New year, new biotech job? Make sure you understand the value of your equity.
by RApport
RApport is an online communications hub for members of the biotech community to share ideas, problems, and solutions.
January 6, 2022
The biotech job market is hotter than ever and it’s not likely to cool down in 2022. So if you’re thinking about joining the Great Resignation and jumping into a new role at a biotech startup, it’s crucial to learn how to think about valuing competing equity offers.
To do so, think of yourself as an investor. Does that sound strange? It shouldn’t - time is money, you’re planning to invest a significant amount of your time in a company, and in exchange they’re likely to pay you in both cash and equity. But not all equity offers are created equal. Ten thousand shares of one company could be worth much more than thirty thousand shares of another company.
To know when that’s true, you need to know which questions to ask. RA Capital team members have put together an explainer deck to help you identify and ask these questions. Read through the whole thing for an in-depth tutorial or read on for a quick sneak peek!
One caveat: don’t stake your success on equity alone!
Every company is likely to offer you a salary, bonus, title, benefits, and equity. Of course, you won’t make the decision to join based on any single factor - you’ll want to consider less tangible aspects, too, like how interesting you find the work; whether your boss is someone you can learn from; how your performance will be assessed; where your office is located (and whether you’ll be required to work virtually or in person); and more. But for now, let’s assume all else will be equal (it won’t be) and just focus on equity.
The basics
When you’re presented with an equity offer, it’ll probably sound something like “10,000 options that vest over four years.” (For more detailed explanations of options and vesting, read our full explainer deck.) But it’s impossible to evaluate an offer like “10,000 options” in isolation. You’ll have to do some legwork to give it context.
Here are the key questions you want to answer: “How much of the company will I own when it’s a big success and I can sell? What are the odds of that happening, how long will it take, and what will the company (and my options) be worth then?”
Importantly, you’re not likely to get precise information as you approximate these values, and your estimates may differ from others’ based on your own knowledge and beliefs. But it creates a useful framework - one we call an Equity Value Proposition - that you can use to help value competing offers.
Comparing Equity Value Propositions
Here’s an example of how this kind of analysis might work. Imagine that you’re weighing two job offers (equal in salary, bonus, etc.), one from Company A and one from Company B. Each company offers you 0.1% in equity, which will likely be diluted over the course of your tenure. (Dilution is the reduction in your ownership percentage as the company grants or sells more equity to new employees and investors. Read a more detailed explanation here.) Which offer should you choose? To help identify the more lucrative proposal, frame each in terms of its Equity Value Proposition.
Company A Offer:
You estimate the company would be worth $5B if it succeeds (for Reason A) and it has a 40% probability of success within 4 years (for Reason B).
They offer you 0.1%, which would likely be diluted to 0.05%.
This means you have a 40% chance of making $2.5M over 4 years if you find Reasons A & B compelling.
= $1M of expected value
Company B Offer:
You estimate the company would be worth $3B if it succeeds (for Reason C) and it has a 20% probability of success within 5 years (for Reason D).
They offer you 0.1%, which would likely be diluted to 0.033%.
You have a 20% chance of making $1M over 5 years if you find Reasons C and D compelling.
= $0.2M of expected value
It’s now easy to see that Company A’s offer is significantly more compelling than Company B’s, even though the offers may look identical at first in terms of salary and equity. Note that even if Company B upped their offer to 0.2% of the company (which would likely be diluted to 0.067%), that would give you a 20% chance of making $2M over 5 years, which comes out to a $0.4M expected value - still much less than you project for Company A. So though a higher percentage equity offer may sound attractive, it may still be worth less in the long run!
Bottom line? The math is worth doing.
Some important notes on the above:
It’s crucial that you actually believe the reasons a company gives to justify their future success (Reasons A, B, C, and D). If you don’t find the company’s reasoning credible and rigorous, don’t accept their conclusions at face value! Again, you’re the investor here and must do your own due diligence.
Sometimes a company will only offer you options (e.g. “10,000 options”) without helping you understand what percentage of the company that represents. A number like 10,000 is useless in isolation, so you’ll want to figure out to the best of your ability how many shares are outstanding (for more on this, read our explainer deck).
Understand that the advice we’re giving here might be dangerous. Some HR professionals doing the hiring are not used to junior candidates asking the kinds of questions that would be expected of an executive candidate (like “How many shares are outstanding?”). If you are just coming out of school, you may not have much leverage. But it’s still reasonable for you to ask, “Can you please give me the information I need to estimate what my equity will be worth if we are successful?” We at RA Capital are encouraging companies to answer that question the way they would if an investor asked it, with an Equity Value Proposition.
Okay, so you decide to take Company A’s offer. You have been granted options and they’re vesting over time. Now, an important data readout is approaching and you wonder whether you should hold your vested shares through the readout or sell them. Is there a similarly helpful framework you can use to make this decision?
Yes! Take a spin through the clear visuals in our explainer deck for guidance on that choice and more.
This piece spotlights one of RA Capital’s Innovator Resources, a guide called “Understanding the Value of Your Equity.” You can read our detailed explainer deck on the subject here (it’s free and publicly available). And if you’re a biotech company that’s actively hiring and you have questions about crafting an Equity Value Proposition, we’re happy to help strategize. Reach out at rapport@racap.com.
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