Joining a startup often means receiving equity as part of your compensation package. Equity is the most valuable "asset" in a company and it is a way to share in the company's success, but it's crucial to understand how it works.
Here are 5 tips:
1. Understand the current value of your equity.
Ask about the company's last valuation or look it up on sites like Crunchbase. As a rough ballpark, a typical startup gives away 20% equity per funding round. If CB says the startup raised €800k, their valuation is likely around $4M and you're offered 0.1%, so your equity is worth around $4,000 initially.
2. Know the vesting period.
Equity vests over time and in steps (e.g. every 6 months), usually over 4 years with a 1-year cliff (this is standard and means no vesting until after the first year). This prevents you from leaving immediately with equity. For example, with a 01.01.2024 start date and 0.1% equity, you'd have 0% if leaving by 01.09.2024, 0.025% if leaving 01.01.2025, and 0.05% if leaving 01.07.2026 and so on...
3. Understand dilution.
When companies raise more funding, new shares are issued, diluting existing equity. Approximate dilution is 0% for seed, 20% for Series A, 33% for A+B, 41% for A+B+C, and 47% for A+B+C+D rounds (Numbers from Index Ventures). With 0.1% equity from seed, staying through A+B+C+D would leave you with ~0.053%.
4. Consider future value.
Equity's value lies in the company's potential exit (IPO or acquisition). If a $4M seed company exits at $4B and you had 0.1% equity, that's $4M. But accounting for ~47% dilution through Series D, it's ~$2.12M. Spread over 10 years until exit, it's $212K/year (10% probability = $21.2K/year). Note, 10% is a very rosy probability for an exit in this range.
5. Watch for unfavorable clauses
Ask about reversed vesting (reclaiming vested equity after leaving), short option exercise windows (dry tax risk in some countries), accelerated vesting, or transfer restrictions. Tip, in my experience LLMs do a good job in finding and explaining these when prompted.
Equity can be lucrative but also risky. Research thoroughly and understand the terms before accepting an equity offer from a startup and think a bit like an investor. But never forget, You can gain much much more than your initial equity from joining a startup and you learn to have skin in the game without being fully exposed.