I've seen job listings for developers that offer salary + equity. Can someone please explain equity with an example or two? What is the typically amount of equity for a developer? Is there any difference if they are the 10th employee or 3rd employee? Say the company gets acquired for X million, how much would the developer get with Y equity?
Equity means shares. I'll start from the beginning.
A share is basically a document saying that you are a partial owner of a company. The more shares you have in the company the more of it you own. Owning shares makes you a shareholder. You make money from your shares from:
There are catches:
So, lets walk through an example:
Acme Startup offers you 10,000 shares as part of your joining their company. Each share is nominally worth $1. Acme Startup is a startup and isn't listed on a stock exchange. The total number of shares available in Acme Startup are 500,000.
You are now the owner of 2% of the company.But the value of the shares is nominal because you can't sell them easily because Acme isn't listed on a stock exchange. The bad news is that your contract says you can't sell your shares until 6 months after the company goes public.
Now, lets look at 3 scenarios:
1) Acme Startup enters the market and is successful. So successful that Acme is going to go public. The initial share-price is set to $15 and, after 2 weeks trading it's now at $23. When you are able to sell, 6 months after the company goes public, your shares are worth $230000. That's a nice number.
2) Acme Startup tanks. Your shares are worth nothing.
3) Google decides to aquire Acme Startup for $100,000,000. This is equivalent to paying $20 a share (100,000,000 /500,000). Because you own 10,000 shares you would be given $200,000 as part of the sale.
The other questions are much more nebulous:
How much equity is offered? Well, that depends. If the company doesn't have much money then they'll give you more equity in the hope that you'll work for the promise of future riches.
If you're a big name or have difficult to get skills (or they just really like you) they may offer you more.
Usually the number of shares offered per employee drops as the company gets bigger. This is because the risk of joining as the 1000th employee is significantly less than if you're the 15th employee. Also, if you're part of the initial "core" people you'll have contributed a greater amount - not just by working there longer but by performaing a more varied role (people tend to perform multiple roles in a small company).
Equity is just a chunk of the company, so to speak. If there are 1000 shares overall and you get 10 for yourself, you own 1% of the company (which is rare for a developer, unless of course, if you're a founding developer).
How much that equity is a function of how mature the company is (the more stable the company, the less the risk you take => less equity), number of employees etc.
if a company gets acquired for X million and you own Y shares (out of a total of N), you'll end up with equity worth