Employee Equity 101
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Talk at Venture for America, Providence, RI, June 25, 2014
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Employee Equity 101
- 1. @tdavidson Employees + Equity Crash Course @tdavidson taylordavidson.com
- 4. @tdavidson How do startups raise money?
- 5. @tdavidson Startups raise venture capital by selling part of the company.
- 6. @tdavidson “Raise $1 MM at $5 MM post-money valuation”
- 7. @tdavidson Expect to sell 10-30% in each round of fundraising * * roughly
- 8. @tdavidson Seed, A, B, C, D +
- 9. @tdavidson Each round creates it’s own class of shares
- 10. @tdavidson Founders and Employees own Common, Investors buy Preferred
- 11. @tdavidson Capitalization Tables = who owns what
- 14. @tdavidson Option Pools 10-20% of shares
- 16. @tdavidson Options 101 - The right to buy stocks at a predetermined price, or strike price - Strike price set at fair market value - Have to be exercised
- 17. @tdavidson Align risk and reward Reward long-term value creation and thinking Encourage employees to think about holistic success http://firstround.com/article/the-right-way-to-grant- equity-to-your-employees
- 20. @tdavidson If i is the average outcome for the company with the addition of some new person, then they're worth n such that i = 1/(1 - n). Which means n = (i - 1)/i. http://paulgraham.com/equity.html
- 21. @tdavidson For example, suppose you're just two founders and you want to hire an additional hacker who's so good you feel he'll increase the average outcome of the whole company by 20%. n = (1.2 - 1)/1.2 = .167. So you'll break even if you trade 16.7% of the company for him. http://paulgraham.com/equity.html
- 22. @tdavidson Save 20% for employees - Sam Altman, Y Combinator http://blog.samaltman.com/employee-equity
- 23. @tdavidson “As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.” - Sam Altman, Y Combinator http://blog.samaltman.com/employee-equity
- 24. @tdavidson Why?
- 25. @tdavidson CEO: 5-10% C-Level Exec: 1-3% VP, Director: 0.5-2% Manager: 0.25-1.00% Board Directors: 0.5% - Rob Grossman http://rob.by/2013/negotiating-your-startup-job-offer/
- 26. @tdavidson “The only thing that matters in terms of your equity when you join a startup is what percent of the company they are giving you. If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own – don’t join the company! They are dishonest and are tricking you and will trick you again many times.” – Chris Dixon http://cdixon.org/2009/08/28/the-one-number-you- should-know-about-your-equity-grant/
- 28. @tdavidson Options are part of a total compensation plan (salary, benefits, options)
- 30. @tdavidson “Your offer is only as good as your negotiation”
- 32. @tdavidson Four year cliff 25% after 1 year Monthly / Quarterly after
- 33. @tdavidson Back weighted 10% after 1 year 20% after 2 years 30% after 3 years 40% after 4 years
- 34. @tdavidson > 4 years Longer vesting should bring larger overall grants
- 35. @tdavidson Refresher / Evergreen New grants during the 4 years http://firstround.com/article/the-right-way-to-grant- equity-to-your-employees
- 36. @tdavidson Technical considerations https://blog.wealthfront.com/stock-options-package- valuation/
- 37. @tdavidson Reporting % on fully diluted shares? https://blog.wealthfront.com/stock-options-package- valuation/
- 38. @tdavidson What happens to vested shares if leave before fully vested https://blog.wealthfront.com/stock-options-package- valuation/
- 39. @tdavidson Early vesting on acquisition https://blog.wealthfront.com/stock-options-package- valuation/
- 40. @tdavidson How are options priced? https://blog.wealthfront.com/stock-options-package- valuation/
- 41. @tdavidson Early exercise of options? https://blog.wealthfront.com/stock-options-package- valuation/
- 42. @tdavidson When was last 409a appraisal? https://blog.wealthfront.com/stock-options-package- valuation/
- 43. @tdavidson What was last funding valuation? https://blog.wealthfront.com/stock-options-package- valuation/
- 44. @tdavidson When is next funding round? https://blog.wealthfront.com/stock-options-package- valuation/
- 45. @tdavidson How to evaluate a startup employer
- 46. @tdavidson Which is better? a) .01% as employee #100 b) 5% as employee #3
- 47. @tdavidson - Do I trust this team? - Do I believe the product will succeed? - Is this the right company? - How much has company raised and on what terms? - How much runway the company has and when they’ll need to raise again? - What is my percentage ownership? - What is the market rate salary and equity comp? - Is there an exit strategy? - What is the estimated valuation at exit? - How long is my vesting schedule? - What are the tax implications?
- 48. @tdavidson You’ve been hired: now what?
- 49. @tdavidson New funding rounds = Dilution
- 50. @tdavidson Dilution? Issue more shares, own smaller % But (hopefully) at larger price per share
- 51. @tdavidson Acquisition or IPO
- 52. @tdavidson All exits not created equal http://rob.by/2013/negotiating-your-startup-job-offer/
- 53. @tdavidson Consider: Preferred / Common Liquidation Preference Valuations
- 54. @tdavidson Raised $18 MM Sold for $20 MM $2 MM to distribute? http://rob.by/2013/negotiating-your-startup-job-offer/
- 55. @tdavidson Details matter Taxes matter Timing matters Legal matters
- 57. @tdavidson Buffer: Open Equity http://open.bufferapp.com/buffer-open-equity-formula/
- 58. @tdavidson Case study: Buffer http://open.bufferapp.com/buffer-open-equity-formula/
- 59. @tdavidson Case study: Buffer http://open.bufferapp.com/buffer-open-equity-formula/
- 60. @tdavidson Additional Resources • AngelList: http://angel.co/jobs • CrunchBase: http://crunchbase.com • Visualization of dilution: http://visual.ly/visualizing-dilution • Fed Wilson’s Cap Table Template: http://avc.com/2011/09/mba-mondays-cap-tables/ • Mark Suster Cap Table and Valuation: http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate- valuation-differently-from-founders/ • Anonymous Startup Salaries: http://www.ackwire.com/ • Wealthfront: https://www.wealthfront.com/tools/startup-salary-equity-compensation • Buffer: http://open.bufferapp.com/buffer-open-equity-formula/ • Salary Negotiation: Make More Money, Be More Valued by Patrick McKenzie: http://www.kalzumeus.com/2012/01/23/salary-negotiation/ • Best practices on financial modeling: http://foresight.is/best-practices • An Introduction To Stock & Options by David Weekly: • Book: http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech- Entrepreneur-or-Startup-Employee • Video: http://blog.dweek.ly/introduction-to-stock-options-startup-founder-entrepreneur- employee/