A layman’s perspective on equity in startups (Part 1)

Let's talk about equity.

Every company you have heard of was, at some point, a startup. Okay, that’s not necessarily true, but I have the detail-oriented readers on high-alert now, so on we go.

Google, Facebook, Amazon, and Apple are all good examples of companies that began as small startups. Today, they are worth billions of dollars. Every employee who believed in their mission & vision, and who took the leap of faith and joined them in their early days is now wealthy. Why is this? In short: equity.

Over the next few paragraphs, I’ll lay out a layman’s perspective (see what I did there?) on startup equity, what it is, how it works, why it works, why it’s important and what it can mean to you as a prospective startup employee.

What is equity?

What does $1,000 worth of equity in a company like Mamo (for example) actually mean? How on earth could one determine if that’s a lot, or a little? Both are wonderful questions. When you are granted equity in a startup you are either granted X shares or a specific dollar amount worth of shares. $1,000 may be 500 shares worth $2.00 each or it may be 100 shares worth $10.00 each. This just means that the shares you’ve been granted are worth this much today (keyword being today).

Equity could mean hyper-gains

“So what do I gain from the equity granted to me?” Over time, the startup you are about to join may grow incredibly fast. It may also fail (most do). If it grows, it will increase in value. The same way traditional companies like Pepsi, IBM, or Microsoft grow in value every year as they generate more revenues and become more profitable. As the startup increases in value, the dollar value per share of that startup increases. Your 500 shares at $2.00 each may become worth $6.00 each next year, tripling the value of your equity in the startup.

How fast does this growth occur? Well, there’s no preset formula, but it’s pretty fast, usually 2-3x or more at every funding round, which typically happens every 12-18 months depending on the industry. Again these figures vary and aren’t set in stone (insert legal disclaimer here).

Great - cash me out

“So does that mean I can actually sell my shares and get the cash at any time?” Well, no. Not exactly. PS. Where are you going? Stay, don’t cash out, the water’s warm.

You, as an employee, are a core driving force behind the startup. You matter. You know a lot and have valuable skills. Without you, the startup’s chances of success are much lower. Seriously, this is not smooth-talk.

Unlike working at large corporations where employees come and go with minimal impact on the business, startups value your contribution and find departures disruptive (more time recruiting, hiring, training, etc) and want you to stay with them for the long-term. The longer you stay, the more valuable your equity becomes and the more of it you have.

Vesting

We’ve covered how equity becomes more valuable (multiplies in value at every fundraising round), but what do we mean by “the more of it you have”? This is where the concept of equity vesting comes into play. When you join a company and are given equity, you are not merely handed the equity in one shot. Otherwise you’d leave the next day having captured the full grant; “Thank you very much”. Imagine doing that ten times a year? You could become an equity collector. Neat.

Okay, so how do startups protect against that? Vesting. Equity grants typically become yours slowly over time. The longer you work in a startup, the more of your initial grant “vests” and becomes yours. Equity grants typically vest over a period of 4 years (called the “vesting period”).

So a $250 of your initial $1,000 grant will become yours to keep every year for a period of 4 years. By the end of your fourth year at a startup, you’d permanently own the full $1,000 worth of equity, and it will likely be worth many times more than it was worth when you joined - remember, each share in the startup that you own grows in value over time, as the company becomes more successful.

Cliffs (seriously)

If you’ve heard the word “cliff” when being offered equity in a startup, you may wonder if it’s dangerous or in any way related to base jumping. We wish it were that fun. Cliffs are a fancy way of referring to the time period you have to stay at a company before the first tranche of your equity vests. So a “$12,000 equity grant vesting over 4 years with a 1 year cliff and monthly vesting thereafter” simply means you’ll get $3,000 at the end of Year 1, and $250 per month every month thereafter. Easy peasy.

Tell me there is way out

So, when do you actually get to make use of this equity? In short, in 2 scenarios: Either the startup you’re working at goes public or your startup gets acquired by another, larger company. This happened with companies like Careem and Souq.com here in the UAE. Uber acquired Careem, Amazon acquired Souq.com, and most of the employees who had joined either company in its early days got to cash-in their shares. Those who joined early enough didn’t have to work again.

There is a big misconception out there that if you leave a startup before it goes public or gets acquired, then you lose all your equity. That is simply not true. All shares you have earned (vested) remain yours forever, even after you leave the startup. In fact, you sign contractual agreements with the startup that protect this right. Those who joined late are now probably and proudly working for Uber and Amazon.

Gimme more

How do companies decide how much equity to grant new joiners? We can’t speak for everyone, so we’ll explain how Mamo does it.

We issue equity grants in two scenarios: when an employee joins Mamo, and roughly once a year as part of our performance management process. This means that every Mamoer gets an initial equity grant when they join, and “refresher grants” while on their journey with Mamo. To determine the size of our grants we take several factors into account including seniority, experience, performance, role, and timing.

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With that, we hope we’ve covered all the basics and that you’re better equipped to understand equity-based job offers. If you feel we missed anything, please let us know  (Emails will not not result in automatic equity grants).

If this resonates, please visit our Jobs page and come on board to help us make finance simpler and friendlier!

Now you can, with Mamo. 👋