A weekly newsletter on navigating the chaos of building & investing in startups. Topics include fundraising, building products, analytics and more, leveraging a combination of best practices & instincts.
You got to know when to hold 'em, know when to fold 'em Know when to walk away and know when to run You never count your money when you're sittin' at the table There'll be time enough for countin' when the dealing's done
- Kenny Rogers
In 2011 I joined an early stage startup, GoInstant, as VP Product. The company had raised $1.7M from top-tier VCs and had 6 employees (4 founders & 2 others.) They had built some amazing technology, but hadn’t yet productized it, or identified the right target market (user or customer.)
Before joining, I asked for 5% of the company. I also asked for the title, Chief Product Officer.
I ended up getting 2% and a lower title. (More on the title later.)
A year later, the company was acquired by Salesforce.
I can’t share exact numbers with you, but the media had the price pegged at ~$70M. With acquisitions like this there are many variables, including the cash paid for the acquisition, and the retention packages offered to individuals. It’s never quite as simple as what’s shared publicly. Sometimes acquirers pay with cash & stock. There’s a “waterfall” that’s triggered, which typically means the most recent investors are paid first. Often there are strings attached to the payouts (“golden handcuffs”) but also future additional compensation that comes from the acquirer (restricted stock units/RSUs, salary bumps, etc.)
I spent 2 years with Salesforce and then left to join VarageSale as VP Product. My earn-out (which was 3 years) wasn’t finished, so I left a considerable amount of money on the table, but at the time it felt like the right decision.
All told, that 2% I “owned” in GoInstant was very meaningful for me and my family. (I didn’t own the options, but their vesting accelerated at acquisition and converted.)
Sometimes, a small amount of equity can be worth a lot of money.
But I still hold to the premise of this article—early employees (especially those first 1-10 employees) deserve more equity. Let’s break this down further:
1. Early employees are taking a lot of risk
Ultimately most startups fail and the equity goes to zero or near zero. Early employees almost always sacrifice salary in exchange for equity (although some have different opinions on this; see below), and that’s risky. You’d make more money working at Google, Facebook or some other large tech company (or even a large non-tech company) than taking a shot at multiple startups over that same time period.
If you’re interested in levelling up during your career, working at a handful of small startups won’t have the same impact as working at a big tech company. Getting Facebook, Netflix, etc. on your resume is gold; once you’ve past their tests to get in, the assumption is you’re going to be great anywhere else. But after working at a few no-name startups—your resume isn’t well padded.
Founders definitely take more risk than early employees because all of the responsibility sits squarely on their shoulders. They probably take even less salary than their employees (at least early on), but they do own a lot more of the company. Here’s a quick example:
Two founders start a company. They raise a bit of money and have given up 10% of the company. They also have an ESOP (employee stock option plan) at 15%. The founders are equal partners, and each own 37.5% of the company.
You’re employee #1, and you get 2%.
Is that fair?
Note: I would say 2% is fairly generous in most cases as well. The range is typically 0.5%-1% (although there’s definitely variance.)
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2. Early employees have a massive impact on a startup’s chances of success
It takes a village to win. Startups aren’t built exclusively on the backs of founders; the contributions of employees—especially early ones—are crucial.
Founders need to recruit the best possible candidates they can, the A-players. If those first handful of employees aren’t fantastic, you’re going to significantly decrease your chances of winning…heck, of even having a shot at winning.
Every startup makes hiring mistakes. It’s inevitable. But if you make those mistakes early on, you could be in real trouble.
A-players deserve to be compensated. And since most early startups don’t have tons of capital, it seems reasonable that those A-players be compensated with equity.
Here are some (very?!?!) generous Canadian founders 🇨🇦, sharing their own examples:
3. Most exits are under $100M and take years
GoInstant was an anomaly because of how quickly we exited. Most startups take much longer to exit. On average, it still takes 7-10 years for a startup to go public. Smaller exits may happen more quickly, but there’s no guarantee.
And most exits are sub $100M. Founder Collective did an analysis of their own portfolio and found the median exit was $44M. I asked ChatGPT about it, and here’s what it said:
So there’s a significant opportunity cost for early employees (this is true for founders, too.)
If you dedicate 7 years of your life to a startup before it exits, owning 1%, and the company sells for $44M, you’re getting ~$440,000. Divide by 5 and that’s $63,000/year. Not bad, but it depends a great deal on the difference in salary you earned. And dilution (which is a whole other topic.)
Sidebar: Talking about titles
Earlier I mentioned that I wanted to be Chief Product Officer at GoInstant. Instead, they made me VP Product. In hindsight, I completely understand.
If you prematurely hire C-level executives it’s very difficult to turn back. There’s a good chance that very early employees at that level don’t scale with the company. A CPO of a 10-person startup is very different from a CPO of a 100-person or 500-person company, etc.
You can’t hire above the CPO, and so that early employee most likely leaves. That could be OK, but you may be losing a valuable resource.
Future VCs may look at your C-level people and question their ability to grow and scale the business. That leads to a lot of awkward conversations.
I’m not particularly prickly about titles, but I wouldn’t give them out like candy. There are real implications. You don’t need a lot of C-level people in an early startup anyway, put everyone at a “lower level” and let them their earn their way up. If they can’t level up alongside a scaling startup, they might still be extremely valuable and happy at the level they’re at, while you’re able to recruit more experienced people to join as executives.
Finding benchmarks on equity & options for early stage employees
Finding great benchmarks isn’t super easy, but there are some out there, and some established understanding of what you should be offering people. Here are a few handy resources:
Index Ventures OptionPlan: A benchmarking tool using 20,000 option grants from 1,650+ startups across the US and Europe.
3 questions with Brad Van Vugt, CEO/founder at Battlesnake
One of the coolest logos, ever.
I posted a few questions on Twitter and LinkedIn about founders’ experiences with option grants. Brad Van Vugt, CEO/founder at Battlesnake responded:
1. What benchmarks did you use, if any?
Brad: 15% option pool (ESOP); 10% to first 10 hires, 5% to the next 20. In practice, this was 2.5% to hire #1, 2% to #2, etc. You can weight them based on start date too, so third and fourth hires might both get 1% if they’re hired at the same time. If this feels too high, then you’re hiring the wrong people.
2. What advice did you get about what to offer employees?
Brad: Best advice was to scale cash with experience level, not options; i.e. if you hire a junior and senior person at the same time, pay the senior person more, but give them both the same equity grant.
3. Do you feel like what you offered was fair?
Brad: Yeah, it’s fair if your cash compensation is fair. These days options should be treated as a bonus, not a cash replacement. The best hires tend to know this already.
Equity vs. Cash
It’s fairly common to “trade” cash for equity. Early startups don’t have a lot of cash, so they offer more equity instead. Brad’s perspective is an interesting one: “options are a bonus, not a cash replacement.” I would suggest that most startups think of options as a cash replacement.
I’m not a fan of that model, although I’m not opposed to offering it to employees. If they’re experienced and know what they’re getting themselves into, and they’d prefer a BIGGER LOTTERY TICKET, you can negotiate that fairly. But most employees don’t really understand options (more on that later.)
Another interesting point that was brought up on my LinkedIn post about this topic: Can higher equity unintentionally create hiring discrimination?
This is concerning and not talked about enough. I don’t have any easy answers here, but welcome the discussion.
If you’re going to join a startup, it’s important to understand how options work. I won’t go into all the details, instead, I’ll share a few good primers. Please note: I’m never going to provide any tax advice. Also note: options are treated different in different places (i.e. Canada, US, Europe, etc.)
I do think there are a couple key things to think about when it comes to stock option grants:
1. Vesting periods should be shorter
The standard vesting period is 4 years, but I think 3 years should be more common. Early employees are going to create a ton of value at the outset, but they may not survive a long time. Shortening the vesting period provides a “quicker win” for those initial employees that took a leap with you.
You can always re-up employees with more options later to keep them incentivized to stay (assuming they’re still providing value.)
Janice Fraser recently replied to my LinkedIn post on this topic with an idea for accelerated vesting, but still a 4-year period:
2. Exercise windows should be longer
The exercise window is the period of time you have after your options have vested to buy them. While working at the company, this is largely a moot point, but it really matters when you leave.
Often after leaving a company, the exercise window is very short — a few weeks to a couple months. That means you have to decide if you want to buy your options quickly, or they go away. If you have a lot of options, this could be very expensive. Some people borrow money to buy their options, which is scary as f*** because the options may still not be worth anything. Borrowing to gamble is dangerous.
Recently there’s been a trend towards extending the exercise window, and I’ve heard of 5-10 year timeframes. That’s a very generous amount of time. For ex-employees in this situation, the hope is that the startup exits (has a liquidity event) before the 5-10 years are up, so they can make a very simple decision. Once the details of the exit are known it becomes very easy to calculate the value of the options and decide if you’ll make money from them.
The argument against such a long window is that the options are being held hostage, and people are less incentivized to stick around once they’ve vested, because they can wait a very long time before deciding to buy them. I don’t really fall into this camp: If a person did great work for 3-4 years and earned those options, they should be able to keep them.
In 2016 I was let go as VP Product from VarageSale. It was a painful experience. I had been one of the startup’s first angel investors, and the founders convinced me to join while I was still at Salesforce (as part of the GoInstant acquisition.) At the time it was the right choice for me.
When things were over I had a decision to make — do I buy my options or not?
I hadn’t fully vested, but the options were worth 6-figures (I can’t remember the exact number.)
The company itself was struggling, and I didn’t want to put that big a bet on its future (especially after how the relationship ended.) So I asked for a longer exercise window.
The founders & board members were good enough to offer me a 1-year extension.
When that 1-year ended, the company wasn’t necessarily showing signs of huge success, and so hedging my bets, I asked for another year extension. This time it wasn’t granted. I let the options expire.
In this case it was a good decision. Some time after that VarageSale was acquired, but not at a price point that would have seen me earn any real money.
Even if the exercise window is longer, it’s not always obvious what you should do.
One person reached out to me to share their story. They were brought on as the COO for an early stage company. When they left, they were given a 1-year exercise window.
Unfortunately, when that time came, the company refused to provide any information on performance. The company said (paraphrasing), “We’re not providing formal business updates to any option holders, outside of information already available publicly or by virtue of being a former employee.”
Without sufficient information, this person decided not to buy the options. That turned out to be the right decision, but they felt burned by the experience.
This is more common than you may realize—companies aren’t obligated to share information with you, so unless you know for sure things are going really well, buying those options is risky.
3. Top performers should be topped up
It’s fairly common for great employees to receive more options. In the same way that you may do annual salary increases, you can look at doing option increases as well (although it’s not common to do it that frequently.)
One founder I know reached out to share her story with me about how they distributed options to employees and advisors. Advisors are an interesting discussion, because they can be extremely valuable, but too often they’re “big names” that don’t really do much. Here’s what she shared with me:
“What I now feel is very unfair—we gave larger chunks to ‘big name’ advisors and much less to employees. Each of our advisors received ~1% and we had a lot of advisors.
For most of our employees we gave them between 0.1% and 0.25%.
The options all had 4-year vesting terms, but once they were fully vested, we kinda forgot about them, until we started having discussions about a potential acquisition.
Ultimately the options ended up expiring for advisors and early employees. So we decided to redistribute them to the small number of advisors that provided a lot of value, and to our employees, who we had given too few options to initially.”
There’s a clear lack of understanding when it comes to options & equity
What has become readily apparent in researching this topic is that there’s a clear lack of understanding about options & equity and how it all works. A number of people told me they were nervous or felt awkward about asking their employer questions.
I asked several people, who have worked at multiple startups over a 5-10 year period: “What do you wish you knew before that you now know?”
Here’s an answer from Anita Chauhan. It’s similar to most of the answers I got.
“I think language is a big thing. Lots of people who are subject matter experts tend to speak of equity, vesting, cap tables, etc. so easily that they forget that many people in junior roles or new to the industry aren’t always familiar with it. I think everyone pretends to know what it means and orgs and leadership teams either don’t care to educate or capitalize on the lack of education. It leaves employees in a powerless role, tending to not ask for what they deserve or knowing the breadth of what is available to them.
I wish I understood valuation, when and how to ask for more (i.e. negotiating more around a raise, or with a promotion), understanding dilution, cliffs, voting rights, etc. I also was shocked when I learned that I had to purchase the shares at the end of my time with [startup name redacted] (I wasn’t willing to spend the money either way, but it was still new information that I didn’t have).
I think given my time in the tech community after 8-ish years, I feel more comfortable with the language and parlance than I did before. I still don’t 100% understand every aspect and despite reading and educating myself, I find it difficult to always wrap my head around it and what it truly means for me.
It also was a large learning curve for me to understand what it meant against my total comp package - like did taking more options over the long term mean less salary, and how long do I have to pay for the shares that have vested after I leave? Basic things like that are what is missing in the education of options and equity grants.”
That’s not good. While Anita is now much more comfortable with this stuff, she’s a “startup veteran.”
Even if options / equity grants are lottery tickets, people should understand them. The implications are significant, in positive and negative ways. You can win big off a small amount of options, but you probably also deserve more.
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Early Startup Employees Deserve More Equity
This is great and super useful as I intentionally construct our equity structure.
This is one of the best (read: honest) breakdowns of employee equity scenarios and outcomes.