Base Salary Versus Equity

Base against equity is the question that comes up most often in our conversations with candidates weighing a startup offer. The pattern is consistent. People are interested in owning part of what they build, and they are wary of formulas they cannot check, and when there is risk in the picture or a family depending on the income, most of them lean towards cash. That instinct is usually right, and it is worth being able to say why.

Why we will not tell you what it is worth

Every calculator that gives you a single number for "what is my equity worth" gets there the same way: an exit valuation somebody made up, multiplied by a probability somebody else made up. The output looks like analysis and it is arithmetic performed on two guesses.

We hold no dataset on how often companies like the one making you an offer sell, or for how much, and neither does anyone quoting you a figure for your specific company. So our equity calculator deliberately returns no valuation and no expected value. It answers the questions that do have answers, which happen to be the ones most offer letters leave out.

The questions that do have answers

• What percentage do you actually own? A number of options means nothing without the fully diluted share count. Twenty thousand of ten million is 0.2 per cent. Twenty thousand of two hundred million is 0.01 per cent, and the offer letter looks identical.
• What does it cost to exercise? Options are a right to buy, at the strike price, if you can afford it and are still there when they vest. That cost is real money, and worth setting against your salary.
• How much comes off the top at an exit? Investors usually hold a liquidation preference, which returns their money before common shareholders see anything.
• Below what exit is it worth nothing at all? The single most useful figure in the conversation, and almost never printed.

The payback, worked through

Take an illustrative grant. The inputs are made up for the example; the arithmetic is what our calculator does with them. Say the company has raised AUD 20 million on a standard 1x non-participating preference, and you are offered 25,000 options out of 10 million on a fully diluted basis, with a strike price of 40 cents.

That is 0.25 per cent of the company, and it costs AUD 10,000 to exercise. Before you see anything, an exit has to return the AUD 20 million to investors and then leave enough for your 0.25 per cent to cover your AUD 10,000. So the grant is worth nothing at any sale below AUD 24 million.

Now suppose you took AUD 20,000 a year less base to get it. Over a four-year vest, that is AUD 80,000 of salary you did not receive. For the equity to repay just that, the company needs to sell for about AUD 56 million. At that exit your options are worth AUD 80,000 net of the exercise cost, which is the salary back and nothing more. Below it, you would have been better off on the higher base.

A company that raised AUD 20 million has to sell for more than twice that before a modest equity grant repays the salary it cost you.

And that is the generous version. It is before tax, it assumes you stay for the whole vest, and it assumes an exit happens at all. None of those is guaranteed. Equity can still be the right call. Know the number before you trade salary for it.

What to ask before you trade base for equity

• The fully diluted share count, in writing. A company that will not give you this is telling you something.
• The strike price and the latest independent valuation. The gap between them is where any upside lives.
• How much has been raised, and on what preference terms. Non-participating is the common case and the friendlier one. With a participating preference investors take their money back and then a share of what is left, which at a modest exit can be most of your outcome.
• The post-termination exercise window. Ninety days is common. If you leave before an exit, you may have to find the whole exercise cost in cash within that window or lose the grant.
• The cliff and the vesting schedule. Nothing is yours until it vests.

If you cannot get answers to these, the equity is not an offer you can evaluate, and it is reasonable to weight the decision towards base. Our longer guide to startup equity goes through each term, and am I underpaid tells you where the base sits against the band.

FAQ

Should I take a lower salary for more equity at a startup?

Only if you know what exit the company would need for the equity to repay the salary you give up, and you are comfortable that it is realistic. In an illustrative case, a 0.25 per cent grant at a company that has raised AUD 20 million needs a sale of about AUD 56 million to repay AUD 80,000 of forgone base over four years, before tax. If you cannot get the figures needed to work this out, weight the decision towards base.

How do I work out what my startup equity is worth?

You cannot, and neither can anyone else, because it depends on an exit that has not happened. What you can work out is your ownership as a share of the fully diluted count, the cost to exercise, how much investor money comes off the top at an exit, and the exit price below which the grant returns nothing. Those have real answers, and most offer letters contain none of them.

What is a liquidation preference?

It is investors' right to take their money back before common shareholders receive anything at an exit. With a 1x non-participating preference, investors take the higher of their money back or their share of the proceeds. With a participating preference they take their money back and then a share of what remains, which is materially worse for employees at modest exit prices.

What happens to my options if I leave the company?

You usually have a post-termination exercise window, commonly 90 days, to buy your vested options at the strike price or lose them. Leaving before an exit can therefore cost you the grant unless you can fund the exercise cost in cash, and possibly a tax bill, within that window.