How To Value Your Startup Equity
Equity is a cornerstone of the Silicon Valley dream. Find the right startup, work your butt off, and ride the rocketship / unicorn to riches and a career as an angel investor.
While there are stories of early employees becoming rich based on their startup’s success, this outcome is the exception, not the rule.
So how should you understand / account for the potential value of equity as part of a compensation package?
As Tradecraft grads evaluate startup job offers, we often get questions about equity. After our reminder to optimize for rate-of-learning early in one’s career, we share a set of resources, reproduced below.
An 80/20 primer on equity.
Why read it? It’s a quick read and gives you all the basics that you need to understand equity in a startup context.
This series from eShares is another great foundational overview of equity.
Why read it? Because the articles give super concrete easy-to-understand examples, and because eShares is known for high-quality content.
This in-depth guide covers all of the core issues around equity and is ever-evolving.
Why read it? It is comprehensive and clear.
Buffer is well-known for its transparent approach to running a business. In this article, they explain how they explain equity to their employees.
Why read it? It is a super-practical, hands-on example of how to think through potential equity upside when you join a company. Note that they don’t go into liquidation preferences, which might affect your outcome as a shareholder.
There are tax implications to how you exercise your options. In this article, the CEO of Lever lays out the pros and cons to early exercise, as well as providing more general context around equity.
Why read it? Because early exercise could save you tens of thousands of dollars in tax bills (or conversely cost you money if your company fails)
A clean and simple compensation calculator that Front uses to help their employees understand comp packages.
Why use it? Because it can help speed up your back-of-the-envelope math. Also, if you can’t fill in the blank on number of shares outstanding, you might want to question the transparency of the company that has given you the offer.
A more sophisticated equity calculator that let’s you play around with multiple scenarios. Note that unlike the Front calculator, this one includes an option for liquidation preference information.
Why use it? Because it’s good to spend a few minutes to understand the mechanics of what effects the value of your equity.
This Bloomberg piece profiles a few startup employees who worked for famous unicorn companies (Box, Square, Jawbone, etc.) and had smaller payouts at IPO than they were expecting.
Why read it? Because frustration is the conflict between expectations and reality. It’s important to have reasonable expectations about the value of startup equity, even in a company that seems to be doing quite well.
This NY Times piece details how employees at a unicorn company lost money after paying taxes on exercised shares which ended up being worth significantly less than they expected.
Why read it? Because it is an important and visceral reminder that you should think independently and consult trusted advisors before putting out your own money to exercise options.
There are many potential points of failure in one’s career. Reading articles like the ones featured in this post can help you avoid many of them. If you want more hands-on support navigating your career, we’ve helped a few hundred people transition into fast-growing startups like Facebook, Medium, Uber, Gusto, Udemy, Doordash, Earnest etc. Learn more at Tradecraft.com.