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STARTUP EQUITY FOR EMPLOYEES: WHAT YOU NEED TO KNOW - YouTube
Channel: Jennifer Brick
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You have your first job
offer from a startup
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and now you're trying to figure
out startup equity for employees.
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Is the equity they're offering fair?
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And what are the things that you
need to consider? In this video,
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I'm going to tell you exactly what
you need to know about the equity.
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Hello and welcome back to my channel
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where I help you with slay or career,
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and cultivate the successful life that
you want. Today I wanted to talk to you
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about the startup equity.
Because I remember the first time
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that I took a job at a
startup and I had no idea
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how to appraise my equity, how to
negotiate for it, what it even meant,
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and it was really hard
to find a single resource
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that told me everything that I needed
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to know in order for me to take the
next step in negotiating the offer.
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And especially in negotiating the equity.
That's why I wanted to make this video
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for you today, because I know some
of you are going to be in this boat,
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or some of you who are in this boat
will discover this video. If you're new,
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welcome to my channel.
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I'm going to give you the basics of
what startup equity is, how it works,
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how you can appraise it, and how to find
out if you're getting your fair share.
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And one thing I want to
make sure that you actually
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stay all the way to the end of this video,
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because there is one thing
when you think about equity,
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and when you're appraising equity,
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there's one thing that
almost no one talks about
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and I think it's really important.
And I want to make sure you know,
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but there's a few things that you need
to know before it's going to make sense.
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Now if you're ready,
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click that like button and
let's get right into it.
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The first thing that you
need to understand about
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the equity in your job offer is if it's
restricted stock or if it's a stock
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option. There is a very key
difference between the two.
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The option is essentially
giving you the right to
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purchase shares at a set strike price.
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That strike price is
going to be based on a
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reasonable valuation
which if you're in the
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States it's probably going to be
based off of their most recent 409A.
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Which is essentially the
valuation of their company.
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Now if you join and the stock
price goes up, and up and up.
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This can be a great deal
because essentially you're
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going to get the benefit of the difference
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between your strike price and the
valuation when there is an exit.
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So if you're a strike price is $1
and there was an exit at $5 a share,
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you're up $4 per share.
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If you have a hundred shares that
is $400 good for you with an option.
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You do technically have to
purchase the share though,
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and that's the contrast
between the option and.
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the restricted stock restricted stock.
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They are just going to grant the stock
to you. You don't have to pay anything.
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This has a monetary value.
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You are going to accrue it
according to the vesting schedule
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which we'll get into in a few minutes.
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There is an important
differentiator between the option
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as well as the restricted stock.
Restricted stock actually has a valuation.
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It is yours. It is essentially
payment to it as it actually accrues,
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whereas an option does not
have the tax implications
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until you actually exercise it. There
is actually a really great resource
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that if you're trying to
understand this from a
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tax perspective that I'm going to link
to down below because to be honest
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I totally am not going
to be the best person
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to talk to you about taxes in the US
if you have a job offer with equity,
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the next thing that you need to know
is how much are you actually getting.
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If it's options or if
it's restricted stock,
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you want to understand how many options
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or how many shares are
being allocated to you
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and really when you're thinking about
this from a compensation perspective,
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what you want to do is
you want to understand
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what the percentages
and what the value is.
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This is where it gets a little
bit tricky because some startups,
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because they are private companies,
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are not going to want to
tell you what their most
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recent 409A is they are going to guard
it. I feel like this is especially common
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with a really early stage
company because their valuation
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isn't something that they're
super proud about yet.
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There will also be some
companies that don't
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want to have a high level of transparency
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about how much percentage
they are giving you
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and you actually get
that based on the number
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that they are giving to you versus
the number that are outstanding.
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You run the math and that's
going to give you the numbers.
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However, some companies will actually
just tell you what percentage
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they're giving you and it's going to
be super easy for you to understand.
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And in my personal experience,
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there was even one time that
I was given the percentage,
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and they didn't even know
what that meant in terms
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of the number of stock units
that I was going to be granted.
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So there is going to be
a different experience
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and it is very much going
to depend on the company
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and who you're actually working with,
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but this is something that you
have to keep in mind that sad.
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You still want to ask
the questions because
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essentially what you're trying to do here
is to do is if it's restricted stock,
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what the actual value is because that is
now compensation or if it's an option.
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You want to triangulate
the option against what
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you think an exit price might
be to see how this actually
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might translate for you longterm.
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At this point you've heard me talk
about investing on several occasions,
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so what is vesting? Aside
from early nineties fashion,
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which maybe one day will make a comeback.
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When we're speaking about fasting in
terms of your restricted units or your
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options, what we're talking about
is how they actually accrue.
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There's going to be something in
your equity plan called a cliff.
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That is you have to work there
for a certain amount of time
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before you actually get stock and
what that means is that you're going
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to have to be there for
a certain amount of time
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before any shares or options
are actually granted to you.
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This might be three months, it
might be six months. Most common,
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I tend to see a year.
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Now there's a few things that you
need to know in terms of vesting.
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First of all, you need to understand
the vesting period. Is it four years?
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Is it five years? Is it 10 years?
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When they grant you the options
or the restricted stock,
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how long is it going to take in order
for you to have rights to purchase,
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or to have all of those that they
have granted to you. That said,
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it's not necessarily going to all be
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trickled down on like
per on a per day basis.
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Typically what you're going to be
dealing with is first of all at cliff,
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and this is the amount of time
that you need to be employed
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before any of your options or your
restricted stock is going to vest.
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So this can be three months,
it could be six months,
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it can be a year after that cliff,
there is going to be a vesting schedule.
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This could be monthly, it can be
quarterly, it could be annually,
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and generally what you're going to find
is that across a period of time the
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shares are, the options are going
to be allocated in an equitable way.
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So if you're on a four year vesting
schedule and you have a one year cliff,
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25% of your options are
going to be available to you
on your first anniversary.
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If that doesn't make sense
or you want some clarity
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in terms of an offer
that you actually have,
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you can drop it in the comments down below
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and I'm going to do my best
to help you understand this.
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The next thing that you need
to know about your equity
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is how you can actually extract it.
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So you have your restricted
stock or you have your options.
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What are they good for?
How? How does this work?
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If you haven't worked in a private company
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and you haven't had stock for
a private company in the past?
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There is something really
important that you need to know.
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It's not like trading on
the New York stock exchange
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or the London stock exchange where you
just don't feel like having them anymore.
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You would like to cash out. I'll just
sell those,... [cash register]. No,
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this is a private company,
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so there are two ways that you're
generally going to be able to cash out
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and actually reap the
benefits of your equity
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and that is an IPO or an acquisition.
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Those are essentially
the two exit strategies
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that are going to free up investors,
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employees and founders to
actually cash in on the equity.
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Now investors are actually
paying for this stock.
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If you're getting restricted stock units,
you're actually working to earn them.
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If you have options, you're
working and you have a deal
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essentially cause you're
going to get them on sale
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when they're worth a whole bunch
more when you have an exit event.
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Outside of an exit event, there
is a couple of other options.
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However, these are a little bit more
tedious and might not be available to you.
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And the reason it's going to be more
tedious is under most agreements,
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most companies are going
to have to consent.
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There have been instances where companies
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will buy back stock or you can sell
your shares during a fundraising round.
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Or rising in popularity over the last
few years, has been secondary markets.
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Secondary markets allow
investors to purchase
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shares from employees
who no longer want them
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or who just want to cash in and buy their
boat. Whichever,I'm not here to judge.
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But again the caveat until
there is an exit strategy
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is that option might not
be available to you and
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what this means is if you have
restricted stock or if you have options,
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you might be holding the bag and
potentially even having to buy that bag
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for a company that doesn't
have an exit strategy.
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And if you leave you're not going to
have any direct influence anymore.
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Finally, the most important
thing that you need to think
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about as you are actually
considering this job offer for equity
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or with equity in a startup is: Is it
ever going to be worth anything? Listen,
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we all watch Silicon Valley
and we have these dreams.
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When we join a startup of
making bucket loads of money,
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and we can buy buy our house, our
plane, our Louis Vuitton bags.
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With all that we made because
we were an early stage
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employee and the company just really
took off and it was the next Facebook,
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it was the next Google, it was the
next Apple, whatever it is. However,
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that's not the reality for most companies
and in fact statistically speaking,
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most companies don't get to an exit event
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they fold before that happens
and this is one of the things
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that you really need to
take into consideration.
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because if you're joining
an early stage company,
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many will offer an under market salary
in exchange for overloaded equity,
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which is something that in theory can
pay off and you can be a billionaire.
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However, is it actually
going to turn out like that?
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Statistically speaking it's really not.
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So as you are actually
considering these things
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and using the resources that
I'm going to actually drop
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in the link below to actually help
you dig into this a little bit more.
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If you want to, you need to be working
on very reasonable expectations
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and really face, is this company
going to have an exit event?
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What stage is it at? And if
you're an early stage employee,
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you probably aren't actually going to
know if it is In fact the next Facebook.
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And even when it gets to an
exit event, if there is an IPO,
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there is a chance that the IPO price
tanks, which is something that we actually
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recently have seen with
several of the unicorn IPOs,
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including one which
was actually withdrawn.
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During an IPO there is
usually a lockdown period
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where you're not actually
allowed to sell any shares,
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so you're not going to be
able to benefit from the IPO
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Excitement of the day.
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You'll probably be able to actually sell
your shares a few months down the road.
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If you've taken an under market salary
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and there never is any
equity that actually pays off
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or amounts to anything
or has an exit event
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or you can't actually
get permission to sell
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on a secondary market or you want to lead
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and you don't want to
actually invest in the company
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to buy your options as
you walk out the door,
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this is something that you
truly need to keep in mind.
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Taking the imbalance between your
salary and equity is a big bet.
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You're essentially playing roulette,
and if you're at the stage in your life,
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your finances and your career
where you can take that bet, do it.
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I personally have in the past. However,
if you're earlier in your career,
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if you're still establishing yourself,
getting your financial footing,
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paying off your student debt,
doing all of those things,
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this might not actually be something
that you really want to bank on.
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Now, I did see one video that
I'm actually going to link
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here that I recommend that you check out.
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Because it actually deep
dives into the technicalities
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of equity versus how you
should think about equity
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and what you need to know
just in context of the offer.
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I highly recommend that if you do want
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to get more into what the different
options are and stuff like that,
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go and check it out. It's not mine,
like it's just a really awesome video,
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and I really think that it's
a great resource. In addition,
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there are some really good resources
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in terms of understanding
what the average allocations
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are and stuff and I'm going to drop
those all into the description. So, Hey,
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you have a one stop shop and now
you can choose your own adventure.
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And that actually gives me
with a question for you.
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Since we're talking about taking an
imbalance between your salary and your
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equity,
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what stage are you at?
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Would you actually take an
offer if it had a lot of equity,
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not as much compensation or does
compensation matter a lot more to you?
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Let me know in the
comments down below. Now,
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if you have that offer
in hand and you want to
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make adjustments to the
compensation, to the equity,
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to really anything about it,
you definitely are going to
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want to subscribe because you will
not want to miss my next video,
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which is going to actually
tell you everything that you
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need to know before you head into a salary
negotiation. If you haven't already,
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I would love for you to
click that like button.
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If you did find this video helpful,
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it lets me know that you
like videos like this
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and that I should probably
make some more just like it.
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Thank you so much for being
unapologetically ambitious,
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for taking this time to invest in
yourself, your professional growth,
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and to really investing
to understand the offer
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that you have and the equity
that you're considering.
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And also of course for taking
the time to watch this video.
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I hope to see you in the
next one. Bye for now.
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