Hi,
I'm expecting an offer from an early stage start-up. Would I sound unreasonable to see their cap table? Are there other questions that I can ask that can help me determine what % of the company I'd be getting in this stage?
Thank you!
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I generally ask these questions:
1. What was the pre/post money valuation of the company at the last round.
2. How much runway do they have right now including already planned increases in burn (i.e hiring plans for the quarter/year).
3. What % interest in the company would my options grant represent? (you use this in combination with the information about the valuation to determine value of said grant)
4. Who are the major non-founder investors in the company? (this is generally public knowledge because investors love to announce these but it's worth asking). Sometimes the CEO will also divulge details about how they work with their investors, level of involvement, board seats etc. CEOs love to talk about these things for some reason.
5. When do they plan to raise money next and do they feel like they are meeting the metrics required for an up round? If not then how does my hiring or other planned hiring seek to address that?
The last question is actually really important and generally how I a) tie my employment to actual value at the company and b) justify my compensation in negotiation stage and/or later negotiations when I can show how my performance has directly affected these important metrics.
Any company worth their salt at the sort of stage where these questions are relevant will answer these, the degree of detail will depend on transparency of the leadership.
Generally speaking when looking to join a company of this size you will be meeting with the CEO, usually after meeting everyone else and before negotiating compensation - that is when you ask these questions and this is exactly what that meeting is for.
If they don't want to answer these then take that as a sign things are worse than they seem and perhaps negotiate for a more cash rich compensation and don't bet hard on the companies future.
Whatever went into taking a down round or having to sign off on something worse than a 1x liquidation preference from a VC is bound to be a touchy subject so I'd word the question tactfully.
What’s the fully diluted number?
How many shares am I getting?
Those are the important questions.
Assume you get diluted for every fund raise.
Of course. The company may still issue more shares but in those cases everyone is getting squashed anyway
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That said, things you could ask for could be: the number of fully-diluted shares (to calculate your ownership), whether they have any convertible notes and what the terms are, what their last valuation was (pre or post-money), how much runway they have at current burn, whether existing investors have any liquidity preference, etc. They may not answer all of those, but they should be able to give you enough to know where you stand.
This is something I've always been confused about. Suppose there are 100M fully diluted shares and you as an employee are granted (and vest) 20,000 shares, so you have 0.02% of the total shares. And suppose the company has a private post-money valuation of $10B and then IPOs to a stable $10B market cap. So you would think (0.02%)×($10B) = $2M payout.
But! This doesn't include the fact that during an IPO, the company creates additional shares, right? And none of these new shares are sold directly to the public; they are first sold to banks or other prioritized buyers, and only then is the public able to purchase shares from anyone who owns them. Would this not decrease the employee payout? Assume the company creates 100M new shares for the IPO at a price of $50 per share. Now the banks pay the company (100M)×($50) = $5B for those shares, and then they sell them the next day on the open market. The final share price for the day would now have to be $10B/200M = $50 to have a market cap that is equivalent to the private valuation of $10B. But that means the employee's payout is actually $1M, not $2M.
Is my understanding of this correct, or am I missing something? It seems like you can't just take your percentage of private shares and multiply it by the private valuation to estimate your IPO payout.
I.e. suppose a startup grants you 20,000 shares. There is a big difference between the startup having 1M fully diluted shares (2%), 100M (0.02%), and 100B (0.00002%). In the first two cases you're getting a reasonable share of the startup (depending on the stage); in the last case you are likely getting scammed.
If that’s the case, and they issue 100M new shares on IPO, then the IPO is effectively a serious “down round” that halves the value of all shareholders pre-IPO.
More realistically would be that the post-money valuation after IPO is $20B or more.
however no company will be able to predict future dilution so this is not really something they can tell you with confidence.
the only thing you can do is gauge current state of the company (funding, readiness for ipo) and try to estimate future dilution but even this is non trivial for early stage companies.
But capital holders (investors) don’t care, because they hold the power in venture backed companies.
The second reason is that the valuation of the company changes (typically, it should go up at each round, but in our current climate, down flat-rounds are very likely for many companies).
So your % ownership should go down, BUT if the valuation goes up by the right amount, the value of your ownership should go up too (ie your price-per-share goes up).
Like any funding round, there is dilution.
The value of your equity is premoney_percentage x premoney_valuation or postmoney_percentage x postmoney_valuation.
As you say, don't make the mistake of premoney_percentage x postmoney_valuation.
https://www.investopedia.com/terms/i/ipolockup.asp
Not to mention, you probably don't hold shares, you hold options, unless you were clever/daring/solvent enough to exercise early. Substantial dollar amounts involved, and big tax implications.
So really it's a question of what the share price is when you're eventually allowed to sell shares, minus the cost of options exercise.
Their level of secrecy should tell you how serious they are. If they are too opaque, my advice would be to switch to a mostly cash comp.
How an employer responds to a difficult question that they don't want to say "yes" to will tell you volumes about their skill and demeanor. And if they gladly answer this question, keep pushing until you find one they won't answer.
If someone revokes your offer because you asked a question, you just dodged a HUGE bullet.
I don’t think being secretive about the exact details of the cap table is indicative of anything.
They should be able to tell you broadly how many shares there are and how valuable your equity grant is tho.
Why is this?
Isn't it pretty much up to the founder and board whether you get diluted (and how much) in the future, and whether any number you see there continues to be accurate (for your own purposes, or others in the table) or not? And unless you're one of the top people at the company, your net worth is going to ride largely on how much of a success the company becomes, not your particular % / exact small share of it.
The VCs and next funders care about the exact numbers. What would you do, use it to negotiate more?
I suppose you could take it as some indication, but it's by no means some kind of binding assurance of the future. This is a thing I have a fundamental gripe about SV startup practices -- there are a lot of things associated with being employed at one that have the appearance of legal obligations and securities regulations to the novice eye, but under the surface they are not at all, and you are largely at them whim of whoever owns the company. The value of your options could evaporate in practice, even though you hold "100,000" of them (either through decline in company's future, or active dilution, or the CEO just doesn't like you).
Or am I exaggerating what I feel after a decade in the area?
There are a lot of questions that people ask, where I feel, is it even meaningful information you would act on or are you trying to feel better about something? (see all the useless 20-year-old-something comments/questions in threads after some company CEO announces the possibility of layoffs... "Can you share the exact formula by which people will be laid off?" "Why are you doing this in successive rounds and not all at once?" etc. etc. What would you do even if you knew the answer?? )
If you take the lotto ticket perspective, you should do everything you can to maximize your odds and part of that is doing as much diligence as you can on the company.
If I were joining as a first/early engineer, or at a senior level - particularly early stage - I'd want to see the cap table.
Startup options are about as valuable as lottery tickets - worthless, unless by some lucky chance they're not worthless.
If they're just an employee then you can argue "who cares" but also "why not?". If they're offered any options I'd say yes they should ask.
Yes, but if your grant is in the same class as all the other regular folks (vs founders, C-suite, and investors), your protection, such that it is, is that the founders want to keep their good reputation.
If they choose to dilute the normal stock classes to nothing for their own benefit, word gets around and it will be much harder for them to hire at their next startup. If they have no other choice than dilution to keep the company afloat, and can demonstrate that to the rank and file, that's still a negative signal, but less of one.
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That's a question I've always used personally, and I've refused offers from companies that wouldn't answer it.
That said, I don't think I've ever interviewed with a startup that gave me an offer with equity that wouldn't share # shares outstanding, amounts invested, and liquidity preferences. If a company won't share that at the offer stage, I'd have concerns.
We do have one small angel investor from our first funding round that asked us not to publicly name them as an investor, so we just don't include them when we share the cap table. That's a rare situation, though, in my experience. This investor is relatively high profile in their non-angel-investing life and they don't want to publicize angel investments.
And the number of fully diluted shares, the ownership percentage that the prospective employee's grant equates to, the strike price of the options, and the price that investors paid (and valuation) of the last round should absolutely be shared with you.
If you have a question I'd just ask it straight out. I mean, you're at an early stage startup. It's a ton of risk for you, so you should know what you're getting.
But remember, 2% of $0 is still $0.
A 1% chance that equity in the company is worth anything, ever.
A 100% chance that whatever percentage you are promised after vesting will be diluted by an unknown multiplier.
Together, this means that you should consider the cash equivalent of the promised shares as something between one dollar and ten bucks. Don't let it convince you to reject a cash offer elsewhere, or a cash + actual stock plan in an established company.
What you should ask for is a percentage equivalent to other people of about your capabilities working for the company, and a promise to continue to make you at least equal to similar folks hired in the future. Remember that business promises are made in writing and signed by a responsible officer of the company.
Actual numbers right now are likely irrelevant.