The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: decessus on July 24, 2015, 11:49:14 AM
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Hi, I was reading: https://blog.wealthfront.com/trade-salary-for-equity/
If you're trying to negotiate a package for yourself at a startup,it seems like you'd be able to easily ask the HR for the numbers below to plug into the formula. But is it wise to trade down your salary for stock options from a Mustachian point of view? My friend is new to this whole area of compensation as they've only tended to work for big companies on a straight salary/benefits package, so any insight is appreciated.
If the company is either sold or goes public at three times (3x) the current Preferred Stock price then the incremental value of making the trade over the next four years would be:
$40,000 ((($3 current preferred price x 3) – $1 exercise price)) x 10,000 shares – $40,000 in foregone salary over the four-year vesting period)
The ultimate company valuation assumed in this example is $900 million (100 million shares x $9 per share). Again keep in mind that our engineer is not assured of earning more money via the trade. The amount actually realized could be a lot higher or lower depending on the future success of the company.
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I have zero interest in stock with the company I work for. To me it's too many eggs in one basket. 100% of my income is dependent on the health of this one company, I don't want part of my portfolio to be as well. If it's given to me for free (I have some with my current job), sure I'll take it, but I'm not willing to trade off a decent salary for it. The other exception to company stock is when you can buy stock at a discount, in which case I would buy it and sell it during the first window possible, as long as it tended to be fairly stable stock.
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ALWAYS take cash over options at startups. Shares in startups aren't like shares in a public company. Private investors own preferred shares that have preferential treatment (both in economics and voting rights) over the pool of common options you'll get. And the company won't tell you what those preferential rights are.
Based on my brief work at a venture firm, and close relationships to lawyers that have done these deals for years, I would say 95%+ of employees at startups have options that expire completely worthless. This will frequently happen even if the company has a "successful" exit like a sale or an IPO.
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Salary should be competitive with what you can receive from the market.
Treat startup equity like a small lottery ticket. If you win great, but not a deal breaker if its worthless.
Keep in mind that at a mid to late stage startup, the total upside of the stock is likely to be minimal (~5 or 6 figures).
Only if your company becomes the next Google or Facebook is your equity going to be a meaningful part of your compensation.
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"I was reading: https://blog.wealthfront.com/trade-salary-for-equity/"
One strange article - how anyone in their right mind would ever want to do something like this? unless you truly buying ownership of the business along with control, absolute majority of 'equity' in startup are badly run lottery tickets. you do not know the true finances (unless you are part of named management team in which case 'equity' itself is small part of your compensation and you are looking at carve outs), you have no control at all on decisions and direction (seat on the board of directors, etc), you do not get to say if, when, or how the stake get diluted (surprise!) or how it would be valued. not a smart decision
Startup should pay sufficiently to compensate both for job risk and instability (as at best it is microcap) in true cash on hand. any additional 'equity' is an icing on the cake. 'equity' instead of appropriate pay (which should be above market) is a tale sold to people who do not understand math of probability.