How relevant is executive management?
16 years ago
Friday, January 8, 2010
Equity in lieu of salary
Problem: Evaluate a job offer which is part salary and part equity.
Interesting. My friend is pursuing an opportunity with a start up and wanted to know how to calculate what equity being offered is worth? Now, I don't know what that equity is worth because that entirely depends on how the future cash flows are. Having delivered a presentation on business plan today (which some people did listen to in half sleep and were courteous enough to tell that it was good), I had some insights into the start up stages. The venture in question being in concept stage, it was difficult to predict what the future would tell.
Here is what I told him and I hope I did not mis-advice him.
Assume that you expect your salary to be INR 3 M ( 30 L) and the firm in question is offering 2M in salary. So, the salary deficit, d = 1M.
Assume:
1. You will stick with the firm for 5 years
2. Your salary inside/outside firm will grow at CAGR (say, g) = 15% (reasonable, considering the food inflation!!)
3. The discount rate is the rate at which you got your PGPEX loan (say, r) = 13%
= 4.58 Million
The same calculation was repeated for multiple scenarios including CAGR of 25%, salary hit of 1.2M etc. and the range for equity negotiation was identified as 4M to 6.5 M.
I recommended that he should negotiate for his share in equity (sweat equity) such that it is valued at about 5M as of today.
I hope I am right.
Interesting. My friend is pursuing an opportunity with a start up and wanted to know how to calculate what equity being offered is worth? Now, I don't know what that equity is worth because that entirely depends on how the future cash flows are. Having delivered a presentation on business plan today (which some people did listen to in half sleep and were courteous enough to tell that it was good), I had some insights into the start up stages. The venture in question being in concept stage, it was difficult to predict what the future would tell.
Here is what I told him and I hope I did not mis-advice him.
Assume that you expect your salary to be INR 3 M ( 30 L) and the firm in question is offering 2M in salary. So, the salary deficit, d = 1M.
Assume:
1. You will stick with the firm for 5 years
2. Your salary inside/outside firm will grow at CAGR (say, g) = 15% (reasonable, considering the food inflation!!)
3. The discount rate is the rate at which you got your PGPEX loan (say, r) = 13%
= 4.58 Million
The same calculation was repeated for multiple scenarios including CAGR of 25%, salary hit of 1.2M etc. and the range for equity negotiation was identified as 4M to 6.5 M.
I recommended that he should negotiate for his share in equity (sweat equity) such that it is valued at about 5M as of today.
I hope I am right.
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