startup means that you have a stake in the business. The startup offer, as listed on the website, suggests a fork of values for both salary and equity. Getting an agreement can take 6 months or . Often small businesses would like to share company ownership with their employees, but are hesitant to take on legal costs and confused by the complexities of choosing a plan. Equity financing: Selling "shares" of your business to outside investors in order to finance your business. I recommend negotiating more shares in lieu of pay as a last resort for my coaching clients. The average equity stake, and thus the valuation - assuming same investment amount- , varies based on the stage of the startup. . Often startups and small businesses can't offer huge salaries, so they offer equity instead. Negotiate for equity as if you are an important part of the company's growth — because you are. Start by evaluating what you have to offer. This is why many startups offer employees a slice of the pie in the form of an Employee Stock . Option, which is an option to purchase the employer's stock in the future for a specified price. It is more advantageous to negotiate equity compensation after joining the company since fundraising occurs sooner. Learn from a top startup Lawyer, as well as a Founder who has raised over $80 million and had a successful exit, on how to strategically negotiate a venture term sheet and equity with investors to generate the best outcome for you and your team. Sweat equity is a non-monetary contribution that the individuals or founders of a company make towards the company. And while funding is important, understanding how to negotiate with investors is increasingly important. The Professor has proposed the the student get almost nothing, and the Professor get the bulk of the equity. Debt financing is when you get a loan from . Exercise shares: to choose to buy or sell your shares in a company. This chapter will help you prepare for negotiating a job offer that includes equity, covering negotiation tips and expectations, and specific reminders on what you can ask and what is negotiable when it comes to equity. 2. A good rule of thumb, though, is this: The earlier a stage the company is in, the lower the salary and employee benefits will . You ask for 5%. What's important to you How to negotiate your salary offer at a startup Photo credit: Pixbay There was a time when working at a startup was considered a bad career move - and a desperate one, too. When a company offers any form of equity as part of its compensation package, there is a whole new set of factors for a prospective employee to consider. Negotiating around equity is tricky. Equity Job Hunting Negotiating When evaluating whether or not to join a company in a technical role—especially if that company is an early stage startup— Ernest Grumbles, a startup IP and business attorney at Adams Grumbles, LLP, recommends thinking of yourself as an investor. Before you start negotiating with third parties, first take a good look at yourself. Startups and private companies sometimes entice recruits with an offer of equity compensation to offset lower cash compensation (base and bonus). If it grows, you share in its profits, which becomes an incentive for you to help its success. There are several factors that can influence your compensation, such as: Geographic location: Consider the cost of living in your geographic location. Here is a consolidated set of my advice, tips, and resources for people won Remember, if a . Ask your prospective employer if you can look at the company's business plan. After dividing initial stakes among themselves , founders use it to lure talent and compensate employees for the salary cut that they almost inevitably will take when joining a startup. How not to lose a million dollars: understanding and negotiating your startup equity - more details around equity - fair market value, strike price, and more. Especially if the startup is in the early stages and hasn't yet reached all of its funding goals, you're much more likely to get somewhere in negotiations if you ask for more equity than if you ask for a higher salary. You can then do a cash equivalent of any equity they offer you, and see if it makes sense to you. Among other things, about 30% of the equity offered is in options, which in this calculation would contribute almost nothing to the value. (All definitions are from Google's dictionary, unless otherwise linked.) Equity compensation: Offering employees a percentage of company profits in exchange for lower (or zero) salaries upfront. From there, I began googling things like "first employee startup equity" and "startup offer negotiation." These were the best resources I found: Why Raise Money - When to Raise Money - How Much to Raise? Do not go gentle into that startup night. Negotiating Equity with a Start-Up "The things you regret most in life are the risks you didn't take." With investors feeling "cash rich" and aggressively seeking higher-return opportunities, start-ups abound, and their number grow daily. This is tough to answer without knowing your background and without knowing how much the current company might be worth. That means you and all your current and future colleagues will receive equity out of this . Negotiate What Matters Most As is typical with any PE funding, after the broad deal outlines were negotiated, both parties turned the deal documents over to their . Let's say, for the sake of clarity, the values are 90k-130k$ and 0.25-2% equity. That might be a good strategy for you too. Equity boundaries at different stages. So now it is up to . If not, then start with those more valuable things. It's important you know exactly how much value you can offer an employer before you begin the process of negotiating a salary. Compensation at a startup company is largely made up of three components: salary, benefits, and equity. Dramatically unequal founder equity splits often give undue preference to the co-founder who initially came up with the idea for the startup, as opposed to the small group founders who got the product to market and generated the initial traction. Oftentimes, people think that they only need to aggressively negotiate equity compensation in a startup environment. Certificate. A simple way to do it is the same as negotiating your salary. So I don't know if market value of shares is the right way to evaluate an equity offer. The prospect of joining a high-potential startup can be very exciting. Negotiating Compensation at a Startup. Accounting software such as FreshBooks or QuickBooks can help you do this. Equity Negotiations w/ Startup (Originally Posted: 08/01/2014). Startup jobs -- where you're given stock in a new company in exchange for working for a low or even no salary -- are like a gambling trip to Las Vegas. How can a founder best negotiate equity and a VC term sheet? With a business registration, you can . There are some good blog posts about negotiating startup equity, in particular this and this. Startup companies need to purchase equipment, rent offices, and hire staff. As a result, I am often asked for advice about finding the right startup to join and then negotiating a startup job offer. A student entrepreneur wrote and asked how he should negotiate with his company co-founder, a Professor, for equity. 1 | Introduction of a co-founder at early stages. In our work at venture-backed startups, we are amazed at how hard new employees will negotiate pay, benefits, workspace, duties, titles, etc. Below is a guide to help you navigate the all-important equity package in your start-up job offer. It usually happens a few months after the constitution of the startup. Although nothing is guaranteed, this is a scenario where negotiating for more equity could make sense. n is 5%, so 1/ (1-0.05)=1.052. See also this previous question: Review offer for being employee #1 To answer your main question: to make sure you're not offered an empty dream but actual stock options (founders are granted stock/RSU, employees are usually granted options to buy stock in the future), you should make sure: For many cofounders, in the early stages of startup development, splitting equity is never a topic of conversation. Most people won't come out ahead, but those who know how to play the game can sometimes win big. I think her list of five points is good reading for both sides of the table, both startup founders and angel investors. Friedman also offers some advice on how to negotiate these agreements. Equity should be split equally because all the work is ahead of you. Rule 4: Aggressively negotiate minor contractual details to preserve flexibility Background: Recording Excellence, an online music mixing startup, closed a small PE early-stage funding round a few years ago. I need to negotiate my contract and I would like to include some equity above the minimum, since I believe on the startup potential; however I don't have a clue of . Other C-level execs would receive 1-5% equity that vests over time (usually 4 years). The start up money required at this point is in the hundreds of pounds . How to Negotiate Equity. Research the company Knowing more about the company can help you determine if the company has a good chance of future success. Debt financing is also another option to get your startup off the ground. You've read Paul Graham's article, and understand that the amount of equity you should ask for is based on some basic math. Venture Deals is a great perspective on start-up funding models. So now it is up to . When negotiating a job offer, companies will always ask you what you want for compensation, and you should always be cautious about answering. You'll be negotiating your equity as a percentage of the company's "Fully Diluted Capital." Fully Diluted Capital = the number of shares issued to founders ("Founder Stock") + the number of shares reserved for employees ("Employee Pool") + the number of shares issued or promised to other investors ("Convertible Notes"). However, understanding and negotiating the equity […] n is 5%, so 1/ (1-0.05)=1.052. That's a really good reason for you to negotiate for a good equity package. Direct grant of stock, specified in the employee's contract of employment. Additional perks aside, the most important balance in negotiating an offer with a startup comes down to equity and salary. This is the first talk about equity stake and valuation. In fact, between growing the company, finding funding, hiring, and more, equity is the last thing cofounders want to think about. First, start talking with these offices ASAP. Equity, typically in the form of stock options, is the currency of the tech and startup worlds. For that reason making sure the startup has the resources and capital to grow, and execute on the idea, is ultimately why the business founder should be allocated more equity. Your past compensation (including forfeited e. This means your equity is more likely to be worthless, and you should plan to live entirely on base-salary. In the beginning, a new startup's founders own 100% of the equity in the business. Negotiating equity with a co-founder. If you are the sole founder, that means you own everything. However, the most successful tech startup cofounders agree on equity split right from the beginning. The company's business plan, a competent leadership . Robin Chase, cofounder of Zipcar, a car-sharing company, had heard a horror story from a friend about how the negotiation over founder equity had derailed the friend's startup. Negotiate for salary, not equity. According to Boris Epstein of BINC Search, companies decide the right compensation for each individual based on four factors: 1. Make sure you're 100% aligned before you want to approach investors! Most of all, understand that a stock option is a lottery ticket. Tech's main currency is built on a range of factors. Raising venture capital money has become an art even the most skilled negotiators may have trouble . At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. 1. Equity, typically in the form of stock options, is the currency of the tech and startup worlds. Suppose you're looking at joining an early-stage startup. You ask for 5%. Startup Equity Dictionary. Equity incentives can be divided into four groups. Equity, typically in the form of stock options, is the currency of the tech and startup worlds. If you were unable to negotiate for those other things, then you might want to negotiate for more shares in lieu of pay. You'll be negotiating your equity as a percentage of the company's "Fully Diluted Capital." Fully Diluted Capital = the number of shares issued to founders ("Founder Stock") + the number of shares reserved for employees ("Employee Pool") + the number of shares issued or promised to other investors ("Convertible Notes"). Dynamic equity splits using methods like a Grunt Fund, are by far the most equitable way to divide equity in a startup company. Know what parts of the equity grant are negotiable. The 11 steps to starting a business begin with market research and business planning. The company's business plan, a competent leadership . It is expected that the company will earn between 5% and 15% of its revenue. If you stay for exactly two years, you vest 2,000 options. - Financing Options - Convertible Debt - Safe - Equity - Valuation - Investors Crowdfunding - Meeting Investors - Closing the Deal - Negotiations - Documents You Need - Next - Appendix - Glossary - Sources. Technology start-ups today offer exciting career opportunities. Unless you're an executive, you'll likely only be able to negotiate your number of shares. If the company that you joined early on becomes one of the small percentage of startups to be financially successful, it will be thanks to your hard work. This book was written to help founders negotiate financing with investors, but it really helped me understand Keen's financial situation, and I highly recommend it to anyone joining a startup. Negotiating Equity with a Start-Up "The things you regret most in life are the risks you didn't take." 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