Employee Equity 101

@tdavidson

Employees + Equity
Crash Course
@tdavidson
taylordavidson.com

@tdavidson

VC
B2B
Marketing and
advertising tech

@tdavidson

Employee Equity

@tdavidson

How do startups
raise money?

@tdavidson

Startups raise
venture capital by
selling part of the
company.

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“Raise $1 MM at $5
MM post-money
valuation”

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Expect to sell
10-30% in each
round of
fundraising *
* roughly

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Seed, A, B, C, D +

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Each round
creates it’s own
class of shares

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Founders and
Employees own
Common, Investors
buy Preferred

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Capitalization
Tables = who owns
what

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Cap table
http://foresight.is

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Option Pools
10-20% of
shares

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Why grant
options?

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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

@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

@tdavidson

Why not
stock?

@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

@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

@tdavidson

Save 20% for
employees
- Sam Altman, Y Combinator
http://blog.samaltman.com/employee-equity

@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

@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/

@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/

@tdavidson

Benchmarks?
angel.co/jobs
ackwire.com
wealthfront.com

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Options are part of a
total compensation
plan (salary, benefits,
options)

@tdavidson
https://blog.wealthfront.com/stock-options-package-
valuation/

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“Your oﬀer is only
as good as your
negotiation”

@tdavidson

Four year cliﬀ
25% after 1 year
Monthly / Quarterly after

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Back weighted
10% after 1 year
20% after 2 years
30% after 3 years
40% after 4 years

@tdavidson

> 4 years
Longer vesting should bring
larger overall grants

@tdavidson

Refresher /
Evergreen
New grants during the 4
years
http://firstround.com/article/the-right-way-to-grant-
equity-to-your-employees

@tdavidson

Technical
considerations
valuation/

@tdavidson

Reporting % on
fully diluted
shares?
valuation/

@tdavidson

What happens to
vested shares if
leave before fully
vested
valuation/

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Early vesting on
acquisition
valuation/

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How are
options priced?
valuation/

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Early exercise of
options?
valuation/

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When was last
409a appraisal?
valuation/

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What was last
funding
valuation?
valuation/

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When is next
funding round?
valuation/

@tdavidson

How to evaluate a
startup employer

@tdavidson

Which is better?
a)  .01% as employee #100
b)  5% as employee #3

@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?

@tdavidson

You’ve been hired:
now what?

@tdavidson

New funding
rounds = Dilution

@tdavidson

Dilution?
Issue more shares, own
smaller %
But (hopefully) at larger price
per share

@tdavidson

Acquisition or IPO

@tdavidson

All exits not created
equal

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Consider:
Preferred / Common
Liquidation Preference
Valuations

@tdavidson

Raised $18 MM
Sold for $20 MM
$2 MM to distribute?

@tdavidson

Details matter
Taxes matter
Timing matters
Legal matters

@tdavidson

It’s your
responsibility.

@tdavidson

Buffer: Open Equity
http://open.bufferapp.com/buffer-open-equity-formula/

@tdavidson

Case study: Buffer
http://open.bufferapp.com/buffer-open-equity-formula/

@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/

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Employee Equity 101