If you’re considering joining a startup, you might be wondering what you can expect in terms of compensation. Unlike established companies, startups typically can’t offer big salaries or traditional benefits packages. Instead, many startups offer equity – a way to give employees a direct stake in the success of the company.
In this article, we’ll explore what startup equity is, how it works, and what you should expect if you’re thinking of joining an early-stage business. We’ll also take a look at some of the possible pitfalls and questions you should be asking before accepting a job offer.
What is Equity in a Business?
Having equity in a business means that you own a small portion of that company. It’s typically given out in the form of stock options, and if the company does well, your equity could be worth a significant amount.
Employees at scaleups like Klarna and Revolut have seen the value of their equity climb into the millions of euros as their employers’ valuations have soared. These employees are known as “paper millionaires” because while their stock options might be worth €1m or more, they’re not yet able to cash them out easily, because the businesses are still privately owned.
When and How to Cash Out Your Equity
Employees are typically able to cash out their equity in two ways: when a business is bought by another business (an acquisition), or through a public listing (where a company lists and sells shares on a public stock exchange). These are known as “exits” or “liquidity events,” and they represent the moment that startup employees are rewarded for their hard work and for taking on the risk of joining a young business.
How Does Startup Equity Work?
When a founder or co-founders of a startup start planning how to divide the ownership of their company, they need to consider three main buckets: the founders, the employees, and the investors.
“It’s typical for employee stock option pools to account for 10 to 15% of the company’s overall available equity – though in some cases it can be as high as 20%,” says David Reuben, director of London-based law firm Postlethwaite Partners.
The amount of equity you’ll be given as an employee of an early-stage startup will depend on how senior you are when you join. Typically, C-suite roles will be offered 1% of the company, while more junior employees can expect 0.2-0.7%.
What Could Go Wrong with Startup Equity?
One stock option term employees should be aware of is the “exercise window,” which refers to the amount of time you have to exercise your options after leaving the company. Another potential pitfall that employees of early-stage startups need to look out for is something called “buyback rights,” which allow companies to buy equity back from employees without their say so.
Why Understanding Employee Equity Matters
As Europe’s startup sector matures, stock option standards and benchmarks are now being established. But European tech workers tend to be less aware of the importance of their equity package than US workers.
“For us, it’s about saying, ‘You matter a lot to us, you’re building a tonne of value with this company, we want you to have every option to have a life-changing financial event with us’,” says Erin Nixon, VP of strategy at workplace mental health company Oliva.
Overall, if you’re considering joining a startup, it’s important to understand what equity is, how it works, and what you should expect in terms of compensation. By being informed and asking the right questions, you’ll be better equipped to make the right decision for your career.
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