equity report 2023 PREPARED FOR doug@doug.com www.mostlyequity.com Your submission Differentiating yourself Tips for negotiating How vesting works Your equity benchmarking The numbers you need to know Understanding the ESOP Table of Contents 01 05 03 07 02 06 04 Doing your homework 08 Tax stuff 09 Keep in mind 10 Your submission used in analysis doug@doug.com Position CFO Most recent fundraise Series B Time since last fundraise 3 to 6 months Age of company +5 years old Employee count 100 Experience in role First time in role SDG Progress Report 2020 Your equity benchmarking The bar chart below represents a theoretical equity grant for your specific experience, taking into consideration the company's lifecycle and the estimated equity available for employees. The figures to the right represent your percentile rank against other scenarios, as well as the theoretical max for someone in the 99% percentile. Minimum equity grant you should request 0.86% Your percentile out of 100% of the population for the position in this scenario 17th Max we've seen for a candidate applying to a company like this 1.57% All percentiles SDG Progress Report 2020 Base (cash): Salary portion; cash Variable (cash): Commission or Bonus based on performance; cash Title (status): Your hierarchy within the org; status Benefits (contra expense): People always say this is a “lever” but I don’t think it really is in startup world, unless you or a family member has a pre existing health condition; contra expense Equity (ownership): The option to purchase a percentage of the company in the future, a specific price, which is linked to the company’s underlying value; ownership Negotiating your equity grant at a startup can be SUPER intimidating. It’s maybe the single most important negotiation you'll have in your career. Here are some tips to help you get paid: Identify your levers There are generally five levers you can pull in any job negotiation: It’s nearly impossible to max out all five. Ideally you’ll be able to max out one, maybe two, and give some ground on the other levers. For example, many people who join a startup make it a point to maximize their equity and title, and take a hit on their base salary and benefits. But it really depends on what your personal situation is and what level of risk taking you’re able to subject your family too. This advice covers the fifth lever, Equity, under the assumption that you are trying to max out this lever in lieu of the others. Let’s go. Tips for negotiating B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM Employee Stock Option Plan The first step is to understand the company’s equity structure - what’s the magnitude of equity that’s still available for new hires. This pool of available equity is called an employee stock option pool. Founders are the individuals with the most equity, usually followed by very early engineers and key day one hires. If there are multiple co founders, this means they had to split up the largest chunks of initial equity amongst more people, leaving less for new hires and future investors (unless they’re all cool with dilution). Factors Influencing the ESOP Companies generally "top off" the ESOP, or increase the pool, after each funding round. This is so they can grant equity to new joiners, based on their seniority and skill set. So there's generally more equity available to employees right after a recent round. You’ll also want to understand how old the company is. A tech firm that was founded 10 years ago has a lot more built up cartilage on the cap table from initial angels, advisors that did or didn’t work out, and maybe even warrants from early stage banks. Companies that are only a couple of years old have a “cleaner” cap table, which means they have less points tied up in the past and more available for future hires. And a Series B company with 100 employees onboard vs a Series B company with 250 employees on board is in a better position to grant more equity. Understand the ESOP B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM Where do you specialize? Once you understand the equity structure, you can start to negotiate. Ask what other members of the team joining at a similar time with a similar skill set and seniority are receiving. This should become your theoretical floor for your negotiation, as you start to differentiate yourself. You should try to differentiate your skills by speaking to specific examples of ways you've helped companies solve similar problems in the past. In particular, as startups get older (say, series C, D, and Pre IPO) they are looking for increasingly specific skillsets. Suddenly you need an equity administrator, a treasurer, and a revenue accountant. Before you had one guy named Tim doing all three, in addition to his day job as an FP&A manager. You need to position yourself as the hero to take them to the next level, based on the corners you can see around. The skills pay the bills. Differentiate yourself B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM The Number of Options : Stated as an absolute number, like 2,000 shares or 5,000 units Fully Diluted Percentage Ownership: Stated as a percentage of all possible shares that have been purchased or are allocated to either people vesting or the stock option pool. Strike Price: The per-share price that you pay to exercise the options, which is based on the latest 409a valuation, which companies must pay a third party to evaluate every 12 months. The Strike is usually at a discount to the value per share investors bought in at the last fundraise (the price of Preferred shares), which is great for you. Post Termination Exercise Period: This is the number of days you have to exercise (purchase) your vested shares if you quit or get fired. Most firms have a 90 day window. If you don’t purchase during that timeframe, you lose them (they’re “canceled”) and hey go back into the employee stock option pool. The Vesting Schedule: More on this below... The who, what, where, when You’ll want to know: Get the numbers B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM Understand the vesting structure In terms of grant structure, make sure you understand the vesting schedule, which outlines when you can actually acquire the equity. The longer the vesting period, the less attractive it is to you as an employee. The less frequent the vesting cadence (monthly vs quarterly), the less attractive it is to you as the employee. Most companies have a one year "cliff", followed by monthly or quarterly vesting over four total years. After that initial year in which you vest 25%, you then vest 1/36th per month from there on, until you get to 100% of your grant. To the right is an example of a hypothetical 20,000 share grant vesting over time. Understand the Vesting B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM Don't go into the negotiation without doing your homework on the company's past performance. Take the time to research the company’s historical growth rates, as well as its past capital events, to get a better idea of the company’s value. If the company is already worth $2 billion, you aren’t going to walk in as the new treasurer and get half a percent. It just doesn’t work like that. You should also size up if you think the company is relatively over or undervalued based on other companies in the space. If you know the company is on a tear, but hasn’t taken a super premium valuation, that means there could be a lot more upside still on the table. Therefore, you’d be willing to potentially take less equity because you know the valuation hasn’t popped yet. On the other hand, if you know the company raised at a nutty valuation, plastered all over Tech Crunch headlines, that’s literally an advertisement to NOT join. Why? Because you are TOO LATE! The greatest trick startup play is using fundraising events to convince employees to join. It’s antithetical to join a startup right after a round if you are trying to maximize your equity outcome. Yes, you may be de-risked now that there is cash in the bank, but your strike price is going to be higher on your options to reflect that new shiny valuation. I’ve seen many employees take a big role right after a big round, only to see their options “underwater” (or valued at less than their strike price) when the economy takes a dip. Company valuation is a double edge sword, so beware. Do Your Homework B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM Play hard, play fair Finally, when negotiating your equity, it’s important to be realistic and remember that equity can be extremely valuable if the company succeeds. You don't want to come off as greedy - you want to appear motivated to help the company reach new heights, and share in that success. Battle hard, but play fair in the negotiation. I liken it to being in a foxhole. If you’re in battle and there are shots going overhead, you want to be next to someone who has skin in the game to survive. What you don’t want is someone who might push you over the side as a distraction to save themselves. Be Realistic Research the tax consequences You should also be aware of potential tax consequences of equity compensation and how it will affect your financial situation. Different types of equity grants (ISOs, NSOs, and RSUs) trigger different tax events. If the company is offering you NSO’s, these are generally less tax friendly than ISOs, and therefore less attractive to you as an employee. But don't worry - there are professionals to help with this part. Death & Taxes B Y M O S T L Y E Q U I T Y . C O M // PREPARED FOR DOUG@DOUG.COM