I'm expecting an offer from an early stage start-up. Would I sound unreasonable to see their cap table? Are there other questions that I can ask that can help me determine what % of the company I'd be getting in this stage?
Thank you!
I generally ask these questions:
1. What was the pre/post money valuation of the company at the last round.
2. How much runway do they have right now including already planned increases in burn (i.e hiring plans for the quarter/year).
3. What % interest in the company would my options grant represent? (you use this in combination with the information about the valuation to determine value of said grant)
4. Who are the major non-founder investors in the company? (this is generally public knowledge because investors love to announce these but it's worth asking). Sometimes the CEO will also divulge details about how they work with their investors, level of involvement, board seats etc. CEOs love to talk about these things for some reason.
5. When do they plan to raise money next and do they feel like they are meeting the metrics required for an up round? If not then how does my hiring or other planned hiring seek to address that?
The last question is actually really important and generally how I a) tie my employment to actual value at the company and b) justify my compensation in negotiation stage and/or later negotiations when I can show how my performance has directly affected these important metrics.
Any company worth their salt at the sort of stage where these questions are relevant will answer these, the degree of detail will depend on transparency of the leadership.
Generally speaking when looking to join a company of this size you will be meeting with the CEO, usually after meeting everyone else and before negotiating compensation - that is when you ask these questions and this is exactly what that meeting is for.
If they don't want to answer these then take that as a sign things are worse than they seem and perhaps negotiate for a more cash rich compensation and don't bet hard on the companies future.
Interview stage: Can you share with me what the liquidation preferences look like?
The company can either say, yes, (good sign, they are at a minimum confident, but also possibly competent) or the company can say no (What are they hiding?)
And you are right, if liquidation preferences are on the table, you should expect your equity to be worth 0. At that point does that change your calculus working with the co?
All of your questions above + liquidation prefs are key IMO
If everyone wants to say that the equity is fake... then ok, it's fake and we can move on. If the firm is representing 50k options are a lot, then I should be able to put a dollar value on those options. In most cases, an employee will expect to get something in between the downside of nothing, and the upside of infinity dollars. The liquidity preference determines whether you in fact get nothing, ever.
Source: Worked at a firm with a 2x liquidity preference on a Series D which ultimately didn't move the needle for the company. Realized ~1.5 years in that the equity would have inconsequential worth in any reasonable outcome for the company.
It would be better to use the market cap of the currently dominant company in the sector to compute the upside (unless the startup is doing something completely novel, like autonomous robotics or nuclear fusion, in which case the risk is so high there's no point in doing the math.)
Whatever went into taking a down round or having to sign off on something worse than a 1x liquidation preference from a VC is bound to be a touchy subject so I'd word the question tactfully.
Of course. The company may still issue more shares but in those cases everyone is getting squashed anyway
What’s the fully diluted number?
How many shares am I getting?
Those are the important questions.
Assume you get diluted for every fund raise.
That said, things you could ask for could be: the number of fully-diluted shares (to calculate your ownership), whether they have any convertible notes and what the terms are, what their last valuation was (pre or post-money), how much runway they have at current burn, whether existing investors have any liquidity preference, etc. They may not answer all of those, but they should be able to give you enough to know where you stand.
Their level of secrecy should tell you how serious they are. If they are too opaque, my advice would be to switch to a mostly cash comp.
I don’t think being secretive about the exact details of the cap table is indicative of anything.
They should be able to tell you broadly how many shares there are and how valuable your equity grant is tho.
The vast majority of them fail anyway, and it's a long shot to ask me to trust them not to fuck me over with equity based compensation.
Working in a startup can easily turn into a rough ride - for not much benefit.
So you might just as well start a company of your own.
I disagree completely.
That being said I believe company’s and founders should be as transparent as possible but sometimes that can come at a price and so it’s not ideal to be completely forthcoming.
How an employer responds to a difficult question that they don't want to say "yes" to will tell you volumes about their skill and demeanor. And if they gladly answer this question, keep pushing until you find one they won't answer.
If someone revokes your offer because you asked a question, you just dodged a HUGE bullet.
I was once in the compensation negotiation phase of an interview. I asked all the root comment questions about equity. They refused to answer any. I was insistent. Their tone changed. They pulled out of negotiation, citing "cultural fit" which I took to mean I was savvy enough to not be suckered.
This is something I've always been confused about. Suppose there are 100M fully diluted shares and you as an employee are granted (and vest) 20,000 shares, so you have 0.02% of the total shares. And suppose the company has a private post-money valuation of $10B and then IPOs to a stable $10B market cap. So you would think (0.02%)×($10B) = $2M payout.
But! This doesn't include the fact that during an IPO, the company creates additional shares, right? And none of these new shares are sold directly to the public; they are first sold to banks or other prioritized buyers, and only then is the public able to purchase shares from anyone who owns them. Would this not decrease the employee payout? Assume the company creates 100M new shares for the IPO at a price of $50 per share. Now the banks pay the company (100M)×($50) = $5B for those shares, and then they sell them the next day on the open market. The final share price for the day would now have to be $10B/200M = $50 to have a market cap that is equivalent to the private valuation of $10B. But that means the employee's payout is actually $1M, not $2M.
Is my understanding of this correct, or am I missing something? It seems like you can't just take your percentage of private shares and multiply it by the private valuation to estimate your IPO payout.
Like any funding round, there is dilution.
The value of your equity is premoney_percentage x premoney_valuation or postmoney_percentage x postmoney_valuation.
As you say, don't make the mistake of premoney_percentage x postmoney_valuation.
If that’s the case, and they issue 100M new shares on IPO, then the IPO is effectively a serious “down round” that halves the value of all shareholders pre-IPO.
More realistically would be that the post-money valuation after IPO is $20B or more.
https://www.investopedia.com/terms/i/ipolockup.asp
Not to mention, you probably don't hold shares, you hold options, unless you were clever/daring/solvent enough to exercise early. Substantial dollar amounts involved, and big tax implications.
So really it's a question of what the share price is when you're eventually allowed to sell shares, minus the cost of options exercise.
The second reason is that the valuation of the company changes (typically, it should go up at each round, but in our current climate, down flat-rounds are very likely for many companies).
So your % ownership should go down, BUT if the valuation goes up by the right amount, the value of your ownership should go up too (ie your price-per-share goes up).
however no company will be able to predict future dilution so this is not really something they can tell you with confidence.
the only thing you can do is gauge current state of the company (funding, readiness for ipo) and try to estimate future dilution but even this is non trivial for early stage companies.
I.e. suppose a startup grants you 20,000 shares. There is a big difference between the startup having 1M fully diluted shares (2%), 100M (0.02%), and 100B (0.00002%). In the first two cases you're getting a reasonable share of the startup (depending on the stage); in the last case you are likely getting scammed.
With dilution it seems that new shares are spawned and every round and more, and so every original owner automatically looses parts of his share even without selling it? I understand that it is legal in the letter of the law. But isn't it basically a scam in the spirit of the law? Or am I missing something?
Slightly longer answer: Let's say you own 1% of a $80MM company that raises $20MM. Your shares were worth $800k before and they still are (0.8%100MM = 1.0%80). The hope/expectation is that money will allow the company to grow its valuation -- if they do, you shares become worth more.
(What you could complain about is the CEO valuing the company too cheaply but there's a huge amount of luck and guesswork and you are missing so much information).
But capital holders (investors) don’t care, because they hold the power in venture backed companies.
Why is this?
Isn't it pretty much up to the founder and board whether you get diluted (and how much) in the future, and whether any number you see there continues to be accurate (for your own purposes, or others in the table) or not? And unless you're one of the top people at the company, your net worth is going to ride largely on how much of a success the company becomes, not your particular % / exact small share of it.
The VCs and next funders care about the exact numbers. What would you do, use it to negotiate more?
I suppose you could take it as some indication, but it's by no means some kind of binding assurance of the future. This is a thing I have a fundamental gripe about SV startup practices -- there are a lot of things associated with being employed at one that have the appearance of legal obligations and securities regulations to the novice eye, but under the surface they are not at all, and you are largely at them whim of whoever owns the company. The value of your options could evaporate in practice, even though you hold "100,000" of them (either through decline in company's future, or active dilution, or the CEO just doesn't like you).
Or am I exaggerating what I feel after a decade in the area?
There are a lot of questions that people ask, where I feel, is it even meaningful information you would act on or are you trying to feel better about something? (see all the useless 20-year-old-something comments/questions in threads after some company CEO announces the possibility of layoffs... "Can you share the exact formula by which people will be laid off?" "Why are you doing this in successive rounds and not all at once?" etc. etc. What would you do even if you knew the answer?? )
Startup options are about as valuable as lottery tickets - worthless, unless by some lucky chance they're not worthless.
If you take the lotto ticket perspective, you should do everything you can to maximize your odds and part of that is doing as much diligence as you can on the company.
If I were joining as a first/early engineer, or at a senior level - particularly early stage - I'd want to see the cap table.
Yes, but if your grant is in the same class as all the other regular folks (vs founders, C-suite, and investors), your protection, such that it is, is that the founders want to keep their good reputation.
If they choose to dilute the normal stock classes to nothing for their own benefit, word gets around and it will be much harder for them to hire at their next startup. If they have no other choice than dilution to keep the company afloat, and can demonstrate that to the rank and file, that's still a negative signal, but less of one.
If they're just an employee then you can argue "who cares" but also "why not?". If they're offered any options I'd say yes they should ask.
By definition, the CEO is issuing stock in lieu of money.
They are issuing a chance at very large future compensation (say 10% chance at 12x) in lieu of current cold cash (100% chance of 1x).
The CEO is not in the driver's seat, otherwise they wouldn't issue stock.
NOTE: This is a totally different thing than stock incentive programs.
That's a question I've always used personally, and I've refused offers from companies that wouldn't answer it.
That said, I don't think I've ever interviewed with a startup that gave me an offer with equity that wouldn't share # shares outstanding, amounts invested, and liquidity preferences. If a company won't share that at the offer stage, I'd have concerns.
That is the usual advice. The median return for common shares is $0 (most startups fail).
Founders can screw up their own ownership https://grayscale.vc/blog/how-that-safe-note-is-screwing-you... and there is no way most people can understand the cap table value without a lawyers help.
Also you have no influence over future rounds, so a good equity deal now could easily be worthless in the future (or even worse, negative returns due to taxation on paper gains that subsequently disappear).
Concentrate on your other benefits, whether you think the founders and investors have integrity, and whether you think the market opportunity might be a winner.
We do have one small angel investor from our first funding round that asked us not to publicly name them as an investor, so we just don't include them when we share the cap table. That's a rare situation, though, in my experience. This investor is relatively high profile in their non-angel-investing life and they don't want to publicize angel investments.
And the number of fully diluted shares, the ownership percentage that the prospective employee's grant equates to, the strike price of the options, and the price that investors paid (and valuation) of the last round should absolutely be shared with you.
If you have a question I'd just ask it straight out. I mean, you're at an early stage startup. It's a ton of risk for you, so you should know what you're getting.
But remember, 2% of $0 is still $0.
A 1% chance that equity in the company is worth anything, ever.
A 100% chance that whatever percentage you are promised after vesting will be diluted by an unknown multiplier.
Together, this means that you should consider the cash equivalent of the promised shares as something between one dollar and ten bucks. Don't let it convince you to reject a cash offer elsewhere, or a cash + actual stock plan in an established company.
What you should ask for is a percentage equivalent to other people of about your capabilities working for the company, and a promise to continue to make you at least equal to similar folks hired in the future. Remember that business promises are made in writing and signed by a responsible officer of the company.
Actual numbers right now are likely irrelevant.
Beyond the % it also helps you evaluate whether the shares are worth anything. Lots of companies have badly structured cap tables. This impacts investability, which impacts your likely return.
If I saw "40,000 shares" with no idea what the denominator was, I would definitely ask clarifying questions.
The core points of working at a startup are: freedom, people you meet, the resume creds, the experience. That's what you really get.
...not that you'll really know how to. And the company probably doesn't, either. Their TAM is probably way off, and most of their projections will just be guesses.
While this is definitely anecdata, my personal experiences with potential hires asking to see the cap table, or overly dig into some of the corporate stock allocations and financials in the very early stages are always indicative of employees that turn out to be regrettable hires.
For an early stage company, the future of the company, and your personal share of it, are 1000 times more impacted by everything that is yet to happen, not the cap table at this stage.
Ask about share class, percentage of your grant, salaries, cash on hand, burn, fundraising plans, etc. But understand that almost every answer you receive at this point is likely to be out of date in a few months anyway.
Without knowing what special rights are attached to different equity and debt holders, you have no idea how the rights ascribed to your equity will rank against them in the event of a liquidation or exit.
If I were you, I'd an innocent question: "how much of the work do you want me to do?" Then lean back and watch how they are trying to square what they're offering with what they expect you to do. The problem is all the employees get allocated a 10% pool of shares, yet they are expected to do all the work.
Number of shares outstanding and current 409a valuation are both semi public info, and you should absolutely be getting access to them as part of your offer.
Maybe the line items of the cap table have sensitive info, so if you ask cap table directly, they’ll say no. But asking summary level questions about the cap table relevant to you may give you the info you’re looking for.
For example, you probably don’t care if VC#1 has X shares and VC#2 has Y shares… you only care:
* how many shares there are
* what percentage have Preference (founders, VCs, investors)
* employee pool / your offer
In fact, you should find a question they don't want to answer "yes" to, and you should push on it. It will tell you volumes about who they are, how much they respect you, and their skill as professionals, negotiators, and more. I've lost offers in the past for being insistent about things. That's fine. I dodged a bullet and saved years of my life.
Directly responsive to your question: you want to know the shares outstanding, the liquidation preferences (if any) of prior investors, if there are any weird share structures (e.g. series FU preferred, which converts 10,000:1 to common and is held exclusively by the CEO's dog), if there's a single- or double-trigger clause for employees, the terms of the stock agreement...there are lots of things you might ask about.
Another bit of advice I wish I received before negotiating with start-ups: stock options are worth what they're worth now, not what they might be worth later. If you get 10,000 shares at a fair-market value of $0.01 that vests over 4 years, that compensation is worth $25 per year. (10,000 * 0.01 / 4). They will try to sell you on the shares sometimes being worth a lot more. I hope the shares are a lot more some day! But their expected value is their fair market value.
> what % of the company I'd be getting
A large percent of nothing is still nothing. Besides your own stock, ask questions to understand the financial maturity of the company. If it's a consumer product, how many customers have they signed up? If it's an enterprise product, have they signed any deals? If they haven't (which happens, signing enterprise deals can take 12-18 months) understand where the deals they are working on are in the pipeline. If they have 12 months of run-way but most of their deals are in the 18 month out horizon, understand that you are taking a lot of risk in joining that company. Also ask about potential customers that are not doing business with the company yet: why not? What are the blockers?
Don't be satisfied with answers like "our founders know this space, they've been here before." No start-up that has funding has an unimpressive founding team. There's no shortage of Ivy League/Stanford grads with years of experience at <whatever company impresses you these days>. Even with those pedigrees, 70% of those companies aren't going to be successful.
Yes, and do not let anyone tell you otherwise. If you accept monopoly money, you have every right to know how many notes were printed and how many more were promised to others.
Will they show it to you? Usually, no. Because that kind of exposes the entire sham. But you can try.
On the upside scenario, your payout will converge to the number of shares.
Asking to see the cap table is not unreasonable but you will be asking for much more information than necessary for your purposes.
You might just ask how much you should get under different scenarios, but sincere founders will not have an answer because they can’t know for sure and they would be irresponsible to set expectations that they might not fulfill.
Just ask them what % of the company you'd be getting at this stage. They should absolutely tell you that; that's the high order bit of equity compensation negotiations. If they don't tell you up front they're wasting your time.
Early-stage startups need mutually trusting relationships in the team. If they don't trust you enough to tell you, or you don't trust them enough to believe their answer, equity comp numbers are not the issue here.
For cap tables, remember than a board can issue as many shares as it wants to whomever it wants, diluting anyone at any time. So even if you could see the cap table, it offers no guarantees.
Maybe what you're looking for is whether their incentives are aligned around developing and keeping talent. For that you can look to the history of the principals: whether they are in for the long haul, if they stick together, and if they are happy to grow offshoots.
I am studying corporate finance and valuation. Recently we had an analysis assignment of a private company. In the EU a lot of financial info is still available even if the company isn’t listed on any stock exchange.
Would it be possible to answer golly_ned:s questions with public financial statements?
At the very least read the internet. You can start here if you like: https://www.ycombinator.com/library/Ep-all-about-startup-equ...
Also, what percentage of the company you're getting and the valuation can be answered without seeing the cap table.
IFF you have only one class of shares and no liquidation preferences. Else the number is meaningless, because you might own 2%, but due to the above things, even on a big exit make nothing.
Startups have a 95% failure rate and an average exit of $243M. Therefore, equity could be considered a lottery ticket with an expected value = Equity% * (1-0.95) * $243M.
That'd value 1% at around $122k.
Ask directly.
Or, if it's truly early stage, you could ask for what % you want instead.