If a Startup Founder Does This, Don’t Take the Job

If you’re offered a job at a startup, your offer probably comes with a stock grant. If you don’t know how much of the company you’re getting, this grant number has almost no information.

You need to know what percentage of the company you’re getting. Founders know this, so they sometimes lie by omission to pay you less. This isn’t ethical and you shouldn’t work for such founders.

Not knowing how much of the company your'e getting is like being told you’ll get 100,000 units of currency every year, but not which currency. US Dollars? Zimbabwe Dollars? You have no idea what you’re getting.

This currency analogy is apt because stock inflation has no cost at the founding of a company. You can form a company and just pick the number of shares to be whatever you want. It can be 10K or 10B.

There are a few ways to package this information. Let’s walk through them so you can understand your job offer.

You can know the total number of shares. Ask for the “fully diluted shared count”. Fully diluted just means things like an option pool that hasn’t been granted to employees but probably will eventually. Here is the math:

Your Shares / Total # Shares = Your Percentage

You can also be told your percentage of the company. The math to show this is equivalent is easy:

Your Shares / Your Percentage = Total # Shares

You can also be told the total dollar value of the stock grant. The problem here is that common stock isn’t worth the same amount as preferred shares. When a company goes public, they all count as a share, but they have different rights. This means if you tried to sell common stock at a private company, there wouldn’t be the same market. The company might have the right to block such a sale anyway. But the preferred share price converges to the price at an IPO over time, so it should be good enough.

You can estimate this with the last round’s valuation. Then the math to get the rest is easy if the valuation is public:

Your Stock’s $ Value = Your Percentage * Valuation

Your Percentage = Your Stock’s $ Value / Valuation

You can also get the total share count to track over time:

Your Stock’s $ Value = Your Percentage * Valuation

Your Stock’s $ Value = (Your Stock Count / Total # Shares) * Valuation

Total # Shares = Your Stock Count * Valuation / Your Stock’s $ Value

Side note: the actual value of your stock is likely to be either zero or a lot. The way to use the percentage ownership is to think about a comparable public company and ask what your percentage would be worth. Then discount by how risky going public is. 99% of startups fail. Also, plan on being diluted to at least half your percentage ownership by IPO.

Another bit of complexity here: convertible notes. Sometimes companies raise money using convertible debt or SAFEs. This means that the number of shares didn’t change when they raised a round. It also often means there is only a valuation cap at which the notes will convert to preferred stock. This isn’t the same as a valuation. This is obvious when you find companies with “uncapped” notes: they aren’t worth ∞.

In such cases, founders should tell prospective hires the total number of shares and their guess at what price the notes will convert. “We’re not sure” just isn’t good enough.

There is a market for a percentage of stock for a given role at a given stage company. You can see this with this awesome salary & equity tool on AngelList. The absolute numbers aren’t completely accurate, but it will help you understand if you’re getting a good deal.

I consider this an ethical issue. If you’re dealing with people that won’t tell you what you’re going to get as compensation, they are trying to lowball and trick you. Don’t work with them. Tell your friends not to work with them.

Oh, and at my startup YesGraph, we tell you how much of the company you’ll get when you’re hired.


Now read this

I’m Going To Give My Startup Ideas Away

I keep a secret list. It has every good idea for a startup I’ve had. Are any really good ideas? I haven’t done the work to find out. The first step would be to explore them in depth, maybe with an essay. The real test is actually doing... Continue →