A startup founder says too many job candidates focus on the wrong thing when it comes to stock compensation | Digital Asia
Digital Asia News Update
- REUTERS/Mike Blake
- Getting a job offer at a startup is exciting. But making sense of the pay package startups offer can be daunting.
- Those offers are often heavily weighted toward equity grants, or stock options, rather than cash salaries.
- Henry Ward, CEO of Carta, says job candidates tend to focus too much on how much those grants are worth in the near term and not enough on what they could be worth in the future.
Henry Ward, a startup founder in San Francisco, said he spends half of his time meeting with potential hires for his company Carta.
Even at Carta, whose service helps companies manage their equity awards (also known as stock option grants) to employees, Ward meets plenty of candidates who say they don’t fully understand how to make sense of a startup pay package. Ward can’t blame them.
In lieu of paying high salaries, startups typically offer candidates equity in the company in the form of stock options, or other forms of equity stakes such as restricted stock units.
Options give employees the right to buy stock in a company at a set price at some point in the future. If the company grows and becomes more valuable, the value of the options increases.
Understanding how much an offer of options or other equity is worth starts with asking the right questions, according to Ward.
The importance of looking ahead
Workers considering an offer letter from a startup often make the mistake of calculating what their stock options or equity grant is worth today, Ward said. But that math really doesn’t tell you much.
“What matters far more than this math is what do you think this is going to be worth in the future,” Ward told Business Insider.
Let’s say you get a job offer at a Silicon Valley startup.
You fire up the calculator and discover the equity grant you’ve been offered is worth a specific amount, based on the company’s valuation. But as investors continue to pour money into the startup, raising its valuation higher and higher, the value of your stock options could reach many multiples of that figure in the future.
If a company really wants to hire you, it’s the startup’s task to convince you to accept the position because the team believes they’re building the next $1 billion “unicorn.” You stand to make a lot of money if you get in at the company early, they say.
Read more: Learn the math of how to value a stock options grant
Of course, most startups fail. In an analysis of 1,098 tech companies from CB Insights, more than 70% of startups that raised their initial seed funding between 2008 and 2010 fizzled out because they didn’t raise any additional funds and weren’t acquired. The chances of any startup becoming a so-called “unicorn” with a valuation of $1 billion or more is less than one in 100, CB Insights reported.
“When you pick the wrong startup, your stock is worthless,” Ward said.
So, why should you believe the CEO’s optimistic forecast?
Ward estimates that 90% of the time he spends recruiting is dedicated to “helping [job candidates] understand what the value of stock could be and what it could mean to them financially.”
He typically gives them the same presentation he shows Carta’s investors. Ward runs them through the company’s metrics, the investment thesis of the venture capitalists that back Carta, and his justification for the company’s next round of financing.
He explains why he thinks Carta will be assigned a particular – generally much higher – valuation when it next raises funds.
Read more: A founder-turned-venture capitalist reveals the questions you should ask before joining a ‘unicorn’ startup
Ward encourages anyone considering an offer letter from a startup to ask for the company’s last preferred stock price, the employee strike price, and the trajectory of the business. He says job candidates should do their own independent research, too.
“Not all stock is created equal,” Ward said. “What matters far more than how much you get is the quality of that stock.”