Communicating the value of equity value is an important part of closing candidates. Below is a template for an offer model provided to us by Kenny Mendes (Head of People and Operations at Coda). Download the offer model, make adjustments, and apply it to your own company. You can also leverage 3rd party tools like Pave's visual offer letter product.
Example: Offer Model for Candidates
Offer Model Instructions
Document and model originally created and shared with us by Kenny Mendes (Head of People and Operations at Coda).
We believe startups generally do a very poor job explaining equity to candidates, and this does a general disservice to the startup community as a whole. We believe better understanding will help attract more great talent into the startup ecosystem and hold startup founders more accountable to being fair with stock-based compensation.
We provide this tool for candidates to be able to better understand and compare an offer from our company with their best option. This tool is theirs, and they are allowed to edit/update any of the assumptions that it has made. We also qualify that this is a tool -- not any sort of prediction or guarantee. Make sure you understand the mechanisms of the model before sharing it with candidates.
Key Variables
- Current Comp (4-year): We call this the BATNA (best alternative to a negotiated agreement). Essentially, their best alternate option, whether that is staying in their current role or comparing your offer against their best other offer. The model calculates comparisons based on a 4-year outlook of total compensation, so if they’re making $200K salary and $300K equity, your input in cell B2 is $500K*4 = $2,000,000.
- Taxes: There’s a link to http://www.tax-rates.org/ next to the fields to input tax rates. Tax rates play a key role in this model, because many of our candidates are comparing compensation packages at big companies which pay RSUs and have most of their income taxed at much higher ordinary income rates. So, making $4M in a startup, with most of that in equity, can be much more take-home dollars than making $4M at a public company. I take a rough stab at estimating taxes for the individual, but encourage them to go adjust their tax numbers themselves. some text
- The existing 4-year comp is taxed against the first tax rate cell (F2).
- Their new salary at our startup will be taxed against the second tax cell (F3)
- Their stock will be taxed at the third tax cell (F4), which is the long term capital gains rate.
- Compensation Options: We give employees three options, with tradeoffs of higher cash or higher equity. We want people to pick a blend that is right for their personal situation and don’t mind them trading off salary and stock.
- Compensation Chooser: Candidates can choose between option 1/2/3 by typing in the number in cell B8, and it will update the rest of the calculations in the doc.
- FF Portion: This stands for Founders Preferred stock, which we currently give to all of our employees (20% of their stock is FF stock). If you are able to structure your equity pool in a way that you can do this, it makes a huge difference in people who are used to having 100% of their equity being liquid. Now, they can see a shorter path to liquidity since they can calculate chances of company raising a future funding round. In rows 39/40, we show what their salary+FF value is, to have a better sense of their more liquid compensation.
- Comp Projections by Outcome: This is the key driver of the model. Essentially, what are possible outcomes for the company, both high and low. Please adjust the numbers in Row 19 to fit your company situation. Row 20 also factors anticipated future dilution to get to those stages. I encourage employees to modify the growth numbers in the model if they feel our numbers aren’t accurate.
- % Current Post-Tax Comp: This is the row people pay the most attention to. It compares their post-tax comp with this offer compared to their other offer across various scenarios. It becomes easy to see the downsides if the company busts and how much the company needs to grow to start seeing a lot of upside.
- Comp Projections by Weighted Scenarios: This is an expected value calculator applied to the growth scenarios above. Scenario 1 is the most pessimistic, and Scenario 4 is the wildly optimistic. Most candidates anchor on scenario 3 but keep a close eye on scenario 2. I encourage candidates who believe Scenario 1 to be likely not to join. :)
- Total Shares: The bottom of the doc has a field for total shares. This model depends on transparency around how much ownership the candidate is receiving in the company, and the potential future market cap for that company.
Other Points:
- Cost of stock: We allow employees to receive the stock as a grant (stock award for services rendered, rather than an option with a price). So, no cost is assumed to receive the stock, though the employee would have to pay taxes on the 409a value of the stock received.
- Asking about Compensation: It is now illegal in California to ask about salary history or other benefits (stock) about their past compensation. This model gives employees a tool to estimate their best compensation future and drives more transparency around how compensation works. Make sure you or your recruiters know and comply with the new laws. Cell B2 is not designed to be a reflection of salary history, but rather, a summary of alternate offers.
- Distributing: To start using this, make a copy for yourself, create a template that works in your organization, and then create draft copies for each one you’ll distribute. When the numbers are correct, make a final copy and only share the latest copy with candidates. Otherwise, candidates can see revision history and whatever placeholder numbers were in there before.
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