The Equity Mirage in Tech Recruiting
Tech recruiters frequently present equity offers with dazzling numbers: 'We are granting you 50,000 stock options with a current estimated value of $400,000!'
To an engineer or product manager accustomed to base salary, this sounds life-changing. But unlike cash or publicly traded RSUs (Apple, Google, Microsoft) that can be liquidated the second they vest, private startup options represent an illiquid call option on an uncertain future exit.
The 4 Questions You Must Ask Before Signing
- What is the Total Number of Fully Diluted Shares Outstanding? 50,000 options out of 10,000,000 shares is 0.5% of the company. 50,000 options out of 500,000,000 shares is 0.01%. Without knowing the denominator, the numerator is mathematically meaningless.
- What is the Preferred Liquidation Preference? Have venture capital investors taken 2x or 3x participating preferred liquidation terms? If the company sells for $50M, do investors take the first $45M, leaving common options with zero?
- What is the Strike Price and Post-Termination Exercise Window? If you leave the company after three years, do you have 90 days to write a check for $30,000 plus AMT taxes to keep your options, or is there an extended 7-to-10 year exercise window?
- What is the Company's Real Net Burn Rate and Runway? If the startup has only 7 months of cash and venture markets are frozen, you may be joining immediately prior to a recapitalization down-round that wipes out common stock.