How much startup stock options are worth
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How much startup stock options are worth
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Re: How much startup stock options are worth
#2Love the simple equation - really calls into clarity what is a very fuzzy subject.
Re: How much startup stock options are worth
#3When people ask me this, I always run away crying. Finally I can point them somewhere.
Re: How much startup stock options are worth
#4I didn't want to clog the article with an explanation of each of the heuristics I provided, so here it is in the comments.
#1 is pretty self-explanatory.
#2 is the expected value, halved because an awesome startup with every chance of success still fails half the time. If you're swinging for the fences (shooting for IPO), you're way more likely to either fail or get so much preference ahead of the common that you never see anything.
#3 is because everyone underestimates the amount they'll need to raise.
#5 The huge penalty is for two reasons. One, because it's tremendously bad for the common. Two, because it often means something worse: the company's up against a wall, the CEO's a bad negotiator, everyone's expecting the common to be worthless so they have to make it up in preferences, etc.
#6 Again, the direct impact isn't as bad as this makes it out to be, but a CEO who does a good job negotiating preferences is a leading indicator of other good things: s/he knows how to generate demand for the company, has leverage, knows how to squeeze every ounce out of a deal, etc. This is basically a proxy for if the CEO will do well during negotiations to sell the company.
#7 A common-dominated board will tend towards common-friendly exits, and indicates a CEO who does well in negotiations. Again, this is all guesswork, particularly trying to figure out the all important "will the CEO do a good job selling the company" factor. But I think it's a decent swag.
Re: How much startup stock options are worth
#5Does anyone have any advice on how you're supposed to tactfully get all the info required to do this computation?
During my recent job search, I received offers with options from companies who refused to tell me what the count of fully diluted shares was. No one was particularly comfortable answering questions about expected exit. When I tried to ask various questions to estimate some kind of ballpark value for the equity being offered, one company took this as a signal that I wasn't sufficiently enthusiastic about the offer or optimistic about their chances for success. They then started saying things like "We want to hire someone who's really excited to join our team..."
Ultimately the I had to use the "assume the options are worthless" stance, but then, with cash compensation being the only consideration, I ended up accepting an offer with a significantly more mature company.
How are you supposed to get this information while not giving the prospective employer the impression that you're either (a) too skeptical of the company's prospects or (b) too motivated by the money?
Re: How much startup stock options are worth
#6Does anyone have any advice on how you're supposed to tactfully get all the info required to do this computation? During my recent job search, I received offers with options from companies who refused to tell me what the count of fully diluted shares was. No one was particularly comfortable answering questions about expected exit. When I tried to ask various questions to estimate some kind of ballpark value for the e…
If they won't even tell you the # of fully diluted shares, I'd run away fast. Sounds like you made the right move.
Re: How much startup stock options are worth
#7Does anyone have any advice on how you're supposed to tactfully get all the info required to do this computation? During my recent job search, I received offers with options from companies who refused to tell me what the count of fully diluted shares was. No one was particularly comfortable answering questions about expected exit. When I tried to ask various questions to estimate some kind of ballpark value for the e…
It's a tricky one as startups are right to be cautious of releasing that info yet you do indeed need to know some of this info to make an informed decision. It's worth pointing out that within VC circles it's probably easy to get those figures for any startup that is funded or doing the round for funding so the data is hardly 'confidential'.
> No one was particularly comfortable answering questions about expected exit.
I also don't think asking founders about their expected exit $$$ is one of the figures you need.
What you need to know is:
1) How many options/shares they are offering you
2) How many outstanding unallocated shares
3) How many total shares in the company
4) Most recent valuation (from funding event, etc)
5) Strike price
These allow you to, among other things, work out the value of your shares today for 83(b) purposes which is important as you would need to paying the tax on that within 30 days of your grant if you want to go the long-term tax efficient route.
While we're on the subject of data startups are reluctant to give, I also need to know:
6) Amount raised to date
7) Runway (psychologically its better to ask for runway and calc burnrate yourself than ask it the other way around)
When I've been in this situation the tact I've used has been "Look, you're essentially asking me to invest in this company too because I'm taking an options/equity stake as part of my remuneration. I need to know the top line figures to make an accurate calculation of the total package
They might want to put you under and NDA to get the above, which is reasonable... just don't sign it unless you are making good progress with your interview
(I tend not to sign NDAs unless it's absolutely necessary and then only at last stage)
Re: How much startup stock options are worth
#8I generally assume they're worth exactly zero million dollars a piece, because that's what they're actually worth. A few places I've been have tried to pass off this whole "half your salary in stock options" rubbish while still giving me an acceptable wage in real money. This put a phantom value on stock options. At best, they're an exit bonus, which is an incentive to do your best to make your company thrive. It gives you a token that could be worth real money if everyone pulls together.
Don't expect anything from stock options.
Re: How much startup stock options are worth
#9Does anyone have any advice on how you're supposed to tactfully get all the info required to do this computation? During my recent job search, I received offers with options from companies who refused to tell me what the count of fully diluted shares was. No one was particularly comfortable answering questions about expected exit. When I tried to ask various questions to estimate some kind of ballpark value for the e…
I would try to get the company to answer these questions:
- Which is the most likely exit?: 10 MM, 100MM, 1B, 10B?
- Which best approximates my ownership?: .0001%, .001%, .01%, .1%?
If you can get answers to these, it's probably enough of an anchor to make an assessment. There so much variance in the outcome that additional accuracy won't add very much to the analysis.
EDIT: I should rephrase the first question as:
Which of these is the lowest number that would be considered a good exit?
If asked this way, it should account for the liquidation prefs, since those are normally irrelevant during "good" exits. It should also account for some level of risk, since the lowest good exit may be significantly lower than the actual exit (i.e. 100M would be good, but 1B is possible).
Re: How much startup stock options are worth
#10This is a fabulous article and I only want to add a tiny little bit of additional context:
* Exits north of $100MM are rare, and a $400MM exit is rare indeed; virtually any such exit will be from a famous company. Valuations are at least somehow tethered to sales, and companies that justify mid- 9-figure exits can usually consider IPO... as an example of how rare that event is.
* In most sectors of the industry there are rule-of-thumb valuations based on multiples on sales. An enterprise software company aiming for a $150MM acquisition is expecting 4-8x, and needs to be achieving 18MM (optimistically) to 40MM (conservatively) sales to do that. You can reconcile this estimate by asking for current sales, this year's "number" (in a well-run company, everyone knows the number), and then asking "what's going to happen to scale the number up".
* Last time I had to think pragmatically about VC, a round that took participating preferred shares (in which the VC takes their money off the table, then takes their percentage off the table) was an indication of a weak round; if they're shooting for the moon, you're entitled to hold that against them.
* Finally, remember that if you quit, the equation changes again. When you leave, you can execute your vested options, but that costs money. Perhaps nobody in the company is less protected than former employees: investors have contractual provisions to protect their money, and employees are given retention grants, but former employees can be written right out of the deal. I've seen it happen.