Do the math on your stock options • Hacker News Board

Re: Do the math on your stock options

#11

Post by diziet » Thu, Dec 31, 2015, 9:25 AM UTC

millstone wrote: post #5

jvns wrote: post #2

I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

If they could not share the numbers when giving an offer, I would be surprised and suspicious. Did you ask the founders?

At least they should be able to tell you the common strike price and ideally the fair market value of preferred shares. This would let you benchmark things fairly well.

What does late stage mean? How many employees? How much funding raised?

Re: Do the math on your stock options

#12

Post by rahimnathwani » Thu, Dec 31, 2015, 9:25 AM UTC

webo wrote: post #6

I have always just asked this one simple question: - What is the price per share at current valuation? I don't think it's has to be that complicated...

It's not that simple if there are multiple classes of shares, particularly if some have liquidation preferences attached.

Re: Do the math on your stock options

#13

Post by chubot » Thu, Dec 31, 2015, 9:26 AM UTC

It definitely seems like a bug that it's so difficult to realize any benefit until the company goes public, and when that happens -- if it happens at all -- is under the sole discretion of management. I guess there is a reason they're called golden handcuffs.

This problem was described well here:

http://blog.samaltman.com/employee-equity

and there are some interesting solutions. I wonder if any companies have taken this advice in the 20 months since it was given.

Re: Do the math on your stock options

#14

Post by diziet » Thu, Dec 31, 2015, 9:27 AM UTC

nbevans wrote: post #10

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

Nothing. Stock will get diluted. Typically every 'Series' fundraise will add 10-20% option pool and dilute the company by another 10-20% of preferred shares. The 'idea' is you have a smaller piece of a larger pie.

Very incredible companies will raise at better terms and valuations and dilute more. This is very rare.

Re: Do the math on your stock options

#15

Post by Anderkent » Thu, Dec 31, 2015, 9:27 AM UTC

You don't have to hold the stock until IPO. If the company is doing good, finding a private buyer through a stock broker shouldn't be that hard. Sure, you won't get the best deal, but it lets you cash out.

Also, if a private company grants you options and never gives you any options for liquidity (like buying the stock back when taking new investment etc) you should be really careful about overvaluing the options. Clearly the company wants to chain you down, not reward you.

Re: Do the math on your stock options

#16

Post by hnarayanan » Thu, Dec 31, 2015, 9:31 AM UTC

millstone wrote: post #5

jvns wrote: post #2

I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

Your experience is not normal, and you did the right thing. If someone offers you stock options as part of a compensation package, they ought to give you enough information to ascertain the current and potential value of these options. The fact that they're secretive about this makes the deal feel sketchy.

Re: Do the math on your stock options

#17

Post by gibybo » Thu, Dec 31, 2015, 9:39 AM UTC

nbevans wrote: post #10

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

In theory, the company has a legal fiduciary duty to act in the best interest of the shareholders. If they try to rob the shareholders by unreasonably diluting, you could sue for breach of that responsibility.

In practice, nothing really prevents it completely. However, the founders will generally be getting diluted the same amount as you so their interests are somewhat aligned with yours to negotiate a reasonable dilution amount. If they make some deal in which other shareholders get diluted much worse than themselves, it's often strong grounds for a legal suit.

Re: Do the math on your stock options

#18

Post by pinkunicorn » Thu, Dec 31, 2015, 9:43 AM UTC

millstone wrote: post #5

jvns wrote: post #2

I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

I can almost guess the company from the number of stock options offered. I was in a similar situation, but I accepted the offer and these articles a bit too late :(

I like the experience of working here, but now I totally realize I have lost a significant amount just by not negotiating anything.

Re: Do the math on your stock options

#19

Post by Gibbon1 » Thu, Dec 31, 2015, 9:46 AM UTC

millstone wrote: post #5

jvns wrote: post #2

I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

If they told you that the number of outstanding shares was privileged and confidential they are crooks in nice suits.

Also at this point in time there is so much shady stuff going on with options that you should always always value options at zero. Frankly if all you are offering is your labor in return for options you don't have the pull to get a particularly good deal. (Example: Friend worked three years at a startup. Friend is smart. Friend got ~$50,000... whoop dee doo dah day)

Only other advice I have is, if you are considering exercising any stock options you need to talk with a tax accountant before you pull the trigger. No exceptions.

Re: Do the math on your stock options

#20

Post by mikeyouse » Thu, Dec 31, 2015, 9:51 AM UTC

rahimnathwani wrote: post #12

webo wrote: post #6

I have always just asked this one simple question: - What is the price per share at current valuation? I don't think it's has to be that complicated...

It's not that simple if there are multiple classes of shares, particularly if some have liquidation preferences attached.

Yep, quick example -- company valued at $300M, 150M shares outstanding, options should be worth $2/share, right?

Except if that company raised $100M to get that valuation, the preferred shares will certainly have at least a 1x preference. If they are fully-participating, the new math world make the shares worth ($300-$100) / 150M or $1.33/share.

In round numbers, I worked for a similar company but they had to take a terrible down round post-GFC with 3x participating preferred. In that case the common options would literally be worth $0.