This link has been bookmarked by 132 people . It was first bookmarked on 24 Apr 2008, by nabhishek.
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31 Dec 17
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25 Sep 15
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27 Aug 15
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Stock Classes: Common and Preferred
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The preference amount is usually (but not always) the amount invested. For example, if Series A stock is sold to first-round investors for $1/share, the preference amount for that stock is usually $1. (In some cases, usually when the company is in a weak position to raise money, there may be "preference multiple" where the preference is larger than the share purchase price).
C
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ommon stockholders should care about the preference, because that preference is "ahead" of the commons in any acquisition outcome. For example, let's assume that the company raises $5m dollars by selling 5,000,000 shares of Series A stock for $1/share. That means that there's a total of $5m of Series A preference in the company. If the company is acquired for $5m (or less), the preferred stock holders get all of the proceeds and the common stock holders get nothing.
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The total preference is less of an issue in early stage companies (e.g. Series A), because it's relatively small. However, it can be a significant issue in later stage companies that have raised a lot of money. I've seen companies with $75m of preference, and very frustrated common stockholders that realize the company needs to get acquired for $100m or more for them to start making any money.
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My advice: get the "total preference" number from the company, especially for companies that have raised a lot of money. If the company is reluctant, point out that you need this information to accurately value your common stock. If they won't tell you, go work somewhere else.
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Additional advice: Also, don't ask for any preferred stock unless you really know exactly what you're doing and are prepared to write a check. Asking for preferred stock will usually peg you as a total novice.
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Dilution
Companies raise money by selling new stock after the board of directors authorizes the sale to investors. Those new shares are created out of thin air by the company, and will dilute all of the current stockholders.
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In a startup, dilution happens, and you just need to factor it in. If you're considering a early stage offer (Series A), your percentage ownership will likely start out as high as it's ever going to be, then go down with each round (Series B, Series C, etc.) In some cases, the company may "re-up" you by granting some more stock. But this usually happens NOT to compensate for dilution, but to recognize a bigger contribution to the company than what you were originally hired for.
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My advice: negotiate for the largest equity portion you can, because that initial grant is going to be the bulk of your ownership and will get diluted down from there. If there is a round of funding, make sure you understand your post-funding (post dilution) ownership.
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Some vesting plans may accelerate vesting for certain events, such as an acquisition. For example, the company may vest 50% of your unvested stock if the company is acquired, or may accelerate an additional year. The vesting may also by conditioned by a so-called "double trigger": you may only vest if you are acquired AND you lose your job. The idea here is that the company is partially compensating you for the stock you could have earned by staying for your full vesting period. These terms are frequently given to executives, especially ones who stand a good chance of losing their jobs in an acquisition.
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My advice: make sure you clearly understand the vesting terms. If you are considering an executive position, make sure you understand the acceleration terms and consider negotiating something more favorable if your position is at risk of not surviving an acquisition.
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Stock vs Options
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So far, we've talked about the stock as "stock", but in most cases the company is not going to give you actual stock, but will grant you an option to purchase stock for some fixed price (the "strike price"). To actually own the stock, you have to exercise your option (as you vest), and write a check to the company for the total strike price.
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Owning the stock has a potentially significant tax advantage: it starts the timer for long-term capital gains. Any capital asset held for more than a year is taxed a low, long-term capital gains rate (currently 15% percent, maximum). Continuing the above example, let's say your company is acquired after another year for $10/share. Your 25,000 shares are now worth $250,000 and you only have to pay long-term capital gains tax when you sell. To liquidate your remaining vested options (e.g. exercise and sell) will likely incur steep regular income or short-term cap gain tax rates.
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(My general advice to common option holders is to exercise as soon as you vest to get the long-term timer going, AS LONG AS you are (a) bullish on the company and (b) have the money. However, doing this has it's own tax issues (AMT); consult a tax professional for real advice).
Where does the strike price come from? It's driven by the Fair Market Value (FMV) of the common stock, set by the Board of Directors, usually based on an external "409A" evaluation of the company. The common stock price is usually a fraction of the preferred price, at least in the early stages.
The strike price typically goes up as the company raises additional funding (at higher valuations). If you are joining a later-stage startup, the strike price could be quite significant, requiring you to write large checks to exercise.
My advice: understand the terms of your option grant, especially the strike price.
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Founder's / Restricted Stock
If you are joining the company early enough (typically before or during Series A funding), you may be able to get so-called "founder's stock" or "restricted stock". This stock is just common stock, but you purchase it all up front instead of getting an option. The company implements vesting with a buy-back agreement; if you leave before you are fully vested, the company can buy back the unvested portion at the price you paid (i.e. unappreciated). For example, if you left after 2 years on a 4-year vest, the company would buy back 50% of your stock.
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In recent years, companies may provide an early exercise clause to provide option recipients some tax advantages. This clause allows you to exercise all of your stock (unvested) up front, as long as you agree to let the company buy back the unvested portion if you should leave. Assuming you can afford the exercise price, the net effect is nearly identical to founder's stock.
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My advice: if you are joining before or shortly after Series A funding, you should ask for a founder's stock agreement. Some companies will push back, arguing it is "special", but it's not really; it's just more paperwork. The tax advantages can be huge.
If you can't get founder's stock, ask for an early exercise clause. See this sample agreement:
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Tax Advice: You probably should make a Section 83b Election if you are getting restricted stock. The IRS lets you choose: pay tax on the stock up front, or pay taxes as you vest (and the stock value appreciates). The former option is almost always the best in a startup scenario. However, the IRS requires you make that choice formally (i.e. declare it to the IRS in writing) and you have to do it in 30 days. Consult a tax attorney for details.
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You should care about the size of the ISO pool (in addition to your grant), because the size of that pool represents the ability of the company to attract top talent with competitive offers. Investors and founders that leave small ISO pools are usually being penny-wise and pound-foolish.
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My advice: gently inquire about the size of the ISO pool and other ownership blocks. The company many not tell you, but if done correctly it doesn't hurt to ask.
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My final negotiating advice: do your best at lining up multiple options (e.g. competing offers). That will give you the quickest and best sense of your market value, and the relative value of each of your offers.
References
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10 Aug 15
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04 Dec 14
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percentage
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venture-funded
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different classes of stock
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Preferred stock classes
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investors
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have already invested some of their own money
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By convention, preferred stock classes are lettered, increasing for each round of funding: Series A, Series B, etc
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in some cases founders
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preference multiple
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company is in a weak position to raise money
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In a startup, dilution happens
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re-up" you by granting some more stock
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go down with each round
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bigger contribution to the company than what you were originally hired for
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Vesting
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4 year vesting, a 1 year "cliff"
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then monthly or quarterly vesting after that
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long intervals
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shortest vesting interval possible
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someone hanging around who doesn't really want to be there
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cause employees to do unnatural career acts to make it to the next big vesting event
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Unless you are considering an executive or other senior position, it may be difficult to negotiate changes to vesting terms
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most companies try to keep all employees on the same terms,
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management reasons
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accelerate vesting for certain events, such as an acquisition
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especially ones who stand a good chance of losing their jobs in an acquisition
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most cases the company is not going to give you actual stock
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grant you an option to purchase stock for some fixed price
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Owning the stock has a potentially significant tax advantage: it starts the timer for long-term capital gains
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terms of your option grant, especially the strike price
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"founder's stock" or "restricted stock".
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joining the company early enough
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leave before you are fully vested, the company can buy back the unvested portion at the price you paid
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vesting with a buy-back agreement
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purchase it all up front instead of getting an option
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Companies can usually only do founder's stock at the early stage b
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exercise all of your stock (unvested) up front
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early exercise clause
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let the company buy back the unvested portion if you should leave
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net effect is nearly identical to founder's stock
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ask for a founder's stock agreement
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cash is precious at most startups, many will try to negotiate your salary down, arguing that equity is making up for any salary hit you might be taking.
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how much salary you need to live and not spend your savings
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Let the company make you an offer first, then negotiate from there
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a Fair Deal
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you, your circumstances, the company, the company's development stage, and how badly they want you
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relative to ownership for other employees
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within some budget (the cap table).
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after more of the risk has been worked out
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coming into the company later
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Companies allocate a pool of stock
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Incentive Stock Option pool, or ISO
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set during the funding negotiations with the founders and investors
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to grant to employees
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percentage of the ISO pool
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if the investors own a large portion
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pool may be very small
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large number of "founders" the pool may be small
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size of that pool represents the ability of the company to attract top talent
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Investors and founders that leave small ISO pools are usually being penny-wise and pound-foolish
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doesn't hurt to ask
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gently inquire about the size of the ISO pool and other ownership blocks
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quickest and best sense of your market value, and the relative value of each of your offers.
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lining up multiple options
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30 Nov 14
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12 Sep 14
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03 Oct 13
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negotiate for the largest equity portion you can, because that initial grant is going to be the bulk of your ownership and will get diluted down from there.
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For example, your 100,000 shares may be in the form of an option, with a $0.10/share strike price and a 4 year vest. At one year, you could write a check for $2,500 to purchase your vested 25,000 shares.
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01 Sep 13
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29 May 13
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15 Apr 13
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11 Feb 13
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Here's the point: a share number is meaningless without knowing the total number of shares outstanding.
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You usually don't get all of your stock up front; it vests over a period of time, starting from your first day at work. Vesting parameters vary widely, but a classic model is 4 year vesting, a 1 year "cliff", and then monthly or quarterly vesting after that.
Four years means that you will have 100% of your stock after 4 years. Vesting is usually linear: 25% vested after 1 year, 50% after two, 75% after three, etc.
A "1 year cliff" means that you don't vest anything the first year, but you get 25% on your one-year anniversary. The idea behind this is preventing a "hit and run"; the employee who's there for 3 months, doesn't work out at all, and then leaves. If you're still there after one year, it's pretty safe to assume you're contributing and should get your stock.
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02 Jan 13
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01 Oct 12
el3nap"Depending on the company circumstances, the ISO pool may be large or small. For example, if the investors own a large portion (>50%) and the founders have large shares, then the pool may be very small. In other cases, if the company was highly valued at the funding rounds, the investor ownership may be relatively small (<25%) with a large ISO pool. Also, if there are a large number of "founders" the pool may be small.
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10 Jul 12
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20 Feb 12
rojwilcoThe re-heating of the venture funded tech market has pushed a heat up of the hiring market, and I'm getting more calls from friends asking for help understanding startup stock (equity) offers. More than one friend has suggested writing the advice down, so here it is.
Important disclaimer: I've got experience negotiating stock compensation packages from both sides of the table. However, I'm not a tax accountant or attorney; my notes here should not be a substitute for real tax or legal advice.
UPDATE: If you're a founder or near-founder, your equity terms are likely defined by the funding terms negotiated with the investors. For a very good summary of investor terms, see Brad Feld's writeups on term sheet terms.
NOTE: If you're an attorney or tax accountant with experience helping startup employees with stock and option issues, drop me a note. I'm trying to find ways to connect folks that found this page with professionals that can help!-
My advice: if you are joining before or shortly after Series A funding, you should ask for a founder's stock agreement. Some companies will push back, arguing it is "special", but it's not really; it's just more paperwork. The tax advantages can be huge.
If you can't get founder's stock, ask for an early exercise clause. See this sample agreement: [1]
Tax Advice: You probably should make a Section 83b Election if you are getting restricted stock. The IRS lets you choose: pay tax on the stock up front, or pay taxes as you vest (and the stock value appreciates). The former option is almost always the best in a startup scenario. However, the IRS requires you make that choice formally (i.e. declare it to the IRS in writing) and you have to do it in 30 days. Consult a tax attorney for details. Also see: [2]
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y be large or small. For example, if the investors own a large portion (>50%) and the founders have large shares, then the pool may be very small. In other cases, if the company was highly valued at the funding rounds, the investor ownership may be relatively small (<25%) with a large ISO pool. Also, if there are a large number of "founders" the pool may be small.
You should care about the size of the ISO pool (in addition to your grant), because the size of that pool represents the ability of the company to attract top talent with competitive offers. Investors and founders that leave small ISO pools are usually being penny-wise and pound-foolish.
My advice: gently inquire about the size of the ISO pool and other ownership blocks. The company many not tell you, but if done correctly it doesn't hurt to ask.
My final negotiating advice: do your best at lining up multiple options (e.g. competing offers). That will give you the quickest and best sense of your market value, and the relative value of each of your offers.
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28 Dec 11
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you need to know the total shares outstanding
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If you've been presented a offer in terms of a number of shares, you need to ask about the number of shares outstanding.
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The preference amount is usually (but not always) the amount invested. For example, if Series A stock is sold to first-round investors for $1/share, the preference amount for that stock is usually $1.
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get the "total preference" number from the company, especially for companies that have raised a lot of money. If the company is reluctant, point out that you need this information to accurately value your common stock
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Unfortunately, some companies play games with offers timed around funding rounds. Make sure you understand your offer in post-funding (e.g. diluted) terms. I've seen cases where a 1% offer was really "pre-Series-A" and quickly became a 0.6% ownership after Series A was done.
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negotiate for the largest equity portion you can, because that initial grant is going to be the bulk of your ownership and will get diluted down from there. If there is a round of funding, make sure you understand your post-funding (post dilution) ownership.
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Vesting parameters vary widely, but a classic model is 4 year vesting, a 1 year "cliff", and then monthly or quarterly vesting after that.
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A "1 year cliff" means that you don't vest anything the first year, but you get 25% on your one-year anniversary. The idea behind this is preventing a "hit and run"; the employee who's there for 3 months, doesn't work out at all, and then leaves. If you're still there after one year, it's pretty safe to assume you're contributing and should get your stock
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The vesting terms are usually set by an "Incentive Stock Option (ISO) plan" approved by the company's Board of Directors, and are used for all employees.
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Some vesting plans may accelerate vesting for certain events, such as an acquisition. For example, the company may vest 50% of your unvested stock if the company is acquired, or may accelerate an additional year.
-
If you are joining the company early enough (typically before or during Series A funding), you may be able to get so-called "founder's stock" or "restricted stock". This stock is just common stock, but you purchase it all up front instead of getting an option. The company implements vesting with a buy-back agreement; if you leave before you are fully vested, the company can buy back the unvested portion at the price you paid (i.e. unappreciated). For example, if you left after 2 years on a 4-year vest, the company would buy back 50% of your stock.
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Most startups look at your compensation as a total package: stock plus salary. Since cash is precious at most startups, many will try to negotiate your salary down, arguing that equity is making up for any salary hit you might be taking
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21 Oct 11
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27 Sep 11
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17 Aug 11
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20 Jul 11
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24 Jun 11
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12 Jun 11
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07 Jun 11
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16 May 11
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27 Apr 11
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tartup Equity For
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elp understanding startup stock (equity) offers.
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nding terms negotiated with the investors. For a very good summary of investor terms, see Brad Feld's writeups on term sheet terms.
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a share of stock represents fractional ownership in a company. To know what the fraction is, you need to know the total shares outstanding
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if you have 100,000 shares of stock in a company with 10 million shares outstanding, then you own 1% of the company.
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share number is meaningless without knowing the total number of shares outstanding.
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ing 1 share of a company with 10 shares outstanding is a much better percentage than owning 100,000 shares in a company with 10 million outstanding.
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sk about the number of shares outstanding.
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ome startups are hesitant to give that information, becau
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for what percentage your share offer represents
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politely ask for the shares outstanding
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approximate shares outstandin
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ock Classe
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ommon and various flavors of preferred
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fferent classes of stock
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ses founders
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red stock classes typically go to investo
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urely be for common stoc
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Common stockholders should care about the preference,
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reference is "ahead" of the commons in an
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ssume that the company raises $5m dollars by selling 5,000,000 shares of Series A stock for $1/share. That means that there's a total of $5m of Series A preference in the company
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If the company is acquired for $5m (or less), the preferred stock holders get all of the proceeds and the common stock holders get nothing.
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. I've seen companies with $75m of preference, and very frustrated common stockholders that realize the company needs to get acquired for $100m or more for them to start making any money.
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the "total preference" number from the company, especially for companies that have raised a lot of money. If the company is reluctant, point out that you need this information to accurately value your common stock
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sking for preferred stock will usually peg you as a total novice.
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elling new stock after the board of directors authorizes the sale to investors. Those new shares are created out of thin air by the company, and will dilute all of the current stockholders.
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et's say you have 100,000 shares of a company with 10m shares outstanding (e.g. 1% ownership). The company raises $6m by selling 2,000,000 Series B shares for $3/share, resulting in 12,000,000 total shares outstanding. Since you still have 100,000 shares, your ownership percentage is now dropped to 0.8333% -- you just got diluted.
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early stage offer (Series A), your percentage ownership will likely start out as high as it's ever going to be, then go down with each round
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ome cases, the company may "re-up" you by granting some more stock. But this usually happens NOT to compensate for dilution, but to recognize a bigger contribution to the company than what you
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nderstand your offer in post-funding (e.g. diluted) terms. I've seen cases where a 1% offer was really "pre-Series-A" and quickly became a 0.6%
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negotiate for the largest equity portion you can, because that initial grant is going to be the bulk of your ownership and will get diluted down from there.
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vests over a period of time
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but a classic model is 4 year vesting,
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monthly or quarterly vesting after that.
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1 year "cliff"
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Four years means that you will have 100% of your stock after 4 years
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5% vested after 1 year
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sting is usually linear:
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A "1 year cliff" means that you don't vest anything the first year, but you get 25% on your one-year anniversary
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rsonally, I prefer the shortest vesting interval possible; long intervals (e.g. one year) can cause employees to do unnatural career acts to make it to the next big vesting event. The last thing a company needs is someone hanging around who doesn't really want to be there, just because they have a big vesting event coming up.
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vesting terms are usually set by an "Incentive Stock Option (ISO) plan" appro
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are used for all employees. Unless you are considering an executive or other senior position, it may be difficult to negotiate changes to vesting terms;
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employees on the same terms, and there are good management reasons t
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ome vesting plans may accelerate vesting for certain events, such as an acquisition. For example, the company may vest 50% of your unvested stock if the company is acquired, or may accelerate an additional year. The vesting may also by conditioned by a so-called "double trigger":
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tives, especially ones who stand a good chance of losing their jobs in an acquisition
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ke sure you clearly understand the vesting terms. If you are considering an executive position, make sure you understand the a
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n most cases the company is not going to give you actual stock, but will grant you an option to purchase stock for some fixed pri
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dvice to common option holders is to exercise as soon as you vest to get the long-term timer going, AS LONG AS you are (a) bullish on the company and (b) have the money. However, doing this has it's own tax issues (AMT); consult a tax professional for real advice).
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rike price typically goes up as the company raises additional funding (at higher valuations). If you are jo
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joining the company early enough (typically before or during Series A funding), you may be able to get so-called "founder's stock" or "restricted stock". This stock is just common stock, but you purchase it all up front instead of getting an option.
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e company implements vesting with a buy-back agreement; if you leave before you are fully vested, the company can buy back the unvested portion at the price you paid (i.e. unappreciated). For example, if you left after 2 years on a 4-year vest, the company would buy back 50% of your stock.
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olding stock has a HUGE long-term gains tax advantage over having an option. Companies can usually only do founder's stock at the early stage because a fair mar
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et value is established after the company is funded, and that amount can be significant. Let's say you're being offered 2% of a company with a valuation of $10m after funding. Buying your stock would cost $200,000!
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he company can, but it creates a tax problem. If the company is funded, then the stock has value, and the grant of anything valuable is taxable income. In the above 2% case, the IRS would be looking for taxes on $200,000 worth of "income".
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rare today; even though they can be perfectly legal, they attract the attention of
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ecent years, companies may provide an early exercise clause to provide option recipients some tax advantages. This clause allows you to exercise all of your stock (unvested) up front, as long as you agree to let the co
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you are joining before or shortly after Series A funding, you should ask for a founder's stock agreement. Some companies will push back, arguing it is "special", but it's not really; it's just more paperwork. The tax advantages can be huge.
-
f you can't get founder's stock, ask for an early exercise clause. See this sample agreement
-
make a Section 83b Election if you are getting restricted stock. The IRS lets you choose: pay tax on the stock up front, or pay taxes as you vest (and the stock value appreciates). The form
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Salary vs Equit
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artups look at your compensation as a total package: stock plus salary
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ill try to negotiate your salary down, arguing that equity is making up for any salary hit you migh
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At a minimum, do your own personal finance homework so you know how much salary you need to live and not spend your savings.
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ompany make you an offer first, then negotiate from there. Make sure you get the full offer (salary + stock + terms)
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Negotiating a Fair Deal
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ow much equity should I expect? Unfortunately, there's no good answer.
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hen a company is figuring out how much stock to offer you, they're usually doing it relative to ownership for other employees, and they're doing it within some budget
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Companies allocate a pool of stock (usually called the Incentive Stock Option pool, or ISO pool) to grant to employees. The pool size is set during the funding negotiations with the founders and investors, and is typically sized to cover the first batch of hires up to the next round of funding.
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eally going on when a company is figuring out your stock offer is not so much figuring out a percentage of the company, but a percentage of the ISO pool
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The company not only has to balance your ownership with other employees, but it needs to budget enough stock in the pool for additional hires.
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pool may be very small. In other cases, if the company was highly valued at the funding rounds, the investor ownership may be relatively small (<25%) with a large ISO pool. Also, if there are a large number of "founders" the pool may be small.
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ou should care about the size of the ISO pool (in addition to your grant), because the size of that pool represents the ability of the company to attract top talent with competitive offers. Investors and founders that leave small ISO pools are usually being penny-wise and pound-foolish.
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ently inquire about the size of the ISO pool and other ownership blocks
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04 Apr 11
samuel sunghe company may vest 50% of your unvested stock if the company is acquired, or may accelerate an additional year. The vesting may also by conditioned by a so-called "double trigger": you may only vest if you are acquired AND you lose your job. The idea here is that the company is partially compensating you for the stock you could have earned by staying for your full vesting period. These terms are frequently given to executives, especially on
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31 Mar 11
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07 Mar 11
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01 Mar 11
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25 Jan 11
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04 Dec 10
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10 Nov 10
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05 Oct 10
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23 Aug 10
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17 Aug 10
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share number is meaningless without knowing the total number of shares outstanding
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olitely ask for the shares outstanding, or for what percentage your share offer represents
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or example, if Series A stock is sold to first-round investors for $1/share,
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get the "total preference" number from the company,
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you need this information to accurately value your common stock.
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100% of your stock after 4 years.
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25% vested after 1 year, 50% after two, 75% after
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15 Jun 10
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31 May 10
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22 May 10
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04 May 10
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total shares outstanding
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Preferred stock classes typically go to investors, and in some cases founders
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total preference
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strike price
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cap table
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ISO pool
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06 Apr 10
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08 Feb 10
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20 Jan 10
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19 Jan 10
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18 Jan 10
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11 Aug 09
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understand the terms of your option grant, especially the strike price.
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companies would sometimes set up a loan to the employee to cover the amount of the stock they were purchasing
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22 Apr 09
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15 May 08
Raúl Hernández GonzálezWiki con algunos conceptos básicos para definir la participación en el capital de una nueva empresa
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22 Apr 08
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20 Apr 08
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14 Apr 08
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13 Apr 08
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08 Apr 08
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15 Jan 08
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