The one number you should know about your equity grant

The one number you should know about your equity grant is the percent of the company you are being granted (in options, shares, whatever – it doesn’t matter – just the % matters).

Number of shares:  meaningless.

Price of shares:  meaningless.

Percent of the outstanding option pool:  meaningless.

Your equity in relation to other employees:  meaningless.

Strike price of options: meaningless.

The only thing that matters in terms of your equity when you join a startup is what percent of the company they are giving you.  If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own – don’t join the company! They are dishonest and are tricking you and will trick you again many times.

I find it really depressing how often employees, especially engineers who are so smart about other mathematical issues, don’t get this.  I felt forced to post this after talking to a friend today who told me about how a prominent NYC startup has been telling hires the number of shares they are granted but won’t tell them the percent those shares represented (“it is company policy”), or the number you need to compute the percent – the total outstanding shares.  It’s really amazing people are getting away with this simple and incredibly cynical trick.

I’ve seen many companies “split the stock” 10-1 so that instead of, say, 10M shares there are 100M shares outstanding so the absolute number of shares granted sounds really big to naive hires who don’t understand that all that matters is the percent they own.

I think every engineering school in the country should have a week-long course on the basics of the capitalization of startups.  There are other things that matter too, but far less (like the number of preferences outstanding).   I’ll try to write about these other things in later posts.

Engineers – here’s how equity is paid out in a normal company sale/IPO (assuming a “good” outcome – in the downside cases it’s more complicated as investors have preferences which act like a max() function).  You get the percent you own multiplied times the price the company was sold for (or the market cap after IPO).  That is why percent ownership is the only equity number that matters.  Don’t work for someone who tells you otherwise or won’t tell you what percent you own.

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