Today's Edition

• Understanding Equity for Startup Employees

• Sequoia’s 2025 Compensation & Equity Report Sneak Peek

💰️Understanding Equity For Startup Employees

Equity can be confusing, especially when you’re joining an early-stage startup. But it’s a crucial part of total compensation. If you’re an employee considering offers or a manager making them, it’s important to understand what’s at stake.

Since 2022, there’s been a trend towards employees favoring a higher salary over equity (according to this Carta report). This points to employees favoring immediate “financial stability” over potential long-term gains from stock options given current market conditions. That said, investors hold cautious optimism about the state of the M&A/IPO market over the next 6-12 months, so it’s very possible the pendulum will swing back towards employees valuing equity over cash.

With this in mind, employees shopping the job market should get comfortable with the world of equity. Here’s a plain guide to asking the right questions about your equity offer.

1. What am I being offered? Most startups offer either:

   • Stock Options: The right to buy shares in the future at a set “strike price.” Profit comes when the company’s value grows beyond the strike price.

   • RSUs (Restricted Stock Units): Shares you earn over time—no purchase required (less common at Series A/B startups).

2. How much of the company am I getting? Your equity is typically measured in shares and percentage ownership. To calculate:

   • Divide the number of shares you are granted by the total number of shares in the company. Example:

   • 20,000 shares granted.

   • 10 million shares total.

   • Your ownership: 20,000 / 10,000,000 = 0.2%. Boom.

3. What’s my equity worth? Two numbers determine value:

   • Strike Price: The cost to exercise your options (lower is better).

   • Fair Market Value (FMV): The current share price based on the latest funding round.

   • Exit: An event that determines the value of your equity. More on that soon.

   • To estimate:

     1. Subtract the strike price from the FMV at exit, then multiply by the number of shares.

     2. For example: 20,000 shares * ($20 exit value - $2 strike price) = $360,000 profit.

4. What’s the vesting schedule? Most startups use a 4-year schedule with a 1-year cliff. This means:

   • After 1 year, you own 25% of your shares.

   • After 4 years, you own 100%.

5. When will I actually make money? Equity becomes valuable only after a successful “exit,” such as an:

   • Acquisition: Another company buys your startup.

   • IPO: The company goes public.

   • Secondary Sale: Some startups let employees sell shares early. Often these are sold at a discount compared to estimated FMV (usually if acquisition or IPO prospects are dim, but not always).

Risks to Consider:

• Dilution: Future funding rounds can reduce your ownership.

• No Exit: If the startup fails, your equity may be worthless.

• Exercising Costs: To own your shares, you’ll need to pay the strike price upfront.

• Tax implications: This is a major one. Exercising stock options can trigger income tax, and selling shares can result in capital gains tax. It's important to understand these potential tax liabilities and plan accordingly.

Let’s Review:

Okay, so now we understand the basics. If you’re looking at two offers and comparing the total rewards package of each, ask yourself these questions:

1. How many shares am I getting?

2. What’s the strike price?

3. What’s the company’s current valuation?

4. What’s the vesting schedule?

5. What’s the company’s potential for a successful exit?

While the overly-simplified guide above may be helpful, evaluating a total rewards package involves more than just understanding equity. You also have to consider salary, benefits, retirement plans, and PTO, just to name a few (if only there was a newsletter that could help with this!).

Each employee must identify what matters most to them as individuals. Are you willing to roll the dice on long-term potential gains through equity with the dream of ringing the opening bell? Or do you seek the security of a higher salary with a smaller equity stake?

Defining your criteria for a good total rewards package is a personal decision, and outside of a competitive benchmark, only you can really define what that means.

📊 Sequoia’s 2025 Compensation & Equity Report Sneak Peek

2024 has been a particularly challenging year for tech companies. Balancing talent retention while conserving cash & equity has pushed leaders to adopt more creative, data-driven compensation strategies.

To help companies plan for 2025, we recently released Sequoia’s 2025 Compensation & Equity Report. While the full report is exclusively available to survey participants, I’m able to share this Sneak Peek with key insights just for readers.

Inside, you’ll find a sample of data from US and global companies, covering:

• Long & Short-term incentives

• Salary administration & increases

• Sales compensation

• Severance practices

Thank you for reading and joining on this journey with me!

Please reach out with any feedback about future topics you’d like to read about.

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