How is a salary package that includes shares at a startup evaluated in the long term, with respect to increases?

Question

I got an offer from an early-stage tech startup and I'm trying to evaluate the offer in terms of salary and shares.

To start off, I know that salary is immediate and generally guaranteed and shares are quite likely to be worthless. Shares are more of an investment into the future of the company and can potentially give quite a big return, but they're only worth something if the company is successful (which is generally quite unlikely), it ends up being sold or going public or something, and I actually stay with the company until that happens (and there are quite a few terms and conditions and things to look out for with any given offer of shares).

I am more wondering what I could expect from salary increases or further stock options (or more in terms of how my existing package will be viewed, given that the former is quite variable).

Let's consider a hypothetical offer of $100k annually (with no shares). Say each share is worth $1000.

Now they give me an alternative offer of $80k with $20k shares (20 shares vested over 4 years). Based on some research, the 1:1 salary-to-shares trade-off ratio appears to be fairly common in early-stage startups, even if the shares vest over 4 years (but I might be wrong).

The potential issue I see here is that the shares seem more like a signing bonus, while salary is permanent (as long as I work there). On the one hand, they can refrain from giving me large raises to bring my $80k up to a more competitive $100k, because I have received shares. On the other hand, I'm not continuously receiving shares, so as I work there longer, I'd just be continuously losing out more and more from that $20k+ difference (even though the shares will ideally grow faster than what I lose out there).

How do I make sense of this?

I would hope for an answer that indirectly addresses the following things I wonder (although I don't expect direct answers to any of these questions):

• Is there some point at which it's reasonable to say the shares aren't relevant to my current package any more, and my salary should be raised to $100k (or whatever is competitive at the time)?
• If so, when will this point be?
• Or, if the shift from $80k to $100k is expected to be more gradual, how quickly should I expect that to happen?
• Or are the shares given on the assumption that they'll (eventually) increase in value at the same rate, or faster, than the $20k difference, so my base salary will always be considered to be $20k more than what it actually is (because of the shares I got once)?
• Or does accepting an offer with shares set some sort of informal precedence about receiving another offer with at least the same amount of shares after some period of time (even if this is in no way legally binding)? And, I'd presumably/possibly have the option of just taking a large raise instead. If so, how long can I expect to wait before something like this?
• Does the current value of the shares I currently own matter? If the original $20k worth of shares I got are now valued at $40k, would this affect any raises I might get (disregarding the implication that the company is now presumably better off and able to pay more)? Or, from a negotiating perspective, would that basically be left in the past as having the $20k value it had when the offer was signed?

Of course raises and things would heavily depend on what the company can afford, how valuable I am to the company and how well I negotiate, but I'm wondering more in terms of how they'll generally think about my current salary package in the future.

Answer 1

The short of it is to think of share/equity options as a some yearly amortized bonus over the life of the vesting period.

As as a result, it's generally important to consider if the options are worth more than your effective salary + options at a public (or Series C/D) company with options that have an established trade value, on a public or private exchange.

Remember that your shares, unless granted, are an option to acquire at a price. If the company's share valuation is the same as your 'strike' (buy) price, then your shares are 'worth nothing' even fully vested. i.e. until the company's next valuation, they're an option to own a portion of the company. But if the share prices doubles at the next valuation, then you can effectively 'buy a $100 bill for $50 dollars'.

Your 'effective amortized bonus' will always be the difference between strike prices and market price. If there has been 4 raise/rounds and the market rate is 20x of your strike price — probably your effective bonus per yer [over the vesting period] is quite a high bonus. Cheers; get ready to put it into a roth or other tax-sheltered account.

If your company is never likely to go public then you'll have to account for broker fees to sell your shares, plus any financing fees if you cannot afford to buy your fully-vested shares before reselling them. Such is life. Maybe you want to factor it into how much equity you should be asking for.

This should not affect raises any more than any other bonus would. If the company is doing well with its valuation increases, maybe they'll try to argue that you've gotten a raise already. It's up to you if that holds water. The way to argue it in your favor is that your could have gotten the same bonus, reliably, from a bigger firm — but instead you chose to bet on this startup. i.e. so they should support you to reap that reward by continuing to raise your comp to market rates, regardless of the value of your equity.

• Nothing prevents you from asking for more options as part of a raise.
• Nothing prevents you from asking that they vesting period be backdated to your start date.
• Nothing prevents you from asking for options at your original strike price.
• But remember that if you ask for options at a lower, or zero, strike price then you are asking one of the founders to give up their own shares. Be valuable if you're going to ask such things.

You can read more depth on these topics here. (backup)

Answer 2

Probably the shares will be worth nothing since most startups fail. They're nice to have if the startup is one of the few that succeeds, but don't bank on that success.

I'd use the job more for getting experience. It's been 6 years now and I'm still relating stories from my startup experience in interviews, and it's stood by me and helped my CV stand out from the crowd.

The startup world moves fast and things can change in the blink of an eye. Review your position with the company every quarter, see if they are meeting milestones, and if not ask why not. If you can't come up with a satisfactory answer, consider jumping ship, and place more weight on cash rather than stock options.

Answer 3

Shares are the carrot startups lure talent in Better ones also include fair monetary compensation, others not so much

In most cases they are worthless and even if seem to be redeemable, if attempted, deemed null and void under plethora of "reasons"

In my opinion, shares can be accepted when they are not affecting compensation

Answer 4

This is a complicated subject. So I'm not going to copy the contents of this link, I'll just point you at it instead:

https://faingezicht.com/articles/2021/09/20/evaluating-startup-offers/

The upshot is that there is a way to compute valuations, but you should focus less on trying to value shares, and more on the intangible benefits you may gain from working at a startup.

Obviously, you will want to make sure that the salary >= your monthly expenses. Beyond that, you will need to try to value what you are going to be doing in terms that only make sense to you.

Answer 5

In 9999 out of 10000 cases "shares" rofl in a startup are utterly worthless.

It's been decades since anyone has fallen for this sort of thing.

Just walk away and forget about it, it's risible, ridiculous.