How To Negotiate Equity in a Startup or Private Company

9 MIN READ

Are you looking for a private or startup job? Or perhaps you're pondering over a job offer? Before looking at just the salary, consider negotiating equity compensation.

Whether accepting a lower salary or expecting the company to go public soon, you may want a solid equity package to take the position.

Knowing how to negotiate equity in a startup or private company is the key to getting paid what you're worth when changing jobs.

When negotiating an equity offer, you may have the option to negotiate incentive stock options, restricted stock units, or stock options.

Here's what you must know to decide the best compensation package.

How To Negotiate Equity in a Startup or Private Company - What Is Equity?

Equity gives you percentage ownership in the company, usually with shares of stock. However, early-stage startups can't offer stock shares upfront.

Instead, most successful startups give employees stock options, which are the right to purchase stock shares at a discounted price or strike price. They usually come with a vesting schedule with an average of four years.

For example, if you receive 100 stock options with a 4-year vesting schedule, you might earn 25% after the one-year cliff and an additional 25% on the same day each year for the following three years.

Another form of equity compensation is Restricted Stock Units or RSUs. Suppose a startup or private company offers RSUs.

In that case, they will reward you with shares of the company's stock on a specific date if you satisfy particular requirements. Some requirements could be working for the company for a certain amount of time or a milestone the company must reach.

RSUs are more valuable than stock options, typically. However, an early-stage startup usually cannot afford RSUs, since the company rewards the stock shares, and employees don't have to pay anything.

With stock options, you have the right (but aren't required) to purchase stock at the strike price. Stock options can become worthless if the price is below the strike price.

Related Article | How to Avoid Double Taxation on RSU Sales

Startups and Private Companies Explained

A startup company is a company in its earliest stages. They usually focus on a single product or service and use bank or venture capitalists financing.

Startups usually have high costs and low revenue. So they typically can only offer stock options in their early stages because it doesn't cost them anything to offer equity compensation. This allows them to attract talented applicants.

A private company is a company owned by private individuals. Private companies can issue stock, but the shares don't trade on public exchanges, like publicly traded companies.

Shares of private companies aren't as liquid as publicly traded companies because there isn't much of a secondary market.

Like startups, private companies usually issue stock options until they go public. After their IPO, private companies may switch to RSUs.

How To Approach Equity Contract Negotiations

Knowing how to negotiate equity in a private company or startup isn't a one-size-fits-all approach.

Every negotiation strategy is different and depends on the employee's needs and the company's financial potential to provide a stock package.

Here are some steps to consider during equity negotiation strategies. Don't worry; you don't need excellent negotiating skills to get what you deserve.

1. Evaluate the Situation

The first negotiating tip is to determine the situation. First, who initiated the position with the prospective employer?

Did you apply and leave a secure position at another company, or did the startup recruit you? How does the salary compare to what you're leaving behind? Is the company in dire need of talented help?

Are you negotiating salary or just equity options?

Also, consider the company's financial risk and future success. How long do they predict until a liquidity event, such as an IPO?

As you evaluate the situation, consider your career plans, is this a long-term gig or if this is short-term?

Is the job your dream or something you're using just to fill a void? Equity offers vary by talent and company need, so evaluating the situation is important.

2. Understand the Offer

When you're provided an offer, consider what it includes. Look at simple facts, like how many shares you are being offered. Are they stock options that you must exercise or RSUs?

If they are options, what is the strike price, and how likely will you be able to exercise it? Also, closely evaluate the vesting schedule. If it's a long vesting period and this is a temporary job, the equity loses value in your eyes.

3. Use the Initial Offer as a Jumping off Point

Closely evaluate the initial offer to help you decide what to negotiate during equity negotiations. First, outline what you like about the offer, and then determine what you'd like to negotiate.

Look closely at the timeline of the offer. If you plan to be with the company long-term, a long vesting schedule may not bother you. It may even work to your advantage as you can minimize your tax liabilities long-term.

You may have more negotiations to make if you aren't sure how long you'll stay or if the company's path to liquidity is long.

One common negotiation is a longer time to exercise options after leaving the company. Most companies require you to exercise them within 30 days, but you may want to negotiate longer if a liquidity event is too far off.

4. Prepare Questions To Ask

How soon is the company planning to update the 409a?
How long do you have to exercise options if you leave the company?
What happens to your equity if you lose your job or retire?
Are you required to sign a non-compete agreement?
If you're working toward a bonus target but leave beforehand, are you paid pro-rata, or do you lose what's outstanding?

5. Negotiation Variables

Like any personal finance decision, there are many variables you can negotiate, including the following.

Number of Shares - If your qualifications warrant more shares, negotiate for them or compare the offer to what similar companies may offer.
Vesting Terms - Depending on your long-term plans, you may consider negotiating shorter or longer vesting terms. Shorter terms ensure you can purchase the stocks and sell shares when the company goes public. Longer terms may be more beneficial for tax treatment.
Other Equity Types - If a company offers stock options, but you'd prefer restricted stock units so you don't have to worry about exercising your rights, negotiate for the type of equity compensation you want.
Early Exercise - If you can minimize your tax obligations with a minimal spread between the exercise price and the current stock price, you may want the option to exercise options early.
More Time to Exercise Options - If you think this is a short-term job, but the strike or exercise price won't be beneficial until after you leave, you may negotiate a longer time to exercise options.
Additional Non-Equity Perks - Don't forget about non-equity benefits. Take time to compare the other benefits offered to what you currently have and are leaving behind or what other companies in the area offer. Additional perks may include cash bonuses instead of equity, higher salary, vacation time, severance, and bonus shares.

Tips for Negotiating Equity

Are you ready for the negotiation? Here are some tips to help:

Fully understand the terms of the offer - Before you do anything, read and understand the offer. Seek legal advice if necessary, and compare the offer to what you leave behind.
Negotiate in a professional setting - It's best to negotiate equity face-to-face, in person. If that's not possible, consider video chat. A conversation that doesn't take place over email or text can have more context and come across better.
Research beyond the company's word - Of course, a company will tell you good things about them, but take the time to research and discover everything. Read about their financial projections, startup equity, and anything else you can get your hands on while also taking time to research similar companies to see what they offer and how they perform.
Don't make a rush decision - Take your time determining if the equity compensation is suitable. Look at your options, and compare each option's short- and long-term consequences before deciding.
Be realistic - Remember that you're applying at a startup. They don't have a lot of equity yet and are trying to get good talent in the door. You won't get front-loaded with an equity offering, but your compensation package may pay off in the long run if you have patience.
Don't let the salary go by the wayside - Don't get so caught up in the equity compensation that you forget about your salary. That's what provides the cash flow you need to pay bills and enjoy life. Equity compensation is great, but it's a bonus; it's not the meat and potatoes of your offer.

FAQs

How Do I Make an Accurate Stock Valuation?

To accurately calculate a stock valuation, you'll need the stock's most recent preferred price, the strike price you're offered, and the number of options.

Plug the numbers into this calculation:

(Preferred price - strike price) * number of options = equity value

How Much Equity Is Typical for Startups?

How much equity you receive is based on many scenarios, including your position, experience, the industry, and where the company is located.

Early-stage startup companies reserve a percentage of equity for their early employees. The amount given depends on how big the company is and what stage they are in. Usually, you can expect 0.2% to 2.5% in equity.

What Are Repurchase Rights for Vested Shares?

Repurchase rights give the originating company the right to buy back vested/sold shares if certain conditions occur.

How Do Taxes Work With Equity Compensation?

You must pay taxes on your equity compensation.

When you exercise stock options, you pay taxes on the difference between the strike price and current market value, and with RSUs, you pay taxes on the value of the stocks you're given at their fair market value.

The Bottom Line

Knowing how to negotiate equity in a startup or private company is essential if you're considering changing jobs and leaving a job with good benefits.

Owning stocks can be a great way to compensate yourself for your job in addition to your salary.

When conducting salary negotiations, evaluate your options for compensation packages if it's something you prefer over cash compensation.

Some equity choices have favorable tax treatment and create a sense of belonging in the company.

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