Career

How to Negotiate Equity at an Early-Stage Startup

Yes, you deserve it. No, it's not free cash. Let us explain...

Imagine that there is an early-stage startup where you really want to get in on the ground floor. So, you ace the interviews. Your references sing your praises. You negotiate for the salary you want. And now you’re 99.9% sure that an offer letter is coming your way. But there’s one last hurdle to jump over: How do you ask for equity in the company?

Yes, you should be asking for equity, which is a type of ownership of a company based on the value of its shares. The compensation package at an early stage startup typically includes equity, as well as salary and benefits like health insurance.

During the hiring process, you can ask for equity from your manager, who may even be the founder or CEO, depending on how young the startup is. The founders and their investors hope the startup eventually goes on to liquidity event (when equity converted into cash for the business owners, i.e. you and the investors). If this happens, you could make some money depending on the value of the shares you own.

How does equity work? The first thing to understand is that equity is not cash. Rather, it usually comes in the form of stock options called common stock. “No employee is ever ‘given’ equity,” explained Matt Cynamon and Macia Batista on the General Assembly blog. “Instead, employees often receive stock options, which are the option to purchase equity in the company at a heavily discounted price. You also are not given all of your stock options up front; rather, you earn an increasing amount of options over a four-year period.” (This is called a vesting period.)

When you’re in discussions with an early stage startup about a job, equity could be part of your compensation package. Therefore, you’ll want to make sure you know how to negotiate for yourself in the best possible way — and make sure that if all your hard work pays off, you see a payday, too.

Equity is about “your sweat, your risk, your life, your commitment, your loyalty,” explained Celia V. Harquail, Ph.D., author of Feminism: A Key Idea For Business & Society. Another way to think about it? “It’s like being in a band,” she continued. “We don’t pay the bass player less because her instrument has four strings, right? The band depends on the bass player, just the way they depend on the drummer. So maybe they should all get the same share in the band’s profits”

Let this philosophy guide you when you negotiate, Harquail said, adding, “Be a little bit bolder than you might be normally.”

Here are some tips on how to ask for equity at an early stage startup:

1. First things first: Realize that the odds are not good that there will be a big payday.

Look, we hate to be the bearer of bad news, but it’s important to understand that working at a startup is risky. A commonly cited statistic is that 90% of startups fail, although what “failure” means can depend on the context. Nevertheless, the reality is that most startups do not go on to become the next Blue Apron or Glossier.

In other words, it is entirely possible that you will negotiate for equity but the startup will never reach a liquidity event and you will end up with nothing. That is just a financial risk you take in the startup world.

Of course, you should still advocate for yourself at the negotiating table. But you also need to be realistic that you won’t necessarily be retiring to Tahiti in the next couple of years. A startup is not a get-rich-quick scheme; it takes some serious hard work.

2. Don’t shortchange yourself on salary.

With the previous tip in mind, you should negotiate for equity with the knowledge that it is not worth anything yet. It only might be worth something in the future. “It’s not compensation until you have it in your bank,” Harquail explained. “While it’s still the possibility of equity or the potential of equity, it’s nothing.” Don’t shortchange yourself when it comes to negotiating a salary, because that money is what you need to live on in the present.

3. Negotiate for equity as if you are an important part of the company’s growth — because you are.

If the company that you joined early on becomes one of the small percentage of startups to be financially successful, it will be thanks to your hard work. That’s a really good reason for you to negotiate for a good equity package.

Don’t let anyone convince you that some roles at an early stage startup are less important than others (and thus less deserving of equity). “Especially at an early stage startup, the number one thing that she has to remind herself is that if she’s there, she’s an important part of making that business grow,” Harquail explained. “There’s nobody at an early stage startup who isn’t important to making that business happen,” she continued, noting that money early on is “precious.” Negotiate for what you deserve.

4. Understand the terms and conditions of the kind of share you get.

“People tend to imagine that all shares are equal and they’re not,” said Harquail. We mentioned earlier that equity that is typically offered to employees is called common stock. But, Harquail continued, “in some companies, there will be different levels of shares that’ll be offered to higher-level managers or to founders and co-founders or the first five employees.” These are essentially “a different class of share” that will be more advantageous to you if there is a liquidity event, she continued. No matter what kind of equity you are offered, make sure that you fully understand the terms and conditions.

5. Conduct your negotiation in person or on the phone.

We live in an era when people learn about jobs over Twitter DMs, Facebook groups and Instagram. The prevalence of social media in our work lives can make it seem as though everything about our careers are casual. This is dead wrong: Any career-focused negotiation, including one about equity, is a serious discussion that should be done verbally.

“I don’t care how casual the conversation style and the communication style is in a company, [negotiation] is important and it should not be left to the most casual modes,” said Harquail. “It deserves high quality, full context conversation.”

It is acceptable, however, to use email to follow up on the details — but only to follow up.

6. Rely on your network for additional info.

When it comes to money stuff, should you trust what a company’s founders tell you or should you solicit your own information? A good standard is to trust, but verify with your own research.

Discreetly acquire more information about similar companies to ensure everything checks out OK. “I think that this is a really important way to use your network of women and close friends at other startups to find out what they know,” Harquail explained. “Valuations and equity tables and all of that stuff is a lot of fancy math and it is hard to know what’s real.” People in your network may be able to see potential red flags before you do.

Knowledge is power and you can advocate for your professional well-being more effectively with data. “It’s always good advice to be as educated as possible,” Harquail said. “And that means [having] three examples, five examples [of] colleagues in similar situations, what kinds of equities they were offered and also what kinds of negotiations they had.”

7. Give yourself time to decide whether to accept.

When you’ve been waiting to hear about an equity offer, you might feel compelled to accept it immediately out of gratitude or relief. Don’t do this! Give yourself some time to decide whether you want to accept the offer (which might entail circling back to your network to get their point of view). “Personally, I’m a big fan of saying, ‘Let me think about that — this is too important to decide in an instant,'” said Harquail. That way you’ll ensure you don’t agree so hastily that you shortchange yourself.

8. Don’t be afraid to make a counteroffer.

Whether you decide to accept the equity offer you receive or make a counteroffer for more money is up to you. If you decide to make a counteroffer, Harquail has some good suggested scripts to follow. You could try saying “I know that often you’re not expecting people, or even women, to negotiate. And I know that this is really important, so I want to come back with a counteroffer.”

You could also frame your negotiation as another skill you bring to the table, which just might impress the person who is about to hire you. Something like, “This is the only time you and I will be opposites in a negotiation and I’m going to negotiate as hard for myself as I will for our company in every other situation” is an excellent way to frame it, Harquail said.

When you ask for equity at your company, make sure you that you feel good about what is finally decided upon. As First Round Review put it, “The best negotiation is when both sides feel like they won.”

9. Have a lawyer look over your equity package before you sign anything.

Hire a lawyer who specializes in startups to look over your package after you ask for equity in your company. Why should you do this? “Because people make mistakes,” warned Harquail. “In crafting offers, people overlook stuff and sometimes people are just — pardon me — [jerks].”

That’s not to say that you should expect to be cheated. However, it never hurts to have a second pair of eyes to look documentation over. (And of course, you should never sign any documents that you have not read or that you do not understand).

Don’t have a lawyer? Try looking for such an attorney on a site like UpCounsel, which allows you to search for startup lawyer by state. Fundera also provides options for finding a startup lawyer. Although these resources seem targeted towards startup founders, they could be worth checking out to find someone who will help an early employee.

10. Don’t be too hard on yourself if it doesn’t work out in your favor.

We’re all doing the best we can do at the negotiating table (and in life). Harquail warned against putting too much pressure on yourself when you ask for equity in your company. “It is high stakes, but it is not the end of the game,” she explained. “If it doesn’t work out the way you expect, there are going to be other opportunities. If you don’t get what you really need, you can stay for six more months and then find a company that values you more.”

Of course, you should not make this mindset apparent to your employers — no one wants to hire somebody who is half-way out the door! But it is an idea that you can keep in your back pocket. Startups, after all, are a lottery ticket. You can always buy another one later on.

Final thoughts on how to ask for equity in your company

When you ask for equity in your company, come prepared. Remember to do your research beforehand, be ready to make a counteroffer and have a lawyer look over your package before you sign anything. If your startup is one of the lucky ones that goes on to become a success, you deserve to get everything that you earned through your hard work.

Jessica Wakeman is a journalist who focuses on women’s social, cultural and political issues. Her work has appeared in Bitch, Bust, Bustle, Glamour, Rolling Stone, The Cut, The New York Times, and numerous other publications. You can read her work here.