Decoding the startup offer
As a woman in technology and an advocate for the underrepresented in the workplace, it is empowering to be transparent about your compensation with your peers and colleagues. While it’s easier to do so when you’re comfortable with your current compensation, you don’t know how much your information can help a peer in need. It’s not uncommon for women and underrepresented folx in the workplace to feel like they can’t negotiate their compensation, or they don’t know what their peer groups are making. But I’d like to normalize the conversation around compensation a little more, to help my brothers and sisters achieve the next level in their careers.
Well, I don’t plan on doing so right here, but I do want to take the first step by decrypting startup offer letters, and sharing a bit about what I know about the space. I am not a financial advisor, I am definitely not the expert on stock options and personal finance, but I want to share the information I know plainly and explicitly, as I would with a close friend.
Startup compensation is generally broken up into two or three parts, base compensation which is what your biweekly take home salary, equity and sometimes cash bonuses. Honestly, I wouldn’t expect cash bonuses in most startup offers, it’s pretty rare. From my experience, the startup offers I’ve received haven’t been heavy on the cash bonuses, in fact of the 5 offers I’ve received from startups (spanning from B2C fintech, B2B fintech and B2B SAAS companies throughout the US), I’ve never received any form of cash bonus for product manager/ BA offers. And I’m not considering relocation bonuses as a part of compensation, as it’s not very common for startups to offer this, especially given the recent shift to remote-first culture.
What I think is the most confusing and not as discussed part of startup compensation is the equity portion. I’m not the expert here, so again, just sharing advice as I would with a friend. Startups usually offer ISO, NSO or RSU stock options, while larger public tech companies generally offer RSU’s as a part of their compensation package.
Now honestly I’m really not the expert on the differences between ISO and NSO options, but I can tell you what I do know in plain English. RSU’s are the most desirable form of equity. ISO and NSO’s are offers of discounted stock units, RSU’s are basically free stock units granted on a schedule. So when you receive an offer of ISO and NSO’s, the company is saying “hey, work for us and we’ll let you buy a slice of this company for cheap!” and with RSU’s, the company is saying, “hey we’ll give you these stocks for FREE on a schedule if you work for us!”.
The schedules are generally standardized between the various types of equity (RSU, ISO and NSO’s), four year vesting schedules with a one year cliff. Which, my friend, in plain English means that you have to wait one year to receive your actual stocks or the option to buy your stocks, then more stocks will vest on a monthly or quarterly basis after that until you have received your entire grant, which is generally four years. Afterwards, you’re generally considered “fully vested” which means that you have the right to buy all of the stocks in your initial equity grant, and there may not necessarily be financial incentive to stay at the company you’re working at.
Now we’ve established the fundamental difference between ISO and NSO’s and RSU’s, the difference between ISO and NSO’s is primarily a tax difference. That means that in order to get the ISO and NSO’s, you still need to pay for them out of pocket, but with ISO’s, you only need to pay income taxes on them when you sell them, whereas with NSO’s, you pay at the time of purchase based on the market value of the stocks.
We’ve got the basics now, and if you’re my friend, I’d say that RSU and ISO’s are generally preferred for compensation and more common than NSO’s, unless you’re a contractor.
Moving into what the equity means, generally when you receive your offer letter, you don’t have your equity grant yet, which is where all of the details of your compensation lies. So you’ll need to ask your hiring manager or recruiter for more intel. I’d say that generally there are a few key pieces of information when accepting compensation with ISO equity. First of all you need to know what the strike price is, basically that means how much you will need to pay for your stock options. Second, you need to know how many shares are outstanding, or much of the pie do you have and how much of the pie there’s left. Think about what it was like buying an Apple stock in the year 1980, you were one of the few folks who had the coveted stock, and now look at what it’s worth! Basically it’s better if you’re not “diluted” or if you’re not one of many thousands or millions of fish who have already dipped their feet into the pool. Finally you should need to know what their current valuation is, as that’ll generally tell you the value of your shares.
Most of the time recruiters or hiring managers will give you general ballpark information on the above, but you should be wary if they’re cagey about the situation. It’s only fair for you to know what you’re signing on for, and when in doubt, negotiate for the greater cash offer because you have to look out for yourself, and you can’t if they can’t be clear with their compensation offering.
I’d hope that you’d be able to come out of the conversation clearly understanding:
- How much of the pie you have the potential to own
- How much of the pie is left, and how much it’s generally worth
- How much it’ll cost for you to buy your slice of the pie
It’s also common for startups to refresh your equity and give you more as you gain tenure at the company. But when you do receive additional equity in the future, it may not be for the same strike price that you’ve received in the past. That’s because for every round of funding, there are more folks buying into the pie, at theoretically higher values. So your pie is being split into smaller and more expensive pieces.
Hopefully you know a little bit more about the potential monopoly fortune.
