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Startup Equity: Do You Know What You Need To Know?

Original post made by Chris Zaharias, Crescent Park, on Oct 14, 2011

Palo Alto is perhaps home to more startups per capita than any other city in the world. Hardware, software, SaaS, biotech, clean tech, you name it, there are PA-based startups building it.

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Posted by Chris Zaharias
a resident of Crescent Park
on Oct 24, 2011 at 10:20 pm

At least a third of the 24 survey responses I've had so far are from people who read this PAOnline post, so perhaps you'll be interested with some brief highlights from the survey:

Several key takeaways:

-37.5% of startup employees don't know what % of equity they have. Imagine if 37.5% of stock market investors didn't know how many shares outstanding there were in the publicly-traded companies they were investing in...
-70.8% don't know what preference structure their startup has. That's like not knowing what your insurance deductible is.
-50% of startup employees don't know how their % equity compares to others in similar roles. Given that the same group expects to make $100K-$1M on equity while working at their startup, you'd think know the comps would be important in negotiating, right?
-45.8% don't know what a trigger is, and only one third have one. People - you may as well get down on your hands & knees and pray before signing your offer letter, 'cause that's how much control you'll have over the outcome if you don't understand triggers.
-62.5% of startup employees have had one or more 'exits'

Every week or two I talk with someone who works at a startup that's recently been acquired, and typically they're in various states of realizing that they had less equity than they thought, were going to make less than they thought, and had less control over the outcome than they thought. In many cases, Common share-holding employees find out in the M&A process what they *should* have known *before*, and yet that equity is one of the mean draws of working at startups.

Anyone have any personal anecdotes? Me; in 1995 when I joined Netscape I virtually didn't know the difference between an IPO and a PPO. At another job, I was the only one out of over 100 employees to ask & find out what the exact number of shares outstanding were. More recently, I was told the preferred shareholders had a 1X preference when they actually had significantly more than that.

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Posted by Chris Zaharias
a resident of Crescent Park
on Nov 9, 2011 at 11:22 am

Here's a link to the survey results (34 so far):
Web Link

and here's a new blog post I wrote analyzing the results:
Web Link

Judging by the number of Palo Altans who've taken the survey, I'd say this topic is very close to home.

Like this comment
Posted by sean
a resident of another community
on Oct 10, 2012 at 1:27 am

We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equityso that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer's book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator.

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