29

Hypothetical situation:

I received an attractive job offer from a startup, which includes a salary of x and equity that the startup values (let's say fairly) at y. y is a non-trivial sum; x+y is a high compensation, x is low. Ideal outcome for me is accepting the job with x+y salary - but some equity is okay, so long as y is not a significant chunk of x+y.

I don't want the equity because:

  • I cannot confidently double check the valuation (private startup, no public data).
  • There is a vestment schedule but I may or may not stay that long.
  • The equity would increase my overall portfolio risk to unacceptable levels.
  • I'm not that confident the company will actually do well over the long term. I don't think they are at unusually high risk of failure, I just don't have the time, inclination or data to do very detailed analysis of whether they will be a unicorn in ten years.

However, I am concerned that if I refuse the equity, they will construe that as not "believing in the company". Frankly, they would be right - I expect to be employed on a professional basis where I get compensated fairly for the work that I actually do. I'm not interested in doing extra work beyond that justified by my pay, out of the goodness of my heart, just to help the CEO succeed. Clearly I believe it is a company with decent prospects, which is why I'm even considering working there. But are their prospects so great that I want to own them? That discussion seems out of scope for a job offer.

What are my options? I can see:

  • Ask for less equity and more cash, but very delicately. (how?)
  • Pretend y=0 and judge the offer as x compensation, ignoring y entirely. (but then it's unlikely I will be able to reach an agreement with any startup)
  • Try to value the equity myself (how?) at r*y s.t. r<1, then judge the offer as x+r*y compensation, ask for x+y which they will treat as a highball offer even though to me it's a normal-ball offer.
  • Demand the usual investor relations stuff to justify their valuation - earning reports, financial statements, quarterly meeting transcripts, independent analyst reports, meeting with executives and so on. I doubt this would be effective.
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    Your first option is addressed in How to politely ask to trade stock option in job offer for something else? – Dukeling Jul 28 '19 at 22:02
  • @Dukeling If you read closely, that question is very distantly related because it's asking about an IPO'd stock. Valuing those is a whole different game. There is also no accepted answer (so not "addressed") and the top answer seems to me quite blunt and not very polite (so again not "addressed"). – SquiddleXO Jul 28 '19 at 22:11
  • @SquiddleXO not all questions get accepted answers (some users on here don’t understand the use of the check mark), but answers to a question show that it has been "addressed"... – Solar Mike Jul 29 '19 at 4:28
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    this is a hypothetical question. – knallfrosch Jul 29 '19 at 6:55
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    @pytago what's the betting it is a "real" situation just anonymized given the amount of detail.... – Solar Mike Jul 29 '19 at 7:05
42

Startups offer equity because they acknowledge the risk to the employees of the company failing, so they present an 'upside' - if the company does well, everyone benefits.

It takes a certain type of person to be attracted by that offer. Other people, like yourself, do the math; the company is unlikely to be that unicorn.

What do you do? You reject their offer, and give them a number that you're comfortable living with if (in your case) 'y' turns out to be zero (it probably will). Be prepared for them to reject your counteroffer, simply because they cannot afford you at your standard rate.

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    What is the risk to the employee from the company failing? That the employee has to find a new job? How is it an upside to increase that risk by forcibly investing part of the compensation into a very risky asset, with an added string that the asset is forfeited if the employee does not work there long enough? It seems to me like equity increases risk, and dramatically. – SquiddleXO Jul 28 '19 at 22:15
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    The risk is that the employee has lost money (salary) that they've agreed to exchange in return for a small percentage of the company. You need to make sure that the gamble you're making is one you're comfortable with. – PeteCon Jul 28 '19 at 22:16
  • @SquiddleXO - Nope, it really doesn't. The company still has to provide high enough cash compensation to attract employees. The "downside" is pretty minimal. From my experience the biggest downside is emotional disappointment. – Julie in Austin Jul 28 '19 at 22:38
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    @JulieinAustin Must be nice to be living in a dream world. In my experience, the biggest downside is having a much lower total monthly income than OP could have gotten elsewhere, for the "benefit" of having a carrot dangling before their face that may or may not materialize into actual income. In most cases I know of, it doesn't. Equities and other "bonusses" and extras are worthless in most cases, similar to special addition offers in shopping television. – Niko1978 Jul 29 '19 at 6:56
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    @SquiddleXO The "risk" is that you waste your time working your butt off for low pay trying to save a company which is fundamentally doomed for reasons beyond your control, in return for a dream about rainbows and unicorns some time in the future. – alephzero Jul 29 '19 at 9:35
10

The first part of the answer to your question is that the portfolio risk working for a startup is nil -- you've paid nothing, you have nothing to lose. If your concern is that the downside risk to your portfolio will cause it to underperform, the question is "How?" Again, you paid nothing, and the only risk is not being compensated what you believe you are worth.

Which brings up the second part of the answer to your question. If you believe you are worth $X / year in the open market, you have to adjust what they are offering with what you believe is the risk-adjusted value of the equity. In other words, if you honestly believe the equity is worthless, well, the "present value" of that equity is $0.00 and you ask for what you believe your fair market value happens to be.

I'm not going to bother with the third part, because in your case you don't appear to believe there is a value to the equity offer, either because you believe the company will fail, or you believe you would leave before you vest. But in the general case, if you believe there is a 20% chance of a $100K payout in 5 years, that's 0.20 * 100,000 / 5, or $4,000 per year. There's more to it than that, but again, you don't believe there is an upside or that you'd stay long enough to benefit.

Startups are not for everyone. In my experience there are two groups of people (there's a third -- "gamblers") that are a good fit. The first group is young and doesn't have hard-and-fast financial obligations. They can afford to take a bit of risk because if it doesn't work out, they've got time. The second group is older and doesn't have the pressing need for cash compensation because, perhaps, the kids are out of college or the mortgage is paid off. In my experience it's the people in the middle (who aren't gamblers) who question the merits of working for a startup.

The final thing, which is really important, is this -- bring your concerns up to the founders. As you can see from my little calculation, the "discount" on cash compensation really shouldn't be all that much. And if you are as talented as you seem to believe you are, you may well be able to positively impact the odds of the company being successful.

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    OP isn't paying nothing for the equity; OP is paying the difference between market rate salary and what this company is offering as salary. – lukkea Jul 29 '19 at 6:27
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    @lukkea Exactly! Also, they would be wasting their time with that startup, while they could be working somewhere else instead and be getting raises and increasing their market value. Also, this answer is written in a very condescending and arrogant way. – Niko1978 Jul 29 '19 at 6:59
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    The first paragraph is nonsense. If you worked elsewhere for a higher salary, everything else being equal you would be accumulating a cash investment portfolio which you could reinvest in whatever way you wanted, with no restrictions attached to it. – alephzero Jul 29 '19 at 9:39
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    @alephzero - That’s why I said he needs to calculate the value of the equity, including the probability of the business being successful several paragraphs down. I even identified what you are complaining about in the first paragraph. I worked with a guy who got a $2M payout on a startup. He and his wife had a baby, he decided he didn’t need to work, so he quit, and then we hated him for leaving. I bet he’s glad he didn’t decide to work elsewhere for more money. – Julie in Austin Jul 29 '19 at 10:42
6

How to politely refuse a startup's equity?

This is how I'd do it:

No, I wouldn't be interested in that. But thanks anyway.

There is really no need to go any further.

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  • Usually a counter offer is worth the time. – Martin York Jul 31 '19 at 8:47
4

Typically you get an offer of low salary + more or less generous equity because the company cannot afford to pay more. They know you are worth more, but they cannot pay the money.

So you can obviously reject the equity, but you are not going to get a higher salary offer. You just have to do the maths: Is the salary x enough to live on: If no, you can't accept. If yes, are you willing to gamble? If not, you reject the offer. If you are willing to gamble, and you think the salary is say $10,000 less than you can get elsewhere, do you think the gamble is worth $10,000? If yes, you take it. If no, you don't. Or you negotiate for more equity.

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  • Or you negotiate for more salary, either at the start, or down the road when you think the salary is too low because the business isn’t tracking according to plan. Startups will pay the “right” candidates fair market if they believe that person is critical to their success. – Julie in Austin Jul 29 '19 at 10:46
3

I've worked at two startup companies. My base salaries were reasonable, IMHO, and equity was a bonus on top of this. I worked for one of them for 7 years and then they declared bankruptcy and I was laid off -- the equity never materialized. The other was acquired and all our equity bonuses immediately vested, so I got a huge windfall.

Related to Julie's answer, working for a startup can require a different mindset. Most of the employees don't consider it "just a job", they're not there just for the salary. A startup can be an exciting place to work, because of the innovation involved. Yes, it's risky, but so is mountain climbing. If the company succeeds, you'll feel an extra level of pride that you were part of making that happen, and on top of that you'll get valuable stock.

But if you're just in this for the money, this is probably not the job for you. Startups often can't afford to pay as large salaries as well-established companies, except perhaps to the most critical employees. You can ask for a larger base salary in lieu of equity, but there's a good chance they can't afford it.

Startups depend on enthusiastic, optimistic employees to make their vision succeed. Offering equity is one way they have of ensuring that employees are invested in the company's success. If you go in with a negative attitude, it's likely to be a self-fulfilling prophecy. If all you see is the downside risk of never receiving part of the compensation you're being offered, this type of company is probably not for you -- you don't need them, and they don't need you.

I sometimes felt similarly about yearly bonuses that were tied to whether the company met its revenue targets. I sometimes worked in internal support organizations, rather than customer-facing jobs, so it felt unfair that my compensation was tied to sales, which I had little direct influence over. But we're all part of a team, and the company's overall success depends on everyone doing their part. E.g. if the customer-facing people depend on internal servers, and those servers fail, it prevents them from doing their job and revenue is impacted.

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-1

THEORY: The only reasonable thing is to estimate the value of Y. There is no point to refuse the options and ask for more salary as many have pointed out already. To estimate Y, you DO NOT NEED financial statements and the like. All you need is some reasonable estimate of company revenue, either now or if the product is not ready then say in 3 years time. This I assume you have some idea based on what you know about the company. What about the number of shares outstanding? Do not despair, it cancels from the final answer, so I will give you a formula that does not need it. It will crucially assume (optimistically!) that your future coworkers were offered and accepted similar deals, and that HR people adjusted the options grants to give away a stake of approx 15%-20% to the employees.

Y = 0.2 * REVENUE / EMPLOYEES

EXAMPLE calculation: Say it was a company with 20 employees and a clear path toward 3 million a year in revenue. The HR people would calculate the options amount to make the options grant be roughly worth US$30K per year (0.2 * 3,000,000 / 20 = 30,000).

FINAL REMARKS: Obviously, this is a very rough estimate: but it underscores the key judgement which you have to make - IS THIS COMPANY GOING TO BE SUCCESSFUL? And success means REVENUE/EMPLOYEE - is it going to be anywhere remotely near Facebook or Google? (even 300K per employee is pretty good)

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-5

How to politely refuse a startup's equity?

You don't. It's free potential money and you'd be stupid to refuse it. You just have to make sure that the this offer still makes sense, even if the equity amounts to nothing (most likely outcome).

Ask for less equity and more cash, but very delicately. (how?)

You just ask. It's easiest if you talk about your cash flow requirements and how the current cash compensation doesn't work for you. Don't offer to lower equity in return, until they bring it up.

Pretend y=0 and judge the offer as x compensation, ignoring y entirely. (but then it's unlikely I will be able to reach an agreement with any startup)

That's just lazy. If you really think the equity is worthless, you shouldn't work for this startup at all.

Try to value the equity myself (how?) at ry s.t. r<1, then judge the offer as x+ry compensation, ask for x+y which they will treat as a highball offer even though to me it's a normal-ball offer.

That's the right thing to do. It's honestly not that hard: post a question on workplace stack exchange or money stack exchange. I think spending 10 hours or so on this can give a reasonably good idea on what it is. If that's too much of a bother: for an early stage startup de-rate to 10% , for something with decent funding and an existing revenue stream de-rate to 20%.

Demand the usual investor relations stuff to justify their valuation - earning reports, financial statements, quarterly meeting transcripts, independent analyst reports, meeting with executives and so on. I doubt this would be effective.

Of course you want to look at this stuff, at least at the high level and most start-ups will be more than happy to do this since they do this song and dance at all day long anyway.

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    It's not free potential money if it's part of your compensation for their work, and especially if it's padding the below-market-rate compensation. – Haem Jul 29 '19 at 6:48
  • Why was this downvoted? It seems a really good answer to me – famargar Jul 29 '19 at 9:54
  • @famargar I downvoted because it seemed like a really bad answer to me – SquiddleXO Jul 30 '19 at 0:34

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