Just read this post called “Earn or Learn” by Mark Suster that I’d had open in my reading browser for a while.  I found it worth sharing for one reason; it removes the ambiguity around startup earnings.  He addresses the situation that young people often stumble into – “I’m going to work at company X and they’re giving me stock!”  Suster dives right in –

Yet I often hear people asking about these types of opportunities express their questions to me whether I think this company is going to be a big hit.  It’s clear to me that many people confuse learn with earn.  I will do a simple calculation for them that goes like this.  OK, you would own 0.25% of the stock.  They raised $5 million in their B round.  Let’s assume that the company raised it at a normal VC valuation, which means it gave up 33% of the company and thus $5 million / 33% = $15 million post-money valuation.  If you never raise another round of venture capital (a big if) and if your company is sold for the normal venture exit ($50 million on average for 200 or so annually that get sold) then what is your stake?  $125,000.  Yup.  Simple math would have solved that but people rarely do the calculations or think about it.

And let’s say that it took 4 years to exit – that’s $31,250 / year.  Now … these are stock options and not restricted stock so you’ll likely be taxed at a short-term capital gains rate (see comments section for why).  In California that averages around 42.5% so in my state after tax you’d make an extra $18,000 / year and that’s in a positive scenario!  BTW, this ignores liquidation preferences which actually mean you’ll earn less.

I had a friend get a job offer with a startup recently that had received some funding , they explained that they paid a slightly lower salary but that he got stock options with the company, his question to me was how do I know if it’s a good idea?  I thought about for a minute, and I didn’t exactly know how to decipher the startup charade into an actual number either.  We ended up just asking the CEO directly, but knew there had to be a simpler breakdown of what was actually going on in such a situation.  Mark does a great job of doing just that.  Give it a read, and don’t be intimidated by the intentionally confusing chaos.