How to negotiate offer package prior to company IPO

January 30, 2020 3:12 PM

I will receive an offer letter very soon. It is with a company with a very strong intent to IPO in the next 12 months. I originally asked for equity as part of the offer. However, this was turned down. Please advise if I should take what they offered instead or come up with a counter proposal.

They offered $100k on the event that they IPO. If they do not IPO in the next 12 months, they will give me a $10k bonus. This bonus does not effect the $100k if they IPO after 12 months. I assume these will be taxed though so the take home might be significantly less?

I've worked for startups before and equity as a percentage in the company was always a given. This is new to me. My gut tells me, a stake in the IPO could be worth more that that, or else why offer me so much as a one off? My position in the company will be at the C-level/executive team, and an integral aspect of getting the company to IPO status.

But this is after I already asked for equity. How do I respond? Should I just take it because at least it is a known quantity on the table? Is there something I'm not thinking of, like asking for the ability to buy shares at a discount or something like that? Is that a thing?

posted by anonymous to Work & Money (11 answers total)

Sounds highly unusual that C-level offer would not have equity no matter how close to IPO; double so if the role is essential for making the IPO happen.
posted by zeikka at 3:31 PM on January 30, 2020 [15 favorites]

If you're going to be on the executive team, talk to the recruiter or better yet, the CEO and ask what they're trying to accomplish here. Maybe they have some legit reason to keeping the cap table small. Maybe they don't know how to run a VC-funded company. (assuming they are VC funded)
posted by GuyZero at 3:42 PM on January 30, 2020 [2 favorites]

Suppose I too have a very strong intent to IPO in the next 12 months. Ain't gonna happen. And I hire you at a discount because startups need to preserve cash, etc. My worst case scenario is that I got a fantastic hire at below market rate for a $10k token if you're still there in a year.

What round are they? What's the fully diluted distribution of shares? Who else is integral to IPO and not vesting? (Don't tell me, but you should know. An attorney of the right flavor can help you ask the right questions.)
posted by lothar at 3:45 PM on January 30, 2020 [7 favorites]

The one part of this I am equipped to answer:

I assume these will be taxed though so the take home might be significantly less?

Yes. Federal bonus tax rate is 22%, plus it would be subject to FICA (until you hit the cap), plus any state and local jurisdiction taxes for where you live. It is also common for 401k to apply to ALL earnings, so if you have a percentage deferral that could also take a large bite.
posted by phunniemee at 3:46 PM on January 30, 2020

Yes. Federal bonus tax rate is 22%

Bonuses are taxed at your marginal income rate, not 22%. Supplemental income (like bonuses) is withheld at 22% (until you reach >$1M in supplemental income), but the tax rate is always your marginal income tax rate. This is a common issue for those whose income is heavily biased towards supplemental income, as frequently these people end up underpaying or overpaying their taxes.
posted by saeculorum at 3:55 PM on January 30, 2020 [8 favorites]

Ok yes ok withholding. For the purposes of how much physical money dollars OP would take home on the bonus check after taxes when they're paid, my answer isn't wrong. What shakes out after tax season is your own business.
posted by phunniemee at 4:35 PM on January 30, 2020 [1 favorite]

You could take a look at recent IPO’s in your industry and see what kind of award or incentive plans their competitors dole out. They will have to include those agreements in their public filings. That would at least give you some idea of what your peers are getting. Assuming we’re talking US public companies - you can look at their S-1’s, their comp tables in their proxies (DEF 14A) and possibly their 10-K filed in the first year. That might inform you a bit as to how you want to move forward.

There are a lot of variables here, the size of the company, the industry, Sponsor/VC backed etc but still you might find out you’d like to counter or maybe it’s industry standard for your company/role.
posted by rdnnyc at 4:36 PM on January 30, 2020

The "no-IPO-in-12" bonus is, for tech and tech-adjacent industries at your (apparent) level, microscopic. That alone makes me suspicious (I mean, it's small enough that why even bother to offer it?). The vibe here seems just kinda wrong.

Also, remember that recruiter-type people will promise the moon and the stars, but they're not on the hook to deliver anything. Any promise they make is worthless unless it's in the offer (I say this in case they promise, I dunno, something like "will re-evaluate where we are in six months and try to make an equity offer at that time" or whatever).
posted by aramaic at 5:07 PM on January 30, 2020

Either you are badly misunderstanding things (like are they offering options instead of rsus? Options are still equity. Or is this some kind of contractor role?) or these people are clowns or scam artists or some kind of clown scam artist hybrid. It is almost completely unheard of for a full time employee at a pre ipo company not to get equity, much less an exec (!). Assuming you have this right — run run run away
posted by phoenixy at 6:40 PM on January 30, 2020 [2 favorites]

This question is like asking "hey, I want to get a job as a doctor at a hospital but I'm not sure where to get a white coat, can you help?" If you're going to be a C-level exec at a real company and "an integral part" of getting them to IPO status, you need to be able to negotiate salary, figure out the company's financial position and how much you're contributing, understand their odds of going IPO, know how much equity you should be getting, etc, and you need to be able to do it without asking metafilter for help (sorry), because the stuff you're going to have to do on a regular basis in this job is a lot harder than any of those.

Similarly, the company should know all this too, so they don't look good for offering you the position either. It seems very slightly conceivable that this isn't really a C-level position and they're just calling it that to sound good, like a Chief Privacy Officer or something, but even assuming that, it's problematic. You should think hard about whether to take this position at all, and I definitely wouldn't take any kind of pay cut to do it.
posted by inkyz at 8:08 PM on January 30, 2020 [14 favorites]

The only reasons I can think of for offering you $100k instead of equity are:

1) Equity is expected to be worth substantially more than $100k, and they want to save money,
2) They already have complicated equity arrangements and do not want to further complexify them by involving a new person.
3) They worry about execs pushing hard for short-term results, cashing out, and quitting.

Note that Option #2 may also translate as "business math is hard for us and we don't wanna do it." That's not a good sign for a company about to go public. And #3 means "we don't trust our own judgment about who to hire."

"We want to save money" is an admirable goal, but skimping on rewards to your C-level execs doesn't strike me as the way to do it, especially as those rewards are intrinsically tied to the financial health of the company. Part of the reason for equity is to keep people focused on making the company successful.

The real question isn't, "Why aren't they offering me equity" nor "What else is reasonable compensation in exchange for equity," but "Why are they avoiding one of the most obvious ways to get execs to deeply consider their decisions?"
posted by ErisLordFreedom at 11:28 AM on January 31, 2020