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Jun 30, 2014

A Guide to Startup Emplo ee Equit

In a n hi S Cal CTO bl g, Ton Karrer, F nde and CTO f TechEm e , F nde and CTO f Agg egage and gani e f he LA CTO F m and S a S eciali Ne k,
ha e ie ba ed n hi e e ience king i h e 30 a e he a 15 ea .

Th a c e a g a ed a "E f Ea E ee Ea S age S a ". Be a e ce ha ha bee e b hed h e :

Fo nders s. Earl Emplo ees

T hel i h hi di c i n, le me a i h a de ni i n f "ea l em l ee." S e e Blank di ide he indi id al a cia ed i h a a:

F nde

Ea l Em l ee (Em l ee # 1-25)

La e Em l ee (Em l ee # 26-125)

The eali i ha he de ni i n f f nde and em l ee i n clea . The fe e le in a a a e n a ec m f f nde . ea l em l ee. F nde a e likel n aid f a l ng
ime and ha e a i eable e i e cen age f ea l i k and ha ing he c nce . An em l ee i la e , ha a g ea e i n f c m en a i n a ca h, ha l e i k, and gene all d e n b ing
a m ch bea in e m f he c nce .

Earl Emplo ee Eq i is an Ar

I me ha ag ee i h F ed Wil n in Em l ee E i : H M ch?

F ke hi e , h ee, e, ma be a m ch a en, ill babl n be able e an kind f f m la. Ge ing me ne j in d eam bef e i i m ch f an hing i an a
n a cience.

Eq i Form las
While i ' me ha an a , he e ha been a l i en ab h can l k a e i c m en a i n.

Pa l G aham ide ha i ghl he c e f m la f e i a an in in The E i E a i n:

Y can e he ame f m la hen gi ing ck em l ee , b i k in he he di ec i n. If i i he a e age c me f he c m an i h he addi i n f me ne e n, hen he ' e

h n ch ha i = 1/(1 - n). Which mean n = (i - 1)/i.

F e am le, e ' ej f nde and an hi e an addi i nal hacke h ' g d feel he'll inc ea e he a e age c me f he h le c m an b 20%. n = (1.2 -
1)/1.2 = .167. S 'll b eak e en if ade 16.7% f he c m an f him.
Le ' n h gh an e am le. S e he c m an an make a " " f 50% n he ne hi e men i ned ab e. S b ac a hi d f m 16.7% and e ha e 11.1% a hi " e ail" ice.
S e f he ha he' g ing c $60k a ea in ala and e head, 1.5 = $90k al. If he c m an ' al a i n i $2 milli n, $90k i 4.5%. 11.1% - 4.5% = an ffe f 6.6%.

Of c e, be able e hi kind f f m la, ill need be able de e mine h m ch im ac he e n ill ha e and g e a al a i n. I' e alked ab hi ic bef e in
H In e Think Ab Val a i n f P e-Re en e S a , and CTO Sala and E i T end 2009-2011. Y can al ake a l k a S a R a' ic : S a Val a i n, P e-M ne
Val a i n, and Ea l S age Val a i n.

Same Val e for S ea Eq i as In es men Dollars?

Ja n C hen in H hink ab ca h . e i c m en a i n (de ni el ead he c mmen ) ide imila kind f f m la . The ke in hi a ach i ha e i c m en a i n h ld
be ie ed he ame a ha ie in e men . In he d , he l f c m en a i n f he ea l em l ee a c m a ed ma ke a e h ld be ie ed a e i alen he e i f
ha ame d lla am n f m an in e .

L gicall , ha ' c ec , b I e nall ld a i k emi m n e i c m en a i n. I al belie e ha ea l em l ee h ld be b inging highe al e han ea l in e d lla a he

can and h ld c n ib e he c nce g ea e han an in e . The a e a iall e a ded b he inc ea e in al e f hei e i . B hei c n ib i n ai e he al e f e e ne. I
belie e ha Pa l G aham' c e f m la ake ha in acc n .

Ben Y k i ge a imila in In Changing E i S c e f Ea l S a Em l ee :

The m e ha h e em l ee feel like f nde in e m f hei ne hi , em i nal a achmen , e n ibili and e all nde anding f he a ce (incl ding
nancing, nning da - -da ac i i ie , e c.) he be e he a ill be.

Da id Bei el i an he a :

Being an ea l hi e a a a gi e an indi id al he abili make emend im ac n an gani a i n a i g and b h he f nde and h e hi e h ld kn i .Of
c e, all f ha a me ha he ea l em l ee d e make an im ac .

Risk Premi m on Eq i Compensa ion?

While Ja n C hen gge ha in e men ca h and ea e i h ld be ie ed he ame, i e a fe e le gge ha he e h ld be a i k emi m f ea l em l ee a ea l - age

a . A i k emi m i a m l i lie ha a ha an e i c m en a i n h ld be ie ed a being h le han ca h f ha em l ee beca e f he i k.

The i k emi m ha I' e een a idel i h eemingl cam f:

N ne - like Ja n

20-50%

3 -4

In a a , gge ing he e h ld be a i k emi m i j a g ing e al a i n and e ec ed e n. The e' al he a ec ha he e i ha icall ge a a fe i c m en a i n

i behind he e i in efe ence and h effec i el ha l e al e.

B he m e im an a i nale i ai ed in he f ll ing ab h em l ee m f en d n ha e igni can c me e en in fai l i i e li idi e en .

Mem CEO And F nde : Sha e The L e

C n ide he ceed f a $50-milli n ac i i i n f a 100- e n c m an ha ha ai ed $14 milli n i h a ical li ida i n efe ence:

Beca e f he li ida i n efe ence, he in e ge $14 milli n igh ff he . The emaining $36 milli n i di ided acc ding e i ne hi .

In e n 50%, and ge $18 milli n, li be een m

The f nde n 33%, and li $12 milli n

The 3- e n e ec i e eam, incl ding a CEO if ne a hi ed, n 10%, and li $3.6 milli n. The eam ge an he $3 milli n a a e e ance a men an ea n- , ee en he
ac i i i n ffe .

The emaining 95 em l ee li 7%, each ea ning $27,000. Unlike he f nde , he em l ee ha e ai n il hei g an e , king a a c m an n l nge f hei ch ing f
ea .

Is i Time for Yo r o Earn or o Learn?

Y ge 1%, ell f $150 milli n and i in 3 ea (e.g. n he l e ). Tha an af e - a gain f $287,500 / ea f 2 ea . N bad. D h! Wai a ec nd. S ck e f 4
ea . Y didn ge accele a i n n a change f c n l? S b d. We ll ha e ei he c ea ning in half $143,750 ll ha e c m le e 2- ea a BigC ha b gh
making he m ne ead e 4 ea i $143,750 / ea f 4 ea .

The eali i ha an ea l em l ee in a e-f nded a ha e en all ai e a fe nd f ca i al ill be dil ed igni can l , i d n he line in efe ence, and ill likel be l cked
f a hile ha e i . And ha ' a ming ha i ' a fai l ii e c me. If i ' an hing le ha i i e, efe ence ill mean he ge n hing he han ha ' e i ed kee hem
king if ha ' needed a he ac i ing c m an ."

D a ee e e e e e ia ad ice? The F de I i ei c e e i g. A da !
Rela ed Insigh s

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