Some suggestions for how to value an equity offer from a startup as part of a decision on whether to join.
Q: How Do I Value an Equity Offer From a Startup?
Q: I am out of my element here, so please forgive my ignorance. I am being recruited by a start up with roughly three dozen employees. They have suggested an executive role and a 2% equity offer as part of a complete compensation package that includes salary, bonus, and benefits.
I do not have an offer in hand but I want to be prepared, but I don’t know how to value an equity offer from a startup that is only six months old. They have hinted that a large company has expressed interest in acquiring them. I would like to understand what steps are involved in making a determination of the value of the equity: what documents, financial information, and other things should I ask for?
A: The most likely value of equity in a firm that is six months old is zero. It’s a sad fact, but the majority of startups don’t succeed. I say this not to discourage you but to help you come to an accurate assessment.
You don’t mention if they are bootstrapping or have taken investment. If they have investors, then the price of the last round would at least tell you how the investors valued it. I would ask the founders what value they place on the firm and what their plans are to sell it or take it public. Until one of two events happen you will be a minority shareholder in a privately held firm, which will make it hard to sell you shares for a variety of reasons.
If the founders or other executives have had successful exits, you can have more confidence in their plan than if it’s everyone’s first try or they have only failed. However, multiple failures are preferable to all first-timers as they likely have accumulated knowledge of what to avoid.
If you are being recruited into the executive team, it’s reasonable to ask to see the Cap Table (a statement of how equity is currently allocated and at what price).
I would also understand who their customers are, how much they have paid, and how satisfied they are. It may not be easy to arrange conversations if you are not on board, but I would ask you to read notes from sales calls, hotline or support calls, and emails to and from prospects and customers to understand how well things are going. It’s reasonable to sign a non-disclosure to be able to see this information (and for the cap table).
Here are some questions to ask yourself:
- Do you like the team and the people you will be working with?
- Will you learn new things you can use in your career?
- Can you add value to their efforts? Are you going to be able to make a contribution? Small firms are much faster to fire. Do you understand what you need to do in the first 90 days and the first year?
- What other alternatives are you considering? It’s better to consider multiple options instead of stay where you are or join this new firm.
- Why are you thinking about leaving your current job?
- What do you hope will occur by joining an early-stage startup?
- If you don’t make any money from the equity, do you still want to work with this team, serving their customers, on the other compensation on offer?
If you want to get a view from the other side of the table check out “Working Capital Volume 2: Assembling Your Team”
Related Blog Posts
- Q: Should I get a normal job or work at a startup?
- 3 Key Questions To Ask Yourself Before Taking a Job with a Startup
- Faith Emittee on “Working Capital: Assembling Your Team”
- Podcast with Pete Tormey on Forming a Team, Dividing Equity, and Gaining Early Traction
- Time to Market: How to Learn From Co-Founder Disagreements
- Recap of SVCC 2013 Working For Equity Panel
- Recap of “Work For Equity” A Startup CEO Panel at SVCC 2012
- Slides from “Working For Equity” Panel at SVCC 2011
You are welcome to drop by a Bootstrappers Breakfast and compare notes with other entrepreneurs. There are three online meetings a month and face to face meetings in San Francisco, Silicon Valley, and Las Vegas.
The meetings are roundtable conversations with other serious entrepreneurs, it’s a chance for candid discussion on the challenge you are facing.