How much equity premium should I ask for a private startup?
When joining a private startup, there is a lot of risk that your stock might become worthless in the future.
Suppose, Google/Meta is offering you $150K stock per annum. For a comparable risk-reward tolerance, how much equity would you ask for a startup? Is there a formula you would use here based on factors such as the latest fundraising round, employee count, revenue, etc?
Discussion
(1 comment)- 012 days agoTech Lead/Manager at Meta, Pinterest, Kosei
There are many inputs into the decision of how much equity to ask for. If you're joining a startup, you need to have conviction that the best days are ahead of the company, so the valuation should increase. But it's very, very hard to tell if the company will go up 2x, 10x, or 100x in value.
The comparison with the equity value of Google/Meta doesn't make sense to me. Those are trillion-dollar companies where the stock is almost as good as cash. For startups, you should expect the latest VC-fundraising valuation is inflated, so simply doing the math of your equity % * company valuation will lead to wonky results.
Instead, you should think about what is a reasonable terminal value of the company after a few years, when you've vested a lot of your equity. Take into account dilution, and then that becomes the rough value of your equity. For example, if the startup is worth $10M today, and you think it could exit for $100M in 4 years, then your 1% equity package would be worth $1MM. Actually, it'll probably be worth less since there will be dilution from future financing rounds.
This is my recommendation for very early-stage companies. For later stage startups, like Stripe, Brex, or Chekr, you can start to look at things like revenue, margins, and growth rates.
I left some thoughts here as well: What do you think is a fair amount of equity for a first developer of the team?
