Employee Equity 101

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Talk at Venture for America, Providence, RI, June 25, 2014

Published in: Business, Economy & Finance

Employee Equity 101

  1. 1. @tdavidson   Employees + Equity Crash Course @tdavidson taylordavidson.com
  2. 2. @tdavidson   VC B2B Marketing and advertising tech
  3. 3. @tdavidson   Employee Equity
  4. 4. @tdavidson   How do startups raise money?
  5. 5. @tdavidson   Startups raise venture capital by selling part of the company.
  6. 6. @tdavidson   “Raise $1 MM at $5 MM post-money valuation”
  7. 7. @tdavidson   Expect to sell 10-30% in each round of fundraising * * roughly
  8. 8. @tdavidson   Seed, A, B, C, D +
  9. 9. @tdavidson   Each round creates it’s own class of shares
  10. 10. @tdavidson   Founders and Employees own Common, Investors buy Preferred
  11. 11. @tdavidson   Capitalization Tables = who owns what
  12. 12. @tdavidson   Cap table http://foresight.is
  13. 13. @tdavidson   Cap table
  14. 14. @tdavidson   Option Pools 10-20% of shares
  15. 15. @tdavidson   Why grant options?
  16. 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. 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
  18. 18. @tdavidson   Why not stock?
  19. 19. @tdavidson   How much?
  20. 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. 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. 22. @tdavidson   Save 20% for employees - Sam Altman, Y Combinator http://blog.samaltman.com/employee-equity
  23. 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. 24. @tdavidson   Why?
  25. 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. 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/
  27. 27. @tdavidson   Benchmarks? angel.co/jobs ackwire.com wealthfront.com
  28. 28. @tdavidson   Options are part of a total compensation plan (salary, benefits, options)
  29. 29. @tdavidson  https://blog.wealthfront.com/stock-options-package- valuation/
  30. 30. @tdavidson   “Your offer is only as good as your negotiation”
  31. 31. @tdavidson   Vesting
  32. 32. @tdavidson   Four year cliff 25% after 1 year Monthly / Quarterly after
  33. 33. @tdavidson   Back weighted 10% after 1 year 20% after 2 years 30% after 3 years 40% after 4 years
  34. 34. @tdavidson   > 4 years Longer vesting should bring larger overall grants
  35. 35. @tdavidson   Refresher / Evergreen New grants during the 4 years http://firstround.com/article/the-right-way-to-grant- equity-to-your-employees
  36. 36. @tdavidson   Technical considerations https://blog.wealthfront.com/stock-options-package- valuation/
  37. 37. @tdavidson   Reporting % on fully diluted shares? https://blog.wealthfront.com/stock-options-package- valuation/
  38. 38. @tdavidson   What happens to vested shares if leave before fully vested https://blog.wealthfront.com/stock-options-package- valuation/
  39. 39. @tdavidson   Early vesting on acquisition https://blog.wealthfront.com/stock-options-package- valuation/
  40. 40. @tdavidson   How are options priced? https://blog.wealthfront.com/stock-options-package- valuation/
  41. 41. @tdavidson   Early exercise of options? https://blog.wealthfront.com/stock-options-package- valuation/
  42. 42. @tdavidson   When was last 409a appraisal? https://blog.wealthfront.com/stock-options-package- valuation/
  43. 43. @tdavidson   What was last funding valuation? https://blog.wealthfront.com/stock-options-package- valuation/
  44. 44. @tdavidson   When is next funding round? https://blog.wealthfront.com/stock-options-package- valuation/
  45. 45. @tdavidson   How to evaluate a startup employer
  46. 46. @tdavidson   Which is better? a)  .01% as employee #100 b)  5% as employee #3
  47. 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. 48. @tdavidson   You’ve been hired: now what?
  49. 49. @tdavidson   New funding rounds = Dilution
  50. 50. @tdavidson   Dilution? Issue more shares, own smaller % But (hopefully) at larger price per share
  51. 51. @tdavidson   Acquisition or IPO
  52. 52. @tdavidson   All exits not created equal http://rob.by/2013/negotiating-your-startup-job-offer/
  53. 53. @tdavidson   Consider: Preferred / Common Liquidation Preference Valuations
  54. 54. @tdavidson   Raised $18 MM Sold for $20 MM $2 MM to distribute? http://rob.by/2013/negotiating-your-startup-job-offer/
  55. 55. @tdavidson   Details matter Taxes matter Timing matters Legal matters
  56. 56. @tdavidson   It’s your responsibility.
  57. 57. @tdavidson   Buffer: Open Equity http://open.bufferapp.com/buffer-open-equity-formula/
  58. 58. @tdavidson   Case study: Buffer http://open.bufferapp.com/buffer-open-equity-formula/
  59. 59. @tdavidson   Case study: Buffer http://open.bufferapp.com/buffer-open-equity-formula/
  60. 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/

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