You got a job offer at a startup. Here are the questions you should ask

Getting
a job offer at a startup is exciting. But making sense of the pay
package startups offer can be daunting and
confusing.
REUTERS/Mike
Blake

• Getting a job offer at a startup is exciting. But
  making sense of the pay package startups offer can be
  daunting.
• Those offers are often heavily weighted toward equity
  grants, or stock options, rather than cash salaries.
• Henry Ward, CEO of Carta, says job candidates tend to
  focus too much on how much those grants are worth in the near
  term and not enough on what they could be worth in the
  future.

Henry Ward, a startup founder in San Francisco, said he spends
half of his time meeting with potential hires for his company
Carta.

Even at Carta, whose service helps companies manage their equity
awards (also known as stock option grants) to employees, Ward
meets plenty of candidates who say they don’t fully understand
how to make sense of a startup pay package. Ward can’t blame
them.

In lieu of paying high salaries, startups typically offer
candidates equity in
the company in the form of stock options, or other forms of
equity stakes such as restricted stock units.

Options give employees the right to buy stock in a company at a
set price at some point in the future. If the company grows and
becomes more valuable, the value of the options increases.

Understanding how much an offer of options or other equity is
worth starts with asking the right questions, according to Ward.

The importance of looking ahead

Workers considering an offer letter from a startup often make the
mistake of calculating what their stock options or equity grant
is worth today, Ward said. But that math really doesn’t tell
you much.

“What matters far more than this math is what do you think this
is going to be worth in the future,” Ward told Business Insider.

Henry Ward is cofounder and CEO of
Carta.
Carta

Let’s say you get a job offer at a Silicon Valley startup.

You fire up the calculator and discover the equity grant
you’ve been offered is worth a specific amount, based on the
company’s valuation. But as investors continue to pour money into
the startup, raising its valuation higher and higher, the value
of your stock options could reach many multiples of that figure
in the future.

If a company really wants to hire you, it’s the startup’s task to
convince you to accept the position because the team believes
they’re building the next $1 billion “unicorn.” You stand to make
a lot of money if you get in at the company early, they
say. 

Read more:

Learn the math of how to value a stock options
grant

Of course, most startups fail. In an analysis
of 1,098 tech companies from CB
Insights, more than 70% of startups that raised their initial
seed funding between 2008 and 2010 fizzled out because they
didn’t raise any additional funds and weren’t acquired. The
chances of any startup becoming a so-called “unicorn” with a
valuation of $1 billion or more is less than one in 100, CB
Insights reported.

“When you pick the wrong startup, your stock is worthless,” Ward
said.

So, why should you believe the CEO’s optimistic forecast?

Ward estimates that 90% of the time he spends recruiting is
dedicated to “helping [job candidates] understand what the value
of stock could be and what it could mean to them
financially.”

He typically gives them the same presentation he shows Carta’s
investors. Ward runs them through the company’s metrics, the
investment thesis of the venture capitalists that back Carta, and
his justification for the company’s next round of financing.

He explains why he thinks Carta will be assigned a particular —
generally much higher — valuation when it next raises funds.

Read more:
 A
founder-turned-venture capitalist reveals the questions you
should ask before joining a ‘unicorn’ startup

Ward encourages anyone considering an offer letter from a startup
to ask for the company’s last preferred stock price, the employee
strike price, and the trajectory of the business. He says job
candidates should do their own independent research, too.

“Not all stock is created equal,” Ward said. “What matters far
more than how much you get is the quality of that stock.”

See also: