Do the math on your stock options • Hacker News Board

Re: Do the math on your stock options

#51

Post by mikeash » Thu, Dec 31, 2015, 12:33 PM UTC

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.

Crooks, or dumber than a baked potato. Either way, run fast and far.

Re: Do the math on your stock options

#52

Post by puppetmaster3 » Thu, Dec 31, 2015, 12:39 PM UTC

rahimnathwani wrote: post #43

davidwihl wrote: post #36

Earlier quoted context omitted.

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…

"obligated to act in the best interest of shareholders". Obligated how specifically?

Also, all shareholders, or the majority?

Re: Do the math on your stock options

#53

Post by isolate » Thu, Dec 31, 2015, 12:42 PM UTC

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 recommend hiring an independent financial advisor, they probably cost $100-200 per hour in your area. (Banks will do it for free but they will also recommend that you buy garbage.) Ask them about options up front and see what they say. And also get an accountant to do your taxes. The cost is peanuts compared to the amount of capital you're dealing with. Just because you can learn how to do something doesn't mean it's worth it.

Re: Do the math on your stock options

#54

Post by mamon » Thu, Dec 31, 2015, 12:55 PM UTC

puppetmaster3 wrote: post #52

rahimnathwani wrote: post #43

Earlier quoted context omitted.

"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…

"obligated to act in the best interest of shareholders". Obligated how specifically? Also, all shareholders, or the majority?

Obligated by law: deliberately acting against (some) shareholders interest is a criminal offense.

Re: Do the math on your stock options

#55

Post by ryaniscool » Thu, Dec 31, 2015, 1:03 PM UTC

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…

Restrictions on transferability is standard for a private company. Kudos if you are able to negotiate this but I think a small company would be crazy to agree to this. It opens the door to a whole list of potential burdens for the company.

Re: Do the math on your stock options

#56

Post by isolate » Thu, Dec 31, 2015, 1:09 PM UTC

Smaug123 wrote: post #28

I have a single peeve with this otherwise excellent article: "My after-tax salary is less than $100,000 USD/year, so by definition it is impossible for me to exercise my options without borrowing money." This fact isn't true "by definition". It's true "by arithmetic". We say a fact is true "by definition" if it isn't true for any other reason. [1] [1]: http://lesswrong.com/lw/nz/arguing_by_definition/

It's not even a fact - she can exercise the options more slowly than she is given them and still exercise all of them.

Re: Do the math on your stock options

#57

Post by shubhamjain » Thu, Dec 31, 2015, 1:11 PM UTC

One thing I wish to know is whether it is possible to negotiate the terms so you have preference of liquidating some of your shares when company raises a round. Surely, the possibility of an IPO or an acquisition might be uncertain but another funding round seems a very plausible event.

One company, Atlassian, did raise one round solely to allow employees to vest their shares but I am not sure how common this is in Silicon Valley's Tech Culture.

Re: Do the math on your stock options

#58

Post by drglitch » Thu, Dec 31, 2015, 1:15 PM UTC

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

Re: Do the math on your stock options

#59

Post by nbevans » Thu, Dec 31, 2015, 1:20 PM UTC

diziet wrote: post #14

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.

Indeed. In other, perhaps less "SV" companies, I've seen it happen where the CEO wants to bring in an associate as perhaps the COO, CTO, CFO or some other high level position. Obviously such a person won't just leave their "megacorp" job without some shares being offered to join the riskier venture. So they end up diluting the company just so that a certain % can be given to this new "super experienced and respected head". It is sold to the rest of the company that he will bring in new customers. What actually happens is almost nothing. No real value is created. Just expectations are created.

This can be the same with "fund raising". Just because the company has diluted itself and now has a few million in the bank... it still has to spend that money wisely and correctly in order to realise a genuine "the pie is now bigger than before" that the shareholders were expecting.

Re: Do the math on your stock options

#60

Post by JumpCrisscross » Thu, Dec 31, 2015, 1:23 PM UTC

ryaniscool wrote: post #55

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…

Restrictions on transferability is standard for a private company. Kudos if you are able to negotiate this but I think a small company would be crazy to agree to this. It opens the door to a whole list of potential burdens for the company.

> Restrictions on transferability is standard for a private company

A right of first refusal (ROFR) is a reasonable transfer restriction. So is a lock-up period, e.g. you may not sell these shares within N years of getting them. Bans, on the other hand, are not. For a common stockholder, requiring board approval is a cutesy way of saying "ban".