I’m working for equity at a startup, The founder wants my stock to vest, how can I make sure that I’m not fired before the cliff is up?

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JASON LEMKIN

I think he is just confused.

My general rule, is when you work for equity instead of cash, you should get “2x” the value of cash to account for risk.

Put differently, imagine you are going to work for 4 months full-time for equity, at the equivalent of a $120,000 salary. That’s $40,000 in “equity” in total, or $10k per month.

I like to then multiply that by 1.5x or 2x, to $60,000-$80,000 in total. The 1.5x-2x factor accounts for the risk in a startup that has no cash to pay you.

And then I like to pay that in stock based on either the last valuation of the company if there was one, or the next/first round if there hasn’t been a fundraising yet.

So if the company then raises at a $2m valuation, you’ll end up with 3%-4% of the company ($60k-$80k/$2m).

On a percentage basis, that may sound like a lot to the founder, at least, in retrospect if the company takes off. Contingent payments often seem expensive with hindsight.

But it is what it is, and it’s fair. And any other formula is sort of a wacky guess.

A variant is to get paid back in cash at the next fundraising, along with some lesser equity.

And note here there is no “vesting” per se, just a conversion based on months worked based on an hourly/weekly/month rate, converted to equity. Whatever you do get, is fully vested.

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Published on April 27, 2017
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