Bill Harris, former CEO of Intuit and PayPal and current CEO of Personal Capital, thinks you don’t understand equity. To be clear, he doesn’t think most employees understand stock options. “It’s like a lottery ticket,” he says. “Maybe they’ll get rich, maybe not. But they don’t get the value.”
So let’s demystify the topic. Here are the four questions you need to be asking yourself when considering how much equity you deserve.
Four Questions to Getting the Equity you Deserve
1. How Much Are You Investing?
Just like an angel or a VC, you’re investing in a start-up in return for equity. However, you’re not actively contributing cash—you’re just giving up the (temporary) opportunity to make more.
To figure out how much money you’re investing, compare your market value to your actual salary. Do you have friends doing the same job at established companies who are making $20,000 more than you? If so, you should be getting stock options worth at least that much.
2. How Much Are You Risking?
Working for a start-up is risky (and awesome, exhilarating, and rewarding, but that’s another article.) To determine how much equity you should be getting, you need to examine a couple key things about the company.
First, how many employees does it have? If you are hire #50, you should be getting significantly less equity than hire #7, who was putting his or her eggs in a much less certain basket.
Second, what stage of funding is it in? Sixty percent of seeded companies don’t make it to a Series A round. If you’re joining the company after one, two, or three successful rounds, your equity should decrease in proportion to the risk factor.
3. How Much Are You Contributing?
For obvious reasons, different roles receive different amounts of equity. The more senior the position, the more equity you should receive. In addition, the more in-demand or specialized your role is, the more equity you should receive.
There’s several different compilations of typical equity amounts. Here are the ranges from Guy Kawasaki, a high-profile VC:
- Senior engineer: 0.3% to 0.7%
- Mid-level engineer: 0.2% to 0.4%
- Head Architect: 1.0% to 1.5%
- Vice presidents: 1.5% to 3.0%
- Chief Executive Officer: 5.0% to 10%
4. How Much Will You Be Getting?
All equity is not created equal. If you’re getting stock options, you get the right to buy company shares at a fixed price. Let’s say when you join the company, each stock is worth $1. Two years down the line, when they’re worth $5, you can buy them at the $1 price, turn around and sell them, and get a 400% return.
The other type is restricted stock. Usually, that means it’s vested—rather than buying your stock, you get it automatically, but it’s paid out over time. The most common pay-out is four-year vesting with a one-year cliff. After you’ve worked at a company for one year, you’ll get 25% of your stock options each year. Maybe you don’t see yourself staying at the start-up for a full four years; in that case, you should negotiate your equity package.
Pablo Pinto works as a product specialist at TARA.AI. He has experience in startup-up operations, business development/sales, growth, and product building. Pablo considers himself a self-starter with an entrepreneurial spirit and a special interest in data analytics and digital marketing.