One of the questions that came up from yesterday’s post on The 5x Rule for Salary vs Equity Trade-off is how to present the value of the equity in a thoughtful manner. Potential team members want to see, in detail, how the equity compensation is calculated.
Here’s an example of presenting the possible value of equity over four years:
- Year 1 – Startup is valued at a $10M post money valuation. Potential new team member to receive stock options for 1%, which has a current value of $100,000 (ignore strike price and 409a valuation for now).
- Year 2 – Startup raises $5M at a $25M post money valuation selling 20% of the company. The 1% is diluted to .8% and is now worth $200,000.
- Year 3 – No fundraising and no valuation change.
- Year 4 – Startup raises $15M at a $75M post money valuation selling 20% of the company. The .8% is diluted to .64% and is now worth $480,000.
This is an example scenario to show how an equity grant now might be worth close to $500,000 at the end of four years, assuming everything goes according to plan. Of course, things could go much better or much worse, and that’s part of the excitement in the startup world.
What else? What are some more thoughts on presenting the possible value of equity over four years?