If you’ve had more than a couple of corporate jobs in your career, you have likely encountered an equity stock option component in your job offers. If you’ve worked for a startup or other early-stage private company with relatively few employees, you’ve had the potential to receive a larger slice of the pie as an early-stage employee, whether you realize it or not.
I’m not going to dive into what equity stock option grants are. There is plenty of information online already about that.
It’s an important topic because, if your time is valuable (and it is), you’d like to know that putting several years of your human capital into a venture is going to result in a lucrative exit after your vesting period. It’s all about how much (or how little) real leverage you are granted with those options. And nobody has figured out how to manufacture time.
This whole conversation is a lot simpler when you receive a job offer from a publicly-traded company, which is required by law to disclose how many shares have been authorized, issued and outstanding. It’s completely transparent how much the company has to grow its bottom line for you to reach a certain goal in yours. You can then use conventional investment planning to estimate the real monetary value of your stock option grant over the vesting period.
Some private companies keep the distribution of company ownership (and options for ownership), also known as the capitalization table, a closely held secret. This can be problematic if you are trying to fairly negotiate your slice of the pie, since you may not be able to find out the total size of the pie. It’s also a red flag that there may already be significant disparity across the capitalization table. Venture Hacks has a decent article on how a capitalization table might be set up, including a sample spreadsheet.
It helps to find out as much as you can about the capitalization table during the interview process, before even getting to the negotiating table. You may not be able to find out exact numbers or fractions. Listen out for terms like majority ownership, dilution, and founder status. It also helps to know the dollar amounts of external investments, particularly the most recent cash infusion. That number, combined with the current option strike price can help you triangulate the approximate number of total shares outstanding, and a starting point for your negotiations.