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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

#41

Post by danshapiro »

tptacek wrote: post #31
danshapiro wrote: post #30

Earlier quoted context omitted.

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.

I was locked out of an investment round at one company because of qualification status. I'm pretty sure being meeting the accredited investor standard actually does matter, at least if you're not an employee and the round involves an exchange of money for financial instruments.

If your agreement had guaranteed you investment rights you would have had them. Since it didn't, it was at their discretion, and they could have used many different criteria to make that decision. Now as a general rule, when you have an option in the matter, you don't want non-accredited investors in your deal. But assuming that accredited status grants follow-on investment rights (or that lack of them prevents it) as a rule is wrong.

Re: How much startup stock options are worth

#42

Post by danshapiro »

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.

That's very normal; founders usually have mostly common, and sometimes have extra restrictions. The other commenter is right, though - anyone with influence in a transaction typically comes out better, and founders are often in such a position.

Re: How much startup stock options are worth

#44

Post by loewenskind »

kevinpet wrote: post #37
yoak wrote: post #13

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 ad…

I don't see what's so horrible about that. By the time you get to the offer, you have an idea of the current valuation of the company. The price * options = $1000 already tells you if the company can grow 25x, you'll make on the order of $25k. Or maybe you're just saying who the hell bothers to negotiate over $1000 over 4 years. I guess that's a valid point.

I think what he was saying is; they don't know what the options are worth. The strike is 10 cents. What if the shares are so diluted that a realistic exercise price will be 8 cents?

Re: How much startup stock options are worth

#45

Post by yoak »

kevinpet wrote: post #37
yoak wrote: post #13

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 ad…

I don't see what's so horrible about that. By the time you get to the offer, you have an idea of the current valuation of the company. The price * options = $1000 already tells you if the company can grow 25x, you'll make on the order of $25k. Or maybe you're just saying who the hell bothers to negotiate over $1000 over 4 years. I guess that's a valid point.

As the other commenter pointed out, that's not my point. If I issue a billion shares and offer you stock options at a $0.10 strike price you can't really expect the company to grow that 25x . It's an entirely different matter if there are 50,000 shares.

You may be assuming that the strike price is fairly pegged at a real value of the company and thus you can make assumptions about real growth of the company in terms of multiple. Short of public markets, this is always a questionable assumption, but in the case of new startups it is almost completely arbitrary. When you start a new one, there is no reason to differentiate between choices in the number of shares varying by a factor of 10,000x or more, and strike prices are almost as flexible.

Perhaps the best reason to pick any number is to pick a large one because of the (irrational) psychological impact that your large absolute number of shares will have in option grants.

I suppose this emerges out of people's naive appreciation of public markets. Smaller companies often have stock prices in the teens. Mature, stable companies tend to hold prices closer to a hundred. Blockbusters like Google go to 400! Etc. These prices are managed with splits and have little to do with the return captured by owners of the stock, but people looking at it from the outside sometimes miss this. That's why I appreciated the article so much. It goes beyond these simple matters.

Re: How much startup stock options are worth

#46

Post by tungwaiyip »

With all due respect on this formula, it is only one instance of many possibities. There are numerous assumption being made. The range of outcome can easily be 10x different (with the mode being 0 obviously).

Could it gives a more reprentative picture if we can do a survey on successful exit? Something like glassdoor.com?

Also i've heard really good story happened to the talents in talent acquisition situations. I wonder if the number can turn out better in those cases, especially for non-founder and non-exec.

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