In late October 2020, SF Women in Tech hosted its very first virtual panel, Techquity 101. For this panel, we invited industry leaders to lead a crash course on startup equity and how to navigate negotiations and refreshers.
Our all-star lineup of speakers included Joey Zwicker, Co-Founder of Pachyderm, Lori McAdams, Marqeta’s very-own Chief People Officer, Lori McAdams, and VP & Deputy General Counsel, Alina Zagaytova, and our moderator, Lisa Wallace, Co-Founder of Assemble.
To recap our event, we highlighted 4 main takeaways for understanding and negotiating an equity offer, no matter where you may be in your career.
Not all shares are created equal
To start, it’s important to understand that not all shares are created equal. There are various types of startup equity. The two most common types are:
Preferred Shares: are mainly issued to investors. Investors pay a premium in exchange for downside protection and other controlling rights.
Common Shares: are the most basic form of stock. It’s mainly issued to founders and employees.
Many companies track employee equity using cap tables which represent all shares within a company (preferred, common, and option pool) broken down into different classes. Carta defines cap tables as “a list of all the securities your company has issued and who owns them. Securities include stock, convertible notes, warrants, and equity grants.” It is especially important to note that as new shares are created, it dilutes the shares.
Equity Grant Lifecycle
The general timeline of an equity grant comprises of 4 key parts:
Grant date – The contract that’s signed before you join a company usually defines how you will receive your shares over time.
Vesting Period – After passing your 1-year cliff, your shares begin accumulating. You can exercise your shares at any time you want.
Exercise date – The point at which you can actively purchase shares at your given strike price (listed in your equity grant). Note: there are tax implications
Sale date – This is the point at which you can start selling your shares. (Remember you must pay taxes on any profits gained)
There are four important “gotchas” to take stock of when receiving equity:
Understand your vesting schedule, milestones – It’s really important to read your stock purchase agreement
Post-termination exercise period – After you leave the company there is a fixed window to exercise the options (most companies will have this).
Know who’s on the board at your company – The more aligned the better but ultimately, trust that the board values your interests
Participating Preferred & Liquidation Preference – These are two types of protections for investors. Participating preferred repays investors before splitting the remaining value with common shares (as opposed to splitting according to ownership %) Liquidation preference guarantees investors make a certain amount back on their invested capital (roughly 1-2x) before paying out common shares.
How to Negotiate an Offer
Lastly, we have highlighted key considerations for negotiating an equity offer. Generally, there are three types of equity grants that make up a compensation package:
New Hire Grant
A few variables that will affect the size of grant and offer are:
The position and applicable equity range that has been established based on market positioning
The stage of the company (the earlier, the more risk)
The company’s overall exit strategy
When negotiating an equity offer, it’s important to keep in mind the following:
Be sure to ask about the equity range when inquiring about salary
Not everything is negotiable in an offer like strike price, vesting schedule however the number of shares is typically negotiable
Ask other essential questions like: "Are there opportunities to receive additional equity?" or "can you describe eligibility requirements for additional equity?"
If you are looking to gain more insights into equity, evaluating an equity offer, or more, we have linked the presentation from our virtual panel here. We also recommend exploring Carta’s Equity Education resources. Lastly, stay connected with SF Women in Tech on LinkedIn to keep an eye out for our future virtual events.