Ask HN: Guide to Understand Equity Compensation

23 pointsbfg_damien3y ago6 comments

Hello, I am a recent hire within a young startup in the US. I wanted to understand how equity compensation really works. I come from an academic background and haven't had much chance to look into the details of this.

One of the many questions I have in mind is the distinction between common stock and preferred stocks. And how do the absence/presence of these specific types have an impact on the eventual payoff, if there is ever one?

Also, how can one negotiate around the eventual dilution of the equity as the startup raises more money?

Is there a guide that goes through these details? I also wonder whether this kind o equity can be used for investment in other assets such as real estate for instance.

6 comments

romanhn3y ago

Holloway's Open Guide to Equity Compensation is a fantastic resource and exactly what you need: https://github.com/jlevy/og-equity-compensation. It's a lot, but there be dragons, so read carefully and future you will be thankful.

bfg_damienOP3y ago

Thank you very much! It does seem exhaustive but I almost prefer that.

dstala3y ago

Thank you!

solidasparagus3y ago

There are a lot of details, but here are some things you should probably understand:

- Post-termination exercise window. This is arguably the most important term that many people don't think about. https://zachholman.com/posts/fuck-your-90-day-exercise-windo...

- The costs of exercising options. Between the strike price and the taxes, it can be a lot. I've heard of but never used companies like SecFi that help with this.

- Whether you have the ability to sell on a secondary market. This might not be an option without approval from the board of directors.

- Whether you can early exercise. This can save a very large amount of money (but it comes with risk).

- Liquidation preferences. If the company raises $1M and sells for $1M, probably all of that money is going to the investors before any goes to you.

- Startups overwhelmingly fail. Every startup thinks they are the exception, but the failure rates say otherwise. I tell people to make sure they can live with that possible/likely outcome before joining a startup.

I haven't heard of anyone getting equity with dilution protection (but I'm not an expert).

ldjkfkdsjnv3y ago

Generally as a junior employee that isnt a founder, value the equity at zero.

kingcai3y ago

Hi, I wrote this blog post about startup equity a couple of years ago that answers a lot of the questions you asked, I hope you find it helpful.

https://jcaip.github.io/Startup-Equity-TLDR/

You negotiate around dilution by asking for additional equity grants, like you would for a raise / promotion. But in general dilution is a good problem to have because it means you are raising more money and growing.

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