Sorry Startup Employee #100, Your Equity Probably Won’t Make You Rich
Bloomberg’s article about lower-than-expected financial gains from startup IPOs for midlevel employees stuck in craw this week because there’s a handful of complex issues at play here.
In No Particular Order:
Startup Equity Is Unlikely to Make You Fabulously Wealthy After Four Years Unless One or More of the Following Apply —
- You were a founder.
- Your company ends up being worth more than $10 billion.
- Your company raises very little capital and sells for $500 million+.
- You join at an executive level pre-IPO for a company that already has huge potential.
Even in successful companies, most initial equity grants will be worth a few hundred thousand dollars to perhaps $1–2 million, when fully vested. Rising in an organization and getting more grants pre-IPO helps, but generally it’s just math.
Assume you get .25 percent of a company and you’re diluted 50–75 percent before IPO. For an “average IPO” it’s just not millions and millions of dollars. It’s real money. Real good money. But don’t assume one IPO turns you into a multi-millionaire.
It’s Often Not Employee’s Fault That They Don’t Understand This
We need to move to more transparency for employees. When I started at Google, all they told me was the number of shares in my grant. Not the company valuation, or ownership percentage or even grant price! Just the number of shares.
Now, Google is an exceptional company and it all worked out, but a company which prided itself on data and hiring analytical employees gave me a number which didn’t mean anything.
My question back to them was, “why even tell me the number of shares?”
So I generally advocate more transparency, helping employees understand different scenarios and being generous with employee grants over time. On the employee end they should realize there’s often a tradeoff between salary and equity. Be willing to take below market salaries if you’re able and load up on equity.