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How much startup stock options are worth

danshapiro.com

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Re: How much startup stock options are worth

#11

Post by tptacek »

mikebo wrote: post #6
abeppu wrote: post #5

Does 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.

I might not run (this is unfortunately a common practice), but I would be explicit in negotiation that you value an options grant without that information at $0.00. You can say that politely, or even apologetically, but make it clear that you'd give some flexibility on salary or paid vacation days in exchange for more information (don't be specific about this though).

Re: How much startup stock options are worth

#12

Post by danshapiro »

abeppu wrote: post #5

Does 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…

Great question. The key is to position your questions of being indicative of commitment and excitement, and part of a measured pace of engagement, rather than skepticism. I like the line about being an investor. Here's a script you can steal from mercilessly.

I've spent many hours with your team, and we've covered a ton of topics: the technology, the vision, the product, the market, and the opportunity. I'm completely sold on all these points. There's just one area we haven't covered, and that's the positioning and goals of the business itself. I'm in this for the long haul and I think of myself as an investor, so I have a bunch of detailed questions for you about the company's finances and plans. Of course, I realize it's very bad for all of us if this information goes out, so I understand if you need me to sign an (additional) nondisclosure agreement before we get in to it. But knowing this will help me understand where we've been and where we're going, as well as reinforcing my gut feel that what you're offering represents a meaningful stake in this business going forward.

Good luck. ;)

Re: How much startup stock options are worth

#13

Post by yoak »

I really appreciate this article. Unimaginably, most programmers I interview to this day in late 2010, react primarily to number of shares an offer includes option to buy. I've written offers with (made up numbers) option to purchase 10,000 shares at a strike price of $0.10 and had candidates, asking no questions, attempt to negotiate for 20,000 shares which is something that they'd be more comfortable with.

In my admittedly limited experience, just realizing that there are a number of shares out there (fully diluted or not!) and that this grant translates to a percentage of the company and that the strike price implies a valuation is beyond a solid majority of people I've seen receive stock option grants. Articles like this one are certainly needed to improve education on these matters.

Re: How much startup stock options are worth

#14

Post by lemming »

tptacek wrote: post #10

This 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…

Great comment, thanks.

former employees can be written right out of the deal

Can you elaborate on this? How does this work? As a holder of a lot of common stock in an increasingly VC-dominated company, this is interesting to me - surely if I buy my shares, I have that proportion of the company with the same rights as any other common stock holder? What about a "normal" acquisition deal could change that?

Re: How much startup stock options are worth

#15

Post by Timothee »

tptacek wrote: post #10

This 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…

My very first job was at a startup and I was all excited to get stock options. Later, I heard from a colleague who had bought his options from a previous company which had been bought recently: he had a call with the CFO who had to explain that, no, there wasn't anything left for the options he had bought. So, the $5k or so he paid for it were worth nothing at all.

That's when I learned to lean more towards the "options are worthless unless you're a very early employee in a high-potential startup".

(when I think about this, it saddens me a bit how cynical my first jobs have made me)

Re: How much startup stock options are worth

#16

Post by tptacek »

lemming wrote: post #14
tptacek wrote: post #10

This 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…

Great comment, thanks. former employees can be written right out of the deal Can you elaborate on this? How does this work? As a holder of a lot of common stock in an increasingly VC-dominated company, this is interesting to me - surely if I buy my shares, I have that proportion of the company with the same rights as any other common stock holder? What about a "normal" acquisition deal could change that?

VC and founders, holding preferred shares, take money off the table first. If things get tight, later VC's may take 2+x preferences. Deals can be structured that return cash to the VC, wipe out the rest of the equity, and leave existing employees grants or bonuses for retention; this latter deal element is an incentive extended by the acquiring company, not an entitlement owed shareholders.

Re: How much startup stock options are worth

#17

Post by tptacek »

Timothee wrote: post #15
tptacek wrote: post #10

This 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…

My very first job was at a startup and I was all excited to get stock options. Later, I heard from a colleague who had bought his options from a previous company which had been bought recently: he had a call with the CFO who had to explain that, no, there wasn't anything left for the options he had bought. So, the $5k or so he paid for it were worth nothing at all. That's when I learned to lean more towards the "opti…

Having friends who had the same experience, that's been my attitude as well, but since I have a knack for sounding like I know exactly what I'm talking about even when I don't, let me candidly say that this attitude cost me a low but significant amount of money when my last employer got acquired. I didn't exercise my options.

I don't regret it, because the money I'd've spent to exercise helped get me through year #1 at Matasano, but if it hadn't, I might be upset.

Re: How much startup stock options are worth

#18

Post by trotsky »

lemming wrote: post #14
tptacek wrote: post #10

This 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…

Great comment, thanks. former employees can be written right out of the deal Can you elaborate on this? How does this work? As a holder of a lot of common stock in an increasingly VC-dominated company, this is interesting to me - surely if I buy my shares, I have that proportion of the company with the same rights as any other common stock holder? What about a "normal" acquisition deal could change that?

I can't tell you the best or even the most modern ways, but one of the simpler ways I've seen this done is a massive dilution where key owners (investors, founders) have anti-dilution clauses coupled with new grants and acceleration for current employees. This works even if the liquidity event is so massive everyone involved is recouping well past their preferences.

My impression is that options agreements and grants that offer any real protection against being screwed once the company lacks any incentive to keep you happy are few and far between. If you don't _know_ you're protected from such things, you're undoubtedly not.

Re: How much startup stock options are worth

#19

Post by donaldc »

tptacek wrote: post #11
mikebo wrote: post #6

Earlier quoted context omitted.

If they won't even tell you the # of fully diluted shares, I'd run away fast. Sounds like you made the right move.

I might not run (this is unfortunately a common practice), but I would be explicit in negotiation that you value an options grant without that information at $0.00. You can say that politely, or even apologetically, but make it clear that you'd give some flexibility on salary or paid vacation days in exchange for more information ( don't be specific about this though).

make it clear that you'd give some flexibility on salary or paid vacation days in exchange for more information

I disagree. You shouldn't trade anything for the information. A company should make the information available if they want the value of the options to be considered greater than $0. You are already considering trading some salary for the options, but the onus is on the offering company to make enough information available to convince you that the options are worth it.

Re: How much startup stock options are worth

#20

Post by donaldc »

abeppu wrote: post #5

Does 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've never had trouble getting the number of fully diluted shares once an offer has been made. If a company isn't willing to share this with me, I'd probably assume they were going to figure out a way to screw me over one way or another.
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