Let’s work together to build something amazing. Share your project details and our team will reply to figure out the next steps to your success.
The potential of a startup requires a delicate dance of negotiations, and at the heart of it lies the art of equity negotiation. When you join an early-stage venture, the lure of equity becomes a pivotal part of your compensation, but how do you determine the proper share based on your value and contribution? This article elaborates on the intricacies of equity negotiation, offering invaluable tips and insights to help executives navigate the complex terrain of determining the right slice of the startup equity pie for each team member.
The Startup Equity Pie: How Much Are You Really Worth?
When you join an early-stage startup, equity is often crucial to your compensation. But how do you determine a fair equity share based on the value you contribute? There are a few common approaches startups use.
Common Approaches to Determining Equity Share
“Rule of Thumb”
The “rule of thumb” approach allocates equity based on broad roles. A CEO may get 50-70%, CTO 10-30%, VP 5-15%, software engineers 1-5%, etc. It should only be used as a rough starting point.
A sophisticated approach considers the startup’s valuation and the size of the equity pie. If the startup is valued at $3 million and has 3 million shares outstanding, each share is worth $1. As the 10th employee, you may negotiate 10% of the company, or 15,000 to 60,000 shares, worth $15,000 to $60,000. Your percentage depends on your skills, experience, and role.
Some startups determine equity splits based on the amount of “sweat equity” each person contributes – essentially, the time and effort you invest. For example, as the first engineer hired, you may work long hours to build the product, justifying 2-5% of the company. However, sweat equity is a more subjective approach and may undervalue key roles like CEO that contribute in other ways.
Ultimately, your equity share depends on negotiating a deal you and the startup feel good about based on all these factors. At Facebook, for example, Mark Zuckerberg kept about 60% as CEO, CTO Dustin Moskovitz got 10%, and other early employees received between 0.5 to 5% or more. At Google, Larry Page and Sergey Brin split about 45%, CEO Eric Schmidt received 15%, and other early staff received 1% or less. Your share ultimately comes down to what you can negotiate based on the value you add.
Not All Shares Are Created Equal: The Truth About Vesting, Preferred Shares, and More
When negotiating equity in a startup, it’s essential to understand that not all shares are the same. The two most common types of shares are common and preferred. Common shares typically represent ownership and voting rights in the company. Preferred shares often have additional rights and preferences, like getting paid dividends first or having veto power over certain company decisions.
The Different Types of Shares
Founders will usually issue common shares to employees and reserve preferred shares for investors. However, employees can sometimes negotiate preferred shares, especially executives joining later. The type of shares you get can significantly impact your influence and payout. For example, Instagram co-founder Kevin Systrom owned 40% of Instagram’s common shares when Facebook acquired it but only 4% of the preferred shares, limiting his control and payoff.
The Vesting Schedule
Another critical consideration is your vesting schedule, which determines when you earn the rights to your shares over time. The standard is a 4-year schedule with a 1-year “cliff,” meaning you make no shares for the first year but get 1/36 of your shares each month after that.
However, you can negotiate accelerated vesting, a shorter 2-3 years schedule, or a smaller cliff. Snapchat co-founder Evan Spiegel famously negotiated a 3-year vesting schedule and no cliff, earning all his shares upfront. But shorter vesting also means more risk, as you could leave before making your shares.
The type of shares and vesting schedule you get depends on your risk tolerance, negotiation skills, and bargaining power. As an early startup employee, keep these things in mind when negotiating your compensation:
- Focus on negotiating a fair number of common shares and a reasonable vesting schedule rather than preferred shares or an accelerated timeline.
- Ensure you understand how your shares could be diluted over time through funding rounds and new hires.
- While equity is exciting, remember that most startups fail, so shares are far from guaranteed.
Equity can be very rewarding with the right expectations, but only some shares or schedules are ideal for some situations.
The Salary Sacrifice: How Much Pay Cut Is Too Much?
Taking a pay cut to work at an early-stage startup in exchange for equity is common, but determining how much of an amount is reasonable can be tricky. As a rule of thumb, aim for at least 70-80% of the market rate for your role. If a startup offers you 50-60% of typical pay or less, that may be a sign that the equity deal isn’t strong enough to justify the sacrifice.
4 Tips for Determining a Reasonable Pay Cut for Equity
1. Research and Negotiate
Do your research to determine typical compensation ranges for your position based on your location, skills, and experience. Check sites like Glassdoor, PayScale, and AngelList for salary data at established companies and startups. Come prepared with a reasonable range and minimum salary in mind before negotiating.
2. Maintain Financial Stability
While startups often can’t match the pay of larger companies, your salary should still allow you to maintain a reasonable standard of living. Assess your financial situation holistically before accepting a pay cut, including your savings, expenses, and financial responsibilities. Make sure any amount allows you to pay off debt, save for emergencies, and cover essential living costs.
3. Evaluate the Upside
A pay cut for equity also means you’re betting the startup will succeed enough for your shares to become valuable. Evaluate the potential upside to ensure it justifies the initial sacrifice. For example, if you give up $30,000 in salary for 0.5% equity, does the company valuation need to reach $6M for your shares to be worth $30K? Is that a reasonable and achievable increase?
4. Explore a Sliding Scale Approach
Some startups structure pay cuts on a sliding scale, decreasing salaries by a higher percentage for more senior roles. For example, the CEO may take an 80% pay cut, executives 50-60%, and entry-level employees only 30-40%. The logic is more senior roles have a more remarkable ability to impact the startup’s success. See if the startup is open to a sliding-scale approach based on your level of responsibility.
A salary sacrifice at an early startup can be very rewarding with the right equity deal. But go in with realistic expectations about compensation, do your diligence, and don’t be afraid to walk away from a deal that cuts too deep or doesn’t provide enough potential upside. Your time and talent are valuable, so make sure any pay cut feels fair and justified based on what you stand to gain in equity.
Equity Negotiation Tactics: How to Get What You Deserve
When negotiating your equity share at a startup, it’s essential to go in with a strategic plan. Here are some proven tactics to help you get the deal you deserve:
Demonstrate your value
Come prepared with specific examples and data showing the value you can add to the company. For instance, highlight key contributions you made at previous jobs as an engineer. As a marketer, share case studies of successful campaigns you ran. The more evidence you have, the stronger your position.
Set expectations upfront
Before diving into negotiations, discuss your desired equity range and role. Explain your rationale based on your skills, experience, and the value you’ll add. Be open to compromise but stand firm in your minimum threshold. Setting clear expectations will make negotiations more productive.
Develop a friendly, collaborative rapport with the other party. Smile, make eye contact, and listen actively to build trust. Frame the negotiation as a win-win discussion rather than adversarial. A positive dynamic will lead to a better outcome.
Leverage outside offers
If you have competing offers from other startups, share the details to strengthen your position. Be transparent that you want to join this startup but need a fair deal. Outside offers are most effective as leverage if they are at a similar stage, so the equity and role are directly comparable. However, use this tactic carefully, as it can damage the relationship if not done right.
Anchoring means establishing a reference point, like a salary range or equity percentage, from which the other party will adjust. Aim high with your initial anchor, as people usually settle on a number lower than the original anchor. For example, if you want at least 4% equity, you might anchor at 6% and negotiate down from there. The other party is likely to end up closer to your actual goal.
Frame the negotiation in a way that motivates the other party to give you a fair deal. For example, discuss how under compensating valued employees often leads to resentment, lack of motivation, and ultimately poorer performance or turnover—which is bad for the startup. Frame an equitable deal as a “win” for the company that will pay off through your loyalty, hard work, and commitment to the startup’s success.
You can negotiate an equity share that appropriately rewards you for the value you will provide the startup using the proper preparation and tactics. But remember, any deal should feel like a win for both sides, so focus on finding a genuinely fair and equitable solution for everyone involved.
Equity Expectations: How Much Equity Do Startup Roles Usually Get?
The amount of equity offered for key startup roles can vary significantly based on the position, experience level, and company stage. However, over time some standard ranges have emerged as benchmarks.
For CEOs, equity shares are typically the highest, ranging from 5-15% for an early-stage startup up to 25% or more for a mature startup. CTOs and other C-level executives also receive sizable equity, usually 3-10%, for early-stage startups. Vice presidents and directors may get 1-5% equity.
Software engineers and other technical roles earn between 0.2-3% equity for early-stage startups, with shares on the higher end of that range for very experienced senior engineers. Non-technical functions like marketing, sales, and operations staff typically receive between 0.1-1% equity.
The Evolution of Equity Shares
Equity shares have trended lower over time as the startup ecosystem has matured. A decade ago, a software engineer might get 1-4% equity in an early startup, whereas today, 0.5-2% is more common. This is partly because startups now have access to more resources to hire top talent, even without sizable equity offers. However, equity remains an essential incentive for attracting and retaining the best employees.
The amount of equity should also depend on when you join the startup. Early employees, especially first hires, take higher risks and deserve more equity. Someone joining within the first year may get twice as much equity as a person entering a year later. Vesting schedules are also shorter and less complex for very early hires.
Real-Life Startup Equity Share Examples
Anonymized examples from real startups provide additional context. A Series A startup gave its CEO 10%, CTO 7%, and VP Engineering 5% equity with 4-year vesting. Another startup offered its first software engineer 2% equity vesting over two years, while a subsequent engineer received 1% over four years. A data scientist was offered 0.5% equity with a 1-year cliff and monthly vesting afterward.
While many factors impact equity shares, understanding these general ranges and trends can help set the right expectations before negotiating an offer at a startup. The key is to evaluate what is fair based on the value you can add to the company in your role and experience.
When to Walk Away: Signs a Startup Deal Isn’t Right For You
As exciting as a startup opportunity can be, it’s essential to go in with realistic expectations about equity and compensation. Only some startups deal will be fair or set you up for financial success. Some warning signs that an offer may not be equitable and could end up being regretted down the road include:
- Lack of transparency. If a startup founder is unwilling to share details about the company’s valuation, cap table, and financial projections, that could indicate they plan to offer you a less-than-generous equity share. Transparency is a sign of good faith in negotiations and is necessary for you to make an informed decision.
- Unrealistic expectations. Be wary of startups that expect an extraordinary time commitment and high-level responsibilities in exchange for a tiny equity slice. While early startup work often requires long hours, the equity offered should be reasonably proportional to the value you’ll be expected to contribute.
- Poor valuation techniques. Sophisticated startups will use established methods to value the company and determine equity splits. Be suspicious of companies arbitrarily assigning equity shares without a defensible valuation rationale. Their offers may not reflect something other than the actual value and potential of the business.
- Vesting that is too long or complex. While vesting schedules help ensure employee retention, deals longer than four years or with complex rules around acceleration or exit can limit the potential upside of your equity. See if there is room to negotiate a shorter or simpler vesting structure.
If a startup offer appears unfair based on these signs, walking away from the deal may make sense. Have an honest conversation with the founder about your concerns, and try to negotiate an equitable arrangement. However, if they are unwilling to budge, declining the offer and continuing your search could be the most innovative option to find an opportunity that appropriately rewards you for the value you bring. While it’s difficult, joining a startup with an unfair equity deal often ends in regret, disappointment, and resentment. It’s best to wait until you find the right opportunity at the correct terms to be set up for impact and financial success.
Key Takeaways About Equity Negotiation
Joining an early-stage startup is exciting, but it can take time to determine a fair share regarding equity negotiation. It’s essential to consider the approaches commonly used to assess equity share, including the “rule of thumb,” startup valuation, and “sweat equity” models. It’s also essential to understand that not all shares are created equal and that vesting schedules can significantly impact your payout. When considering a pay cut for equity, research and negotiate based on market rates to ensure that the amount still allows you to maintain a reasonable standard of living. Negotiating a fair deal for you and the startup based on all these factors can lead to a rewarding experience with equity compensation.
Get the latest news and updates from Aleph One in your inbox.