Author Topic: Equity v. Salary  (Read 6600 times)

Rebecca Stapler

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Equity v. Salary
« on: July 16, 2014, 06:57:43 AM »
My husband was offered a new job at a startup tech company, under 2 years old and not making any revenue (as far as we can tell). They offered him a 50% salary increase from his current job and 1% equity, but would increase the salary by up to $15,000 if he wanted to take less equity (0.5%).

We are trying to pay off a lot of SL debt (currently $185k), so to me it seems a no-brainer to take the higher salary instead of the equity. I might be super cynical, but to me the equity is worthless at this point -- the company so far only has seed money and hasn't raised a Series A round of funding yet. The business model seems based on the "get as many users as possible and the revenue will come later" model that I feel is creating a bit of a VC bubble. It feels like taking equity in lieu of the $15k is a big gamble that is unlikely to pay off. It's not like my husband could cash it out if he left.

And yes, we realize that our cynicism about the equity says something about how long this job may last. But for a 50% salary increase (more without the 1% equity), we're willing to take the chance. My husband will have other opportunities if this job doesn't last.

What am I not considering? Is it not as much of a no-brainer? What would Mustacians do if they were in our shoes? (I realize a lot of Mustacians are NOT in debt payoff mode, and are building their nest egg, so I think the considerations would be very different if we were in that mode)

Badass by 41

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Re: Equity v. Salary
« Reply #1 on: July 16, 2014, 07:19:12 AM »
The typical equity vesting period is 3-4 years, so even if you took the full 1% you would have to wait that long to exercise it all. And speaking of exercising, at 1% you should run the numbers on how much it will cost you to exercise when the time comes. Hopefully your strike price will be in the pennies, but you should know for sure.

Given the vesting timeline, are you expecting to be debt free within that window? How many years doe the extra $15k take off that timeframe?

mak1277

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Re: Equity v. Salary
« Reply #2 on: July 16, 2014, 07:25:09 AM »
Lots of things to consider here and I won't hope to touch on all of them. 

Do you have any sense as to the Company's worth right now?  If you only got a one-time payment of $15k, in exchange for giving up 0.5% of the company, that would assume the company is worth $3 million.  But you're getting, in theory, a $15k annuity, so unless the company is worth a lot more than $3 million I think math would say take the money.

Also, if the company does explode in value, you'll still have that 0.5% equity stake, so you aren't giving up all your upside by taking the extra cash up front.

Will there be ongoing equity grants or stock options?  If so, that too would push me towards taking the cash now and letting my equity build up slowly.

Paul der Krake

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Re: Equity v. Salary
« Reply #3 on: July 16, 2014, 07:26:40 AM »
Only you can decide whether the additional 15k make a difference (it sure is if he makes 70k, not so much if 200k), and whether he believes the company has a future. But you are right, until the company is more established, equity is worthless. Make sure you understand how the vesting works. If it's a standard, 4 year vesting period with a one year cliff, you get nothing should he leave before the first year is over. Be aware of the Fair Market Value gotcha too, when/if he decides to exercise.

This is a great intro to stock options for people in tech.

Rebecca Stapler

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Re: Equity v. Salary
« Reply #4 on: July 16, 2014, 08:24:17 AM »
It is the 4-year vesting schedule with a 1-year cliff, which raises a good point: If we take the $15k, it's essentially exchanging 25% of 0.5% equity each year ... so, after 4 years we would gain $60k at the expense of the 0.5% equity.

As far as we know, the company was valued at $8 million in its last round. So, that's giving up a potential $100k/year in exchange for a certain $15,000/year.

There's no proposal in the offer for ongoing stock options, and this equity doesn't require a buy-in per se (although I guess you could say that the buy-in is the $15k/year)

Rebecca Stapler

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Re: Equity v. Salary
« Reply #5 on: July 16, 2014, 08:28:54 AM »

Given the vesting timeline, are you expecting to be debt free within that window? How many years doe the extra $15k take off that timeframe?

No, we won't be debt-free in 4 years because we plan to buy a house in the meantime. So, if we don't have the SLs, we'll have a mortgage. $60k over 4 years will make a significant dent, though.

Also, the next 12 months we will have more expenses / less income because I will be taking unpaid maternity leave and then we will have 2 kids in daycare for 6 months. The $15k would all go towards debt, but the raise is probably going towards this expensive year. Once September 2015 rolls around, though, the raise plus $15k will be going towards debt.

mak1277

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Re: Equity v. Salary
« Reply #6 on: July 16, 2014, 08:33:56 AM »
It is the 4-year vesting schedule with a 1-year cliff, which raises a good point: If we take the $15k, it's essentially exchanging 25% of 0.5% equity each year ... so, after 4 years we would gain $60k at the expense of the 0.5% equity.

As far as we know, the company was valued at $8 million in its last round. So, that's giving up a potential $100k/year in exchange for a certain $15,000/year.


I don't think you're giving up $100k/yr. 

$8m * 0.5% = 40,000...vested over 4 years means you're giving up only $10k per year (ignoring appreciation) in exchange for $15k per year of cash.

Rebecca Stapler

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Re: Equity v. Salary
« Reply #7 on: July 16, 2014, 08:43:07 AM »
It is the 4-year vesting schedule with a 1-year cliff, which raises a good point: If we take the $15k, it's essentially exchanging 25% of 0.5% equity each year ... so, after 4 years we would gain $60k at the expense of the 0.5% equity.

As far as we know, the company was valued at $8 million in its last round. So, that's giving up a potential $100k/year in exchange for a certain $15,000/year.


I don't think you're giving up $100k/yr. 

$8m * 0.5% = 40,000...vested over 4 years means you're giving up only $10k per year (ignoring appreciation) in exchange for $15k per year of cash.

Gotcha. Thanks for figuring that out for me -- it makes it a much clearer choice that way!

mak1277

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Re: Equity v. Salary
« Reply #8 on: July 16, 2014, 09:16:27 AM »
It is the 4-year vesting schedule with a 1-year cliff, which raises a good point: If we take the $15k, it's essentially exchanging 25% of 0.5% equity each year ... so, after 4 years we would gain $60k at the expense of the 0.5% equity.

As far as we know, the company was valued at $8 million in its last round. So, that's giving up a potential $100k/year in exchange for a certain $15,000/year.



I don't think you're giving up $100k/yr. 

$8m * 0.5% = 40,000...vested over 4 years means you're giving up only $10k per year (ignoring appreciation) in exchange for $15k per year of cash.

Gotcha. Thanks for figuring that out for me -- it makes it a much clearer choice that way!

I think I've probably over-simplified this by a mile though.  I mean, the chances that equity is going to be worth exactly $40,000 is pretty close to zero.  Also, the $15k additional salary doesn't stop after four years, it continues indefinitely as long as he works there.

I wouldn't look at it as giving up $40k in equity...I'd try and make my best guess as to whether you think you're giving up something like 10 or 20 times that much as a result of appreciation.  If you'd rather take the bird in hand and pay off the loans, I think that would be perfectly mustachian.

I also think it really helps that he is still going to get 0.5% equity no matter what.  That protects you from the risk of "losing" a huge upside if the company does great.

Rebecca Stapler

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Re: Equity v. Salary
« Reply #9 on: July 16, 2014, 09:58:27 AM »
Yeah, there are a lot of "what ifs" that could make that equity a shitton more valuable. But as far as I know, the odds are stacked against tech startups. It seems so speculative at this point that the equity will ever be worth anything.

But at least he would have half that amount in equity, so if others make a shitton of money on an acquisition or IPO, he will "only" make half a shitton. That's OK with me!

Frizhand

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Re: Equity v. Salary
« Reply #10 on: July 16, 2014, 10:06:22 AM »
I know a lot of people in the tech business that wish they took the cash instead of the equity.  It's impossible to know if a company will do well.  Even companies with the best people, ideas and technology that are sure 'winners' can go out of business.  I would always go with the higher salary and look at the equity as a lottery ticket...it could pay off but it's a gamble.

desrever

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Re: Equity v. Salary
« Reply #11 on: July 16, 2014, 10:16:29 AM »

desrever

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Re: Equity v. Salary
« Reply #12 on: July 16, 2014, 11:01:59 AM »
Double check the contract for a clawback provision, granting the company the right take back vested equity in the event your husband quits, or any other situation. I've heard horror stories of such provisions not just in the news, but also on this forum. Such a limitation would severely depress the value I'd be willing to put on an ownership stake.

My instinct is to model the decision like this: if you had $54500 to invest (the present value of 4 annual payments of 15K assuming a 4% interest rate), would trading that for a 0.5% stake in this company be your best choice? It is easier to evaluate the risks/rewards when you think of this kind of transactions as a buyer, rather than someone who's being given a windfall.

defenestrate

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Re: Equity v. Salary
« Reply #13 on: July 16, 2014, 11:12:54 AM »
--This is a basic valuation problem. What is the likelihood the company will succeed? I have found that most companies overvalue equity especially early on.

The likely scenario is that the first round investors will completely dilute current equity holders (especially if equity is concentrated, becuase they can gross up the decision makers and dilute the rest of the ownership pool).

If the company is not insisting on your taking equity, they also are stating that they do not believe your efforts will add value to that equity--again a sign of overconfidence.

I have no idea what industry this is in, but I would take the 50% salary increase over equity--

However, if the company has never really valued its shares, it may very well be the case that the "stock" is priced arbitrarily, and is incredibly valuable as is. Without a round of funding, you have little basis to understand the real value of the privately held stock. If the cost basis is incredibly low, it makes sense to reconsider taking the stock options, and quickly putting them into a roth IRA or something of the sort. The reason is that you will have a huge tax on the upside when the first round comes in.

Difficult to give any advice without a lot more information, but if there is any question about the success of the business, and or the integrity of the leadership, best forgo the equity.
 

Mrs. PoP

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Re: Equity v. Salary
« Reply #14 on: July 16, 2014, 11:31:05 AM »
Assuming this is common shares, not preferred, you also want to think about if there are preferred shares out there and what the liquidation preference (if any) on those rounds is.  If there's a liquidation event while the preferred shareholders are still underwater (or barely above water) on their liquidation preference, common equity might end up being worth A LOT less than you would have otherwise calculated. 

But I don't know how easy this information is to know with that company. 

If it were us in this position, with non-mortgage debt, I'd take the cash and keep half the equity offered, viewing it as my riskiest asset class.  It's a lot of eggs to put in one basket (job + risky investment) when you've still got a significant amount of debt. 

seattlecyclone

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Re: Equity v. Salary
« Reply #15 on: July 16, 2014, 12:00:15 PM »
It is the 4-year vesting schedule with a 1-year cliff, which raises a good point: If we take the $15k, it's essentially exchanging 25% of 0.5% equity each year ... so, after 4 years we would gain $60k at the expense of the 0.5% equity.

As far as we know, the company was valued at $8 million in its last round. So, that's giving up a potential $100k/year in exchange for a certain $15,000/year.

There's no proposal in the offer for ongoing stock options, and this equity doesn't require a buy-in per se (although I guess you could say that the buy-in is the $15k/year)

Are you sure about the bolded part? If it's a stock option, it definitely requires a buy-in to receive the shares. At this stage his exercise price will probably be set at pennies per share, but those pennies can add up to real money when you're talking about thousands of shares. When (or if) to exercise is a whole other question. There can be substantial tax benefits to exercising early before the shares become worth much, but there's also substantial risk to doing so, namely the risk that the company will go out of business and your shares will become worthless.

Ask about the financials of the company. How much cash do they have on hand? What's their burn rate? How much hiring do they plan to do in the near future? This will help you get an idea for how much longer the company can stay afloat without additional investment. Once that point comes, the company basically has three options. Either they can find additional investors (potentially diluting everyone's equity quite substantially), they can get acquired, or they can go out of business. I would be very wary about joining the company if they were unwilling to give me this information up front. For a larger company it's understandable, but if they're offering you 1% of the equity you have a huge interest in knowing about the financials and being an active steward of the company's scarce cash.

Speaking of cash, be aware that as an early-stage company, every extra dollar going out the door can accelerate the company's path to running out of cash. Thus the founders may not be too happy with you if you trade your equity for $15k/year. Doing so increases the likelihood that they'll need to take a low-ball investment to stay afloat before they build up a good revenue stream. Furthermore, it would be seen as a sign that you don't really believe the company is going to be around in two years.

That said, if you really don't believe the company is going to be around in two years, taking the $15k is a completely rational thing to do. Your creditors probably won't accept shares in lieu of cash for your debts, so there's that too.

NoraLenderbee

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Re: Equity v. Salary
« Reply #16 on: July 16, 2014, 01:58:07 PM »
I would take the extra $15K. You're not giving up the chance to profit if the company succeeds, because you'll still have 0.5% equity.
But neither option is a terrible choice.

Rebecca Stapler

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Re: Equity v. Salary
« Reply #17 on: July 16, 2014, 07:50:03 PM »
Thank you! This is all very helpful, and highlights a lot of our concerns -- taking just the 0.5% might say we don't believe in the company's success (but I'm not sure we do; the big bonus to the job is that MH will get to do what he loves to do); the job itself is risky, why add to the riskiness with speculative equity?; etc.

Decisions, decisions. I'll update when we make one. For now, we're collecting our thoughts.