Understanding Startup Equity: 9 Questions to Ask About Your Equity Package

If you’re interviewing at a startup, then equity will likely be part of your compensation offering.

For many people, equity is a huge draw to working at a startup. There is, of course, the potential to earn a substantial amount of money should an exit event take place. But equity also means you’re directly tied to the success of the company. There’s an extra level of investment. It means you get skin in the game.

It’s exciting to get equity, but many candidates dread having a discussion around it. It can be confusing and hard to get an accurate understanding of the offer.

Here are some key questions you can ask during the interview process to unpack your equity offer:

What type of equity would I receive?

Stock options and Restricted Stock Units (RSUs) are some of the most common forms of startup equity.

A stock option means that once you take the job, you’ll get the opportunity to buy stock in the company. This kind of equity doesn’t involve a transfer of ownership. It’s a right to buy shares at a specific price within a certain window of time. As an employee, you’ll profit on the difference between the option price and the actual market price.

RSUs are more common at larger, more established startups. For this type of equity, the company simply commits to giving an employee stock in the company when a certain requirement is met, such as being at the firm for a set length of time. Once you’ve met the requirements, the company will give the RSUs either in actual shares or the cash equivalent based on what the stock is worth at that point.

For a deep dive into these types of equity, check out this article by SmartAsset.

What is the Percentage of My Ownership?

The percent you own will determine how much you’ll be paid out in an exit event.

To calculate your percentage, you’ll need to know how many shares you would own and how many shares are outstanding. Your percentage of ownership is the number of shares or options you own divided by the total shares outstanding.

When calculating this percentage, make sure you get the number for all outstanding shares (including preferred stock, restricted stock, etc.) — not just what’s left in the option pool (the equity that’s reserved for early investors or employees).

Bonus Tip: Some companies will just want to provide the number of shares that you would receive. But that number is meaningless if you don’t know what percentage of ownership you would end up having in the organization. If the company is early stage, it’s even more significant to know how much you might be able to gain from having equity in the company.

What is the company currently valued at?

If you multiply the company’s valuation by the percentage you would own, you can get a general idea of how much your equity is worth.

A lot of startups won’t be willing to share this information openly. In that case, you can do a little research to see if there’s information on Crunchbase or Pitchbook. You can also see if their latest valuation was announced in a recent press article.

Bonus Tip: It’s also worth asking how much money the company has raised and how long that funding will last. If they’re planning to raise additional funding in the near future, then that means additional dilution of your ownership. To get an accurate understanding of your ownership, you’ll need to consider how much you’ll own post-financing.

What is the vesting schedule?

When a company gives you equity as part of your compensation package, they’re offering you partial ownership of the company. But you typically need to work for the company for a period of time to earn your shares. This process is called vesting.

It’s important to know how long you have to stay at the startup to earn those options or shares and whether or not any conditions are tied to them.

A 4-year vesting window with a 1-year cliff is pretty standard for employee stock options at a startup. That means you have to work at the startup for 1 year before your shares vest at all. If you leave at the 12 thmonth, you get 25% vesting. Leave after 3 years and you get 75%.

For more information on vesting, check out this resource about equity education.

How do you decide how many options each employee gets?

The answer to this question will depend on the stage of the company. If it’s early stage, they might not have a standard system in place. If they’re later-stage and more established, they might have a tier or band system based on your level within the company.

Asking this question will help you make sure you’re getting a fair equity offering in comparison with other employees at the company.

What happens if the company is sold?

This is especially worth asking if you’re interviewing for an early-stage startup. If the company is acquired before your vesting period, you’ll want to know what will happen to your stock.

A lot of the time, companies offer an acceleration period if an acquisition takes place. This acceleration of vesting is helpful for a couple reasons. First off, you might not want to stay at the company after it gets acquired. Also, lay-offs aren’t uncommon after an acquisition.

It’s important to know what will happen to your shares if any of these things take place.

When can I sell my shares?

Will you be able to sell shares before an exit event (i.e. an IPO or acquisition)?

It might be worth knowing if they’ll hold tender offers (opportunities for you to sell shares of equity) if their game plan is to stay private for a long time.

Something to note: you don’t want to come across as being too focused on money when asking this question, but it’s worth being knowledgeable about the details of your equity offer.

How long after leaving the company do I get to exercise my shares?

Once you leave the company, you might only have a certain period of time to purchase your options. You’ll lose them if you don’t buy in time.

90 days is a common amount of time at most startups. If you leave the company, you’ll want to make sure you exercise those options before you hit that date.

Bonus Tip: it’s worth asking if anything will happen to your vested shares if you leave before your vesting schedule has been completed. Most of the time, you get to keep anything you vest as long as you exercise within the 90-day window. But occasionally a company will have the right to buy back your vested shares at the exercise price if you leave before a liquidity event.

What are the company’s future plans regarding an exit strategy?

It’s nice to know if the startup is planning on selling, going public, or merging with another company. Some startup leaders won’t share this information. There’s a lot of moving pieces when it comes to an exit strategy and they may not want to make any promises to potential employees. However, it’s helpful to just hear the general vision of where they’d like to take the company.

If the company doesn’t do well, then you won’t get much (or anything) for your investments. On the other hand, if they exit at a great valuation, then you could make some good money depending on how much you own.

Conclusion

While this list is far from exhaustive, it’s a great starting point to a knowledgeable discussion. And it will help you avoid blindly accepting an offer.

While you’re having these conversations, it’s helpful to note that some companies will tell you everything and others will keep the information close to their chest. Either way, you should be prepared to ask questions so you can understand exactly what your equity offering entails.

Originally published at https://www.myhatchpad.com.