caughtlackinย inย ย 
Software Engineerย 2 years ago

At what point do you stop using ownership percentage at a startup?

Is there an employee number or valuation at which point you stop using percentage of company as the equity you'd be getting? Shouldn't you always know the percentage that your equity represents? Is it mainly because it gets super low and becomes unreadable like 0.000001% and it isn't as friendly as just telling you the options and share price

19g6vkvllmyk3Software Engineering Managerย 2 years ago
It's not about being friendly vs unfriendly -- it's more about what the amount represents and the maturity phase of the company. If the company has a clear and stable valuation per share, then locking in a share count is the right way to do it. If the company does not, then a percentage is more meaningful. "# shares" has no meaning to a person when there's no per-share price attached -- they have no frame of reference since they don't know how many total shares are in the pool. Meanwhile, "% equity" is less meaningful than "# shares with a strike price of $price per share" -- so if a strike price is readily available, the employer should state # shares with the strike price instead of using the percentage. Note that if a company has not IPOed, it will almost certainly not have a strike price they can tell you, because it literally isn't worth anything yet. "But..." -- OK, yes, Series A/B/C/etc rounds of investment create relative value (i.e. headlines about Unicorn $#B valuations, but not in a way that creates meaning to a small-percentage equity holder like Jane Smith / John Smith random employee sitting at 1%, 0.1%, 0.01%, etc. Until IPO, that equity is worthless for the small employee shareholder. From the candidate's perspective, anything other than "# shares at $price per share" should be interpreted as "zero dollar value" for the purpose of computing the employee's own compensation. If you can't vest it and sell it, it's speculative and best to assume it's worthless in order to avoid hurt feelings down them road in the likely case that it actually becomes worthless. Example scenarios include: employee fails to stay long enough to vest, company fails to IPO, company goes bankrupt, company sells to IPO or PE at a value that eliminates some/most/all employee shares at zero value, etc. Also, because the OP is using "options" and "equity" interchangeably, please be aware that options are not at all the same thing as equity. Options entitle a person to purchase using the person's own money shares of the company at a future date. Equity is like cash in the pocket -- more like real ownership of a small portion of the company (I say "more like" for the pedants out there -- since different stock classes will give an investor more or less real ownership control of the company).
caughtlackinSoftware Engineerย 2 years ago
Thanks for such a thorough response. Wondering though shouldn't a company still have some sort of valuation they use to come up with the strike price for your shares. And even then when you have a share price, shouldn't they be able to tell you how much of the company that is based on the overall valuation?