In Fundraising Tips, Partners

The San Francisco Bay Area Rules in Equity Offerings for New Hires

Written by and shared with permission of: Mighty Capital Partner, Jennifer Azapian Bay Area tech companies are paying much, much more in new hire equity grants vs. their East Coast counterparts. When VPs, Directors and Managers sit down to negotiate offer terms, there’s a huge gap between West and East Coast outcomes. In Silicon Valley, candidates command 3-4 times the value in new hire grants compared to those out east. Why the difference, and how should startups position themselves accordingly?

Silicon Valley still rules the roost

The San Francisco Bay area has been the global tech epicenter for decades. Although other mini-meccas have been sprouting up in the US (Denver, Austin, Charlotte, Grand Rapids, etc.), the most recent data* reveals that 44% of venture capital funding for US-based firms ends up in the San Francisco and San Jose metropolitan areas. The money is there, so they use it. Additionally, the majority of acquisitions are still made by Silicon Valley companies, which continues to reinforce the desire for a local presence.

Bay Area culture

With its ultra-high cost of living and Google buses, the Bay Area is a little like a country of its own. It has developed its own corporate culture, and this includes compensation planning. Over the past 20-30 years, the area’s tech workers have grown accustomed to broad-based equity plans as part of compensation.
“A VP at the average later-stage company in San Francisco could receive about $1MM worth of equity in a new hire grant…while in NYC, the same job at a company of equal valuation might offer only about $300K.”
Hop over to the East Coast and equity is much more tightly held. It’s not uncommon to find options or shares offered only to Director level positions and above, and the amounts are much less. Out east, they rely on cash and bonus compensation to do most of the talking. This means a VP at the average later-stage company in San Francisco could receive about $1MM worth of equity in a new hire grant (which ideally would increase in value by time of exit), while in NYC, the same job at a company at the same stage, industry, and revenue size might offer only $300-400K in equity value.

Early stage company strategies

VC’s typically request that a certain amount of the total cap table be set aside for employee grants. On the West Coast, 15-20%  is the normal option pool size. On the East Coast, about 10% is the standard for covering new hire grant costs. So when evaluating your total cap pie, be sure the hiring slice is big enough. For hiring cost planning, don’t forget to include the higher salaries that can also come with the terrain for certain roles at emerging startups, especially if you’re in the Bay Area.
“When evaluating your total cap pie, be sure the hiring slice is big enough.”
The last thing investors like to hear -- other than the fact you’re running out of cash -- is that you’ve run out of equity due to insufficient budgeting and/or overspending. Boards and founders can be loath to restructuring cap tables and injecting additional dilution unexpectedly.

It’s not just about the money

Equity compensation is not really just about money. There is an implicit value in receiving equity as part of a compensation package, linking an individual’s long-term compensation to company performance. The perceived value is what’s important, even if the shares are completely illiquid and may only have a very limited chance of providing a high-value outcome. And if you receive an additional grant along with a promotion or in recognition for job performance, it can be a more effective retention tool than simply earning cash – due to a grant’s typical 4-year vesting schedule.   New hires at exciting startup companies can be overly optimistic about the upside potential of a grant – which is actually necessary for that person to bring passion, drive, and commitment to help a business succeed. Even with the added risk and uncertainty, equity compensation really does matter as a hiring and retention tool, especially for West Coast firms.
“Equity, therefore, has permeated the Bay Area culture as wealth creation is critical to cover the cost of living.”
But it’s not only means of retention or a negotiation tactic  -- as sky high housing costs in Silicon Valley also play a role. The average home price in San Francisco is now $1.62 million. Equity, therefore, has permeated the Bay Area culture as wealth creation is critical to cover the cost of living. While there’s a low probability of a successful exit for most startups, there’s a high enough concentration of companies that do well in Silicon Valley for employees to aim to see a nice (even if not unicorn sized) exit payout.

Take home message

  • If you’re looking for a job, know how much you can ask for – which can be significantly altered by the the position – or the company - location.
  • Startups - plan accordingly. Don’t get stuck short, and be smart about funding. And if you hire in both West and East coast locations – you might consider your employee equity strategy based on what the market pays in each geography.
*Between 2010-2018, 7 of the top 10 startup acquirers in the world were based in the San Francisco Bay Area. And the majority of acquired US tech companies were also based in Silicon Valley/San Francisco. For more information, see “Startup M&As – 2018 Report” by Mind the Bridge & Crunchbase.   Author Bio:  Jennifer AzapianJennifer Azapian is a Partner at Mighty Capital and works actively to source, assess, and invest in deals and to support portfolio companies with their HR strategies.  Since starting her career scaling Virgin America from 10 to over 2200 employees, she has spent the last 15 years working with growing businesses, their leaders, and investors as an executive coach and advisor on issues such as compensation, organizational design, headcount and performance strategic planning -- all with an eye to helping companies prepare for smooth, rapid scale or for an exit.  Jennifer holds a BA from Dartmouth College, an MBA from INSEAD, and Compensation Committee Certification from the Economic Research Institute.