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Do the math on your stock options

jvns.ca

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Re: Do the math on your stock options

#81

Post by JumpCrisscross »

ryaniscool wrote: post #74
JumpCrisscross wrote: post #60

Earlier quoted context omitted.

> Restrictions on transferability is standard for a private company A right of first refusal (ROFR) is a reasonable transfer restriction. So is a lock-up period, e.g. you may not sell these shares within N years of getting them. Bans, on the other hand, are not. For a common stockholder, requiring board approval is a cutesy way of saying "ban".

You're basing this on what? Not saying your wrong but what is the basis of this opinion ? Employees usually get restricted stock until there is a liquidity event.

"Restricted stock" means the securities are un-registered [1]. The minimum holding time is 6 months. All stock issued by a privately-held company is "restricted stock". Practically all other transfer restrictions are at the company's discretion.

ROFRs are the only restriction I've seen widely enough to merit calling "standard". Everything else exists in different forms in different companies, all the way up to being wholly non-existent for some combination of employees, executives and institutional shareholders.

My work involves helping private companies raise capital and investors (mostly institutions) sell privately-held positions.

[1] http://www.sec.gov/investor/pubs/rule144.htm

Re: Do the math on your stock options

#82

Post by ryanSrich »

drglitch wrote: post #58

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

In my experience it's never a good idea to take a pay cut in lue of equity. Taking a pay cut because you like the product, the role, etc. are infinity better reasons than equity.

In my opinion a 40% pay cut and being one of the first 5 engineers warrants co-founder status.

Re: Do the math on your stock options

#83

Post by DanielShir »

As a founder who's been through a liquidation event, I have to say that stock options are a terrible way to reward employees. The tax issues alone (not to mention all the other stuff mentioned in this thread) are a huge pain for most ordinary people. The only reason companies use this is that there's no better alternative... Anyone ever encounter some other financial instrument that's possible to use in this situation?

Re: Do the math on your stock options

#84

Post by jonathanwallace »

inthewoods wrote: post #68
JumpCrisscross wrote: post #40

Always ask for: 1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide". 2. CASHLESS EXERCISABILITY. Always a…

I've never seen the ability to customize these kind of things because they generally are, in my experience, part of the core options agreement for the entire company and would require BoD approval. Thus, you're asking a lot - works if your a key employee but probably not for the average employee. Would love to hear if people have been able to get these terms.

If everyone asks for such things, then boards will get the message and make this standard to compete.

Re: Do the math on your stock options

#85

Post by mettamage »

ap22213 wrote: post #66
drglitch wrote: post #58

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

Are they offering options for stock, or stock? Make sure it's real equity. If it was me, I would start at 5-6% and negotiate from there. Assuming that this opportunity could turn into something huge, I highly recommend taking some negotiating training, if you have the time. Back when I was an executive, I was given a week-long negotiating training session. It was seriously the best, most useful training that I'd ever…

What kind of training was this, can I look it up? Or perhaps the training isn't available, but it's derived from somekind of methodology. In that case, what methodology was it?

Re: Do the math on your stock options

#86

Post by geertj »

In my experience and understanding, investors (almost) always get preferred shares with a liquidation preference. So unless you know what the preferences are, any such calculations are completely bogus. But even if you know them (and note that full cap tables are not commonly shared with employees in my experience) such calculations are still mostly bogus, because:

* You don't know what the preferences of future rounds will be. Your founders may say that they will never go above 1x or whatever, but the company may enter difficult waters and be forced to accept less beneficial terms.

* If you hold common shares in the presence of preferred shares with a liquidation preference, the payout function at acquisition/IPO will depend non-linearly on the selling price. There are steps and there will be a price below you will be 100% wiped out. So the incentives are not aligned. Preferred normally has all the voting rights, and for them 5% more or less on the acquisition price might not be a deal breaker. For for the common, 5% may be the difference between a nice down payment on a home or a 100% wipe out.

Based on this I would always negotiate a market rate salary at a startup company and value the options at $0, with 4 exceptions:

* You're offered to be a co-founder or one of the very first employee (* You're joining a late stage company and based on your industry knowledge you expect the company will do a successful IPO within 12 months. In essence you become a late stage investor in this scenario and your investment is your time.

* You're not in it for the money but instead want to change the world (and you don't mind someone else will make money based on your work if successful). For me personally a company like SpaceX could be in this category.

* You "trust" the founders to have your back and make sure your efforts will be rewarded whatever happens. This is a thin justification, but I could imagine doing it if you have been in business with the same team of founders for multiple times already.

Re: Do the math on your stock options

#87

Post by rdl »

jvns wrote: post #2

I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.

Unfortunately, not telling people the total number of shares outstanding is more common than it should be (10% of companies? heavily weighted toward the crappy ones, but some decent ones, including at least one of the top YC investments).

This is probably something which should be fixed by regulation.

Re: Do the math on your stock options

#88

Post by rdl »

JumpCrisscross wrote: post #40

Always ask for: 1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide". 2. CASHLESS EXERCISABILITY. Always a…

You are a lot more likely to just get conversion from ISO to NSO and 7-10 year window for exercise, than either of these (which I've never seen).

You could also get early exercise. That, personally, is what matters the most to me in a company with common valuation <$100mm. I have very very little interest in holding options; shares (either directly via grant, or via early exercise), or RSUs (which are even flimsier than options, but at least come in public companies.)

Re: Do the math on your stock options

#89

Post by dman »

pinkunicorn wrote: post #18
millstone wrote: post #5

Earlier quoted context omitted.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

I can almost guess the company from the number of stock options offered. I was in a similar situation, but I accepted the offer and these articles a bit too late :( I like the experience of working here, but now I totally realize I have lost a significant amount just by not negotiating anything.

What would you have done differently if you had known at that point what you know now?

Re: Do the math on your stock options

#90

Post by icedchai »

Gibbon1 wrote: post #19
millstone wrote: post #5

Earlier quoted context omitted.

I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…

If they told you that the number of outstanding shares was privileged and confidential they are crooks in nice suits. Also at this point in time there is so much shady stuff going on with options that you should always always value options at zero. Frankly if all you are offering is your labor in return for options you don't have the pull to get a particularly good deal. (Example: Friend worked three years at a start…

In addition to the # of outstanding shares, you want the valuation, the # of preferred shares, their liquidation preferences and multiples, and a couple more things I'm probably forgetting.

You can never get this information even as an employee. You ask directly, and nothing. They don't want to give it to you.

Your company could be sold for 100's of millions, paying off the investors at 2x investment, and the common stock holders get nothing.

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