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Do the math on your stock options

jvns.ca

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Re: Do the math on your stock options

#41

Post by x0x0 »

jakozaur wrote: post #27

It would be so much easier for everyone, if companies would IPO earlier. Evaluation of your option value would be straightforward, there is liquid market, no need to worry about investors preferences, ratchets, etc. Also the whole market gains a lot of efficiency if basic financials are public. Not so long ago, companies used to IPO way earlier... Microsoft, Apple, Amazon...

Unfortunately, it appears that many startups have gotten their valuation ahead of their economics, so IPOing isn't an easy option for them because it would be a large down round. IIRC, most of the large tech ipos in the last year went public below their final private valuations. Though to be fair, the last investors often got ratchets.

This is a good read too

http://thomasgr.tumblr.com/post/135710601255/the-pre-ipo-dip...

Re: Do the math on your stock options

#42

Post by draw_down »

jackgavigan wrote: post #21
Gibbon1 wrote: post #19

Earlier quoted context omitted.

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 start…

> If they told you that the number of outstanding shares was privileged and confidential they are crooks in nice suits. Never attribute to malice that which is adequately explained by stupidity. Getting a seed round doesn't magically confer the founders/C*Os with an comprehensive understanding of how company equity works. Or common sense.

If they were that dumb they would have just coughed up a number. So let's trade aphorisms:

"A witty saying proves nothing." - Voltaire

Re: Do the math on your stock options

#43

Post by rahimnathwani »

davidwihl wrote: post #36
millstone wrote: post #5

Earlier quoted context omitted.

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…

Even if you knew the number of shares outstanding at the time of the option grant, it would still be useless. The company can issue new shares at any time leading to dilution. Also at some future liquidity event (acquisition, IPO), a significant number of new shares can be issued leading to more dilution. So yes, options are somewhat of a lottery ticket with ever changing odds. If the company does extraordinarily wel…

"The company can issue new shares at any time leading to dilution."

Yes, but the directors of the company are obligated to act in the best interest of shareholders, so hopefully they would do that iff it increases the value of existing shares. (OK, there are many things wrong with this, including the fact that option holders are not shareholders.)

"If the company does extraordinarily well, you will do well also."

Yes, but if the company does very (but not extraordinarily) well, you might end up with nothing.

"If you are making a significant contribution to that success, a rational company will want to reward you and incent you to stay with more options."

But your contribution may not be constant. An early engineer who took a risk (low salary, high chance of being laid off) and built the prototype may not fit in when the company grows, so there may be little rational incentive to treat her fairly.

Re: Do the math on your stock options

#44

Post by rahimnathwani »

JumpCrisscross wrote: post #40

Always ask for: 1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide". 2. CASHLESS EXERCISABILITY. Always a…

Is it common for engineers to be granted these terms if requested, even if they're not already baked into the company's existing documentation?

If the company hadn't done this before, they'd need to think through the implications for their processes, and probably get a legal stamp of approval. They might not be willing to do this, and instead pass on even a potentially great employee.

Re: Do the math on your stock options

#45

Post by lifeisstillgood »

Is this a sensible approach:

You have offered me X ordinary shares which is y % of total outstanding.

I want a contract that guarantees me the same % of this class of shares, and the same % of any other more privileged class of shares, and I am given an opportunity to participate in every liquidation event pre public offering

Seems to cover many of the horrors people have hit?

Re: Do the math on your stock options

#46

Post by vidarh »

discordianfish wrote: post #32

Is it really that hard to find a buyer for private shares in a "good looking" startup? It almost sounds impossible, yet I talked to some people who said it's not that hard. I guess I have to find out..

There are tons of brokers that makes their living doing this. It's not necessarily hard, depending on how good price you want to hold out for, but it can take a lot of time and be unpredictable, because the buyers are not necessarily sitting around waiting and so it can depend on finding a broker that have the right kind of potential buyer on the books that they can contact.

I've sold shares same day in an unlisted company, and then a few weeks later called the broker to sell more and ended up taking several months to find a buyer, but on my end it wasn't "hard" - it was just a matter of waiting it out.

Re: Do the math on your stock options

#47

Post by JumpCrisscross »

rahimnathwani wrote: post #44
JumpCrisscross wrote: post #40

Always ask for: 1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide". 2. CASHLESS EXERCISABILITY. Always a…

Is it common for engineers to be granted these terms if requested, even if they're not already baked into the company's existing documentation? If the company hadn't done this before, they'd need to think through the implications for their processes, and probably get a legal stamp of approval. They might not be willing to do this, and instead pass on even a potentially great employee.

With an early-stage company, i.e one having not yet raised its Series B, a high-value employee should be able to negotiate almost everything. The earlier-stage and higher-valued the employee, the likelier the company is to budge.

I wouldn't encourage anyone to turn down an offer for its lack of cashless exercisability. The lack thereof, however, causes pain. That should be compensated for. On transferability, I would mark down non-transferable stock to zero in any salary-or-equity trade-off calculation.

Re: Do the math on your stock options

#48

Post by lazaroclapp »

jackgavigan wrote: post #21
Gibbon1 wrote: post #19

Earlier quoted context omitted.

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 start…

> If they told you that the number of outstanding shares was privileged and confidential they are crooks in nice suits. Never attribute to malice that which is adequately explained by stupidity. Getting a seed round doesn't magically confer the founders/C*Os with an comprehensive understanding of how company equity works. Or common sense.

In all fairness, anyone who doesn't get that the expression c/x where c is known and x is unknown can match any given rational number - or the implication that this makes c convey zero information - is pretty much definitionally unfit for running a tech company. So malice might actually be the charitable explanation here.

I mean, imagine if someone followed the same practice for the salary part of compensation: "We will pay you money!" "Eh... how much?" "Some. The actual number is privileged and confidential."

Re: Do the math on your stock options

#49

Post by maaku »

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…

Yes, and yes.

Re: Do the math on your stock options

#50

Post by fiachamp »

There actually IS a way to exercise after you leave without laying out cash + tax dollars today. Consider esofund.com, its a fund that will pay your exercise price and tax liability for a proportion of your upside in a good financial outcome. If it doesn't work out, well at least you didn't throw away your own cash. They're basically a vc that takes common stock in companies by getting rights to employee shares.
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