CJ Gustafson on negotiating startup equity, getting CFO buy-in, and avoiding vanity metrics
Product State Q&A
EC: You’re a CFO who has negotiated equity with tons of employees. Do you have any tips for someone negotiating for equity at a startup?
CG: Negotiating your equity grant at a startup can be SUPER intimidating. It’s maybe the single most important negotiation you'll have in your career.
Yet most startup employees forget that the most concentrated asset in their personal financial portfolio, other than maybe their home, is their Incentive Stock Option grant. And it’s probably sitting in a desk drawer, collecting dust somewhere.
Here are some tips to help you get paid:
Identify your levers: Decide which lever(s) you’ll try to max out - Base pay, Variable pay, Title, Benefits, Equity. You can’t maximize all of them, so choose wisely.
Understand the ESOP: Figure out how crowded the cap table is.
Differentiate yourself: Pick specific skillsets you can address relative to the company’s lifecycle. Companies hire for different people at different times. Be the skill they need at this point.
Get the numbers: Ask for the number of options, strike price, fully diluted percentage of equity, cash value of equity grant, post termination exercise period, and vesting schedule.
Understand the vesting structure: Know how many years you are signing up for, and where the cliff is.
Research the tax consequences: Anticipate when you’ll get hit with a tax bill, based on the security type.
Understanding dilution: Benchmark how much dilution is normal.
How dilution impacts me as an employee: Forecast how your outcome and ownership may change over time.
Do your homework: Decide on your own if the company is relatively over or undervalued?
Be realistic: Play hard, but play fair with your ask.
EC: What’s the best way to convince your CFO your department should get more budget?
CG: I’ve sat in hundreds of budgeting conversations with department leaders, and the ones who walk away with the most resources do their homework.
I. Apply staffing ratios across your headcount asks:
There should be a clear through line across all your headcount asks.
For most departments there’s a ‘core’ role that the rest of the group is staffed around.
In Sales, it’s the Account Executive - all the other resources are aligned through some ratio to the individual quota carrier.
In Product, it tends to be the Product Manager, with Designers and Researchers (and even Engineering, and Product Marketing) falling into line.
II. Identify where your department is relative to the company’s overall lifecycle:
Companies hire for different roles at different stages in their revenue lifecycles. When you are sub $10MM in ARR, you over index for people who can build the product. Otherwise, you’d have nothing to sell. And as you scale through, say, $20MM, you increasingly layer on Sales and Marketing resources to distribute said product.
III. Use benchmarks to determine what a best in class department looks like:
Comparing yourself to ‘Best in class’ companies with the same monetization model (e.g. PLG vs Field Sales vs Usage Based) will win you more resources.
IV. Ask for placeholders when it comes to tools and consultants:
A great example of this — my Chief Product Officer knew he’d need a feature flagging tool at some point in the year, but he didn’t know who the vendor would be — or when the product build would call for it.
We talked through it and landed on a place holder of $5,000 per month, starting in Q3.
Now he has the autonomy to make that decision later in the year.
EC: What’s the number one vanity metric you think tech companies should avoid?
CG: I hate when companies get cute with cumulative metrics. I’ve worked at companies where we publicly marketed all-time users, all-time customers, all-time downloads, and all-time bug fixes.
These stats looked great on investor splash slides, but were empty for three reasons:
They don’t provide historical growth context
They had no ability to go down over time
They intentionally masked retention issues
Here’s the solution:
State the measurement period
Include a growth rate
For any user graph, make sure to clearly state the measurement time period, and avoid using nonstandard cuts (e.g., ‘last 17 months’ or ‘trailing five quarters’).
You should also clearly state the growth rate — whether that be month over month, quarter over quarter, or year over year.
For a metric to be useful in decision-making, you need to make it comparative and give it a ratio or rate to show how it is trending.
“Negotiating your equity grant at a startup can be SUPER intimidating. It’s maybe the single most important negotiation you'll have in your career.”
- CJ Gustafson
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