All you should know about equity in startups
Startups, when they are in their early stages, usually need professionals who are willing to be super-dedicated to their jobs. And it is precisely at these stages that employees usually receive equity from companies, and it is precisely about equity that many candidates end up getting lost and not understanding. So keep reading, this article is precisely to explain this term that causes a lot of confusion.?
What is equity?
In a simple way of talking, Equity is the participation in a company, you will have stock in that company. It would then be to own a percentage of the company as a form of non-monetary compensation - but which may become so in the future.?
Why accept equity from a startup??
Working in a startup in itself is already a great privilege. Around here we love the flexibility that startups can bring to people's lives. However, we know that flexibility is not the only issue that interests us when we are deciding on a new job, there are other weights, such as well-being, stability, and remuneration, and this is exactly where the equity opportunity fits in.?
All of the world's most successful startups started somewhere, and several of them had in their first employees, major investors. Through their belief in the potential of the company, it was possible for it to grow, and many of these early-stage employees received equity and ended up growing along with them.?
One of the great Equity stories is Uber's. After building the first version of the app, the founders decided to look on TWITTER for four entrepreneurial product managers and what did they offer at this early stage? That's right, A HUGE EQUITY! Today we know that the company's income exceeds the millions, so we already know about the financial situation of those managers who came into the company in the early stages.
How to know that is a good company to invest in??
Great, you know why accept equity in a company, but should you accept this from any company??
So, equity is an investment, right? Ok, you didn’t need to buy those stocks with money, like other investors, but with your dedication and effort, and you also should understand if this is a good investment in the market.?
First of all, you should take a look at the market and see the company's valuation in the market, furthermore, research whether the company has already received any kind of financial investment, this can show you that investors trust its potential and so should you. Also take a look at who the founders of the company are, the C-levels, and the employees, and check their background.?
But most important of all, trust your judgment and your knowledge of the area, do you believe in the goals of the company and in its future? Yes? Good, go ahead.?
How can I evaluate the startup's potential?
This question is really very important, especially when deciding how much equity you will ask for. For example, if the startup is really in a very early stage, where you don't see any outside investment in it yet, but you really see potential, it would be better to ask for a higher amount, since you will have to invest a lot of your talent in it.
But there are ways to understand what stage the startup really is at that can help you better discover both the value of the company and its potential. These are some of the questions you should raise before accepting any kind of proposal regarding equity in a Startup:??
Were you able to find out whether the company has potential or not? Let's go to the next steps to help you in your decision.?
Stock Options or Restricted Stock?
Stock Options or Restricted Stock are different types of equity compensation with different conditions, so each one will have its own particularity, let’s understand each type:?
Restricted Stock is an unrestricted and unregistered stock that is issued only to employees of a specific company. Generally, they exist as an incentive for good performance and to try to keep employees longer.?
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Often the employee earns or acquires these stocks on the condition that he or she will stay with the company for many years, or through meeting some target. These shares are obtained, often in stages, with a set acquisition date.?
This stock option is granted to the employee and these will be deposited in a fund for the employee, not giving him the freedom to decide whether to buy or sell, but they will always maintain their fair market value, without oscillating.?
Stock options are the possibility to buy the stock at a specific price, which can be below the market price, and the employee can sell them and earn a profit on them. These shares are usually available in companies and startups in their early stages, with the aim of making employees work to improve the company and its market value.?
They will also have a certain timeline for acquisition and especially for sale, to avoid employees staying for a short time in already public companies or selling too quickly after the IPO.?
This stock option must be purchased and the employee can decide everything about them, as long as it is within the schedule defined in the contract, such as selling or buying more. This type of stock is considered riskier because its value will fluctuate with the market, up or down.??
When can I ask for equity??
If you are in a company's selection process and realize that you will most likely be hired, that is the time to ask for an equity option in addition to your salary. Keep in mind that there is the probability that because you are being hired by a very early-stage startup your salary may be a bit lower than the market value, which is exactly why it is super reasonable to ask for equity at this point.?
Also, make clear your intention to continue in the company for many years and to dedicate yourself to making it grow and gain value in the market. Surely this question will be very important for the contractors, especially if this company is in an early stage.?
How much can I ask? How can I calculate my equity??
First of all, keep in mind that when it comes to negotiating your equity percentage, you should put yourself as an important part of the company, and you probably are, since you were chosen to join an early-stage startup. Also, in the early stage, all positions are important and your work will also be to make the company grow in the way it needs to.?
There are a few issues that must be taken into consideration when you are going to order an amount of equity:?
All these questions helped you decide how much equity you should ask for in a startup. Also, if your salary is lower because of the company's ability to pay, you should ask for slightly higher equity. There’s a very nice calculator that you can use to find the amount of equity you should order, I'll leave it here for you.
When can you sell your stock?
This is something super important for anyone who owns stocks in a company. Not least because stocks, in this case, can turn into a huge amount of money. For this reason you should be very cautious about what kind of equity you own and what the terms and conditions were when you earned or bought it.?
So, do you own Stock Options or Restricted Stock? Do you have an acquisition schedule for your shares? You need to know this to know when you can sell your shares! Most likely you will not receive or be able to buy your shares in the first year, your shares will probably be split over the next four years or so. This strategy for you to stay with the company for many years, otherwise, you will not have access to all the shares that have been offered to you.?
After thinking about all this, you still need to understand whether your company's actions have already gone public or not. In those cases you can sell them to the market; if they have not gone public, you can sell them to the company and its employees - but always with the company's approval.
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Regardless of the case, have EVERYTHING on paper before you even sign your contract.?
Despite all the issues, the compensation package that includes equity is very important for early-stage startups, because the founders need to encourage their first employees for the company to evolve. Know, equity is about your career, your risk, your loyalty to the company, your dedication, and most of all your future! So, do your research before making any kind of decision.?