Let’s dive right into it: equity is the value of options issued by a company. In layman’s terms, the company is showing how much they value you. As you and the company grow, your options will grow over time, eventually growing in value for you to purchase later. Think of it as owning a part of the company.
However, before you start picturing your fancy sports car or yacht, there’s a bit of a catch. These options are not given to you haphazardly—you will have to purchase them at a discounted price (or strike price) after a specific time period. But we’ll get into that later. For now, we’ll break down the important bits of understanding your equity offer. Please keep in mind that this is not for tax purposes, it's a general guide and every situtation or offer is unique.
No need to worry about understanding equity terms because we have you covered—from ‘strike price’ to ‘vesting’. No more frantic googling, all the definitions you’ll need are in our Equity Glossary. Welcome to the wonderful world of equity.
Vesting is the process of earning an asset; in this case, the options offered to you by your company. Like a fine wine, the longer you stay at the company, the more valuable your options become and the more your eventual reward is. It’s an incentive to stick around and do well because remember: the harder you work, the better the company will do, and, over time, the better your eventual payout will be.
While the company gives you options as part of your compensation package, they’re not ready to purchase right away. Your stock will usually have to vest first for a set period of time; a contract, if you will. You stay with the company for, let’s say a year, and at the end of the year, as a reward, you are given the option to own part of the company eventually.
Your offer letter should explain what your vesting schedule breakdown is. Typically, it will be broken down over a few years, i.e.1,200 options with a one-year cliff over four years. The one-year cliff means that you will have to stay with the company for a minimum of one year before being able to vest. If you leave before that year is up, all options become forfeit, expire, and return to the company after thirty days.
However, once the one-year cliff has passed, you can’t buy all of your options, only a set number (the vested amount). If, for example, it is a four-year vesting period, then after your first year has elapsed, you will be able to exercise ¼ of your options. Then, it will be broken down into each month, giving you a little more each month until finally, after four years, you will, theoretically, be the proud owner of your entire option grant. If you're lucky enough to receive more options as the years go by, they will also be dependent on their unique vesting schedule.
Hopefully, we haven’t lost you by now, but if so, no worries! Here’s an example that will hopefully make a little more sense:
Margot is the lucky new employee at Company Inc, and as the newest SDR, she’s been given an option grant with 1,200 options over a vesting schedule of four years with a one-year cliff. Exactly one year after her start date, she reaches her cliff and ¼ of her options (300 options) vest. After that one-year cliff, 1/36 (3 remaining years times 12 months) of the granted options vest each month until the end of the four years, wherein she can now officially purchase all 1,200 of her options at that original strike price.
However, if she decides to leave the company after two years, she can exercise ½ of the options awarded to her at the original strike price. With that in mind, she can choose to either go ahead with a purchase at that strike price or walk away from the options as a whole. And again, any unvested options will be returned to the company and distributed among the company option pool.
Equity Compensation by Role
Equity by Role
Now that we’ve covered what equity is and how to make sense of it, let's make sure that you’re getting the compensation you deserve by looking at average equity compensation by role. So we’ve broken down what average equity compensation as a % of the total company for our sales roles for Seed through Series B companies based on data from our thousands of placements over the last year.
Interestingly, while compensation has increased dramatically over the past couple of years, equity has for the most part is, growing at a much slower pace. With one big exception, which is Senior Leaders and C-levels getting up to 30%+ more equity in Seed and Series A.
So when thinking about joining a company in different stages of the startup lifecycle, it's important to understand the risk and rewards. When thinking about joining a company that has just raised a Seed round, they are at the beginning of their growth journey which means there is high risk in those companies having a successful exit. The rule of thumb is 1/10 of startups will have that exit. So high risk, but you get the largest amount of equity for that risk. You’ll see in the table below that seed round companies give out 4-5X the options vs a series B company. That is how you hit a 100X return.
That said, while a Seed series company only has a 1 in 10 chance of a successful exit, a series B company has a 1 in 3 chance of a successful exit, so while you’re getting fewer options off the bat, you have a much higher likelihood of getting to the exit.
Joining a Series C Company, you have an even higher chance of an exit at 8 out of 10 but your average payout will be 2-10X vs potential of 100X+ from a seed series.
There simply won’t be enough equity available to hand out %’s by Series C and the actual exit value is fairly easy to predict so companies usually give out equity as a multiple of annual OTE with a strike price similar to that of the last valuation price per share.
Here’s where it can get confusing, and please keep in mind that not every company doles out equity this way, but if Margot gets a role at a series C company as a CRO with an annual OTE of $500k, then her equity compensation would be two multiplied by her OTE to receive the value of what her shares should be at the end of the four year vest. This is heavily dependent on company value, strategic nature of roles, growth potential, etc but it's a good baseline for Margot to understand her value to the company.
Assuming the company Margot joins is a typical Silicon Valley start-up, then it should have about 10 million shares with 1.5-2 million reserved for the Optional Pool. In other words, those 1.5-2 million shares are reserved for the employees when they join the company or as a reward for hard work.
Now, the table is also going off the idea that the percentage of shares reduces as the company raises money—you and your employees will theoretically be making more money as the company raises more funds, so the percentage of shares given will be smaller. Furthermore, again, the vesting period is based on the most common of schedules: the aforementioned one-year cliff and four-year vesting schedule that Margot already experienced in the example above.
If your company goes public, please keep in mind that you no longer get a percentage of the company but you will get a certain dollar value of your base salary or OTE (on-target earnings). Typically, you will receive around 10% as an initial option grant. After, you’ll have the opportunity to buy more equity through a stock buyback program through your payroll at a discount. For example, if you make $1,000/month, then you could spend $200 on stock at a 20% discount. What a way to invest!
Feel free to enter your equity information, into our Equity Calculator to see what your equity could potentially earn in the long run!
And lastly, remember that as the company grows, the percentage of ownership will get diluted as more and more people join the company. Again, think of it as a bottle of wine: the more people you share the bottle with, the less that ultimately ends up in your cup. That’s not to say that you won’t get any, but you won’t be getting as much as if you were to join during the seed round.
Two vital elements come into play when dealing with the amount of equity you’ll be offered by your company: your title and the round of funding your company is in. As your company goes through funding, the amount of equity that you will receive can get a little more diluted due to more and more people (hopefully!) joining the team.
Don’t be too worried—it’s a natural progression of growth and doesn’t mean that you’ll be missing out on more money in the long run! The more your company grows, the more money in the bank, and the more money you ultimately can earn.
Now that we’ve covered how the chart works, let’s break down the information to be more user-friendly. Margot is joining Company Inc. as an SDR during Series A. That means that she would be receiving 0.05-0.10% of shares at the time of signing on. Please keep in mind that this amount can change based on your location, experience, and the actual title that you sign on with. Notice how Margot receives a different amount than if she were a VP of Sales or an Account Manager. If Margot reaches her dreams in five years of becoming a VP of Sales, she would expect to make $175,000 annual salary with an equity offer of 35,000 options.
A good breakdown to make sense of it all is as follows: “Title” | “series” | “location” = x amount. Therefore, an SDR at a company in Series A should look at making 0.10% equity using this equation: (salary X multiplier)/ company value X # of diluted options outstanding = amount of equity.
Don’t worry if you’re confused! That’s why we’re here to make sense of it all.
If you find yourself reading this and wondering why you should even offer equity, think of it this way. First of all, any potential talent you’re looking to hook is swimming through a sea of offers. If your onboarding package isn’t substantial enough, you’ll risk losing a great catch to a bigger and better offer. A new hire wants to feel like they’re joining the company fully and wholeheartedly—offering equity offers a reward for joining the team and letting them know that you’re hitching your wagon to their horse. You want them to succeed as much as they want to succeed.
When your employees feel valued and rewarded for their hard work, they’ll be less likely to walk away. Employee turnover will decrease when employees have something that will accrue the longer they stay: it’s a waiting game, and you’ll reap the rewards. If you stay for your four-year vesting period, and the better your work, the better rewards.
Building a culture of rewarding success will ultimately have a happier work environment. People love to know that they’ve done a good job, and even more than that, they love to be rewarded for said good job. Equity makes it easier for employers to show their appreciation for their team's hard work.
And finally, equity builds a foundation of ownership. As has already been mentioned, your employees are working towards making the company better and working towards their investments and their futures.
It ultimately comes down to understanding your worth and your employees' worth. Making sure everyone has equity goes a long way towards making sure that everyone is fairly compensated as well as happy in their positions. It may even be the deciding factor in an employee staying instead of leaving the company.
Now that we’ve gotten caught up with the importance of equity, let’s check in and make sure you’re on the right track regarding compensation. Feel free to check out our compensation guide to make sure you’re getting what you’re worth! Happy Working!
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