Pay me in equity

When a startup offers any form of equity as part of its compensation package, there is a new set of factors for you to consider as a Millennial in tech. Before accepting any offer, you’ll want to negotiate the terms firmly and fairly. After all, if you’re planning to commit your time to any startup, do yourself a favor and make sure you put the highest valuation on yourself. It’s pretty natural to be anxious about negotiations, whether you’re going through this process for the first time or the tenth. Quite frankly, there’s a lot at stake, and it can be uncomfortable and stressful to ask for things you want or need. Unfortunately, too many young professionals I’ve come across think negotiating could get the job offer revoked, so they’ll accept the offer with little to no discussion. All in all, because startups are leaner than many mature companies, and because they may grow quickly, additional considerations are in your best interest when negotiating a job offer from a startup.

The trade-off: salary vs. equity

From my experience, salaries at startups are often a bit below the market rate compared to an established tech company. It’s common for companies to have flexibility during negotiations, letting you decide whether you prefer a higher salary or more equity. When choosing between the two, it’s important to understand how they differ in the short-term and how they may pay off in the long run. The advantage of cash compensation is simple. You know precisely what you’re getting. It’s a fixed dollar amount that you can count on and plan your life around. Conversely, equity is a bit trickier. For very early-stage startups, the risk is higher, offers vary vastly, and variation among companies will be more significant, particularly when it comes to equity. While you have the potential for a substantial payout if the company succeeds, the main risk inherent with equity compensation is that it’s not guaranteed that you’ll gain from your equity’s appreciation. There are plenty of variables determining whether your equity will pay off in the long run, most of which are not in your control. Nonetheless, choosing between cash and equity is a personal decision based on your unique cash flow needs, belief in the company’s management, career goals, etc.

What happens when a change in control occurs?

Since startup employees earn, or vest, their equity over time, a company may be acquired before employees are fully vested. How a company treats unvested shares when an acquisition occurs affects the risk calculation of joining that particular startup. In other words, your right to earn 100% of the shares gives the equity offer a higher potential upside than the right to earn only a portion of the shares promised to you.

Double Trigger Acceleration

Early-stage employees can negotiate special vesting schedules to protect themselves from losing unvested shares in the event of an acquisition. With Double Trigger Acceleration rights, any unvested equity will immediately vest if an employee is terminated after an acquisition. It’s called a Double Trigger Acceleration because vesting occurs immediately when two triggers have occurred — first, the acquisition and, second, the termination. One rationale for negotiating double trigger accelerations is based on hedging risk. Think about it like this, if you’re taking a significant risk to join a startup, such as sacrificing cash or other compensation for the equity, it’s wise to negotiate for Double Trigger Acceleration to protect your upside if the equity becomes valuable. Another key rationale for this negotiating term is based on aligning incentives. If employees could lose valuable unvested equity by achieving a prompt acquisition, their incentives would not be aligned with the company’s goals. For these reasons, Double Trigger Acceleration rights bring your incentives in alignment with the company’s goals, and often work in your favor.

Single Trigger Acceleration

As the name suggests, Single Trigger Acceleration rights allow for immediate vesting once an acquisition occurs. From my experience, companies can be apprehensive about negotiating for these terms. Their argument is the company might be perceived as an unappealing acquisition target if their talent isn’t incentivized to stay. This is especially the case for technical talent like designers and engineers. On the other hand, the key argument for Single Trigger Accelerations is based on the need, or lack of need, for the employee’s role after an acquisition. For instance, I’ve worked with a VP of People who negotiated for a Single Trigger Acceleration because she was hired with the express purpose of improving the company’s culture and growing the startup to achieve an acquisition. Negotiating the terms in your offer can get a bit tricky. Depending on the startup stage, acceleration terms may or may not be on the table in equity offer negotiations. Be that as it may, the availability of acceleration protection is a factor in assessing the risk of joining a startup. Without these protections, it may be beneficial to negotiate for a higher cash salary or more shares to balance the additional risk.

What happens when you’re fully vested?

The tech industry is known for using refresher grants to incentivize employees to stay longer with the company. Essentially, a refresher grant is an incremental grant of additional shares of the company to an employee who has already received an initial equity grant. Quite a few startups will offer equity compensation over a four year vesting period. That being the case, refresher grants come in handy when the company’s goal is to retain all-stars. The new grant will have a new vesting schedule, so you will continue to have an equity-based financial incentive to work in addition to your salary and benefits. In fact, it’s common for companies to use refresher grants on an annual basis, or to top off the equity grants for employees who have shown exceptional performance, or loyalty, or received raises and promotions.

Is company leadership transparent?

Not all startups are created equally. It’s important to ask questions when you get an offer that includes any aspect of equity. In addition to understanding the facts and nuances about the equity offer, the process of discussing the details can help you get a sense of the company’s transparency and responsiveness. Startups are understandably meticulous about sharing financial information, so you may not get full answers to all of your questions. Still, you should at least ask questions related to the 409A valuation, percentage of ownership, vesting, business goals, etc. Here are some questions you should consider asking when evaluating and negotiating your offer at a startup:
  • What percentage of the company do your shares represent?
  • What is the most recent 409A valuation? When was it done, and will it be done again soon?
  • Do you allow early exercise of my options?
  • Am I required to exercise my options within 90 days after I leave or am terminated? Does the company extend the post-termination exercise window of the options of employees that depart?
  • Is there any acceleration of my vesting if the company is acquired? (discussed above)
  • Does the company have any repurchase rights to vested shares?

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