Working at a startup comes with inherent risks. Most startups fail. You will never have the same job security at a startup as you will at a corporation. That being said, there are rewards to be had if the startup where you work makes it big. That’s where equity comes in.
But what is equity, and why do startups offer it? And how can you make sure you’re getting the best deal?
When it comes to public and private companies, there are different types of equity. For example, public companies have stocks that can be bought and sold on the stock market, while private companies have restricted stock units (RSUs).
Companies usually give startup equity to their employees to thank them for helping the company grow. It’s also a way to motivate and retain employees since they know they can cash in on their equity if the company is sold or goes public.
What Is Equity and Why Startups Offer It to Employees
In simple terms, it’s a stake in the company that you own. It can be in the form of stocks or RSUs, which entitles you to a portion of the company’s profits. The amount of equity you receive is usually based on your position and experience and how long you’ve been with the company.
Employees generally only receive fractions of a percentage of equity, but if the company is successful, it can be worth a lot of money. For example, if you have 0.5% equity in a company that’s sold for $100 million, you’ve just made $500,000.
So, why do startups offer equity to their employees?
The answer is simple: to attract and retain the best talent. Startups often have tighter budgets to allocate salary and equity is a nice bonus in the total compensation package.
This is especially true for people who are early in their careers and are looking for an opportunity to learn and grow. Startups, being smaller and newer companies, often throw their employees feet-first into their work. Having a stake, even a small one, in the success of the company is a great way to incentivize the employees to put out their best work every day.
When to Negotiate for Equity in a Startup
Equity is a valuable asset, but it’s important to weigh it with the rest of your compensation. Do not let equity replace part of your salary, rather use it as a part of the negotiation process. Negotiating equity falls more in the lines of non-salary negotiation.
Not all startup jobs come with equity. If you are content working with the compensation and benefits package that doesn’t include equity, you can focus your efforts on negotiating salary and other parts of your package. You have a certain amount of leverage in negotiations, and it’s up to you to decide whether you want to push it towards gaining equity in the company or increasing other compensation.
How to Negotiate Equity in a Startup
- Be realistic. Don’t expect to receive a high percentage of equity just because you’re working for a small company. The equity you receive is usually based on your position, experience, and how long you’ve been with the company.
- Do your research. Before you start negotiating equity, determine how much equity is typical for your position and experience level.
- Be prepared to compromise. Don’t worry if they say no. Use the leverage you have to create the best compensation package you can.
When negotiating equity, it’s important to remember that you’re not just asking for a salary bump — you’re investing in the company you’re working for. If the company is not a good fit for you, you can focus on other aspects of your compensation package and use it as an opportunity to grow professionally and increase your expertise.
Work With a Negotiation Consultant
Joining a startup can be a great way to jump-start your career, but most professionals don’t take advantage of negotiating equity. If you’re offered equity, it’s essential to know how to negotiate for your interests. A negotiation consultant can help you get the best possible deal. Pathrise provides one-on-one negotiation support and advice on how to increase your equity offer. Learn more and connect with a negotiation consultant here.