📈 Equity 101 Resources
Welcome to Equity 101 💸
In the world of high-growth startups, equity can be a significant portion of the overall value you receive in a remuneration package - and if you're fortunate, can create a life-changing amount of personal wealth through allowing early joiners to own a portion of the company.
However, correctly assessing the current value of equity options can be pretty confusing - as can comparing the value of equity between different companies, predicting the future value of that equity, and understanding the intricacies of how / when / at what cost they can be exercised.
This is a collation of resources designed to help you understand what equity is, understand its value and make good decisions about it (from a personal or a founder point of view).
If you have more resources we've missed, or suggestions you'd like to add, feel free to DM Lucy Wark on LinkedIn and we can add them in.
A few perspectives on equity 🤔
Personally I work out a low med high case for it in 3-5-7 years and then spread it on top of my base pay as “equivalent income” and use that to weight my risk vs reward calc
“Equity doesn’t pay for nappies” best advice I was ever given on whether to join a start up
My view is that you should cover your basic lifestyle and a little bit more with your base salary and view equity - if you're not an exec - as a bonus that you're working towards. You know the chances of a return are low, so make sure any trade off on base salary vs equity manages that risk. Also, consider that it's easier to get an increase in base salary vs equity.
Remember that startup valuations you see in press coverage - especially at early stages - are not 'true' valuations. They're arrived at through supply and demand - basically, investors and founders gauging how many people want to invest and how much money they'd like to deploy, relative to how much money the founders want to raise, and how much of the company they're willing to sell off in exchange for that money. So the valuation is the number that they use to solve for that - most of the time, the company may be pre-product, pre-revenue, or pre-profitability, and its paper valuation makes little sense compared to its mature peers in the public markets. As companies mature, they start to be compared more to their peers in the public markets, and their valuations start to move closer to 'reality' - however, a lot of hot startups
In an early stage startup, don't treat equity options as a one-to-one swap for cash (for a few reasons - they're not liquid, you may need to pay to exercise them, there is substantial risk attached as many startups run out of funding before they achieve product market fit / scale / achieve a liquidity event, and of course, you can actually invest or compound that cash today). As a rule of thumb, I often use a ratio of 3-4 to 1 (i.e. equating 3-4 dollars of paper equity options to 1 dollar of cash). As companies mature past Series B / C and beyond, you might compress that down, or even move to a 1 to 1 ratio, or a ratio which favours the equity, if you have high confidence in the future growth of its value.
Highly recommended resources 👍
Designed for employees
- Guide to valuing startup equity, by Eucalyptus CFO Alexey Mitko - detailed and accessibly written step-by-step guide. If you read nothing else, read this.
- Carta Equity 101 Video Course - 10 video episodes explaining key concepts and terms, plus an Equity 101 Glossary
- ESOPs Explained, by Kirstin Hunter (for Brighte) - high level overview
Designed for founders & managers
- Airtree Open Source VC Guide - Communicating ESOP Value to Employees
- Airtree Open Source VC Guide - Crafting Your ESOP: Best Practices & Key Terms
- Index Ventures Option Plan - Benchmarking > 20,000 startups in US & European markets
- Index Ventures Rewarding Talent Handbook - designed around US & European markets but super detailed advice on 'market standard' equity allocations across startup journeys
- Tidal Ventures 'Seed Space' - one-stop-shop resource for founders, including resources on equity and a number of other topics
Useful for both
- Cake Equity: Equity Toolkit - includes equity compensation calculator, benchmarking tool, startup dilution calculator, valuation calculator and legal template
- Startup Equity Matters podcast episode: Startup equity 101 with Jason Atkins
- ESOP Tips & Best Practices by Soroush Pour (for Vow) - for both founders / managers and employees highlighting key terms to make ESOPs accessible and fair
- ESOP Academy - series of podcast episodes and articles - relatively in-depth but first episode / article is a good explainer for employees
- Slicing the Pie Equity Calculator
People you can reach out to
- Fee Lal: Senior Associate @ Tidal Ventures, host of Subtitles On podcast - happy to be reached out to with questions about specific offers