How To Negotiate Equity In A Startup

Hiring employees for a startup is challenging, especially for those in their early stages. That’s why companies often give equity compensation packages to enhance their job adverts. For any person looking to work for a startup, startup equity negotiation is necessary to ensure you see returns for the work you contribute to building a company from the ground up. To successfully negotiate equity in a startup, you must do your research, know your priorities, and understand the terms and conditions of different equity packages.

Understanding how to negotiate equity is a key area an entrepreneur must be familiar with when starting a business. 

What Is Equity?

Equity refers to a percentage of a startup’s shares that are distributed or sold to founders, investors, employees, and, later on, the public. Equity represents the amount of money shareholders would receive if the company had to liquidate its assets, with all debts and liabilities paid off.

Forms Of Equity Compensation In Startups

For early startups, equity is often given to employees as stock options, in the form of either incentive stock options (ISUs) or non-qualified stock options (NSUs). These contracts give an employee the right to buy or sell the shares of a business at a specific price, usually within a set period.

These options often need to be earned in a process called vesting before you’re allowed to exercise them. The same is true for restricted stock units (RSUs), which are awarded outright (i.e., an employee doesn’t have to purchase it later). Depending on the equity package, vesting can be defined by time (e.g., four years with a one-year cliff), milestones (e.g., a finished project), or a hybrid of both.

How Much Equity Should I Negotiate?

The amount of equity that a startup offers—and an employee can negotiate for—is dependent on several factors. From the employer’s side, these include:

● Funding stage

● Stock option plan

● Budget

● Stock pool

● Company structure

From the employee’s side, on the other hand, equity can be based on:

● Seniority

● Experience

● Skillset 

● Negotiation skills

● Time of employment

Employees can negotiate for anywhere between 0.05% to 30% (sometimes more!) equity in the company. Usually, the earlier you join, the better the equity package—unless you’re an exceptional hire.

To know exactly how much equity you should negotiate for, consider the different factors that apply to the startup in question. Research different rates, then qualify these with what you believe you deserve.

How To Negotiate Equity

Negotiating equity in a startup is just like haggling for a better offer in any other company. Getting the best deal requires research, preparation, and confidence. Here are some things to remember when negotiating equity:

Do Your Research

Comprehensive research will give you an idea of the amount of equity that you can negotiate. Dig deep into learning about the company—its founders, finances, projections, etc. You could also research similar companies to determine what the industry standards are, which will help you know what to realistically expect. Rely on your network to know what standard rates and packages you can negotiate.

Remember Your Salary

It’s important to keep in mind that equity isn’t something you’ll get right off the bat. Though it can potentially safeguard you financially in the future, it’s not going to pay the bills today. Don’t shortchange yourself on salary just to get a more extensive equity package.

Negotiate In Person

Be sure to conduct your negotiation in person to better contextualize the situation and be more effective. If that’s not possible, request a video or audio call. As much as possible, avoid making deals via email.

Understand The Offer

Don’t just accept an offer as soon as it’s handed to you; taking some time to mull it over can be really beneficial. Also, know that you have options: you can consider other equity packages if a few are available. Finally, it doesn’t hurt to ask if terms like vesting schedules, acceleration triggers, etc., are negotiable.

Consult A Professional

It’s good to have a second pair of eyes to evaluate an equity package as they can ensure you’re protected and that you come into your equity smoothly when the time is right. Have a startup lawyer check the fine print before signing on the dotted line.

If You Believe In It, Be Part of It

Equity is more than just securing financial gains. Having equity in a startup means that you have a stake in the business. If it grows, you share in its profits, which becomes an incentive for you to help its success. Negotiating equity proves that you believe in the potential of a business—remember this when you start negotiating numbers.