2

The startup offer, as listed on the website, suggests a fork of values for both salary and equity. Let's say, for the sake of clarity, the values are 90k-130k$ and 0.25-2% equity.

I need to negotiate my contract and I would like to include some equity above the minimum, since I believe on the startup potential; however I don't have a clue of how to get even a rough estimation.

What is commonly used to approximate it?

  • 2
    (I'm assuming that by "startup" you mean "very recently started up" company, as opposed to "small player in an industry that's relatively young compared to the other players) As far as I'm aware, you can't accurately judge equity of a startup; there's too many variables at play that affect whether they make it big or go bust entirely. If you take a guess by estimating their eventual value, though, immediately divide that value by... 10, or maybe 100, depending on what the rate of startup failure is. I alternately hear 9 in 10 and 99 in 100. – Nic Hartley Apr 30 '17 at 5:20
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    I suppose it's an on-topic question in that it relates to contract negotiation but I doubt you'll find useful answers here beyond "it's worth nothing". [Startups.se] might be a better place to ask this. – Lilienthal Apr 30 '17 at 9:37
11

Very simple: 0. Exactly 0.

Want me to invest into your company, hand me a prospektus and give me a valuation and exit conditions that will make me want to invest. Any shares either are interesting enough for me to actually invest half a year+ in wages, OR - please assume I value them at exactly 0.

  • Joe is right. I'd value the equity at 0.0000000000000000001. – Jonathon Cowley-Thom May 3 '17 at 12:55
  • Yeah. I think I can agree to that, even if I consider that a little high as far as valuations go ;) – TomTom May 3 '17 at 14:00
4

Salary is everything. Press for more salary, even at the expense of a lower equity. You'll definitely get the salary (while the company exists), while you may not ever get to the point of the equity share becoming valuable.

Some numbers to think about; Venture Capitalists invest in about 1 in 40 of the companies they see details for. Of those 5 companies in 200, only 0.1% will ever get to the situation of an IPO (numbers from http://blog.gust.com/the-startup-failure-rate-among-angel-funded-companies/). The numbers are NOT in your favor. If you think they are, buy a few lottery tickets.

  • Yes. Problem is - equity is a gamble because you can only work at one company at a time ;) – TomTom Apr 30 '17 at 17:55
3

You could go with the valuation they got the last time they raised money. If someone paid $100,000 for 10% then 1% is valued at $10,000.

2% is a lot for a regular employee. With just 50 employees that is the whole company. The idea is to hold back equity to sell. There is probably not much latitude on that number.

You are in a little better position than the investor as they are stuck. For you if things start to not look so go you can leave. I

Not getting your logic here. If the valuation is low you are going to ask for a bigger %? I would be more interested in if the are making a profit? Do they still need to get more funding. Would your equity be diluted if they raise funding. Stock options can be diluted.

Is it a sweat shop type start up? I think you are getting ahead of a lot of more important stuff.

Treat equity as a nice surprise you are not counting on. Start with a salary you are comfortable with.

1

The value of startup equity can be estimated but takes a bit of work. You basically have to run a bunch of scenarios and estimate the likelihood of that scenario and your gain from the scenario. A 10% chance of a $1000 win is pretty dull but 30% chance at a $1,000,000 win sounds much better.

A good startup will have a business plan, a valuation strategy, some key milestones and some credible plan for equity. Research those carefully. You can also look at comparable companies and see how they are doing and what's their valuation is. Take a look at the investors: A highly reputable venture capital firm would be a good sign, since they do a pretty careful assessment before they open up the wallet.

This way you can build up a picture of the potential upside and the associated risk. The risk will always be there and one of the scenarios always will be "you get diddly squat". That is something you would need to accept.

Valuing at zero without doing the homework is just plain stupid. While in many cases this may be the outcome , there are also quite a few cases out there where equity is highly valuable and it would be silly to not at least give it a thorough evaluation.

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    That is all well and nice, but ignores the fact that unless you can gain SIGNIFICANT from a startup, you loose possibly significant unrecoverable income. It is a gamble - and it kills your options for years. So, take a fair valuation and make sure you get 10 or 20 times that as minimum - OR are willing to commit, long term, get enough to demand a seat on the board. You want to work for peanuts and chance, better make sure chance is GREAT. Otherwise you end up with shares that may have a value - if you can sell them in 20 years possibly. blog.asmartbear.com/cash-equity-compensation.html – TomTom Apr 30 '17 at 17:04

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