Joelle Fox asked a question earlier today about reasonable expectations for the amount of money a startup employee might make at time of exit based on their equity or stock options:
Of course, there’s no exact answer, but there are several good examples to talk through. Generally, when talking about equity for startup employees, I like to set expectations that if we do well, this will pay for a nice new car (e.g. $40k). If we do great, it’ll pay for a new house (e.g. $400k), and if it’s a once-a-decade company, it’ll pay for a new life (e.g. $4M). The reality is that most of time the equity isn’t worth anything because the startup goes out of business or doesn’t sell for an amount that’s greater than the amount of money invested.
Typical equity grants in a startup are in the .1 – 1% range, assuming fewer than 10 employees and some funding. In the example above with the new car, house, and life, if you assume .4% fully diluted ownership of the business, the company would have to sell for $10M, $100M, and $1B to achieve those results. Very few startups ever sell for $100M or more, so the common outcome, assuming there’s any success at all, is in the new car range (e.g. .2% and sell for $30M, results in $60k for the equity).
So, equity should be viewed as icing on the cake and the salary and benefits should be the main financial compensation. Of course, there are stories of winning the lottery, and it’s definitely possible to hit it big in a startup, but that shouldn’t be the main driver.
What else? What are some other thoughts on employee equity value at time of exit?