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?
1% of 10M is $100k, etc.
Is representing equity in percentage the ideal or even most transparent way to discuss potential future value with employees? I think share prices based on growth and market assumptions makes more sense. (Of course, I think the team should have all the information they need to calculate what % their options represents, including any preferences that go before them, but I don’t think framing things around %s is the best way).
What are the pros to framing things around %s?
http://www.bothsidesofthetable.com/2010/09/06/how-to-discuss-stock-options-with-your-team/
.1% of 10M is 1,000 not 100,000. I think you meant to say 1%
Stephan