Compensation With Currency With No Agreed Upon Value

14 Dec

Equity is an integral part of start-up compensation. However, employees and employers may disagree about the value of equity. Employers, for instance, may value equity higher than potential employees because they have access to better data or simply because they are more optimistic. One consequence of the disagreement between potential employees’ and employers’ valuations of equity is that some salary negotiations may fail. In the particular scenario that I highlightabove, one way out of the quandary may be to endow an employee with options commensurate with their lower valuation and have a buy-back clause if the employer’s prediction pans out (when the company is valued in the next round or during exit). Another way to interpret this particular trade is as trading risk for a cap on the upside. Thus, this kind of strategy may also be useful where employees are more risk-averse than employers.