Early Exit #16: Asking For Equity
Equity isn't off limits to you as a freelancer.
You’re reading the Early Exit Club — a newsletter about leaving the 9-5 workforce to build a $20k/month solo business by Nick Lafferty.
When I was leaving Loom last year I interviewed for a VP of Marketing position at a smaller startup.
It wasn’t the right fit for either of us but something the CEO said struck me as weird: he didn’t believe in giving equity to all his employees.
My role had an equity package but some other roles, like those in customer success and support, didn’t include equity.
That sucks.
Ever since I got my first taste of startup equity at a small Austin company that sold for $60m I told myself I’d never work for a company that didn’t include equity in the compensation package.
I believed then, as I do now, that equity builds wealth, and I wanted a piece of the pie.
Equity is typically part of the comp packages at most startups, but it’s also available to consultants and freelancers too.
This week we’re going to talk about navigating those conversations with some examples from my recent experience.
Have you received equity in exchange for your consulting work? Reply and let me know!
What is equity?
Equity means you own a (often very small) piece of a company.
When that company sells you share in the gains.
I often use equity interchangeably with startup options but they’re quite different.
Options, which is what most startup employees get, give you the right to purchase shares in the company at a pre-defined price called the strike price.
You don’t own anything until you purchase your options, which is called exercising them.
This can be quite expensive and can also cause surprise tax bills if you’re not prepared for it.
Here’s a very good primer on how startup equity works that does a much better job of explaining this:
Why I value equity
I value equity for two reasons:
I gain if the company exits
It aligns my interests to theirs
Financial Gain
I view startup equity as a lottery ticket where your work can influence the outcome.
You’re not guaranteed to win anything but you might get lucky and make out big.
I’ve worked at two companies that had a liquidity event (a fancy investment word meaning someone else bought them).
One that sold for $60m that I mentioned above
One that sold for $2b
This is vastly better than the average because most startups fail (I’ve seen numbers between 70-90%).
How much have I earned from those exits? Stick around to the end to find out 😎
Working at a startup is hard work that comes with long hours, tons of stress, and more fire drills than you can count.
You’d think your salary (or your hourly rate as a freelancer) is enough to make it worth it.
I’m here to tell you it isn’t. Not even close.
Because when that company sells, and hopefully most of the startups you work at do sell, you could have a significant financial windfall.
Of course not every startup exits, and even if they do sell sometimes it’s only for enough money to pay back the investors (who have preferred stock), so the employees get nothing (because we have common stock).
Aligning Interests
If you have equity in a company then you’re tied to their long term success.
If they do really well then you get a bigger pay day, so you’re more incentivized to think long term.
And it means everyone operates from the same playing field: we all have skin in the game.
How to get equity
Simple: ask for it.
Most people don’t even know to ask for equity.
You may not get it (it’s kind of a pain to add someone to the cap table), but you can always ask.
Now this is often easier said than done, and your success rate depends on who you’re asking and what stage the company is in.
If you’re talking with the Founder of a small startup? Higher chance of success.
If you’re working with a more junior employee at a larger company then you’re probably going to have a harder time.
It also depends on the scope of your work with that company.
If you have a broad scope across multiple projects, initiatives, or campaigns then you’re probably making a bigger impact and the founder might want to better align your incentives to theirs.
Before you make the ask, read up on how equity is structured so you can speak the same language. You should understand:
vesting periods
cliffs
exercise windows
strike prices
common vs preferred shares
I’ve seen consultants get between 0.03% and 0.1% ownership of a company in exchange for their work. The exact amount depends on many things, like the current valuation of the company.
Thanks to Jonathan for sharing a link to this FAST agreement that outlines how much equity is reasonable to ask for based on stage of company and depth of engagement.
How I’ve asked for equity
I’ve successfully navigated the equity conversations a few times.
And every time it meant lowering my rate in exchange for equity.
I’ve found a 50/50 or a 70/30 split of cash to equity is a good balance because you can’t pay your mortgage with equity.
Example #1: Seed Stage Startup A
I work directly with the co-founders of a company that is one of my rare clients where I bill hourly, most of my clients now are on monthly retainers.
I strongly believe in the product and I brought up equity in one of our first conversations.
We worked together for a few months at my standard hourly rate and then circled back to the equity conversation later.
This allowed both of us to feel out the engagement to make sure we were a good fit for each other.
I agreed to lower my hourly rate by about 60% in exchange for a tiny slice of equity. My equity is on a 1-year schedule with no cliff and it vests every month.
This is a more extreme example of how this could play out because again I have high conviction in the company.
Example #2: Seed Stage Startup B
I was in the final stages of conversation with a prospective new client who’s the founder of the company.
The founder initially pushed back on my rate and proposed a lower amount.
I don’t negotiate my rates so I held firm but I proposed a cash/equity split as a compromise:
75% in cash
50% in equity
I asked for twice as much equity as the cash equivalent due to the risks involved so the total value of the offer was 25% more than a full cash offer.
Before sending this email I reached out to two of my connections that have navigated similar questions in the past. I received some great feedback from them that helped craft my final message.
Read on to see if asking for equity is right for you. But first..
🎉 Solopreneur of the Week: Alberto Di Risio 🎉
Alberto is a fellow growth marketing consultant for B2B SaaS companies, based in Copenhagen who has deep experience across demand generation, SEO, and product marketing.
He was also one of the earliest supporters of this newsletter and makes his own Limoncello which I can testify is absolutely delicious.
Say hi to him on LinkedIn(his posts are way funnier than mine) and reach out if you need any marketing help :)
Want to be featured? Submit yourself to my Solopreneur Directory and maybe you’ll be the lucky winner one week.
Is Equity Right For You?
Asking for equity isn’t for everyone: you’re giving up a higher paycheck today in exchange for a potentially bigger payoff down the road.
You should have conviction in the company’s product, leadership team, and unique position in the market.
I’d only recommend starting this conversation if you’re making enough cash with your other clients and you can take a little risk.
Oh, how much did I earn from those exits I mentioned earlier?
$0.
Both times I didn’t have any vested equity at the time the company exited.
But now I do have vested equity in a few companies and I’m hoping my beginner’s luck in picking companies holds true over the next few years :)
See you all next week,
Nick
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