How To Hang On To Maximum Equity In Your Startup
Equity is often handed out like play money. Then it becomes valuable and the knives come out.
I get the same panicked email about once a month, without fail.
A founder writes in all freaked out because someone is now holding on to way more equity than they deserve. It could be a cofounder, an early investor, or even a rank-and-file early employee.
The question to me is always: How do I claw that equity back?
And the answer I give is always: You don’t. Not without a fight.
Let’s avoid this scenario altogether, and talk about properly valuing your stake in your startup.
First rule: Equity value means nothing until the startup exits
The dividing line between a successful startup exit and an unsuccessful exit comes down to the value of the equity you’re holding onto at the end, not at the beginning.
Some of my more successful startup exits, financially speaking anyway, were actually on the smaller side in terms of the sale price of the company. This was because I owned much more of the company when it sold. In one case, I owned 100 percent.
It is an amazing feeling to bootstrap a company to exit and not have had to give up so much as a splinter of it. It’s the exact opposite of that awful feeling when your company sells for an insane amount of money and you’ve optioned and diluted your way to only hanging on to a few of those splinters.
As you might imagine, the latter scenario kept playing out for me earlier in my career, until I learned how to value equity and options properly.
Let’s learn from my mistakes.
Early on, there are two extremes of perceived company value
During the early days of a startup, there’s the notion that equity options in the company are worth less than the paper they’re (no longer) printed on. This leads early stage founders to err by handing out wads of options like play money.