Nivi · July 16th, 2008
We’ve been answering this question a lot lately:
“I have a job offer at a startup, am I getting a good deal?”
This isn’t a comprehensive answer—just some questions we would ask if we had an offer.
If you don’t understand your offer, get a lawyer. But—right or wrong—most people don’t hire lawyers to review their offer letter.
Table of Contents
The Offer (answers follow)
- Can you give me the offer in writing?
- How does my compensation compare to my peers in the company?
- What are my options worth?
- What percentage of the company do my options represent on a fully diluted basis?
- Can I exercise my unvested options early?
The Company (see Part 2)
- How much money do you have in the bank right now? How long will it last?
- What was the company’s post-money valuation in the last round?
- What are the investor’s preferences?
- Who is on the board and whom do they represent?
- Would I hire the CEO and board to increase the value of my options?
The only good answers to this question are,
“Yes, an offer is on the way.”
“Let’s work out the major points and we’ll give you a written offer. We don’t want to start things off on the wrong foot with an offer that is way off the mark.”
Some companies pay more, some companies pay less, but an offer is fair if your compensation is in line with you peers’.
Your total compensation consists of salary, options, vesting, cliff, acceleration, bonuses, and severance. And a peer is someone who (1) joined the company at roughly the same time as you did (e.g. halfway between the Series A and Series B) and (2) has roughly the same title you do.
Most employees have a 4-year vesting schedule with a 1-year cliff, no acceleration, no bonuses, and no severance. The exceptions are for Vice-Presidents and higher (and founders).
By the way, your cliff may be longer than the company’s runway, but c’est la vie.
First you have to know how many options you have and how they vest. Let’s say you have 1000 options and they vest over 4 years. So you get 250 options a year for 4 years.
Now you have to guess what an acquirer would pay for your shares. Let’s call this the acquisition share price. Setting the acquisition share price to the preferred share price of the last round is a good start—let’s say it was $1/share.
Now multiply your options (1000) by the acquisition share price ($1) to calculate the acquisition value of your options: $1000. Since the options vest over 4 years, the annualized acquisition value is $250/year. And while the acquisition value of your options might be $1000 today, you’re naturally hoping that the company’s acquisition share price increases over time.
If the company has gained a lot of value since the last round, you might set the acquisition share price higher than the preferred share price. If the company has not has not done well since the last round, you might set it lower. Either way, you will have to ask the company for the preferred share price in the last round. Or if someone has offered to buy the company for $50M since the last round, I might use $50M to calculate an acquisition share price.
Finally, you will have to pay for your options—they’re not free. Options have a strike price—that’s what you pay for your options. Sometimes it’s much lower than the acquisition share price and can be ignored. Sometimes it’s high and can’t be ignored—high strike prices are becoming more common due to high-valuation rounds (Facebook), founder cash-outs, and high 409A valuations.
4. What percentage of the company do my options represent on a fully diluted basis?
Most people think this number is important—it’s not. You care about the value of your options, not your percentage of the company. Your percentage will decline over time but the value of your options will hopefully increase.
Focus on the how many options you have and the acquisition share price (see question 3 above). Terms like percentage ownership and valuation can fool you.
This is for advanced Venture Hackers only. Don’t do this without an accountant and/or lawyer.
Exercise your options early if you want to start the clock on capital gains tax eligibility for your stock. Startup pros usually exercise their options early to lower the expected value of the taxes on their stock. In certain cases, you will pay less taxes in an acquisition or IPO if you exercise your options early.
Use an accountant or lawyer. Don’t sue us if this blows up in your face.
This post continues in Part 2.