What are the questions to ask a pre-seed start-up in order to understand the value of the offered equity?

Question

A start-up with pre-seed closing round average of 5 days is to soon begin its fourth and final pre-seed round @ $15M evaluation, up from a current $12M. Planned for Q2 of next year is a first Seed round $40M eval. Their offer as the 12th employee and lead software engineer of one of their two teams:

$80K base + $40k non-diluted shares with SAFE conversion dilution of 25% for each round. 10%-20% salary bumps after each funding round.

18-month cliff; 5 yr vesting schedule.

The cliff and vesting seems very harsh given what feels like a "meh" compensation package compared to my current base salary, but Im not experienced in this department and having difficulty in placing a quantifiable value behind the equity.

Do I have enough information to get such an understanding? If the current evaluation is $12M and I join now with an offered $40K in shares or options at the upcoming $15M pre-seed, does that mean I get

$40K / $15M = 0.267%

equity in the company? Or because of the 25% SAFE dilution, does it become

($40K * 75%) / $15M = .2%

What are the questions I should be asking at this point to understand the value of offered equity?

Answer 1

Just FYI, that's a harsh cliff and a long vest. 1 year cliff is standard (with monthly or quarterly beyond that) and 4 years vest (although that's negotiable, what matters is how much you get per year). As for the salary- I get regular approaches at 160-200K from series C startups based in New York, as a senior engineer (20 years experience). An earlier series obviously pays less and location matters, but that's a really meh salary unless you're in the middle of nowhere. The percentage of the company you're being offered is low as well- see https://www.holloway.com/g/equity-compensation/sections/typical-employee-equity-levels Generally a series A senior engineer should get closer to .5-1%. I'd pass or at least negotiate.

The reality is you can't ask the questions you need to know. Even to know the current, if things were to end today value, you'd need the full cap table. That means not only how many shares are owned, but all of the conditions (first money out, multipliers, all that good stuff) and all the potential shares (things like convertible notes and whether they're likely to be converted). Your closest estimate would be to ask how many shares there are, and how many you're getting and that would give your percentage ownership. Then multiply that by like .2 to account for the schenanigans above. Also watch out for anything that allows them to reclaim your vested shares if you quit (I've seen that bs being pulled).

More accurately you'd need to be able to see into the future and see what will occur in terms of dilution. Of course that's impossible to even guess at.

I view pre-IPO shares as lotto tickets. They're worth 0 until they aren't. Do the other advantages of working at the startup plus a tiny chance of making good money outweigh the extra money you'd make at BigCorp? That's the question you should ask.

Answer 2

When you get pre-IPO equity, you are getting lottery tickets. They have no effective valuation.

In most cases, shares never turn into anything - you have to have an IPO or other exit, AND they have to not rip you off in the transition (commonly done regardless of anti-dilution clauses).

First, make sure that $40,000 is at current valuation not at liquidation. Otherwise you’re taking, say, a $20k a year pay cut to get 40k in 5 years.

Then, you can say that if the company successfully exits, and if it’s done in a way you actually get money and not new options or other wooden nickels, then it should be worth a multiple equivalent to the change between current and exit valuation. At seed that’s at least 10x but could be more.

In my experience with startups (many, at various stages), you have an 80% chance of getting nothing, 18% chance of getting “new car rich”, and 2% chance of getting “new house rich.” The founders have a chance of getting “new life rich” but you don’t.