Venture Capital for Tech Employees: What you need to know to get what you’re worth
Would you ever take a job in which your current salary was cut in half?
If you’re interested in working for startups, this is a very real thing to consider.
Consider two companies, A and B.
Company A attempts to woo you with promises of 10,000 shares in their startup and a modest salary if you work with them.
Company B lays 20,000 shares of their company at your feet, in addition to a generous salary.
Who do you choose? You’re thinking that 20,000 is a much more attractive offer and you choose the latter. You are confident in your decision and proud of yourself for negotiating such a great deal with a top company like Company B. You look forward to a bright future with them.
Fast forward a year later.
Things have not worked out as well as you had hoped at Company B. You decide that you want to leave and take your promised 20,000 options with you. You announce your plans to your boss, yet they promptly proceed to burst your bubble. As you are leaving after your first year, you are only entitled to 6,666 shares. This is due to the fact that sign-on stock bonuses can be clawed back if an employee leaves before staying with the company for three years. On top of that, you find out that these shares are not worth as much as you thought, as the company has a total of 100 million options.
What you need to know as an employee
In order for you to avoid any costly mistakes when getting a job in the tech industry, try to be informed about the process of venture capital. This will force you to better understand how companies are funded, and the role that you play in the process.
Companies raise money through two separate means: with venture capitalists or angel investors. Oftentimes with both. Venture capitalists are responsible for investing certain amounts on behalf of clients to make a profit for them in turn. It is their job to do this well. On the other end of the spectrum lie angel investors. These individuals put their own money into startups and larger companies to make a profit for themselves. Angels could have made their money in a separate industry, or are previous startup founders who made their fortune by selling their business to big corporations.
This first round of funding is called Series A. As the startup builds revenue, it can go through several more venture rounds (i.e. Series B, Series C, etc.) as it becomes a grounded and profitable company. In the event of an acquisition or if shares of the company become tradable on the stock market, the venture capital and angel investors are the first individuals to receive their money back from their initial investments.
In 2015, tech companies in the United States recorded expenses of more than $40 billion in stock-based compensation. This method of compensation is used strategically to herd and retain top talent.
That being said, what can you, as a prospective employee, do to make the most bang for your buck? It is your responsibility to ask questions and understand what you’re getting into before you accept your salary and shares.
To know how much of a company a stockholder owns, you need to know the total number of shares that all shareholders have in total (otherwise known as the fully diluted share count) and the breakdown of ownership amongst them. The number of stocks offered to an employee by the employer can vary by company. Therefore, it is critical to understand what percentage of the company that the stocks represent.
For instance, to revisit Company A and Company B in the introduction, Company A offered 10,000 shares in their company while Company B offered 20,000 shares. Upon hearing this, your next question should have been about the fully diluted share count.
Company A has a total of 1 million shares total while Company B has 100 million shares. This knowledge entirely reverses the prior situation, as the former offer is now more attractive due to the fact that the shareholder will be worth ten times more than the latter offer.
When it comes to salary, your choice between a higher salary verses more equity in the company is one that you need to take seriously. Shares can be exciting and rewarding however, the industry itself is volatile.
If you are not in a position to take a risk with your salary, I suggest thinking very carefully about what would work best for you. However, if a company does end up doing very well, that kind of investment can pay off handsomely. Ultimately, it is up to you to compare the benefits of stock versus salary, pertaining to your own unique situation.
When it comes to your salary and shares, knowledge is power. Managing your stocks in the future plays an important role during your courtship with a startup. Although it is a great idea to negotiate your sign-on stock bonus, it is also vital to inquire about the denominator and the hypothetical value of the stock during the final venture rounds. Asking about the startup’s liquidation preferences and other barometers for the likely long-term value of the stock can only be to your benefit. Not doing this is comparable to negotiating your salary without specifying the currency you will be paid in.
Questions to ask during the interview process
As you are thinking of applying for positions within tech companies, I encourage you to ask these four key questions throughout the process. When you ask questions, you will be able to make an informed decision about your employer, and thus will more likely be professionally happier in your chosen job.
1. What benefits do you offer?
To gain a broad idea of your options, asking this open-ended question will let you lead into inquiring about the company’s funding history and how it affects you.
2. How many shares are withstanding in the company and how many am I being offered?
Having this information will provide a good picture of where you would stand within the company. This question is to know which percentage of the company your shares represent and thus how much of the company you will own when you have access to your shares.
3. What is the exact period of employment time which I must fulfill in order to receive my shares?
Imagine if you gave a person $100 to walk your dog for three days, but they only ended up walking them for one day. Would you want to pay them the full $100 when they only did 1/3rd of the work?
This is the mentality that businesses maintain when allocating stocks to their employees. As with the example I listed in the introduction, companies will only let you have full access to your stocks when you fulfill your end of the agreement.
4. During your last series of financing, what was your company’s value?
Knowing the company’s estimated value is essential in determining how profitable your shares could be. You will ideally want preferred stock over common stock until the company goes public on the stock market. It is hugely important to know how confidently an employer will speak about their financing to understand where they’re headed as a business.
As a part of the tech industry, I cannot emphasize enough how much of an advantage you will have by understanding venture capitalism. Knowing how startups raise money will help you understand where a potential employer is coming from when they are presenting an offer to you.
To become more knowledgeable for your job hunt, I implore you to acquaint yourself with the business you are applying to and the benefits that they offer beforehand. This is important because doing so will secure your ability to ask open-ended questions during the interview, thus determining if you are a good fit for the company and vice versa.
It can be difficult to become aware of the ins and outs of a company from an outsider perspective. However, there are two sources I recommend to you to begin your research.
First, take a look at Glassdoor.com. This site allows current and former employees to anonymously review their employers. The website also allows employees to record their salary and benefits for job-seekers to get a general idea what it’s like at a particular company. Although you are required to register and write a review of your past experience to view most of their content, the interface is pretty simple. Glassdoor is an invaluable resource for you when you are looking for the best companies to apply for.
Next, to know more about the startup you are applying for, I would suggest exploring BetaList.com. Where Glassdoor might pertain more towards larger companies, BetaList specializes in providing basic information about startup companies, what they do, and why it is a valued commodity. Although salary and stock information is not available, this site is a great way to search for startups which haven’t garnered a reputation yet.