Buying the Hype:
Understanding Startup
Stock Options
Jessica Parsons
@verythorough
Documentation engineer at
(We're hiring!)
The Dream
The Reality
source: xkcd
The Basics
Defining Terms
Stock Options: An option to buy a certain quantity of stock at a certain price
Grant
Vesting
Exercise
Sale
The Grant
Grant date: date when your grant begins. All other dates calculate from this one.
Strike/exercise price: the price you pay for your shares (usually "fair market value" on the grant date)
Quantity: number of shares you can buy when fully vested
Legally binding agreement of terms for your options
Vesting Schedule
"Four-year monthly vesting with a one-year cliff"
Vested shares
Gradually gives you access to your options
Exercise Terms
# of shares x strike price = cost basis
# of shares x (current fair market value - strike price) =
1000 x $0.10 = $100
1000 x ( $1.00 - $0.10 ) =
bargain element
$900
(This is important for taxes.)
The act of purchasing your actual stock
Sale Terms
# of shares x current market price = gross proceeds
gross proceeds - cost basis = net proceeds
1000 x $2.00 = $2000
$2000 - $100 = $1900*
* $900 of this is the bargain element
The act of selling your stock
The Startup
Buying Private Stock
You can buy and hold, but you have to watch out for...
Can't sell until there's an exit:
acquisition ~ or ~ IPO
Private Company: A company that is not publicly traded (i.e. you can't buy shares on the public stock market)
AMT
Alternative Minimum Tax
Counts the bargain element as income
at exercise
... but it may not apply to you. (It's complicated.)
AMT can be huge
10,000 shares Strike price $0.10 Value at exercise $5
Cost basis = 10,000 x $0.10 = $1000
Bargain element = 10,000 x ($5 - $0.10) =
$49,000
taxable "income"
Waiting for an exit
Schedule limitations
Termination (voluntary or involuntary)
Quit/fire/layoff is usually 90 days
(but some are offering much longer)
Death or disability may have a longer window
(like 12-18 months)
Expiration
10 years after grant date
The Offer
Evaluating an Offer
General Considerations
- Are you taking a cut in salary?
- How much?
- When will you reach market value?
- What stage is the company in?
- How are its prospects?
Evaluating an Offer
Questions to ask the company
- How many shares are being offered?
- What % of the company are the options worth?
- Compare with benchmarks and job listings
- What is the 409a valuation? (estimates your strike price)
- How much has the company raised?
- When do you plan to raise more? How much are you aiming for?
- What are your exit dreams for the company?
Acquisition? IPO? When do you hope this will happen?
Calculating Possible Exits
Dilution and Preferred Shares
Dilution
Your option count stays the same (for this grant), but your percentage will decrease as more investors join
This can mean that if the company sells for $100M
but raised $100M to get there, your shares are worth $0
Preferred Shares
Investors typically have preferred shares, which usually includes liquidation preference, which means investors get back what they put in, first.
Calculating Possible Exits
See what info you can get from the company
- What is the liquidation overhang?
- How much has the company raised?
- Is all of that preferred with liquidation preference?
- Do any investors have multipliers or participation rights? (This amplifies the liquidation overhang.)
Calculating Possible Exits
Generate possible minimums
- How much would the company have to 'sell' for before your stock is worth anything?
- How much before you get back your lost salary?
- How much before it really gets interesting?
How likely is this to happen? How long will it take?
(Be sure to consider future funding in your calculations.)
Find similar companies to compare.
The Negotiation
Negotiation Points
Minimize upfront costs
Early exercise
Buy shares before vesting to eliminate bargain element
10,000 shares Strike price $0.10 Value at exercise $0.10
Cost basis = 10,000 x $0.10 = $1000
Bargain element = 10,000 x ($0.10 - $0.10) = $0
(If you leave before full vesting,
you'll have to sell back unvested shares.)
archival photo, Silicon Valley circa 2015
but don't forget ...
Negotiation Points
Keep your options on the table
Extended exercise period
Keep your options for years after you leave, so you can wait for an exit. Some may scoff, but companies are doing it.
Follow-on stock grants
See if the company has a policy for granting more stock over time, to curb dilution and get options with later expiration.
Accelerated vesting on acquisition
Avoid losing unvested options if the company is acquired (single-trigger) and lays you off (double-trigger).
The Follow-Up
After Accepting
Gotchas to watch out for
Get your grant
This is not your offer letter! It may be months before you get it, especially in a new startup. Try to ensure you get it before the company's valuation goes up.
Look before you leap
Before exercising options (especially buy & hold), make sure you know the tax implications. Get professional help!
After Accepting
Reality Check
Money isn't everything
And stock options may never be money! Remember there are many reasons to join a company.
Satisfaction is perception
Wondering if you could have negotiated a better deal will not bring you more money or happiness. Celebrate what you achieved and move on!
(and new funding rounds are a great time to renegotiate!)
Thank you!
Questions? DM me:
@verythorough
Buying the Hype: Abridged WaffleJS Edition
By Jessica Parsons
Buying the Hype: Abridged WaffleJS Edition
Stock compensation is complicated, especially with private, venture-backed startups. I’ll give a quick but thorough explanation of terms, pitfalls, and negotiating points for a common type of offer: private company ISOs. I’ll also share resources for learning about other types of equity and sharing this info with others. This version was shortened for WaffleJS. A more complete version, which I plan to turn into an open-source hands-on workshop, can be found at https://github.com.verythorough/stocks-workshop
