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The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
Earlier quoted context omitted.
It's the preference and its multiplier that gives investors their money back first. These aren't different things, they're one thing, and generally only matter if the company exits for less than the valuation the investors invested at. The exception to this is if any investors have a liquidation preference > 1x (you should avoid companies where this is the case). Preferences also don't stack with the rest of a liquid…
Whether it's and vs either/or is the difference between a liquidation preference or a participating liquidation preference. And indeed the more than 1x cases are also problematic for common stock holders. But I do assume the 409A for the fair marker value of the common stock takes these into account? Not a US tax expert :-)
To answer your question, yes, doling out company value to different share classes is part of the 409A calculation. I've used Carta and Pulley for this, but it looks like neither has their docs posted publicly. Here's Pulley's overview page from our last 409A, though:
Valuation Analysis
To determine the fair market value of the Subject Interest in our analysis, the following steps were taken:
Step 1 - Determine the value of the Company using an appropriate methodology(ies)
Step 2 - Allocate the value of the Company to the various share classes taking into account share classes economic rights and preferences
Step 3 - Apply a discount for lack of marketability (“DLOM”) to the resulting per share value of common
Step 4 - Analyze any secondary transactions that have incurred in the past and determine to what extent they should be considered relevant in determining the value of the Subject Interest in the analysis
The system is built to handle non-standard liquidation preferences, but anything more esoteric (e.g. your participating preferred shares) probably needs a bespoke valuation. You won't see this stuff from successful VCs, though. It would be a bit like investing in SpaceX, but having one of the terms be an increase in Earth's gravity.
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
One thing I've learned working for startups is if you're working for a founder who's already had a previous successful startup exit(s), two things are true: 1. the founder already has generational wealth and this current company means practically nothing to them. 2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
What you should understand is that they are a longshot. Like, worse than 10 to 1. I’ve gotten lucky and made a truckload of money on them, and know many people who have done the same. I’ve also had them be an utter waste of money. It’s very much a gamble and it’s unlikely to pay off. This doesn’t make it a scam.
What I particularly resent is the pretence from companies that a lower salary can be compensated by options. Such BS
Just something I’ve seen lately at all of the startups I’ve worked at… The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV
I've concluded that options are a scam after owning them in many companies. It's never amounted to anything
For all the complaining about options there's little acknowledgement of how little startup work contributes to society relative to the money we rake in from people willing to fund it.