Ask These Stock And Valuation Questions To Early-Stage Startups
When evaluating my job offer from FlexAI, I talked to Nikitha Suryadevera, Product Manager at Temporal, Angel investor, and a tech blogger who has been writing since 10+ years. I loved her framework to evaluate a startup. So, I took her permission to share it here.
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Background To Nikitha’s Framework
Nikitha recently moved from Google to Temporal. She created this framework when moving from a publicly traded company to an early-stage startup.
She recommends using the Carta equity calculator. You can even download an Excel sheet from Carta and input your numbers.
Evaluating Stock Options And Startup For A Job
When negotiating, ask for more options. More options mean owning a larger share of the company. This significantly impacts your payout when the company exits. For example, owning 0.01% vs. 0.3% makes a HUGE difference if exits are in the billions.
Confirm Company Valuation: Know the total shares on a fully diluted basis to accurately evaluate your stock options' worth.
Confirm the Most Recent Preferred Price: Companies often aim to keep their preferred price high. Find out the most recent preferred price to get a clearer picture of the company's valuation.
409a Valuation: This helps you understand the fair market value of the company's common stock.
Total Shares on a Fully Diluted Basis: It helps you determine your percentage ownership in the company.
Early Exercise Window: Check if the company offers an early exercise window for your stock options. This can provide tax advantages.
Post-Termination Exercise Window: Find out the length of the post-termination exercise window. You can exercise your stock options after leaving the company during this time period.
Calculate the value of your stock options: (number of shares) x (share price - strike or exercise price). For example, if you have 1,000 options at $100 per option, their value is $100,000.
Divide your options by the total outstanding shares to find your percentage ownership.
Why do you need percentage ownership? If the company exits for $100M, your ownership % determines your payout. If you own 0.1%, you would get (0.1% * $100M - exercise cost).
Investors In The Startup
Investors' Ownership Percentage: Understanding what percentage of the company investors own gives you insight into the company's financial health and the distribution of ownership.
Liquidation Preference of Investors: Find out if investors are participating or non-participating, as this affects payout distribution during an exit.
Customers And Cash
Current Customers: How many customers does the company have right now? This number gives you an idea of its market traction and customer base.
ARR and ARR Growth: The company's financial performance and growth potential indicators.
Net Dollar Retention (NDR): Measures the company's ability to retain and grow revenue from its existing customers.
Runway, Burn Rate, and Cash in Hand: Indicates how long the company can operate before needing additional funding.
Licensing and IP Ownership: Understand the company's licensing agreements and IP ownership, which can affect its long-term value and growth potential.
Applying This Evaluation Framework
Evaluating a startup job offer involves understanding various financial metrics and ownership details. By following these steps, you can make a well-informed decision and negotiate effectively for your equity stake.
I applied this evaluation framework here.
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