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If you have startup stock options, check your option plan

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Re: If you have startup stock options, check your option plan

#51

Post by simonebrunozzi »

AndrewKemendo wrote: post #11

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and…

Andrew, it would be great if you write a detailed blog post about this. I bet that quite a few startups would love to follow you here.

Re: If you have startup stock options, check your option plan

#52

Post by choppaface »

AndrewKemendo wrote: post #11

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and…

Does this system effectively make employees do 83b early exercises? or is it more like a custom RSU program?

Re: If you have startup stock options, check your option plan

#53

Post by joncalhoun »

triplesec wrote: post #23
AndrewKemendo wrote: post #11

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and…

I wish more companies were so transparent and decent as yours. Why do others prefer not to do it this way, if it's not just sheer greed and obfuscation?

I believe this is typically called "reverse vesting", and it isn't incredibly uncommon, but I have only seen it with small (pre-series A) companies.

My (very basic) understanding is that this works fine early on, but once a company reaches a certain size & valuation it becomes hard to continue.

Re: If you have startup stock options, check your option plan

#54

Post by ChicagoDave »

Options are useless. Their value is entirely based on what the actual shareholders decide. It doesn't matter if stock gets sold to other investors or the company goes public. Options are useless. You want a stake in a business, you need to ask for actual stock. Not options.

Re: If you have startup stock options, check your option plan

#55

Post by icedchai »

cylinder wrote: post #30
bluehex wrote: post #5

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic,…

How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?

Basically, the investors (with preferred stock) get paid out first, sometimes at a multiple of their original investment. The amount "left over" goes to the common stock holders. Sometimes that amount is zero, so they get nothing.

I had this happen to me in a previous start up. I wasn't really surprised.

Re: If you have startup stock options, check your option plan

#56

Post by dmitrygr »

tieTYT wrote: post #29

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this informatio…

"nobody has ever asked these questions about the options they were getting" -> "company is full of idiots - run (dont't walk) away"

Re: If you have startup stock options, check your option plan

#57

Post by ChuckMcM »

cylinder wrote: post #30
bluehex wrote: post #5

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic,…

How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?

It works as follows, there is a line of people who need to get paid,

If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK

When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the common value, the investor gets their liquidation preference and the common value. Note that these numbers are in $dollars not in $shares, so if VC A puts in $1M dollars with a 2X liquidation preference they get back $2M dollars. $POOL -= $LIQUIDATION

Sometimes at the same level, or just behind the investors, are convertible note holders, who gave money or equipment in exchange for shares. They often have the choice of getting either their money back, or the shares. $POOL -= $NOTE.

At this point, if there is anything left in the pool it gets distributed to common shares.

A nice rule of thumb is that the most common liquidation preference is 2X (these days anyway) so if the price is And in those situations it makes no difference if your stock 100% vests on acquisition or not, it is still worth 0.

Re: If you have startup stock options, check your option plan

#58

Post by icedchai »

tieTYT wrote: post #29

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this informatio…

They don't want to tell you, because that would essentially reveal their inflated valuation.

Re: If you have startup stock options, check your option plan

#59

Post by mattgreenrocks »

Someone could probably make a nice bit of money on the side helping new engineers in SF review/deal with their stock options. You'd have to know this stuff well, but I don't think that's a big hindrance to anyone.

Think of it as both giving back and pushing back on what can be predatory treatment of employees.

Re: If you have startup stock options, check your option plan

#60

Post by ScottBurson »

ditonal wrote: post #50
iykwimthrowaway wrote: post #44

Earlier quoted context omitted.

I'm very curious about the middle part of this spectrum, since I'm currently in it: I'm an early employee with a significant chunk of options (high single-digit %), and the company is profitable and valued at (to my understanding) somewhere well over 10x the total amount of funding we took (I've heard talk of 40-50x). Management is explicitly not looking for an exit: they just want to keep building this company for t…

Are you invited to board meetings? If not, considering yourself a "potential owner" when you're not invited to the meetings where owners decide things means you are very confused about things. There's a reason why when a company goes public, the quarterly minutes at board meetings become public as well, because you aren't really an owner if you're excluded from even learning about the biggest of decisions. What you s…

Why do you think the common shares are worthless, if the company is worth 10x (to use the conservative number) the amount invested in it?

I think my inclination would be to exercise the options, because if I didn't, and they turned out to be worth something, I would just want to shoot myself. But this isn't necessarily a rational argument :-)

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