David Cummings on Startups

Employee Equity Value at Time of Exit

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David Cummings

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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:

https://twitter.com/joellefox7/status/451436670198759424

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?

Comments

3 responses to “Employee Equity Value at Time of Exit”

  1. Dave Kellogg Avatar
    Dave Kellogg

    It scary how similar we analyze stuff — I, too, use the exact car-money, house-money, or lifestyle-changing money metrics.

    While I agree that you shouldn’t count on options money, you can do things that tip the odds in your favor over time: [1] work your up the mgmt chain — while salaries rise 20% per level, equity rises 2-4x, [2] work at top-quality startups with strong investors and proven mgmt teams — in effect, let “the system” help you filter your oppties, [3] don’t stay somewhere too long if it’s not working.

    I believe that while the odds of “hitting it” at any one startup are long, if go work across your career in say 8, 5-year stints are quality startups, and do so in a relatively senior position, then you are greatly tipping the odds in your direction.

    Best,
    Dave

    Reply
  2. Joelle Fox Avatar
    Joelle Fox

    Thanks, David for the swift response. I think there are several that are realistic about their expectations but the high profile exits that get the most press tend to alter presumptions a bit.

    Reply
  3. Junior Gaspard Avatar
    Junior Gaspard

    David – just saw this post. Agree with you 100%. I tell folks who ask about hitting it big via equity to chase the dream – not the money. I’ve been a part of a startup that closed its doors, one that got acquired by IBM, and one that had to pivot and change business model, and another that is now on a great trajectory. Find a product you love – people you respect and will like working for and make it happen!

    Reply

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