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Joining a Start-Up? Negotiate Cash Over Equity

Source | LinkedIn : By Victoria Pynchon

Do not go gentle into that start-up night.

Whether you’re joining a start-up with seed funding or being recruited by a company that’s already raised serious chunks of venture capital ($50 million, for example) you must acquire industry knowledge and conduct due diligence to avoid becoming a casualty of founder over-confidence.

I’ve been consulting with women in tech startups – biotech, big data, genomics, pharma and the like – for more than two years now and every consulting assignment deepens my understanding of the pitfalls to mid-career people who trade a stable but boring job for the lottery ticket of start-up equity.

The internet is chock full of good and not so good advice. My purpose here is not to spill all the beans on startup heaven, but to guide your own independent research and point out some common perils.

So, let’s begin.

Trading Base Salary for Equity: Dilution 

This is the 5th circle of hell for non-founders who are considering giving up cash compensation today for a chance at the brass ring that eluded Eduardo Saverin, co-founder of Facebook. As the wildly successful Facebook-founding film, The Social Network revealed, Saverin’s interest in the company was rudely yanked out from under his feet by the principle of dilution.

Trading Base Salary for Equity: Vesting

These days, few start-ups are offering their new employees options to buy stock in the company. Instead, they’re offering Restricted Stock Units (RSU’s). The typical offer comes with a one-year “cliff” after which the new employee is granted a fourth of the total equity awarded, “payable” during the second through fifth  years of employment. 

The problem with RSU grants is their treatment by the IRS as income during the year they “vest,” i.e., the year you actually own them but still can’t trade them. Some start ups have graciously “solved” this taxation problem by delaying the actual grant of RSU’s until the company goes public (and its shares become tradeable on a stock exchange) or the year in which the company is sold to third parties (and its shareholders are paid for their interests).

Although start-ups tend to monetize RSU’s as part of employee compensation, the taxation “solution” makes them incapable of valuation. Why? Because the start-up may never go public and its founders may never sell it. That doesn’t mean it will fail. It just means that its founders will neither sell it nor go public and your RSUs will never “vest” even as the company’s value soars. If you’ve become a key employee, delayed sale is a good reason to renegotiate your compensation, especially if you’ve been given assurances that the company plans to “go public” in a year or two. This will not happen, of course, in the worst case scenario – the company fails and everyone’s equity becomes worthless. 

Employees joining companies that have received several rounds of venture capital should know that even these companies in which investors have placed their faith – and considerable sums of money – are more likely to fail than not even if they’ve raised series B or C funding. As Pando explains, this “Series B Trap” results in failure when a company has scaled up too quickly with the money raised in the B round.

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