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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

#21

Post by URSpider94 »

What you REALLY want to know are things that you're not likely to find out in your offer:

* How does your share allocation compare to your peers, superiors and subordinates? In other words, are you getting an equitable share in the company for your position?

* What is the board's strategy for maintaining employee ownership in the face of dilution? Regardless of what you start with, it can be made irrelevant as the number of outstanding shares goes up in future financing rounds. It is natural to expect your ownership share to go down over time as the company grows, but additional share grants can mitigate that effect.

Re: How much startup stock options are worth

#22

Post by lemming »

tptacek wrote: post #16
lemming wrote: post #14

Earlier quoted context omitted.

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.

Is it normal for founders to have preferred shares? In our case the founders all have common stock (albeit a lot of it), and in fact it came with more restrictions than normal common stock, namely a 3-year restricted stock period similar to an option vesting period.

Re: How much startup stock options are worth

#23

Post by URSpider94 »

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?

Key phrase: tyranny of the majority.

You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's.

One way this is typically done is to increase the share count by 10X, then sell these new shares for 10 cents on the dollar to a sub-group of new investors.

As an existing shareholder, you MAY have the right to buy into such a deal, but only if you are a "qualified investor", meaning that you have substantial liquid wealth. Otherwise, you'll be left sitting on the sidelines.

Even in a "normal" acquisition, the current shareholders will have to vote on the deal, so it's not uncommon for the large shareholders to cut lucrative side deals with the buyer that give them much more profit than the average shareholder.

Re: How much startup stock options are worth

#24

Post by timr »

tptacek wrote: post #16
lemming wrote: post #14

Earlier quoted context omitted.

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.

Concrete example -- Slide's acquisition:

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/08/06/...

The later investors just barely made their money back, so the employee options were (probably) worthless as well. Google issued new retention to make up for the fact that the employees got squashed, but not every acquirer is so generous.

Re: How much startup stock options are worth

#25

Post by tptacek »

donaldc wrote: post #19
tptacek wrote: post #11

Earlier quoted context omitted.

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 inform…

Your argument is principled but not very pragmatic.

When a potential employer gives you anything they consider "significant" equity (ie, worth mentioning as a major part of your comp plan), they are implicitly discounting your salary to make up for it. If you accept their offer, you have given them salary flexibility without receiving consideration.

In reality, information is very much something that negotiating parties exchange. But, I agree that you should reasonably expect enough information to value your equity if equity is a major part of your comp. All I'm really saying is, make it clear to your counterparty that the lack of information about your equity is raising your negotiating floor. Which, logically, it must.

But I am also specifically not saying, "offer 5k off your salary in exchange for valuation information".

Re: How much startup stock options are worth

#26

Post by tptacek »

lemming wrote: post #22
tptacek wrote: post #16

Earlier quoted context omitted.

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.

Is it normal for founders to have preferred shares? In our case the founders all have common stock (albeit a lot of it), and in fact it came with more restrictions than normal common stock, namely a 3-year restricted stock period similar to an option vesting period.

Dunno, but note that founders often hold board states, and VC has an incentive to make sure they can take some money off the table, else they can make it harder to complete the best deal VC thinks they can get, in the name of holding out for an actual return.

Re: How much startup stock options are worth

#27

Post by skinnymuch »

URSpider94 wrote: post #23
lemming wrote: post #14

Earlier quoted context omitted.

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?

Key phrase: tyranny of the majority. You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's. One way this is typically done is to increase the share count by 10X, then sell these new shares for 10…

Did Facebook's Eduardo Saverin get 5% of Facebook back because he was singled out? If more stock holders were pushed out, would Saverin not have gotten 5% back?

Re: How much startup stock options are worth

#28

Post by tptacek »

URSpider94 wrote: post #23
lemming wrote: post #14

Earlier quoted context omitted.

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?

Key phrase: tyranny of the majority. You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's. One way this is typically done is to increase the share count by 10X, then sell these new shares for 10…

This all sounds plausible but note that the owners don't even have to intend to screw you out of your equity to screw you out of your equity. All that has to happen is for the company valuation to come in under the value of liquidation preferences, or for the deal to be so tight that much of the return is structured as an earnout for existing employees.

Re: How much startup stock options are worth

#29

Post by tptacek »

URSpider94 wrote: post #21

What you REALLY want to know are things that you're not likely to find out in your offer: * How does your share allocation compare to your peers, superiors and subordinates? In other words, are you getting an equitable share in the company for your position? * What is the board's strategy for maintaining employee ownership in the face of dilution? Regardless of what you start with, it can be made irrelevant as the nu…

It is simply irrational to value an offer of employment relative to what existing employees received.

Re: How much startup stock options are worth

#30

Post by danshapiro »

URSpider94 wrote: post #23
lemming wrote: post #14

Earlier quoted context omitted.

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?

Key phrase: tyranny of the majority. You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's. One way this is typically done is to increase the share count by 10X, then sell these new shares for 10…

One mistake in the above: the right to participate in future financing rounds has nothing to do with qualified investor status, and everything to do with whether your agreement guarantees it. Good CEOs will often make sure all their investors are given a chance to participate (because it's the right thing to do and reduces the chance of one class of lawsuits) but it's only a guarantee if your documents say it is.
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