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Jan 28, 2022
12:03:28pm
macdizzle All-American
Gotten a lot of questions about negotiating/getting equity at tech companies.
I'm not some rich expert, but I've learned a lot in 10+ years in tech about negotiating equity, what questions to ask, and how to avoid getting screwed. I've also negotiated equity with 5-8 companies, and with dozens of employees at 2 companies. (So both sides of the negotiation).

I thought it'd be useful to post given the questions I've gotten in the last 24 hours. Read it or don't, but here you go.

Anyway, here you go:
- This only applies at private owned tech companies. I have no idea how equity at law firms, dental offices, financial services companies, etc. etc. work. Nor am I terribly familiar with equity packages at publicly traded tech companies. This applies to founder-owned, VC-owned, and PE-owned tech companies.

- At most companies, you've got to be valuable, easy to work with, and good at your job to get equity. Check those boxes first.

- Most companies only give equity to Directors and above. Execs get the most. CEOs get the very most. And the difference between those amount is exponential, not linear. For instance, a Director might get 20,000 shares and a VP will get 500,000 and the CEO has 30,000,000.

- I've worked at 3 tech companies. I was given stock options (shares) at all 3. The first company they were worthless. I didn't know what to ask for, how to ask for it, or even what I was getting. Second company I did better, but should have pushed harder. Ended up getting a decent chunk when a new PE bought us. Third company...did it the right way and it's paid off.

- Keep in mind the entire reason for why this matters: PEs and VCs want to flip their portfolio companies every 2-5 years. So EVERY SINGLE successful tech company is going to have an acquisition event of some sort every 3-5 years. And people who have equity at those companies make a chunk of cash whenever those events happen.

- If you really believe in the management team and growth trajectory of the company, don't be afraid to take less OTE to get equity.

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Asking for Equity
- If you have a Director+ title, you should go into negotiations expecting equity. If you aren't offered it, ask for it. If you are offered it, ask for more.

- If they push back and won't give you equity, that's when you have to decide if you really want the job, if the OTE is high enough without it, etc. But in my mind there's almost no reason to work for a small tech company--at a Director+ level--unless you have equity. There's risk, your OTE probably isn't great, and there's a lot of stress in the early stages...so if you aren't getting equity...what's the point? Go find an easier job somewhere.

- Make sure you understand the rough value of the equity before you accept the job. Younger employees will often just be so excited to get 1000 shares that they stop asking questions and don't even understand what they're getting. They have no idea how much the 1000 shares is worth.

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Questions to Ask - No one has ever asked these questions or is familiar with these things when they have come to me wanting equity. ​I didn't ask them for my first job in tech and it cost me a lot of money and caused me to turn down jobs I should have taken, because I didn't understand the equity.

- How many total outstanding options are there? What percentage of the company do the 10,000 options (example) you offered me, represent? Knowing this is important for obvious reasons. You can calculate how much your stock options would be worth if you know this information.

- How much is the company worth today, roughly? Every CFO or Founder will know this, but may be reticent to tell you.

- What's the Strike Price/Exercise Price? When the company sells and let's say your 10,000 shares are worth $4 each, you have to pay the strike price per share. For instance, if the strike price is $1 per share and the company sells for $4 per share, that means you'd get $3. This is VERY important and is why some people feel like they got screwed with their equity. Because if the strike price is $2.10 and the company sells for $2.50 per share...you aren't getting very much money. People have done math based on $2.50 per share...not the 40 cents per share they're actually getting. MAKE SURE YOU KNOW THIS NUMBER. It'll allow you to calculate the value of your stock options.

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Vesting - Most companies will offer you 25% of your stock after 1 year and then an additional 25% more (or the equivalent each month) each year until year 4 when you're fully vested. This is fine and likely can't/won't change. The issue is this: what happens if your company sells BEFORE that 4 year window. In other words, if the company sells after 13 months, you only get 25% of your stock options...that's a lot less than what you thought you were getting (another reason people often feel like they got screwed).

So here's the important thing to ask 'Can I get 'Change in Control' acceleration'? - Basically your shares would vest upon a 'qualified change in control'. So if someone buys your company in 13 months you get ALL the options.

Often the company won't give you 100% of the shares on a change in control, but they'll give you 75% of them immediately or something.

I can't stress clearly enough how vital this is. And VERY few people ask for it. In fact, almost nobody asks for it in my experience.

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Waterfall - Where do I fall on the liquidation waterfall? - This is less important because you can't really control it, but still ask it. It's good to know. Read this: https://fundwave.com/blogs/liquidation-waterfall-part-1/

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I said this in my career post from yesterday, but the big thing here to note is this: you can change your financial trajectory if you do this right. Most people look at equity at a tech company and see the multi-billion dollar exits OR the people who got nothing and got screwed. The vast majority of people fall somewhere in between. I know people who have gotten enough every few years to finish their basement, buy a new car, put a down payment on a second house etc. It's not just get 'retirement money' or get nothing. It's getting chunks every few years that's key. That's the fun and lucrative part with tech: guessing right about which company to join and riding the wave until a big (or small) exit.
This message has been modified
Originally posted on Jan 28, 2022 at 12:03:28pm
Message modified by macdizzle on Jan 28, 2022 at 12:09:49pm
Message modified by macdizzle on Jan 28, 2022 at 12:12:07pm
Message modified by macdizzle on Jan 28, 2022 at 12:16:41pm
Message modified by macdizzle on Jan 28, 2022 at 12:23:49pm
macdizzle
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