Don’t let recruiters trick you (or how to evaluate an offer from a technology company)
Truly understanding the value of an employment offer, especially from a technology start-up, can be complicated. Given my experience running a start-up, as well as hiring at scale at Twitter, I recently gave a talk to my part-time coding bootcamp class on how to understand and compare start-up offers and thought it would be useful to put together a guide with links to more comprehensive sources on each topic as a resource for people who are evaluating offers.
A couple of overarching points before diving into specifics:
- If your goal in working at an early stage company is to get rich, I recommend getting a job at a hedge fund instead. Given that the majority of startups fail, the likely value of options — particularly at an early stage company — is unknown and has a chance to be $0. There are a number of reasons to join an early stage company (eg, career growth, being inspired by the mission, etc), however, assuming you are getting in early at the next Facebook is not a great one. That being said, equity in the company gives you a chance to participate in any upside, so is a key part of your comp package.
- Recruiters are evaluated and compensated by closing you as a candidate. As such, many (though not all) will bend the truth or obscure information to get you over the line. You should gather as much information as possible to make an informed decision; if the company you are talking to is unwilling to share this information, that is a serious red flag.
Please keep in mind that I am neither a lawyer nor a tax professional, so you should definitely consult both before signing a contract.
I’ve broken up this guide into several sections so you can jump around to the information most relevant to you.
- Base Salary: Though relatively straight-forward, this is likely the only guaranteed compensation you are going to receive. While most offers for similar jobs in similar industries will likely cluster together, sources like Glassdoor can give you comfort that your offer is in the right range.
- Bonus: Though there likely will not be a predictable bonus offered at smaller companies, more mature companies will often provide a target bonus as part of the overall comp package. “Target” generally means the bonus you can expect if you meet expectations and will often include multiples based on individual and company performance. Additionally, some companies will offer bonuses in the form of equity (which may have a vesting period).
- Sign-on Bonus: Companies utilize this lever to provide an incentive to sign, cover an expense associated with the job switch (relocation, payback of a bonus/grant), and/or close a compensation gap. This tactic is often considered “easier” for companies to deploy since it doesn’t create a recurring expense.
Vesting: Before jumping into the main vehicles for equity, let’s talk about vesting, which refers to the process by which an employee “earns” shares over time. Wealthfront offers a great discussion on vesting. Here are the highlights:
- The two hurdles an employee generally has to clear to vest are tenure with the company and some period of time after a liquidity event.
- A typical vesting schedule is over four years with a one year cliff. This means that the employee will receive 25% of their grant after one year of tenure with the company and then either 1/48th monthly or 1/16th quarterly after that. In other words, if you leave the company after 11 months, you will receive no stock.
- In addition, if the equity is granted with a company that has not yet had a liquidity event (eg, an IPO), the employee will generally not receive anything until some period of time after the liquidity event (a standard waiting period is 180 days).
- While a four year vest is typical, look out for non-typical vests such as five-year time periods, back-weighted vesting (Snapchat and Amazon have back-weighted vesting, for example) or even a requirement to be with the company at the time of a liquidity event (see here). These offers end up being less attractive due to time value of money, among other factors.
Common vs Preferred: as a startup employee, you will be receiving common equity, which has a lower valuation than preferred equity. This difference is due to the fact that preferred shares hold a liquidity preference — ie, in a liquidity event, preferred equity gets paid back before common equity. Read the full discussion here.
RSUs: Restricted Stock Units are the equity vehicles of choice for larger / more mature companies.
Definition — Check out the formal definition on Investopedia. TL;DR is:
- Employee does not receive the granted stock until vesting requirements have been met (more on vesting above).
- Shares can be sold at any time after vesting, subject to “blackout” periods set by the company, generally to prevent insider trading.
- RSUs are assigned a fair market value when they vest and are considered ordinary income. Thus, a portion of the shares are withheld to pay income taxes.
- Capital gains will also be due at the time of sale on any appreciation from vesting time.
Options: There has been a ton of ink spilled on this topic (I like this article), so I’ll hit the highlights.
- Definition: a call option gives the owner the right (but not obligation) to buy an underlying asset at a particular price (the strike price).
- What pieces of information do you need to understand the value of your options? Since it’s almost impossible to properly value options of an early stage company, the best we can do is strive for an apple-to-apple comparison.
- Strike price: this is often the 409A valuation , or the fair market value of common equity as determined by an independent appraisal.
- # of shares granted
- Vesting schedule (detailed above)
- Preferred valuation at latest round of funding
- Fully-diluted shares outstanding: per Investopdia, the total number of shares that would be outstanding if all possible sources of conversion are exercised. This is important to understand because your percentage ownership will decrease as the overall # of shares granted increases.
Value calculation: with the above information there are two ways to calculate the “value” of your shares so you can compare across offers. The basic assumption here is that, in a liquidity event such as an IPO, the value of the common and preferred equity will converge. I’ve included two different variations that can be used depending on what information you have (note this represents the intrinsic value and doesn’t include the time value of the options) :
- # of shares granted * (preferred valuation per share - strike price per share)
- (# of shares granted / # of fully-diluted shares outstanding) * preferred valuation - (strike price * # of shares granted)
What are other important considerations?
- Taxes with options are complicated so you should consult a tax professional, but here is a primer to get you started.
- Some companies will attempt to sell you on the fact that your equity is “worth” the latest preferred valuation without mentioning the fact that (a) common equity is worth significantly less than preferred (see the recent Softbank tender offer for Uber shares which was ~30% below the preferred valuation) and (b) you have to pay a strike price for your options, which means the money that will end up in your pocket is always the spread between the eventual stock price minus your strike prices. Don’t let recruiters fool you here.
- Time to exercise when leaving: If you leave a company in which you have options before a liquidity event, you will typically have 90 days to exercise those options. Given the combination of strike price and tax implications (discussed above) this can potentially cause a cash crunch (see this article about Uber). Some companies (like Quora and Pinterest) are moving to longer exercise periods, but this remains the exception.
- Ratchets: Some later stage financing will come with a ratchet attached, meaning that if the IPO price does not meet a certain level, the investor will receive additional shares at IPO until the originally agreed upon return is met. Why does this matter? Increasing the number of total shares dilutes the value of the shares you own. In the recent Square IPO, a ratchet kicked in for Goldman Sachs, hurting employees of the company.
- ISOs versus NSOs: Most companies award employees Incentive Stock Options (ISOs) as opposed to Non-Qualified Stock Options (NSOs). You should know what you’re getting and there is a good discussion on the implications of each type (as well as equity in general) here.
- Refresh grants: Generally, companies that care about employee retention will offer “refresh” grants to employees at various points (eg, as bonuses, as part of promotions and/or at regular intervals). Understanding this cadence will help you get a sense of how your equity compensation may evolve over time. Andy Rachleff has a good discussion on refresh grants here.
Vacations: I recommend understanding both (a) the company’s official vacation policy and (b) the amount of vacation employees actually take (though I wouldn’t have this discussion until after you have an offer). A lot of companies are offering “unlimited” vacation policies these days, so understanding how much vacation people generally take is key to getting insight into what the culture of the company is like — you want to be careful that “unlimited” doesn’t really mean no vacation.
Family Leave: Understanding the family leave policy for both primary and secondary caretakers is not only important if you are considering starting a family but can also give insight into how seriously a company takes diversity and inclusion.
401(k) match: It’s never too early to start saving for retirement and a generous 401(k) match can make a huge impact in the long run.
Level & Title
Level & title will be more relevant at more mature companies and are an important consideration as level will often dictate salary and equity bands (ie, what salary and equity grants for which you are eligible) as well as bonus targets. Title may be more or less relevant depending on your particular function — it’s good to know up front what this will be for clarity and proper expectation setting.
Considerations for More Senior Roles
Deep in the legalese of most employment contracts are terms you should at least be aware of, though most companies will likely not budge on these unless you are getting a c-suite or senior executive role.
- Non-compete + Non-solicit: Most companies will have terms that prevent you from working for a competitor within a set time frame following your employment with that company. Most will also have terms preventing you from attempting to hire people from that company within a certain timeframe after you leave (more details here). While hard to enforce in some states like California, these restrictive covenants are important to understand. If you can negotiate, ideally you should try to reduce this time period following employment with the company as much as possible. If possible, you should also negotiate to adjust the definition of “competitive” to be as narrowly defined as possible (definitely consult an employment lawyer for more advice here).
- Accelerators: Some employment agreements offer accelerators upon a liquidity event, so that vesting of equity will “accelerate” some agreed upon amount. There are two common types of accelerators — single and double trigger (if you’re interested, check out a full discussion of both here). Since potential acquirers dislike accelerators, they are not typical, but if you are going for a senior position, it’s definitely worth asking.
- Severance: For senior executive jobs, severance is common and typically looks something like 6–12 months of pay + COBRA. That said, severance is very rare for most positions, which are commonly at-will.
Some companies will put expiration dates on offers in order to (a) put pressure on the candidate to accept and (b) prevent a candidate from shopping an offer around. While one week is a reasonable time period, extremely short time periods like 24 or 48 hours should be a red flag. If an employer is pressuring you to take an offer without having a reasonable amount of time, there is often something they are hiding.
Another technique I’ve seen is for an employer to refuse to discuss compensation details until a candidate has verbally committed to the company. Again, this is a major red flag; while it’s great to want a missionary, not a mercenary, you deserve full information before making a decision.
Company Data Points
Besides the specifics of your offer, there are some important details to understand about any company you’re considering joining.
- Runway: Runway refers to how long a company has before it runs out of money. There are two components to understand here: (a) cash in the bank, and (b) monthly burn rate (eg, how much the company spends per month). Cash in the bank divided by monthly burn should give you a sense of how much time the company has. Typically, you’ll want the company to have at least 18 months of runway to provide some stability to your tenure there. Anything less than six months (or if a company is unwilling to share these numbers) should be a serious red flag.
- Lifetime value / customer acquisition cost: Ultimately, having an understanding of a business’s health and future prospects is useful to deciding if you want to dedicate the bulk of your time to working there. Digging into some key metrics on business health can really help here. One I like in particular is LTV / CAC, which measures the amount of money a customer brings into the business over their lifetime divided by the cost to acquire that customer (healthy businesses have a ratio of 3+ meaning the business can sustainably pour money into growth). This metric is especially useful to understand by various cohorts (here’s a primer on cohort analysis).
Considerations Beyond Compensation
There are numerous other considerations that will likely have a much greater effect on your day-to-day happiness beyond comp. A few that are particularly important to consider:
- Your direct manager: You may have heard the saying, “people quit managers, not companies.” Your direct manager is likely to be a huge source of day-to-day fulfillment in your job, so take the time to understand if (a) you will work well with your manager and (b) your manager is someone from whom you can learn.
- Company mission: Author Dan Pink writes about three factors that drive intrinsic motivation: Autonomy, Mastery & Purpose (check out his TED talk here). The company’s mission will feed into your daily sense of purpose, so understand if the company’s mission resonates with you.
- Company culture and values: Do the company’s cultural values align with yours? Beyond reading their website, try to get a sense of what is important to them by asking both future co-workers and management what they value, what the company values, and by looking for common threads in their answers (here are a few more suggestions).
Simple, right 😉? Offers will vary significantly from company to company as will the amount of information available to you. To give you an example of offer details done well, I love what eShares is striving for in their process. Just remember: