When you’re negotiating a job with a new employer, offer a range rather than a hard number on what you think your equity holdings are worth, a veteran in-house legal leader says.
Assessing a value for your equity holdings in a job you’re leaving can be hard if you’re in a privately held company. Unlike with a public company, whose share value is visible based on its latest trading price, privately held companies have nothing comparable for establishing how much one’s equity holdings are worth.
By one estimate, almost 60% of general counsel and chief legal officers receive some portion of their pay in equity holdings.
For in-house counsel whose compensation is at least partly tied to equity, coming to agreement on what those holdings are worth can be crucial in negotiating what one’s compensation would be in a new job.
“There are so many dynamics in private company equity,” Melanie Margolin, executive vice president and chief administrative and legal officer of data analytics company Clarivate, said in a BarkerGilmore webcast.
Last year, when she negotiated details of her joining publicly traded Clarivate after working three years at privately held Thumbtack as its chief legal officer, discussions required the two sides to agree over what the new company could offer in equity compensation that would be equivalent to what her old company had given her.
Just as important as those details, though, was how the discussion created a level of trust between the two sides, Margolin said. Getting to a point of trust is crucial given that she would be joining the company as its top lawyer.
“We got to a place that felt fair to both of us,” she said. “Knowing they heard me and valued me and trusted me felt good to me, and knowing I wasn’t saying … it has to be $10 a share or nothing felt good to them.”
As a starting point, she said, she offered them a range at which she thought her equity holdings were worth based on what the former company was valued at during its last capital raise and what it provided to the IRS to establish a strike price under Section 409A of the tax code.
Under 409A, privately held companies provide a third-party estimate of the value of their common stock so they can establish a price at which employees can exercise their option to acquire stock.
Depending on when the IRS filing is submitted relative to where the company is in its growth cycle, the tax valuation can be significantly out of sync with the company’s market value, but it’s still useful to provide that number as an objective measure that can serve as a starting point for negotiations.
“I shared with them the 409A value because there wasn’t much spread [between the strike price and market value of the shares] at that time,” she said. Thumbtack was “pretty far along in its growth stage. But I then said, here’s what I think would be a fair assessment of my current equity replacement value.”
Her negotiating counterpart at Clarivate didn’t agree to her assessment of the market value but the two of them were nonetheless able to come to agreement on an amount.
“They came in and did not low-ball me on that, and did not give me my top end, but we got to a place that felt fair to both of us,” she said. “I maybe got a little bit more by being transparent and sharing the process I was thinking through.”
In some ways, working through that process is as valuable as the outcome that’s agreed to because valuations are always going to be up or down while trust is either established or is not, said Jamey Seely, general counsel of Crusoe Energy Systems and host of the webcast.
“It goes back to general counsel first principles,” Seely said. “How do you establish trust and do so quickly?”
The answer, Seely said, pointing to Margolin’s experience, is, “you have to make some reasonable arguments.”
