How to Value the Equity Grant in Your Job Offer

repvue
repvueNov 5, 2020
Your equity may not be worth what you think…

Recruiters and hiring managers regularly pitch equity as a key part of the compensation package during the interview and offer process.  I’m sure many of you have received such an offer and were excited to be able to ‘share in the success’ of the company.

Hold on, though, before you get too excited, there are a few critical elements that are often overlooked by sales professionals during this process.

If the offer is coming from a public company, that’s great, because the math will be easy. While there are a few different types of shares (RSUs, options, etc – we’re not going to go into those specifics here) but what’s clearly known is that each unit/share, etc will have a defined value based on the current share price (which you can easily monitor), and they may have a strike price per share (so you’d potentially only benefit from the upside).

So generally speaking the actual/real value you are being offered by that public company from the equity component of your job offer should not be extraordinarily difficult to ascertain.

What about that high flying venture capital backed company though?  The rocket ship they are selling you.  “When you are offered a ticket on the rocket-ship, you don’t ask which seat, you just get on!”, you were told.

This is where things get a bit more tricky, and usually it’s because the company isn’t as forthcoming with a critical piece of information to allow you to accurately place a value on the equity award they are offering you. 

Usually an offer might include something like 5,000 options, vesting quarterly over 3 or 4 years.  Pretty simple right, so if it’s 5,000 quarterly over three years then you’ll vest 416.67 shares per quarter for three years.  When shares vest that means you have the ability to acquire them via an exercise process. 

That’s awesome because {insert high valued public company name} is kinda like ours, just a few years ahead and their shares are worth $80!  So this is an award worth in total $400,000 if we can just hit the plan!

WRONG!

You haven’t factored in the size of the share pool, often referred to as total shares outstanding.

Getting an equity award without knowing how big the total share pool is the same as getting a salary offer without knowing whether it’s in USD or pesos.  It’s the exact same concept. Would you take a job if they didn’t tell you what currency you’re getting paid in? Probably not.

So let’s just play this out. If the company has 350,000,000 total shares (which isn’t crazy if there have been a number of rounds of financing), your company would have to be worth $28B (yes, I said 28, and yes that’s with a B) for your shares to be worth $400k. 

So how should you approach this during the interview?  Well, you shouldn’t, but you should approach it during the offer negotiation process (and yes, negotiate your offer people).  Just ask them how many total shares the company has outstanding.  This will quickly tell you what your shares represent, as a percentage of the company. And from there the math gets much easier.

What’s interesting about this question is that it is VERY common for companies not to want to disclose this information to their employees.  The reason why is that for many employees, particularly early in their career, this equity is significantly overvalued in terms of how much the employee believes it to be worth.

There is absolutely nothing wrong with a small equity stake for an SDR or an AE.  If the value of that is reasonable believed to be $5,000, or $10,000, that is fine.  There’s real value there and it can absolutely make up for another offer that may pay a little more with no equity.  The issue comes in when the employee believes that it’s worth $90,000 or $200,000, but aren’t given the information to even try to figure out if it’s true.

If the company doesn’t want to disclose that one key piece of information, a simple follow up would be to ask the contact there how you should value the equity award that you’re being offered.  “Ok understand that you don’t want to disclose that information, can you help me understand how you work with employees to make sure they are valuing the equity the company offers them in an accurate way?”

Let’s continue to drive transparency.

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