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Understanding Equity As Part Of Compensation Packages

In this talk, we'll cover the different types of equity, how to evaluate/compare equity offers, what questions you can ask to get further clarity, and what to consider as equity vests.

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Alright. So thank you for the introduction and and thank you all for having me. I I'm also a bit under the weather. So if if I sound a little off, I apologize.

But definitely happy to be here today with everybody. So as Kai mentioned, the the topic today is understanding equity as part of a compensation package. So who am I? Well, I'm not an equity expert.

I'm not a tech tech expert. And I'm definitely not a creator of engaging slides. So you'll you'll kinda have to bear with me on the slides, but hopefully the information will make up for the lack of visual appeal.

As Kai mentioned, I I have I put 10 years here, but I I do actually have over 12 years of experience And I've made, you know, hundreds of offers with equity as a a component of the offer.

So, hopefully, it can bring a little value to this topic. So why why did he say, you know, sort of covered, even less covered, not covered.

Well, equity is pretty complex. It's you know, you start to read a little bit about 1 component and you can go down and grab whole, another component, another rabbit hole.

So I wouldn't consider any of these areas a hundred percent fully covered, but, you know, try to do my best today to at least hit on, you know, what are the different types of equity?

What questions should you be asking? The last covered would be the equity components. Such as stock purchase program or performance stock units, how to evaluate the equity portion of your offer?

Because 1 again, that's pretty complex. And 2 you know, everybody would have a different opinion on that. And and there's lots of articles out there that you can read you know, I certainly have my own bias.

So we'll we'll kinda touch on it, but not dive too deep. And then, of course, likelihood of an exit is sort of similar in the sense that, you know, everybody's gonna have a different opinion on on the likelihood of an exit.

I think it's important to to address it because especially for stock options, if there's no exit, then there's no value to those options.

And an exit can be going public or it can be getting acquired. So have to touch on it, but not gonna try to cover it in in complete detail.

And then not covered at all, is should you cash out your restricted stock units or options option dilution or tax implications because, again, just too complex, you know, definitely would wanna do your own research, form your own opinions.

So not trying to cover that in in detail at all today. So types of equity. And so what you have are stock options, which generally are coming from a non public company.

You have a set strike price, you have a vesting schedule, and you can purchase those options when they're vested. And I'll I'll come back to these things and explain them a little bit more in detail.

But important to note that, you know, with options, you do actually need to to purchase those options. Restricted stock units are generally coming from a public company. There's no strike price.

I mean, you'll know that the price of the option that the you'll know you'll know the option value that that option has on the market when you're joining that company. But you will not exercise your option at that exact value.

You know, the stock may go up, the stock may go down. So there's no set strike price. And then vesting schedule and it is yours once vested. You do not have to to purchase like you do have to with an option.

And then less common employee purchase plan and performance units. The idea behind an employee employee purchase plan is that you maybe you're at a company where they're not giving out options, but you can purchase options.

So generally, you can do that. And you'd want, you know, obviously talk to the finance team, hey, trucking there. You can do that at a discount on the option and with some tax advantages.

Performance units, these are, you know, if you think of typical RSUs as being vested over a set period of time. So your earnings, say, 25 percent of of your RSUs after your first year.

You could call that time based options performance or performance units are really just awarded by company performance. So you will see you know, some options if company hits x amount of revenue, for example.

So talking specifically about RSUs again restricted stock units. So these are, you know, generally public company. It's already on the market. There's already, you know, clear value.

You you can trade it by sell. 1 you're gonna wanna know what the vesting schedule looks like. Different companies have different vesting schedules. So, you know, my company, which is not a public company.

We have options. But just to give you a sense of our vesting schedule, it's it's 25 percent after the first year, and then it continues to vest every month until your fully vest to be into 4 years.

At least when I was at Amazon, and this was quite some time ago, Amazon, I think, was like, 5 percent best in the first year, then 15 percent best in the second year, and then you start besting every month if if I recall.

So definitely you're gonna wanna ask about the vesting schedule to know how many of these RSUs are you actually seeing in your first year, second year or so on.

What level is reflected by this number of RSUs? And when I'm I'm talking about level, and and I'll get to this again in a bit, 1 nice thing and I should have called this out earlier.

1 nice thing about all of this is that, you know, there's a lot more pay transparency these days, and and that's great, and it's getting even better. That means that there's a lot of resources out there now, for example, levels FYI.

That break down various public companies levels of those companies and how many RSUs or percentage of a compensation package is created by RSUs depending on which level.

Right? And that can be levels for a variety of positions. You can have you know, level 1 through 7 for account executive level 1 through 7 for software engineers.

So when I talk about asking, you know, what level is reflected by this number of RSUs, they should be already talking to you about what level they're considering bringing you in at.

But if they haven't, you can kinda get an idea by saying, hey, if you're giving me this percent of RSUs above my compensation package is that a level 3 level 5 so on.

Our additional RSUs part of your employee retention strategy. That's just finding out if you're going to see more options along the way. Refreshment means they're gonna give you more options.

You know, at different points in time to try to keep you past that initial vesting schedule. So they'll give you more options, let's say, at the end of the first year, those options will have a 4 year vest.

So now they're figuring, okay, hopefully, we'll have this employee for the first 4 years on their first vesting schedule, and then an additional year because we've added these additional options.

Promotion options, of course, you know, you you go up and level hopefully, see more options that are reflective of that level.

Will you issue more RSUs if your stop drop? Stock drop significantly. The reason I'm tackling Obviously, you know, the market being what it has been the last, I don't know, 3 months, 6 months, tech stocks are taking a hit.

And so this is a a huge question to ask. Is, you know, what are you gonna do I think I was looking at Amazon again. Like, they had a 50 percent drop off.

You're they're not year to date, but within the last year. So you should be asking the company, okay, if if you're basing part of my conversation package on the value of these options, what if the value of these options takes a big hit?

I mean, there's still gonna be some value. You're still gonna be able to to cash out at at some value, which is the different to the different did is different to the risk of stock options where you may not get anything.

But at the end of the day, you know, if they're trying to compensate you 30 percent of your offer in RSUs, if there's a big hit to that stock price, then, you know, you would wanna understand what they're gonna do, if they're gonna up your salary, at the annual review if they're gonna issue you more stock to make you whole.

So important question to ask. And then, of course, in case of acquisition, is there an accelerated vest? So this means you're already at a public company, but what if they get acquired by another company?

Will the the remaining options that haven't invested yet? Will they accelerate? Oftentimes, the answer is no, but, you know, it doesn't hurt to ask, it doesn't hurt to understand what the plan would be.

Sometimes the answer is yes or sometimes you can negotiate the answer to being yes. So good question asked there. And then stock options.

So Of course, again, besting schedule, you know, understanding how long you you need to be there, just start to see different percentage of your options, be available to to purchase what is the current share price?

What is the strike price? And and I'll come back to these in a second. So current share price, strike price, current company valuation, how many basis points is reflected by this number of options?

Are additional options part of your employee retention strategy? How long is the exercise window? And in case of an exit, is there an accelerated best?

So coming back to the beginning of that, vesting schedule, we talked about a little bit, the current share price, that is going to be what an investor is willing to pay for that that stock option.

So you can take that and then you can take the strike price, which is set by most recent 04:09 a evaluation. That's saying if this option was on the market now, what would be the price that we would set it at.

And then you can start to figure out how valuable is your option. So if your strike price is a dollar and the current share price, which is again what an investor would be willing to pay for that if it was on the market, is 6 dollars.

Well, then you are actually already 5 dollars in the positive. Should there be an accident, right, because your strike price is a dollar? Share price is 6 dollars, 5 dollars positive.

Give me 1 second. Current company valuation is important because that's how you're gonna be able to figure out essentially how many what percent of the company you have in terms of options. Right?

So and and that factors in later in negotiating and starting to understand what is a fair, you know, fair ask in terms of number of options based on the stage of the company and and, you know, your your level within that company and and but not.

So let's say, maybe they'll just tell you right at about how many basis points. And a basis point is I didn't have the right view. I I meant to have my notes view up here, but it is 0.

01 of a percent as a basis point. So when you think of of all the options that exist for this company, the options pool as being hundred percent a basis point of that is 0. 01 of a percent.

So to figure out, you know, how many basis points you're getting when you're you're getting your options award as part of your conversation package, you can take the share price minus the strike price divided by the current valuation of the company and you'll be able to actually see how many basis points you're getting even if they won't tell you.

So for example, going back to our original numbers, let's say, the share price is 6 dollars. The strike price is 1 dollar, you know, 5 dollars let's say the company is being valued at did I get that right?

Hold on. Let me let me try a different view here. Let's see if I can put it in. Present review. There we go. Alright. Now now we'll actually be able to give you the exact numbers.

So that makes more sense. So the way to actually calculate the basis points is the number of options you've been given times the share price divided by the valuation of the company.

There we go. So let's say a company gives you 6000 options, the share price. So this is not talking about the strike price.

So the share price is 5 dollars. So 6000 options times 5 dollars. You've got 30000 divided by a company valuation of 3000000 you will essentially have 1 basis point of that entire options pool.

And we can come back to that if if that doesn't make sense. And then the rest of these topics, I think, are are pretty self explanatory.

So, again, you know, part of retention strategy the exercise ah, the exercise window. So the exercise window, that is, let's say, you have been there 2 years, you have earn 50 percent of your your overall options package.

50 percent has vested. And you leave the company you have a certain amount of time to purchase those options.

And that's important to know because if you don't know that and the window is short, and I think it can be sometimes as short as 30 days, then you will actually miss out on those Sometimes a a company can have up to 10 year window.

So definitely ask, you know, how long do you have to to exercise on these options? What is the exercise window?

Alright. So looking at evaluating different equity offers. So here you have, you know, options and and RSUs. So for the options, the question would be, you know, is this a fair amount a fair amount and is the upside worth the risk?

And again, you know, I I think you're going to get a lot of opinions on that. Again, I certainly have my own bias So you need to to form your own opinion on that.

I was reading in an article a couple days ago that, you know, you're you're apparently never joining a startup from AAA pure financial decision. You're, you know, you're joining a startup for the the experience.

That you'll you'll get from that, you know, potentially broader scope, whatnot. But, you know, from a financial angle, it's generally not gonna add up and I can get to the the data as to why that is.

But, you know, you're still gonna wanna know, is there a lot of upside coming from this given the risk that I may not actually see any upside.

And is it a fair amount of options? So things to consider for that would be you know, what is the stage of the company?

Is it a a seed stage company where, you know, you likely have angel investors and friends, family, angel investors usually define to someone that, you know, has a lot of money. They're just an individual investor.

You can think of of Shark Tank and and what those individuals are doing as someone like that, whereas, you know, venture capital, they're coming actually from a company where where they're taking other people's money that's pulled together and investing it.

So stage of the company, seat stage, series a, which is when some VC start come in series b, which is still considered early stage, although you you've probably got your product on the market, and there's some validation for it.

CND where, you know, you're you're talking kind of growth and maturity. So the the risk at those various stages definitely changes. And again, I'll touch on that in the next slide.

But you're gonna wanna see a lot more potential upside given the risk they're earlier coming in. So stage of the company, you know, if you're talking seed stage, you're probably wanting to see full percentage points of of equity.

I think I was reading something where, you know, a non founding CEO is getting something like 5 to 7 percent in equity of that company.

Obviously, this changes to to just, you know, a few maybe 1 basis point, maybe half a basis point depending on your role and level.

The farther you go along, because, obviously, there's less risk. So, again, earlier on, and I can touch on something that's a good resource for this to know what the market looks like for this right now.

But earlier on, you know, full percentage points to couple basis points from maybe series a to you know, 8 basis point or less than a basis point the farther you go along.

Again, obviously, it depends on your role and your level. Most recent valuation. And I would say this is important to know because you want to know what potential upside looks like.

Right? So if you know that your current value of an option is again, let's take the previous example where the the share price is 6 dollars. The strike price is 1 dollars.

So each option you have is already worth 5 5 dollars. But what does that mean in potential upside? And and so you wanna start to see, like, based on when I'm coming into this company, how much is is this likely to to grow?

So if you're coming in, and then these are general numbers, and again, that you'll find different numbers depending on on different resources.

But generally speaking, you know, the earlier investment is coming in, they're expecting to see 20 x in valuation growth because they're expecting to see 20 x of their investment.

Middle to, you know, call it, middle stages, growth stages, it's about 10 x.

And then more mature company, if an investor comes in, they're expecting to see about 5 x. So let's say, you know, you're coming in and you've got that that 5 dollars for each share of value.

You've got 6000 options, that's 30000 and you're coming in around the time you know, like series a well, more like series b, series c when they're expecting, you know, 10 x of their investment.

Okay? So then, you know, potential upside of this. And again, you know, it's all hypothetical.

It can fluctuate, but potential exit of this would be about 10 x that that 30000 So your upside looks like 300000 hopefully, that that makes sense. We can come back to that again if if necessary.

And then likelihood of an exit, obviously, again, if there's no exit, the the options have 0 value. So let's let's touch on that in a second. With RSUs, it really comes down to is this a fair amount of RSUs?

Again, that that can be based on the level and and not only the level, but the the role and that you're coming in, other software engineer, you know, sales development representative, the level you're coming in as.

What is the overall percent of the offer that is being comprised of of RSUs?

And then of course, taking a look at stock sector market performance. You know, if you're coming to this company and the whole sector has been growing at 10 percent year over year, you can start to say, okay.

Well, obviously, the market can fluctuate, but, you know, I have faith that myRSU value will grow something roughly, you know, 10 percent a year over the next 4 years, which is a typical vesting schedule or vesting time limit.

Will come to this resource in a second.

But important to note that, again, compensation, transparency, paid transparency, you know, you now have levels of FYI, which has got hundreds of public companies breaking down the different roles, the different levels, and what per percent of the offer package is comprised of RSUs for those individuals.

So very useful resource. Now, again, likelihood of an exit, this is it's not to myth it's this is not meant to bias anyone away from going to startups and and taking that shot on startups.

Again, there there's other value to it, the value to grow you know, be part of growing a company and the value of of what you can learn there.

So this is not the discouraged, but it is important to note that, you know, you really do want to see significant upside because there is significant risk. 9 out of 10 startups will fail.

And this is not tech sector specific or even, you know, you'd wanna go farther than tech sector, you'd wanna say, difference between SaaS companies or platform of service companies, you know, if you go in farther and say, speech tech companies.

Right? You know, you could go even farther in research and find out what the that the rates of success are. So this is broadly speaking, but 9 out of 10 stars will fail, 60 percent of startups fail between precede and series a.

35 percent between series a, you know, trying to reach series b. And then after series c, startups actually have a high chance of an exit. The failure rate is roughly 1 percent.

So that's why if you come in at a series c, you're taking a lot less risk. You're gonna see probably less than a basis point of equity, but you've got a much higher likelihood of seeing value from that equity.

And then resources, I looked at Carta, Harvard Business Review, Investopedia, Levels FYI, all these various links I believe will be available after this.

And I will stop there for questions.