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How to value your
equity in a company

Owning equity in a company might one day have a major impact on your net worth, but it can be challenging to project how much you stand to benefit.

This section breaks down some of the complex elements — such as your ownership percentage and company valuation — so that you can better understand your equity compensation.

Equity: a guiding framework

Your initial job offer, as well as promotions and bonuses, might consist of just one type of equity, or a combination of stock options and restricted stock units (RSUs).

Many different factors affect their value, including (but not limited to) the type of equity you're given, the percentage of the company they represent, the company valuation, how long you work for the company, and the company's overall success.

Do equity terms make your head spin?
Head over to the Tax Overview & Glossary to learn more →

What your equity could be worth

Ultimately, your equity is only valuable if your company has a successful exit: either through acquisition or IPO. That's why it's far more important to choose the right company to work for rather than focusing on the amount of equity you can get.

If you choose the right company, your equity may one day result in a windfall. How much will you stand to benefit? At a high level, the calculation below can help you understand what your equity could be worth.

Do equity terms make your head spin?
Head over to the Tax Overview & Glossary to learn more →

Chart Chart

Note: We are simplifying these concepts to some extent to help give you a framework for how to value your equity. If you own 1% of a company valued at $500 million, that doesn't necessarily mean your shares are worth exactly $5,000,000 — you can't forget to consider the impact of the company's liquidation preferences and the taxes you'll have to pay when you exercise your options.

Your percentage ownership

Your percentage ownership matters more than the number of options you were given. To calculate percentage ownership, take the number of shares you were offered and divide by the total number of fully diluted shares outstanding.

You can find your equity information in your offer letter, or in the equity management platform your company uses (like Carta, for example). To determine the number of fully diluted shares outstanding, you'll have to ask someone on the talent or finance team at your company. This number should include common stock, RSUs, preferred stock, options outstanding, unissued shares remaining in the options and RSU pool, and warrants.

How vesting factors in

You don't own all your equity on day one. Both options and RSUs are doled out according to a vesting schedule. The typical vesting schedule is over four years with a one-year cliff — meaning that on your one-year anniversary, you will have vested 25% of your initial grant. After the cliff, your options will vest monthly until you are fully vested after four years.

After you begin working, you may get additional equity grants as part of a promotion, a reward for exceptional performance, or an incentive to motivate you to stay at the company longer. Those kinds of grants typically don't require the one-year cliff, but they still usually vest over four years.

Leaving early?

Sometimes staying a full four years to vest your initial equity grant just isn't in the cards, but as long as you've hit your initial vesting cliff, you typically keep anything you've vested when you leave the company. However, there's a catch: If you've been given options, you'll have to exercise within a certain amount of time after leaving (usually 90 days).

Vesting acceleration

You might find yourself in an accelerated vesting situation — where your stock vests faster than the original schedule dictates — if your company gets acquired or participates in a merger. Be sure to ask your employer about the specifics.

A note about dilution

These days, a very successful company may need at least four or five rounds of financing before it has the opportunity to go public. If your company raises more money and takes on more investors, they could issue more shares, and thus dilute the value of your shares. Your ownership will also be diluted when the company issues options or RSUs to attract new employees and/or retain old ones. But dilution isn't the end of the world — raising money to grow faster can make it worthwhile if it's meant to accelerate growth.

When asking about the shares outstanding...
"It's a huge red flag if a prospective employer won't disclose their number of shares outstanding once you've reached the offer stage. It's usually a signal they have something they're trying to hide."

— Wealthfront CEO Andy Rachleff

Curious to know which companies we think have enough momentum to become successful businesses?

Check out our 2019 Career-Launching Companies List.

Company valuations

It's important to understand how your percentage ownership and vesting impact the value of your equity — but at the end of the day, the value of your equity is more closely linked to the success of your company. In other words, the size of the pie is far more important than your particular slice.

Not all companies have the same potential upside. The ultimate value of a company is most influenced by its long-term growth rate. Growth is influenced by market size, so it's important that your company addresses a large enough potential market that it won't place a limit on growth. The keyword here is potential, because companies that attempt to take share from others in a mature market seldom grow as quickly as companies that exploit a new market.

Company valuations will change after each round of funding, so ask your employer what they think they could be worth in four years (the length of a standard vesting schedule). Their answer will be their best guess — so try to evaluate their logic versus anchoring on the number. In other words, ask them why they believe in the potential valuation.

Curious to know which companies we think have enough momentum to become successful businesses?

Check out our 2019 Career-Launching Companies List.

Valuations Example Valuations Example

In the above example, if your company is worth $1B and you have 80,000 options at a $1 strike price, your equity could be worth $720,000. If your company is valued at $4B, your equity’s value jumps to $3,120,000. Note: These scenarios do not include the effect of taxes.

When choosing a company...

Beware of bias

It's common and natural to be excited about the value of your company — after all, you work there for a reason! That being said, its extremely common for employees to be overconfident in their estimates of the company's performance.

Don't be a "valuation chaser"

Seeking out companies with the highest valuation is analogous to buying hot stocks that are priced high. Ideally you want to find a company with a relatively low or reasonable valuation in an industry you like, with proven product-market fit and a lengthy projection of rapid growth.

Don't dismiss down rounds

A down round might feel like a negative event, but that's not necessarily the case. It's very common for private company valuations to get ahead of the business. The valuation can rise much faster than the revenue in the beginning, especially in industries that have garnered a lot of hype. In these circumstances it is not unusual for the companies to have a down round, but if they continue to grow, then the revenues catch back up to the valuation and the value grows over time.

netflix spotify facebook logo
Case studies: Down rounds

Facebook and Spotify — two of the most successful public companies in the last decade — had down rounds when they were private companies. (Note: Public companies also have the equivalent of down rounds all the time. For example, Netflix's stock dropped 85% in 2011, when it initially tried to separate its streaming business from its DVD business. It was a massive hit, but Netflix's stock is up more than 30 times since then).



Equity versus salary

When you get an offer from a company, you might wonder whether you should prioritize asking for more base salary (cash) or more equity. If the company is willing to negotiate, there are a few things you'll have to consider:

netflix spotify facebook logo
Case studies: Down rounds

Facebook and Spotify — two of the most successful public companies in the last decade — had down rounds when they were private companies. (Note: Public companies also have the equivalent of down rounds all the time. For example, Netflix's stock dropped 85% in 2011, when it initially tried to separate its streaming business from its DVD business. It was a massive hit, but Netflix's stock is up more than 30 times since then).

Company maturity

While early-stage companies may be open to trading salary for equity (because they'd like to save cash), more mature companies may not want to deviate from the equity allocation budget approved by their board of directors. Companies that are on a path to IPO will likely not have much wiggle room. The best way to test if your employer is willing to make the trade is simply to ask when you receive your initial offer to join.

Your comfort with risk and your personal financial situation (they're related)

Maximizing your equity can lead to a much higher payout, but it also runs a great risk of not being worth anything. Before making the trade-off, you should be confident you could cover all your ongoing expenses with the salary you're offered. If you're risk averse, or if you are optimizing for cash due to near-term financial goals, you may consider asking for more cash and less equity.

Asking for more equity

If you decide you want to trade a lower salary for more equity, there's a formula you should have on hand to figure out the number of extra options you should receive:

asking-for-more
asking-for-more

Wealthfront's board member and investor, Mike Volpi, believes mid-stage companies should be willing to trade salary for equity based on the number of shares one could purchase at the current option price. In one example he shared with us, if a new employee wanted to forgo $10,000 in annual salary for the next four years in return for the opportunity to buy more shares — and the current option price were $2 per share — then he suggests advocating for an additional 5,000 shares.

Company culture matters, too

When it comes to job offers, some companies believe in starting with a low offer to see if you will negotiate while others offer fair market value and usually are not willing to negotiate. Their approach to making an offer is likely a proxy for how you will be treated as an employee. You should recognize which type of company you're dealing with and decide which type of company you want to work for.

Valuing your equity: Checklist

It's important to ask your employer about the different aspects of your equity compensation. In these conversations, be friendly but direct. A simple way to kick off the conversation: "I'd like to discuss the terms of my compensation package and have a few questions. Would you mind walking me through my equity plan?"

ASK YOUR EMPLOYER

  • The number of options or RSUs and the total number of fully diluted shares outstanding (to calculate your percentage ownership)
  • Vesting schedule terms
  • Future plans for dilution
  • What they think the company could be worth in four years
  • The potential market size for your company's business

WHAT TO WATCH OUT FOR

  • Employers that calculate the ownership percentage your offer represents using a smaller share count than fully diluted shares outstanding
  • Seeking out companies with the highest valuation
  • Dismissing a company just because they experienced a "down round"
The shares of a company stock that you have the right (but not the obligation) to buy or sell at a set price Compensation issued to an employee in the form of company stock Determines the payout order and amount in case of a corporate liquidation The total common shares of a company, including currently issued or outstanding shares, as well as shares that could be claimed. A company's stock currently held by all its shareholders. The process by which you earn your shares over time. When your options vest ahead of the predetermined schedule. When investors purchase stock or convertible bonds from a company at a lower valuation than the preceding round