Ask HN: Are my options worthless now?

[throwit]

I'm an early employee at a startup. From the go, our money has come from our founders, and from a single external investor.

A year into working there, now with ~15 employees, we (most of us) were issued stock options. At this point, we were still in 'stealth mode', with no additional investment than the start.

There was a valuation (as I understand it, a number picked from a mix of equations, and pulling things out of the air) of $30MM, at an exercise price of $4.00, for 37,500 shares; for a total of $150,000's-worth, 0.5%

Another year later, we're not turning a profit but we've had a few more investors come in over the past 6 months, no new hires.

We just got word that those who didn't get granted options last year, were granted them this year (the reason they weren't given them the first time round with everyone else? Personal differences with the CEO).

They were issued at an exercise price of $1.00, for 9,000 shares; for a total of $36,000's-worth.

This is where my math gets off. I'm assuming the share price has gone down, because of the investment we've had. But, should it really be that much? If today's price is $1 per share, does that mean that (assuming worst-case, the self-valuation hasn't changed) there are now 4x as many shares in total? And hence, my options worth (0.5% / 4)?

[bobfirestone]

In options there are two important numbers the current stock price and the strike price. Assuming the stock price is higher than the strike price the option is worth the difference between the two.

I am a little unclear about the "$36,000's-worth". I assume that that is the face value of the 9,000 shares. So if $36k is the value of the underlying stock than the share price is $4. The same $4 a share that the stock was worth when your options were issued.

The new options were issued for $1 a share with a $4 stock price. Assuming that there was a buyer for the shares at the current price of $4 the options could be exercised today and be worth $27k.

$4 - $1 = $3 per share profit X 9,000 shares = $27,000.

Some valuation examples

Price Theirs Yours $4 $27k $0 $5 $36k $37.5k $6 $45k $75k $7 $54k $112.5k $10 $81k $225k

What the options are worth today is really a minor concern. You control substantially more shares than the people who have just been issued options. If the company succeeds you all walk away with a bunch of money. If it doesn't, well none of you are going to make anything from your options.

[bobfirestone → bobfirestone]

The table lost its formatting

Price Theirs Yours

$4 $27k $0

$5 $36k $37.5k

$6 $45k $75k

$7 $54k $112.5k

$10 $81k $225k

[fringedgentian]

What they are probably doing is multiplying everyone's options, including yours, by 4 and reducing the value of each one to 1/4 the original. Then everyone still owns the same % of the company but it is easier for the finance people work with them.

So your # of options is probably changed just like everyone's, but they don't bother letting you know usually unless it is time for you to sell them. If you get the opportunity to sell, they will let you know your actual number of stock and what each can be sold for. That's what happened to me anyway.

[btilly]

Short answer, the $4 options aren't likely to pay off. The $1 options might or might not, but in terms of your personal financial planning you should assume they are worth nothing as well.

Read on for the long answer.

-----

Let's start with the facts.

First of all your options are contracts obligating someone to sell you stock at a fixed price should you choose. If the stock costs more than that, then your options can be used to make you a profit. If the stock costs less than that, then it makes no sense to exercise your options. If you have 9000 shares at an exercise price of $1.00, then thats not worth $9000, that's an opportunity for you to SPEND $9000 and get something that might or might not be worth more. (Note, there are tax consequences to handing out options at a price different from the valuation of the company, so at the point they are issued the return you can get from exercising them is usually $0.)

Secondly a company is worth today what someone is willing to pay for it. No more, no less. All of the possible potential growth, and future revenue? They only matter in so far as they convince someone that it is worth spending money on. Tomorrow may be a different story, but today it is only worth what you can find a buyer for it.

Thirdly, early stage companies are highly illiquid. Meaning that there is no real market for them, and different people will assign wildly different valuations. Also those valuations can change, fast, as facts change. (Where facts may be as simple as, "there is a different person willing to invest".) A 4x fluctuation is very, very easy to believe. A 4x fluctuation down with new investors tells me that the company could possibly succeed (else where would you find investors?) but the prospects are nowhere near as bright as the company previously thought.

-----

Now what do these facts mean for you, or any employee?

First, options are not worth the strike price. $150k is not the worth of the options you got in the first round. That is the amount you are allowed to spend at that price for stock that might or might not be worth more. (Hopefully will be worth more.)

Second, as an employee you like low strike prices. The lower it is, the easier it is to be worth a lot later.

Third, options for the future could always wind up worth something, but that is not guaranteed. Your $4 options are only going to be worth something if the company grows to the point where it will be worth a lot. Even if the company is worth less now, it is possible for it to be worth more later. Nobody knows whether that will happen, and your guess is likely to be better informed than mine.

Fourth, the high valuation on your initial options suggests that this is the value that the initial external investor thought it deserved, and maybe invested at. The current valuation is likely to be based on what current investors think it is valued at, and likely that reflects what value their investments were made on the basis of. That means that the initial external investor really believed in the company, and has likely lost a lot of money on paper so far. (But could still make it back if the company succeeds.) As upsetting as this may be for you, it is unlikely that anyone was intentionally trying to cheat you.

[btilly]

FYI, you replied from the wrong user account. I recommend deleting the comment.

Options not vested seems to me to be a red flag. That's a sign that you want another job, there are just too many ways that can go wrong. Such as, "Shortly before payout, the CEO fires everyone he doesn't like." And given that you weren't given the second round at the first opportunity, do you think you'll be on that list? Or, alternately, "We can't make the sale unless we reduce options, we're firing anyone who doesn't voluntarily give up half their options."

Let me give a real story. I know someone who worked for a small company that was bought by AOL. Part of the purchase was a large options grant with a 1 year cliff. They worked hard for that year. 1 week before the cliff, AOL fired everyone, including the former CEO.

Turns out that AOL had planned the episode from the beginning as a way to spend less but let the company think that they were getting paid more. Any time you get something that is entirely dependent upon another's good will, it is only worth as much as that other's good will when the time comes to pay out. Is that a position you want to be in?

[throwit → btilly]

Much appreciated.

Yes, I've ready many horror stories. The combination of "at-will" and "you lose everything if you're fired" just reeks of danger, to be honest...

I've been dangling on the edge of leaving for some time now, the options were literally the only thing keeping me there -- the hope that if I stayed for 2-3 months longer, perhaps we'll get a surprise early exit. But it seems that given how much the valuation has changed now there's some more experienced people involved, even in the case of that early exit (which is very unlikely, I know), it isn't really going to do anything for me...

> Included from deleted post above, for the history books:

> Thanks for that. I've always been skeptical, and me (or any other employees) actually believed the company should be valued at $30m when it was. Another thing I found that was; my options aren't vested. They're exercisable immediately, but are restricted in the sense that the moment I leave the company (for any reason), I lose them. From what I've heard, it's much more common for a ~4 year vesting period, at which point they're essentially 'yours', whether you stay or not. Is that unusual? From every angle, it kind of feels like we're being given a bum deal here (I won't go into salaries, demotivating work environment, 2 years of 60+ hour weeks ... )

[ProblemFactory → throwit]

It's fairly common for options to expire shortly after leaving employment, regardless of vesting: you have to either buy them out or lose them.

Options are not shares. They are a contract that allows you to buy shares. When options vest over time, you become eligible to buy actual shares. In your case it seems that the options do have actually vested: but you still need to pay $150k out of pocket to own real shares in the company.

This is not an issue when the company gets acquired, because you can buy the shares and then sell them on immediately, pocketing the difference.

In summary this means that your choices are:

1. Stay employed with the company until it gets acquired or goes public. If the final valuation is over $30m, you can at best earn (X-$30m)*0.005. For example, at a $40m sale, you could make up to $50k (minus taxes, or the investors' preferred share payouts). If the company is sold for less than $30m, the options are worthless.

2. Leave now, and just before that spend $150k of cash to exercise the options, buying shares. The profit calculation is still the same, but in addition you have to risk actual cash.

3. Leave now, and don't exercise the options.

The second choice is extremely risky, especially when you don't have $150k to blow on investments, or when you don't believe that the company's value has increased far above $30m.

[btilly → ProblemFactory]

Expire shortly, yes.

Lose immediately? That's what I understood him to be saying, and it is a red flag.

[nrgc]

Cut the math for now, on what basis are you valued at $30 million? You said it yourself, out of thin air.

If you are not making profit, still in stealth-mode and have no clients, sorry to break it to you but it's worth...: $0.

[salahxanadu]

They were never worth anything.