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.