understand amount of equity

As an independent Information Architecture consultant, I am frequently asked by others in the profession, or those trying to get into the profession, about the money. What money specifically? The money they will or will not be making as a UX or IA person. In today’s piece I wanted to touch on the money topic, but in a different way. I wanted to talk about the promised land and, more specifically, the money you can earn there. That promised land? Working for a startup of course. The money you earn there? Yep many times it comes in the form of equity. This is what I refer to as “the old pay me later model”, to be more precise. Today I wanted to talk about determining how to 1. think about and get your head around the idea of getting paid with equity, and 2. how this thinking helps you figure out how much equity to take so that you can be properly compensated.

The current state for many of us UXers, or just many of us professionals, is that we work full time in companies where our intake, aka our salaries, are predetermined for us. Many of us know what we should be earning if we are working full time for someone else. Of course, we always have the ability to negotiate more salary or more time off, but the great part is that in an industry of full time workers, there is usually a standard for us to base our compensation off of, and thus we don’t have to take too much time to figure that number out. (Now finding out that standard isn’t always easy, but that is for another day).

The other part of our current state as full time UX professionals inside a company or agency is that we, many of us anyway, despise the businesses we work for. They are old places, with red tape and unnecessary rules that stifle our creativity! (OK maybe despise is too strong of a word, but many of us do dream of working in places that “get it”. Places where the clients and work is innovative, and UX is more than wireframes). Thus, many of us long to play in this land of startups, where you have nap rooms, and ping pong tables, and more importantly where you can be truly creative (I’ll leave the question of if you can truly be creative at many startups to another post.). Of course, if we could, many of us would quit our jobs right now to do work in startup land, however this land surfaces for us several problems which keep us tied to our full time corporate or agency life. The biggest problem is compensation. How do we get compensated at a business that is raising money to stay afloat? One way startups make this attractive is by offering equity as compensation, but the problem for us is, what the hell does that even mean?

Because we don’t know how to, turn equity into salary or meaningful compensation, several other problems unfold. First, we end up not realizing our true value. We undervalue ourselves a great deal, and we therefore if we go into a startup, we don’t get paid what we should (I’ll also leave the discussion of undervaluing ourselves in full time jobs to another discussion, however, UXer Whitney Hess has written some great pieces on knowing your value and getting paid. You can find one here Ironclad Contracts: Tougher Than a Pinky Swear.

The second problem that unfolds is that we choose to stay in the “safe” world of full time and not support startups or small businesses with our talents because we just don’t think we’ll be able to get paid enough (which actually may be true). Thus, we stay in businesses that don’t understand UX, that give us the uncool work, and that don’t respect our value, which turns us in to the classic disgruntled worker.

I won’t be telling you to venture out and leave your job in this post. But, what I am here to help you with is to understand a way to figure out how much equity you would need to take in order to live and get paid properly so that the scary world of startups might seem a little less frightening. At the very least, I hope to educate you on how I’ve made it work for myself, in hopes that you can create a model of your own, if you so choose.

Thus here we do, a 5 step plan to determining the amount of equity to take that is right for your value.

Step 1: Understand your value

As I mentioned before one of the best pieces I’ve read that have helped me to understand my own value is Whitney’s post Ironclad Contracts: Tougher Than a Pinky Swear. I have also recently taken the Skillshare class Mo’ Money No Problem in which instructor Brennan Dunn has a whole section on figuring out your value.

The long and short of it is this. We have been conditioned to think of ourselves as an expense, a cost. We say to ourselves, “I’m going to cost this company $50,000 a year so I should make sure not to ask for too much else, because I’m asking enough as it is”. But, in reality, your work brings a company WAY more value that $50,000. You are designing for projects that are aimed at lowering costs, increasing users or revenue, basically making the product better. And this work will scale to a level that will, of course, make your company a profit that is way higher than $50,000. Your work then, has created a great deal of value. Your worth is much higher than you think. In this way you can begin to think about how having you on the team is an investment for the business, not a cost.

When you think about working with startups, you, as a UX person, are going to be helping to implement a process, make the product more usable, make the product enjoyable, basically you are going to be bringing a great deal of value. In this way you should think in order to figure out what you are worth.

Step 2: Understand their value

What is the startup worth? This is where the word valuation comes to the surface. The valuation of the company, in UX speak, is basically how much another company would pay to acquire the startup. If a company is worth 1 million dollars, that means another company would pay 1 million dollars to buy them. Valuations are REALLY controversial, however the important point for you is to understand that valuation of the startup that you are looking work for. Ask about this number. “What are you valued at now?” and “With my help what are you hoping to be valued at”. Also ask things like “How are you calculating this valuation? What variables affect this valuation?”. Knowing this will help you to work into our next step.

Step 3: Figure out how much value can you add.

So you are interviewing at a startup that is worth $1 million dollars. And they know this because they are bringing in $500,000 in ad sales and have 500,000 users. But wait a minute, if they change up their ad placement, and make the sign up process more contextual, as we UXers can help with, we can easily increase those numbers to $600,000 in ad sales and 550,000 users. In effect, our help will increase that valuation to $1,150,000, basically by $150,000 or something like 15% (I’m not the best at this part) in the first year! Thus, if we plan on working at this startup overtime, we can project that this rate will only grow.

Step 4: Understand the types of equity

In this step, we have to realize that there are different types of equity. There are stocks, there are stock options, and there is a big difference between the two. Basically a stock is something certain. If you get a 1% equity share that is in stocks, that means you are certain to have 1% of the company if it gets acquired. BUT if you have 1% stock options, that means you have the OPTION to get 1% of the company. Basically think of this as a fixed versus variable interest rate. Obviously the stock is the better thing to have because it’s more concrete. Of course, stocks are a lot less easy to obtain, so most of the time you’ll be receiving options. What this means for our purposes is that you should be getting a higher percent when taking options, because the future of those is less certain.

Step 5: Figuring out your compensation

Wow this is easy right? At this point you may be thinking, Lis what the hell does all of this mean? I just want to know how to get paid well so that I can go work for this cool startup! Well this is what it means.

1. Understanding your value: Let’s say you are worth about $100,000 a year based on market standards.
2. Understanding their value: And, you are interested in working for a company valued at $10 million dollars
3. Understanding how much value you add: You can bring their valuation from $10 million to $15 million. Of course you aren’t doing this alone, but with the team so let’s say you are adding 20% of value to the bottom line (this is a guesstimate)
4. Type of Equity: And they are offering you options
5. Your compensation: You want to make $100,000 per year. However, your startup can only afford to pay you $50,000 per year in cash but is offering the rest in equity. How much equity percentage points is that?

You take the valuation $10 million and divide by $50,000 and get .05%, we then increase that by the 20% value that we add .05% *1.2 and get an equity percentage of .06%. Now keep in mind that the .06% only covers you for one year, and if you want to be there for three years, to be compensated properly you’ll want to earn about .2% equity in that timeframe (rounding up).

In short, you should negotiate for .2% of the company

I get that this was a lot of math, but you can see that there is a way to break down equity so that you can ensure you are getting properly compensated. The outcomes of breaking it down in this way, is that you can understand how and what you are getting paid, you can ensure you are getting compensated for your value, and can be a little more closer to working with that cool guy you met at the last meetup. Being informed and educated is the key to getting where you want to be.

I hope that seeing this model has helped you to think differently about taking equity in startups. It is, of course, not perfect, however it is one way that we can look at making sure that if we work for a startup, we don’t lose our house. I encourage you to bring other ways and thoughts to the table as well, so that we can make this model even better! (Or find a better one all together). Good luck UXers and remember, you are valuable, and don’t let anyone tell you different!