With all the press about startups raising large sums of money at huge valuations, especially Slack just a few weeks ago raising $160 million at a $2.8 billion valuation, one item that hasn’t been talked about much is how large valuations help when it comes to recruiting talent. In the war for talent, equity compensation plays an important role, and larger valuations make it easier to give larger dollar amounts of equity, everything else constant.
Let’s look at how larger valuations make it easier to give more enticing equity grants:
- Post Series A, a standard equity grant for a software engineer might be .1% (one tenth of one percent)
- If the startup raises a $10 million Series A on a $40 million pre-money, the post money valuation is $50 million and the .1% equity grant is valued at $50,000, assuming a full, in-the-money sale of the business
- If the startup raises a $50 million Series A on a $200 million pre-money, the post money valuation is $250 million and the .1% equity grant is valued at $250,000, assuming a full, in-the-money sale of the business
- An equity grant of $250,000 is much more compelling than an equity grant of $50,000
Of course, if the valuation was less, more equity can be granted to make the dollar amounts equal. Only, the amount of equity is a fixed constant (e.g. you can’t have more than 100% of the equity, but you can keep diluting existing shareholders, within reason, to create new stock option pools). While equity is fixed, the valuation has no max, so a higher valuation makes it easier to make the same stock option grant look much better because the dollar amount is much higher.
Often, the size of the equity grant to a new employee goes down with each round of financing as the number of employees to be hired from the pool of equity goes up (e.g. after Series A, hire 25 people, after Series B, hire, 75 people, after Series C, hire 150 people, etc). So, assuming a bigger valuation early in the multi-round fundraising process, talent is easier to recruit as the same percentage of ownership results in a much higher dollar amount.
What else? What are some more thoughts on bigger valuations helping to recruit talent?
David Cummings on Startups 
The only problem with that math is it doesn’t hold up in the ATL, maybe SV?
Agreed, usually doesn’t happen in the ATL, but it has happened at least three times in the past 12 months here, so it can happen.
Good topic David. I’m in the heart of SV and the valuations are pretty crazy.
One thing that is often overlooked by junior non-executive employees though is strike price of the shares they receive at companies like Slack. You might get a bunch of shares, but you are going to have to buy them at hefty price (let’s just say $8/$10 share) and they’ll have to go up just to make money on any of the equity. People are getting caught in this web and of course if the company can’t keep pace with the valuation, money can be lost. The days of getting in at a company that’s a rocketship with a .10 share valuation are much trickier because so much money is getting thrown around so early.
Agree with Ray, other factors being equal a high valuation is a worse deal for the employee until the company switches from options to RSUs. The high strike also makes it impossible to early exercise so that’s another 25% haircut.
Additionally, preferences wipe out the value of all but a huge exit, so even if you point out there is a delta between common and preferred, making the options immediately in the money, that is only true if the valuation holds up until the options are liquid.