equityI have been offered a role at a startup - first employee stage. Salary is OK plus 2.5% of the company.
On the surface everything looks good, I know the founder from way back, equity is shares not options, vesting is reasonable, single share class.
The question is can you ever trust startup equity?
Even assuming perfect motives on the part of the current founders/owners - ultimately we are at the mercy of VCs / potential buyers. The startup is in the biotech sphere so exit event is likely being bought-out by a global pharma company (not known for for being nice guys).
We can picture a future exit sitting across from some Darth Vader lawyer saying “I have changed the deal, pray that I do not change it further!” Given the information/power asymetry it seems impossible to ever ensure that employee equity has any value.
Are stories like Job’s takeover of Pixar, Microsoft’s of Skype, 10x liquidation preferences, and others where the employees got nothing - the odd events that make the news or the standard behavior?
If you don’t sit at the executive table in this startup be prepared to get nothing for your shares. You’ll be pleasantly surprised if you get something then.
First of all, the startup has to succeed. Which is about 10% chance. Then all your share structure will be shuffled with every round of investments. The company might end up with literally hundreds of them.
Finally, during exit, the negotiations will be conducted in the manner to benefit those, who seat at the table. For instance, the sale price is lowered, but executives receive a large carveout.
The only event, I’d expect you to get something out of it is when it grows so large it becomes impossible to hide it and cheat you out without costly lawsuits.
At this stage it is impossible to tell.
When somebody invests in you they usually have a clause in the contract that says “when the IPO happens I must get X times my investment back from the shares” (where X can be anything from 0-10 or even more).
In these cases after the IPO/sale event these investors well get priority in getting there money back. Any employees with shares will get what’s left. If the IPO/sale goes well the investors will get just the value of the shares. If the IPO goes badly then the investors will get more than their shares are worth leaving less for standard share holders (like you). SO you may get less than the value of the shares.
Now if your company is doing well and looks like it will survive then then X will be low (even zero) as you will have options on who will give you the money (everybody wants to invest in a profitable business).
But if the company is desperate for cash then then investors will be able to force conditions like a large X on your (as otherwise the company will fold).
While shares are also risky, they are less risky than other alternatives like stock options (I have lost lots of them in the past just because the company moved over the ocean and I was not able to follow). The owner offering shares is potentially better than the owner offering various replacements of them, or nothing at all. Other things considered equal, such a startup should benefit from attracting better team.
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